Tax Law

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GENERAL PRINCIPLES OF TAXATION
Manifestations:
 Imposition even in the absence of
DEFINITION AND CONCEPT OF constitutional grant
TAXATION  State’s right to select objects and subjects
of taxation
Taxation is the power by which the sovereign  No injunction on collection of taxes
raises revenue to defray the expenses of the
government. National Government vs. Local Government
Units
It is a way of apportioning the cost of the  National Government – inherent
government among those who in some measure  LGU – not inherent; can only impose taxes
are privileged to enjoy its benefits and must bear when there is:
its burden. a. constitutional grant
b. legislative grant
It is the inherent power of the sovereign exercised
through the legislature to impose burdens upon 2. Legislative in Character
subjects and objects within its jurisdiction for the
purpose of raising revenues to carry out the Only the legislature can impose taxes.
legitimate objects of government. It is based upon the principle that taxes are a
grant of the people who are taxed, and the grant
must be made by the immediate representatives
PURPOSES OF TAXATION of the people. And where the people have laid their
power, there it must remain and be exercised’.
Primary: To raise revenue to promote the general (Cooley)
welfare and protection of its citizens.
NOTE: The power to tax is primarily vested in
Secondary/non-revenue Purposes: Congress. However, in our jurisdiction, it may be
(RIPE) exercised by local legislative bodies, no longer
a. To reduce social inequality; merely by virtue of a valid delegation as before,
b. To implement the police power of the State; but pursuant to a direct authority conferred by
c. To protect our local industries against unfair Section 5, Article X of the Constitution (Mactan
competition; Cebu International Authority vs. Marcos, G.R. No.
d. To encourage the growth of local industries. 120082, September 11, 1996).
Scope of Legislative Power (SM-PARKS)

NATURE OF TAXATION a. Subjects of taxation (persons, property,
occupation, excises or privileges to be taxed,
provided they are within the taxing
1. Inherent Attribute of Sovereignty
jurisdiction)
b. Amount or Rate of tax
The power of taxation is an incident of sovereignty
c. Purposes for which taxes shall be levied
as it is inherent in the State, belonging as a matter
provided they are for public purpose
of right to every independent government. It does
d. Kind of tax to be collected
not need constitutional conferment.
e. Apportionment of the tax (whether the tax
Constitutional provisions do not give the power to
shall be of general application or limited to a
tax but merely impose limitations on what would
particular locality, or partly general and
otherwise be an invincible power.
partly local)
f. Situs of taxation
Basis: Life-blood Theory
g. Method of collection
Taxes are the lifeblood of the nation. Without
taxes, the government would be paralyzed for lack
Extent or Scope of Taxing Power (CUPS)
of motive power to activate and operate it. Hence,
a. Comprehensive - It covers persons,
despite the natural reluctance to surrender part of
businesses, activities, professions, rights and
one’s earned income to the taxing authorities,
privileges.
every person who is able must contribute his share
b. Unlimited - The power to impose taxes is one
in the running of the government. (CIR vs. Algue)
so unlimited in force and so searching in
extent that the courts scarcely venture to
declare that it is subject to any restrictions
2 |TAXATION LAW REVIEWER
whatever, except such as rest in the discretion use of

of the authority which exercises it. property
c. Plenary - It is complete. As To Benefits
d. Supreme - Only that it is supreme insofar as Presumption of No direct and The person
the selection of the subject is concerned. receipt of immediate affected receives
benefits to benefits just
every person received by compensation
3. Subject to Constitutional and Inherent the person from the
Limitations affected property taken
from him
It is not an absolute power that can be exercised As To Amount Of Imposition
by the government. (Refer to discussion under No limit Sufficient to No imposition,
Scope and Limitations). cover cost of the person is
regulation paid the FMV of
his property
POWER OF TAXATION COMPARED As To Relationship To The Constitution
It is inferior to Superior to Superior and
WITH OTHER POWERS the “Non- the “Non- may override the
impairment impairment” “Non-
Power of clause”. The clause impairment”
Power of power of clause because
Police Power Eminent
Taxation taxation cannot the welfare of
Domain be exercised to the State is
Definition impair the superior to any
It is the power It is the It is the power to “Obligations private contract
to take property power to take private and Contracts”
for the support enact laws to property for clause
of the promote the public use upon
government and general payment of just As To Limitation
for public welfare of the compensation. The exercise is Limited to Limited to public
purpose people. It is constitutionally public purpose and just
wider in and inherently interest and compensation
application limited or the
because it is restricted requirement
the general of due
power to process
make laws.
As To Purpose
Revenue and Property is Property is PRINCIPLES OF SOUND TAX SYSTEM
support of the taken for taken for public (FAT)
government public use use
A. FISCAL ADEQUACY:
As To The Authority That Exercises The Sources of revenue must be adequate to meet
Power expenditures. It must be able to provide
Government Government Government or sufficient revenues in order to meet the
private
legitimate objects of the government.
individuals or
corporations Violations of this principle will make the law
As To Necessity Of Delegation unsound but still valid and constitutional.
No delegation There must There must be
is necessary be due due delegation  "An approximate estimate of government
because it is delegation before the local expenditures" is sometimes sufficient to
inherent before the government or satisfy the requirement.
local private party
government may exercise it B. ADMINISTRATIVE FEASIBILITY:
may exercise The tax law must be capable of convenient,
it
just, effective and efficient enforcement and
As To Persons Affected
administration. This principle equally
Community of Community Operates on the
class of of class of owner of the
applies to taxpayers. Violation of this
individuals individuals property principle will make the law unsound but still
As To Effect Of Transfer Of Property Rights valid and constitutional.
Money paid as There is no There is transfer
taxes becomes transfer of of right to C. THEORETICAL JUSTICE:
part of public title, at most property Taxes must be based on the taxpayer’s ability
funds there is whether it be of to pay and proportional to the relative value
restraint on ownership or of the property. The Constitution provides
the injurious property right that taxation must be uniform and equitable.
The State must evolve a progressive system of
FAR EASTERN UNIVERSITY  CENTRALIZED BAR OPERATIONS 2012

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taxation. Violation of this principle will make in case of illegal imposition of taxes and
the law unsound, invalid and irregularities. But where the power to tax is
unconstitutional. used solely for the purpose of raising
revenues, the modern view is that it cannot be

THEORY AND BASIS OF TAXATION allowed to confiscate or destroy.
c. The presumption that tax laws are valid.
1. LIFEBLOOD THEORY d. The right to collect taxes is imprescriptible.
Taxes constitute the lifeblood of the nation e. Collection of taxes may not be enjoined by
and are greatly needed to support the injunction.
government and its widely expanding services f. Taxes could not be the subject of
to the people. Without taxes, the government compensation and set-off.
would be paralyzed for lack of motive power
to activate and operate it. While taxes are the lifeblood of the government
and should be collected without unnecessary
This implies that: hindrance, such collection should be made in
a. The BIR is justified in availing of the accordance with law as any arbitrariness will
most expedient remedy in the collection negate the very reason for government itself.
of the tax. (CIR vs. Pineda, 21 SCRA 105) (Marcos II vs. Court of Appeals, 273 SCRA 47)
b. The BIR is not bound by the mistakes,
errors, or omissions of its agents (thus,
the doctrine of estoppel does not apply to 2. NECESSITY THEORY
the collection of taxes). (Vera vs. Taxation is a power predicated upon
Fernandez 89 SCRA 199) necessity. It is a necessary burden to preserve
c. No court other than the Court of Tax the State’s sovereignty. (Phil. Guaranty Co.
Appeals (CTA) may enjoin the collection vs. Commissioner, 13 SCRA 775)
of taxes.
Taxation proceeds upon the theory that:
Principles that flow from the Lifeblood Theory:  The existence of the government is a
a. Power to tax is an unlimited and plenary necessity;
power.  It cannot continue without means to pay
b. The power to tax includes the power to its expenses;
destroy.  This means it has the right to compel all
its citizens and property within its limits
Two Views: to contribute. (71 Am. Jur. 2d 346)
1. Marshall Dictum: “The power to tax is the
power to destroy.” Due to the inherent and
unlimited nature of the power to tax, it 3. BENEFITS-PROTECTION THEORY
includes the power to regulate even to the
extent of prohibition or destruction. It applies In return for the taxes received, the
when power to tax is used validly as an government only secures to the citizen that
implement of police power in discouraging general benefit which results from protection
and prohibiting certain things or enterprises to his person and property and the promotion
inimical to the public welfare. of those various schemes which have for their
object the welfare of all.
Marshall Dictum has no application to a
lawful tax. This is pertinent only when there This theory spawned the doctrine of symbiotic
is no power to tax a particular subject and it relationship:
has no relation to a case where such right Taxes are what we pay for a civilized society.
exists, because the power to destroy may be a Without taxes, the government would be
consequence of taxation, but it cannot tax to paralyzed for lack of motive power to activate
the point of confiscation. and operate it. Thus, despite the natural
reluctance to surrender part of one’s hard-
2. Holmes Dictum: “The power to tax is not the earned income to the taxing authorities, every
power to destroy while this Court sits.” The person who is able must contribute his share
power to tax is unlimited except when it runs in running the government. The government,
counter the constitutional provisions. In such for its part, is expected to respond in the form
case, the court may declare and hold such act of tangible and intangible benefits intended to
as unconstitutional. improve the lives of the people and enhance
their moral and material values (CIR vs.
Reconciliation of Marshall and Holmes Dicta: Algue, 158 SCRA 9).
The power to tax, though unlimited, must not
be exercised in an arbitrary manner.
Taxpayers may seek redress before the courts
period to assess is within ten (10) years from

DOCTRINES IN TAXATION discovery of the omission, fraud or falsity.
b. Tariff and Customs Code – It does not express

PROSPECTIVITY OF TAX LAWS
any general statute of limitation. It provides,
however, that when articles have been entered
(Doctrine of Non-retroactivity of Laws) and passed free of duty of final adjustments of
Tax laws are prospective in character and in duties made, with subsequent delivery, such
application. entry and passage free of duty or settlements
of duties will, after the expiration of three (3)
Exceptions: years from the date of the final payment of
a. The retroactive application is necessarily duties, in the absence of fraud or protest or
implied from the language used. compliance audit pursuant to the provisions of
b. It involves income tax. this code be final and conclusive upon all
c. The retroactive application is clearly the parties, unless the liquidation of the import
intent of the Congress. entry was merely tentative.
When the tax law imposes a criminal liability, it c. Local Government Code – Local taxes, fees, or
cannot be given retroactive effect because that charges shall be assessed within five (5) years
would violate the ex post facto law. But if it from the date they become due. In case of
imposes civil penalties like fines and forfeiture, it fraud, or intent to evade the payment of taxes,
can be given retroactive effect unless it produces fees, or charges, the same may be assessed
harsh consequences, its validity may be within ten (10) years from discovery of such.
questioned on grounds of equity and due process. They shall also be collected either by
administrative or judicial action within five (5)
Rule on non-retroactivity of rulings under the years from the date of assessment.
NIRC. Any revocation, modification or reversal of
any of the rules and regulations promulgated in
DOUBLE TAXATION
accordance with the Sections the NIRC or any of
the rulings or circulars promulgated by the
Commissioner shall not be given retroactive Kinds of Double Taxation:
application if the revocation, modification or 1. Direct duplicate taxation – double taxation in
reversal will be prejudicial to the taxpayers, its strict sense and is prohibited because of
except in the following cases: the violation of the constitutional precepts of
equal protection and uniformity in taxation.
DeDiBad It means (elements/requisites) -
1. Where the taxpayer Deliberately
1. taxing same SUBJECT (person,
misstates or omits material facts from his
property or right) twice
return or any document required of him
2. for the same PURPOSE
by the Bureau of Internal Revenue;
3. by the same taxing AUTHORITY
4. within the same JURISDICTION or
2. Where the facts subsequently gathered
taxing district
by the Bureau of Internal Revenue are
5. within the same taxable PERIOD
materially Different from the facts in
6. and they must be of the same KIND
which the ruling is based; or
or character of tax
3. Where the taxpayer acted in Bad faith.
(Sec. 246, NIRC) 2. Indirect duplicate taxation – double taxation
in its broad sense and is permissible. This
exists when one or more of the foregoing
IMPRESCRIPTIBILITY
requisites is/are not present.
As a rule, taxes are imprescriptible as they are the International Juridical Double Taxation -
lifeblood of the government. However, tax statutes refers to the imposition of comparable taxes in
may provide for statute of limitations. two or more states on the same taxpayer in
respect of the same subject matter and for
The rules that have been adopted are as follows: identical periods.
a. National Internal Revenue Code – The statute
of limitation for assessment of tax if a return is  This occurs when a person is resident of
filed is within three (3) years from the last day
one country/ state and derives income
prescribed by law for the filing of the return or
if filed after the last day, within three years from (or owns capital in) another
from the date of actual filing. If no return is country/state and both countries/states
filed or the return is false or fraudulent, the impose taxes on such income (or capital).

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E. Evasion
 This occurs only when the state of F. Exemption
residence of the taxpayer imposes tax on
A. SHIFTING
the income from sources within and
It is the process by which tax burden is
without. Therefore, only resident citizens transferred from statutory taxpayer (impact of
and domestic corporations may be taxation) to another (incident of taxation) without
subjected to international juridical violating the law.
double taxation.
 A tax treaty is normally entered into by Ways of Shifting the Tax Burden:
two contracting states to eliminate this. a. Forward Shifting – the burden of the tax
is transferred from a factor of production
through factors of distribution until it
Remedies of Double Taxation:
finally settles on the ultimate purchaser
(CD – RET)
or consumer.
1. Tax Credits – an amount subtracted from an
individual’s or entity’s tax liability to arrive at
b. Backward Shifting – the burden of the
the total tax liability.
tax is transferred from the consumer or
purchaser through the factors of
2. Tax Deductions – tax write-off or reduction in
distribution to the factor of production.
the gross amount on which a tax is calculated.
c. Onward Shifting – the tax is shifted two
3. Reduction of the Philippine income tax rate
or more times either forward or
backward.
Ex. Tax Sparing Rule
Only indirect taxes may be shifted; direct taxes
4. Tax Exemptions – a grant of immunity to
cannot be shifted.
particular persons or corporations from the
obligation to pay taxes.
Impact of Taxation - point on which tax is
originally imposed.
5. Tax Treaties – agreement between two
countries specifying what items of income will
Incidence of Taxation - point on which the tax
be taxed by the authorities of the country
burden finally rests or settles down
where the income is earned.
Statutory Incidence vs. Economic Incidence
Most Favored Nation Clause (MFN) in Tax
(impact of taxation)
Treaties
The purpose of the MFN clause is to grant to the The statutory incidence of a tax is who the law
contracting party treatment not less favorable says pays the tax while the economic incidence of
than that which has been or may be granted to the a tax or burden is who really bears the tax. Where
“Most Favored” among other countries. the burden of the tax is shifted to the purchaser,
the amount passed on to it is no longer a tax but
The MFN Clause is intended to establish the becomes and added cost on the goods purchased,
principle of equality of international treatment by which constitutes a part of the purchase price.
providing that the citizens or subjects of the
contracting nations may enjoy the privileges B. CAPITALIZATION
accorded by either party to those of the most It is the reduction in the price of the taxed object
favored nation. equal to the capitalized value of future taxes
which the purchaser expects to be called upon to
To invoke the application of the “most favored pay.
nation” MFN clause, the subject matter of the
other tax treaty should be the same as that in the C. TRANSFORMATION
tax treaty under which the taxpayer is liable. It happens when the manufacturer or producer
(Commissioner of Internal Revenue vs. S.C. upon whom the tax has been imposed, fearing the
Jhonson & Son, Inc., 309 SCRA 87 [1999]) 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 production,
FORMS OF ESCAPE FROM TAXATION thereby turning out his units at a lower cost.
D. TAX AVOIDANCE
A. Shifting
It is the legal or permissible means to reduce tax
B. Capitalization
liability through maximization of deductions,
C. Transformation
exclusions and exemptions and minimization of
D. Avoidance
income.
a. It may be based on a contract

E. TAX EVASION b. It may be based on grounds of public policy-
It is the illegal or fraudulent means to defeat or granting tax exemptions to Rural banks and
lessen payment of tax. sweepstakes or lotto winnings
c. It may be based on some grounds to foster
A scheme outside of those lawful means and when charitable and other benevolent institutions
availed of, it usually subjects the taxpayer for d. It may be created under a treaty on grounds
further or additional civil or criminal liability. of reciprocity
e. It may be created to lessen the rigors of
Elements of Tax Evasion: international double or multiple taxation
a. The end to be achieved, i.e., the payment of
less than that known by the taxpayer to be An exemption from “all taxes” excludes indirect
legally due; taxes, unless the exempting statute is so couched
b. An accompanying state of mind which is as to include indirect tax from the exemption.
described as being evil, in bad faith or
deliberate; Tax deductions for income tax purposes partake of
c. A course of action or failure of action which is the nature of tax exemptions and are strictly
unlawful. (CIR vs. Estate of Benigno P. Toda, construed against the taxpayer, who must prove
September 14, 2004). by convincing evidence that he is entitled to the
deduction claimed. (Philex Mining Corp. vs. CIR,
Tax Avoidance Tax Evasion 551 SCRA 428)
(Tax (Tax
Minimization) Dodging) Q: Is an exemption granted under the
Constitution self-executing?
Legality Legal and not Illegal and
A: It can be self-executing or the Congress may
subject to criminal subject to
require an act for its application.
penalty criminal
penalty
If self-executing, the legislature cannot add or
Effect Minimization of Almost
detract from it. It may however prescribe
taxes always
procedures to determine whether a claimant may
results in
enjoy the said tax exemption privilege.
non-payment
of taxes
Grant Of Tax Exemptions
General Rule: “No law granting any tax
exemption shall be passed without the
F. TAX EXEMPTION
concurrence of a majority of all the members of
It is a grant of immunity, expressed or implied, to
Congress.” (Art. VI, Sec. 28[4] of the 1987
particular person or corporation or to persons or
Constitution)
corporations of a particular class from a tax upon
property or an excise which persons or
Rule on Construction of Exemption:
corporations generally within the same taxing
1. Exemptions from taxation are not presumed.
district are obliged to pay. (51 Am. Jur. 503)
2. He who claims as exemption must be able to
justify his claim by the clearest grant of
Nature of Tax Exemption:
organic or statute law by words too plain to be
1. It is a mere personal privilege of the grantee.
mistaken. If ambiguous, there is no exemption.
2. It is generally revocable by the government
3. He who claims exemption should prove by
unless the exemption is founded on a contact
convincing proof that he is exempted.
which is protected from the impairment.
4. Taxation is the rule; an exemption is the
3. It implies a waiver on the part of the
exception.
government of its right to collect otherwise
5. Tax exemption must be strictly construed
would be due it, and is so prejudicial thereto.
against the taxpayer and liberally in favor of
4. Need not be discriminatory, it only needs to
the taxing authority (Mactan Cebu
have a reasonable foundation or rational basis.
International Airport Authority vs. Marcos,
261 SCRA 667).
Kinds Of Tax Exemptions:
6. Constitutional exemption is self-executing.
As to basis:
7. Tax exemptions are personal.
1. Constitutional: immunities from taxation which
originates from the constitution.
Strict Construction Rule
2. Statutory: those which emanate from
It simply means that if, after the application of all
legislation.
rules of interpretation for the purpose of
ascertaining the intention of the legislature, a well
founded doubt exists, then, the ambiguity
Grounds For Tax Exemption:

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that occurs may be settled by the rule of strict b. If the tax exemption is granted by the
construction. Constitution, its revocation may be effected
through constitutional amendment only.
Exceptions: c. Where the tax exemption grant is in the form
a. The rule on strict construction does not apply of a special law and not by a general law even
where the statute granting the exemption if the terms of the general act are broad enough
expressly provides for liberal interpretation. to include the codes in the general law unless
b. The rule does not apply to special taxes there is manifest intent to repeal or alter the
relating to special cases and affecting only special law. (Province of Misamis Oriental vs.
special classes of persons. Cagayan Electric Power and Light Co. Inc
c. In case of property owned by the state an GRN No. 45355, Jan. 12, 1990)
express exemption should not be construed
with the same degree of strictness that applies COMPENSATION AND SET-OFF
to exemptions contrary to public policy of the
state, since as to such property, “exemption is General Rule: No set-off is admissible against the
the rule and taxation the exemption”. demands for taxes levied for general or local
d. Exemptions to traditional exemptees, such as governmental purposes.
religious and charitable institution.
e. The rule does not apply in the case of exemptions Rationale:
in favor of governmental political subdivision or 1. Lifeblood theory
instrumentality. (Maceda vs. Macaraig, Jr., 197 2. Taxes are not contractual obligations but
SCRA 771) arise out of duty to the government.
f. If the tax payer falls within the purview of 3. The government and the taxpayers are
exemption by clear legislative intent. (CIR vs. not mutually creditors and debtors of
Arnoldus Carpentry Shop, G.R. No. 71122, each other.
March 25, 1988)
Exception: When both the claim of the government
Revocation of Tax Exemption for taxes and the claim of the taxpayer for the
Since taxation is the rule and exemption is the services rendered had already become overdue
exception, the exemption may thus be withdrawn and demandable as well as fully liquidated,
at the pleasure of the taxing authority. (Mactan COMPENSATION therefore, takes place by
Cebu Int’l. Airport Authority vs. Marcos) operation of law. (Domingo vs. Garlitos, 8 SCRA
443)
Tax exemption is a mere privilege of the grantee,
thus, revocable unless founded on a contract. (p. Doctrine of Equitable Recoupment
74, Review Notes and Outlines in Taxation, Lim. A claim for refund barred by prescription may be
2008 Ed.) allowed to offset unsettled tax liabilities arising
from the same transaction.
Tax exemption may be granted by contracts
Those that are so granted are protected by the The SC rejected this doctrine in Collector vs. UST
“Non-impairment Clause” of the constitution. (Ex. (104 Phil 1062), since it may work to tempt both
Government bonds) parties to delay and neglect their respective
pursuits of legal action within the period set by
 Whenever a valid contract is entered into law.
between the contracting parties, even the
state is prohibited from impairing said COMPROMISE
contract. However, police power is superior to
the impairment clause of the Constitution,
It is an agreement between two or more persons,
whereas, taxation is inferior to the non-
to avoid lawsuit, amicably settle their differences
impairment clause.
on such terms as they can agree on.
Tax exemption granted by means of a legislative
franchise is revocable. TAX AMNESTY
Limitations on Revocation: It is a general pardon or intentional overlooking

a. Where the exemption was granted to private by the State of its authority to impose penalties on
parties based on material consideration of a persons otherwise guilty of tax evasion or
mutual nature, it then becomes contractual violation of tax law. The purpose is to give the
and is covered by the non-impairment clause of erring taxpayer a chance to reform and become
the Constitution. part of the society with a clean slate. (p. 77, Lim.
Review Notes and Outlines in Taxation, 2008 Ed.)
Tax amnesty is granted to erring taxpayers and

not available to agents of the Tax Bureau.
2. Civil in nature. Hence, not subject to ex post

TAX EXEMPTION vs. TAX AMNESTY facto law prohibitions;
3. Not penal in character.
TAX EXEMPTION TAX AMNESTY
There is immunity Connotes RULES ON CONSTRUCTION OF TAX LAWS
from tax. condonation from
payment of an 1. Generally, no person or property is subject to
existing liability. tax unless within the terms or plain import of
The grantee does not The grantee pays a a taxing statute.
pay anything. portion. 2. Tax laws are generally prospective in
Can be availed by any Not always application.
qualified taxpayer. available.
It is prospective in It is retroactive in Exception: While it is not favored, a statute
application. application. may nevertheless operate retroactively
Tax liability does not Tax liability provided it is expressly declared or is clearly
attach top one enjoying attaches to a the legislative intent. (Cebu Portland Cement
a privilege of tax taxpayer who wants vs. Coll. G.R. No. 18649, Feb. 27, 1965)
exemption. to avail of tax
amnesty. 3. Where the language is clear and categorical,
Requires no payment Requires the the words employed are to be given their
of tax. payment of certain ordinary meaning.
percentage of unpaid 4. When there is doubt, tax statutes are
taxes. construed most strongly against the
Immunity from civil Immunity from civil, Government and liberally in favor of the
liability. criminal and citizen because burdens are not to be imposed
administrative beyond what the statutes expressly and
liability. clearly import (Collector of Internal Revenue
vs. La Tondena, Inc., et al., L-10431, 31 July
Rules on Tax Amnesty 1962).
1. Tax amnesty 5. Provisions of the taxing act are not to be
extended by implication.
a. like tax exemption, it is never favored nor 6. Tax laws are special laws and prevail over
general laws.
presumed
7. It must be given reasonable construction with
b. construed strictly against the tax payer
the view of carrying out their purpose and
(must show complete compliance with the
law) intent.
8. It must be construed to avoid the possibilities
2. Government not stopped from questioning the of tax evasion;
tax liability even if amnesty tax payments
RULES ON CONSTRUCTION OF TAX
were already conceived.
EXEMPTIONS
Reason: Erroneous application and
enforcement of the law by public officers do General Rule: Laws granting tax exemption are
not block subsequent correct application of construed in strictissimi juris against the
taxpayer and liberally in favor of the taxing
the statute. The Government is never stopped
power.
by mistakes or error of its agents.
Exceptions:
Basis: Lifeblood Theory
1. When the statute granting exemption
provides for the liberal construction thereof;
3. Defense of tax amnesty is a personal defense.
2. In case of special taxes relating to special
cases and affecting only special classes of
Reason: Relates to the circumstances of a
persons;
particular accused and not the character of
3. If exemptions refer to the public property
the acts charged in the information.
4. In cases of exemptions granted to religious,
charitable and educational institutions or
CONSTRUCTION AND INTERPRETATION OF their property;
TAX LAWS 5. In cases of exemptions in favor of the
government, its political subdivisions or
Nature of Tax Laws instrumentalities.
1. Not political in character. They are deemed to
be the laws of the occupied territory and not NOTE: The intent of the legislature to grant tax
of the occupying enemy. exemption must be in clear and unmistakable
terms. Exemptions are never presumed. The

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Where a statute is susceptible of the meaning

placed upon it by a ruling of the government
burden of establishing right to an exemption is
upon the claimant. agency charged with its enforcement and the
legislature thereafter reenacts the provisions
RULES ON CONSTRUCTION OF TAX RULES without substantial change, such action is to some
AND REGULATIONS extent, confirmatory that the ruling carries out
the legislative purpose. (Alexander Howden case
Tax Regulations Tax Rulings supra)
They are promulgated Issued only upon
by the Secretary of query by a taxpayer.
Finance in order to They are the best SCOPE AND LIMITATION OF TAXATION
implement the guess of the moment
provisions of the Tax and incidentally often Scope of Taxation
Code. contain such well-
considered and sound The power to tax is (CUPS)
law; but the courts 1. Comprehensive,
have held that they 2. Unlimited,
are merely advisory – 3. Plenary, and
sort of an information 4. Supreme
service to the (Judge Cooley)
taxpayer. (Quiazon
and Lukban, op cit.) “Wide Spectrum of Taxation”
It is one that extends to every business, trade or
General Rule: The construction placed by the occupation; to every object of industry; use or
office charged with implementing and enforcing enjoyment; to every species of possession; it
the provisions of a Code should be given imposes a burden which in case of failure to
controlling weight unless such interpretation is discharge the same may be followed by the seizure
clearly erroneous. and confiscation of property after the observance
of due process.
RULE ON CONSTRUCTION OF PENAL
PROVISIONS OF TAX LAWS The power to tax is unlimited in force and so
searching in extent. (Tio vs. Videogram)
Penal provisions are given strict construction so as Unlimited in force jibes with the pronouncement
not extend the plain terms thereof that might of the court in Sison vs. Ancheta: The State is free
create offenses by mere implication not so to select the object or subject of taxation. It is the
intended by the legislative body. (RP vs. Martin) inherent power of the state to select the object of
taxation.
INTERPRETATION OF “NON-RETROACTIVE
APPLICATION TO TAXPAYERS” The power or taxation is the strongest power of the
government. It is superior when it comes to the
General Rule: Rulings are not retroactive if they imposition of tax and in determining the object of
are prejudicial to the taxpayer. taxation. The power of eminent domain and police
power cannot interfere as regards the
Exceptions: determination of the object of taxation. (Sison vs.
a. Where the taxpayer deliberately Ancheta)
misstates or omits material facts from his
return or any document required of him Two-Fold Nature of Taxation
by the Bureau of Internal Revenue; -Inherent in character
b. Where the facts subsequently gathered -Legislative in character
by the Bureau of Internal Revenue are
materially different from the facts on
which the ruling is based; or Limitations of Taxation (Quick Glance)
c. Where the taxpayer acted in bad faith.
Inherent Limitations - proceeds from the very
 Rulings which merely embody administrative nature of the taxing power itself. They are
opinions on queries submitted do not have the otherwise known as “elements/characteristics
force and effect of laws. (Alexander Howden of taxation”.
and Co., Ltd. vs. CIR, L-19392, April 14, 1965)
1. Public purpose
Principle of Legislative Approval of an 2. Inherently legislative
Administrative Interpretation through 3. Territorial
Reenactment. 4. International Comity
5. Exemption of the Government b. Promotion of the General Welfare Test -

When the proceeds of the tax will directly
Constitutional Limitations-restrictions promote the welfare of the community in
imposed by the Constitution. equal measure
A. Specific or Direct NOTE: Incidental advantage to the public or

1. Prohibition against imprisonment for non- to the State, which results from the promotion
payment of poll tax; of private enterprise or business, does not
(Sec. 20, Art. III, Constitution) justify their aid by the use of public money.
2. Uniformity and equality of taxation;
(Sec. 28(1), Art. IV) The power to determine whether the purpose
3. Progressive system of taxation; of taxation is public or private resides in
(Sec. 28(1), Art. IV) Congress. However, this will not prevent the
4. Grant by Congress of authority to the court from questioning the propriety of such a
President to impose tariff rates; statute on the ground that the law enacted is
(Sec. 28(2), Art VI) not for public purpose; but once it is settled
5. Origin of revenue and tariff bills; that the law is for a public purpose, the court
(Sec. 24, Art VI) may no longer inquire into the wisdom,
6. Veto power of the President; expediency or necessity of such tax measure.
(Sec. 27(2), Art. VI)
7. Prohibition against taxation of religious,
charitable entities, and educational It is the purpose which determines the public
entities; (Sec 28, par 3, Art. VI) character of the tax law, not the number of
8. Majority vote of Congress for grant of tax persons benefited. As long as the ultimate
exemption; result favors the welfare of the public in
(Sec 28 (6),Art.VI) general, the appropriation of public revenue is
9. No use of public money or property for deemed done for the public purpose.
religious purposes;
(Sec 28, par. 3, Art. VI) Public purpose must exist at the time the tax
10. Special assessments; proceeds are being used or a tax law is being passed
(Sec. 29, par 3, Art. VI) for a certain purpose, whichever comes first.
11. Non Impairment of Jurisdiction of the (Pascual vs. Sec. of Public Works)
Supreme court;
(Section 5 (2) (b), Art.VIII) Taxpayers’ Suit – requires illegal expenditure of
12. Grant of power to Local Government Units public money.
to create its own sources of revenue;
(Secs. 5 &6, Art. X) Requisites of taxpayer’s suit:
13. Prohibition against taxation of non-stock, a. That the tax money is being extracted and
non-profit institutions; spent in violation of specific constitutional
(Sec. 4 (3 and 4) Art. XIV) protection against abuses of legislative power;
b. That public money is being deflected to any
B. General or Indirect improper purpose;
1. Due process clause; c. That the petitioner seeks to restrain the
(Sec. 1, Art. III) respondents from wasting public funds
2. Equal protection clause; through enforcement of an invalid or
(Sec. 1, Art. III) unconstitutional law.
3. Religious freedom;
(Sec. 5, Art. III) However, the SC has discretion as to whether
4. Non-impairment clause; or not to entertain a taxpayer’s suit and could
(Sec. 10, Art. III) brush aside the lack of locus standi where the
issues are of transcendental importance in
keeping with the court’s duty to determine
that public offices have not abused the
INHERENT LIMITATIONS discretion given to them. (Kilosbayan vs.
(PITIE) Guingona, 232 SCRA 110)
1. PUBLIC PURPOSE
2. INHERENTLY LEGISLATIVE
Tests to determine whether or not taxation is
for public purpose: General Rule: Power of taxation is vested in
a. Duty Test - The thing to be furthered by Congress and may not be delegated by it based
the appropriation of public revenue is on the doctrine of separation of powers.
something which is the duty of the
government to provide;

11
d. Subject matter of the tax (person, property,

Exceptions: rights or activity);
a. Delegation to Local Governments. e. Citizenship of the taxpayer; and
Local taxing power granted by the f. Nature, kind or classification of the tax being
Constitution (Art. X, Sec. 5, 1987 imposed.
Constitution). Local governments shall
have to create its own sources of revenues
and to levy taxes, fees, and other charges GENERAL RULES OF TAX SITUS
subject to limitations Congress may
provide, which shall accrue exclusively to Situs of Income Taxation
the local governments.
Sources of Income Taxpayers
Under the Doctrine of Implied Necessity, Income RC/DC/Estate NRC/Aliens/F
the power to create municipal Earned: s/ C
corporations carries with it by necessary
Trusts
implication the power to compel upon it
Within Taxable Taxable
the power to tax.
Without Taxable Nontaxable
In case of doubt as to whether the LGU Partly Taxable Partly taxable
has the power to tax or not, all doubts within and
must be resolved in favor of the existence without
of such power. This is not the rule RC- NRC – Nonresident Citizens
without such provision in the Resident FC – Foreign Corporations
Constitution. Citizens
DC-
b. Delegation to the President Domestic
 to fix tariff rates, import and export Corporation
quotas (Art. VI, Sec. 28[2], 1987 s
Constitution);
 emergency powers (Art VI, Sec 23 [2] Source Rules in Determining Income from Within
1987 Constitution); and Without
 to enter into executive agreement, Quick Glance
and to ratify treaties which may Type
contain tax exemption provisions Interest Residence of the
subject to the concurrence by the debtor
Senate in the ratification made by Income of merchandising Place of sale
the President. business
Services or compensation Place of
c. Delegation to Administrative Agencies income performance of
(The power of subordinate legislation) service
It must comply with a set of sufficient
Rentals Location of
standards expressed by law.
property, real or
personal
3. TERRITORIAL
Royalties Place of use of
intangibles
Situs of taxation
Sale of real property Location of
It means the “place of taxation”, is a limitation on
property
the taxing power. This is so because however
broad the power of taxation may be as to its Sale of personal property Place of sale
character and no matter how searching it is in its Sale of shares of stock of Within Phils.
extent, such power is necessarily limited only to domestic corporation
persons, property or businesses within its
jurisdiction; that is to say, to subjects within its
The following taxpayers are taxed from their
jurisdiction, or over which it can exercise
income that is exclusively within the Philippines:
dominion. (Shaffer vs. Carter, 252 U.S. 37)
a. Non-Resident Citizens;
The following factors are determinants to the situs b. Resident Aliens;
of taxation: c. Non-Resident Aliens Engaged in Trade or
Business;
a. Place of the excise, privilege, business or
d. Non-Resident Aliens Not Engaged in Trade or
occupation being taxed;
Business;
b. Source of the income being taxed;
c. Residence of the taxpayer; e. Special Aliens;
f. Resident Foreign Corporations; and
g. Non-Resident Foreign Corporations.
Corporate Taxes – is taxed on the country where

The following taxpayers are taxed from their the corporation is organized.
income within and without the Philippines: 4. INTERNATIONAL COMITY
a. Resident Citizens;
b. Estates under Judicial Settlement; The property or income of a foreign state or
c. Irrevocable Trust; government may not be the subject of taxation
d. Co-ownership; and by another.
e. Domestic Corporations. This is based on:
a. The Latin maxim, In par parem non habet
 Situs of Property Taxes imperium. As between equals there is no
sovereign. Taxation is a high perogative of
Real Property sovereignty, hence may not be imposed
It is subject to taxation in the state or country where upon foreign sovereigns.
it is located (lex rei sitae), regardless of whether the b. The rule of international law may not be
owner is a resident or a non-resident. [First National sued without its consent so that it is
Bank vs. Marine, 284 U.S. 321.] useless to impose a tax which could not be
collected.
Personal Property c. The concept that when a foreign sovereign
The situs is wherever it was actually kept or enters the territorial jurisdiction of
located (lex rei sitae), or it was held to be the another, it does not subject itself to the
domiciled of its owner, following the age-old jurisdiction of the other.
Doctrine of Mobilia Sequuntur Personam
(movables follow the person). DOCTRINE OF SOVEREIGN EQUALITY
(In par parem non habeat imperium)
 Situs of Excise Tax This means that the property or income of a
foreign state may not be the subject of taxation by
Estate Tax – is subject to taxation in the place another.
where the decedent is last domiciled.
 Thus, if a tax law violates certain
Donor’s Tax – is subject to taxation in the place international laws, it is not only invalid but it
where the donor is domiciled at the time of is also unconstitutional because the
transfer. Constitution says "the Philippines adopts the
generally accepted principles of international
A Resident Decedent/Donor is taxed on all their law as part of the law of the land."
properties (whether real or personal) located
within and without the Philippines.
5. EXEMPTION OF THE GOVERNMENT
A Non-Resident Decedent/Donor is taxed on their ENTITIES, ANGENCIES AND
real and tangible personal properties located INSTRUMENTALITIES
within the Philippines. Their intangible personal
properties are taxed only if they are located within General Rule: As a matter of public policy,
the Philippines unless exempted on the basis of properties of the State or any of its political
the Principle of Reciprocity. subdivisions devoted to government use and
purposes are generally exempt from taxation.
 Situs of Business Taxes
Exception: When there is a law that says that
Sale of Real property – is taxed on the place where it is not exempt from tax.
the real property is located.
Nothing can prevent Congress from decreeing
Sale of Personal property – is taxed on the place that even instrumentalities or agencies of the
where the sale took place. government performing functions may be
subject to tax. (MCIAA vs. Marcos, 261 SCRA
Value-Added Tax – follows the Destination 667)
Principle also referred to as the Cross Border
Doctrine. No VAT shall be imposed to form part of Agencies performing governmental functions
the cost of the goods destined of consumption as a rule are tax exempt (by reason of public
outside the territorial border of the taxing policy) unless expressly subject to tax.
authority. Hence, goods are taxed only in the Agencies performing proprietary functions
country where these are consumed. are subject to tax unless expressly exempt.
(Posadas vs. Standard Well)
Franchise Tax – is taxed on the country that
granted the franchise. With respect to government properties, NDC
vs. Cebu City enunciated these principles:

13
1. Properties owned by the Republic of the

Philippines AND agencies without The Constitutional provision which provides that
the Congress shall evolve a progressive system of
separate and distinct personality are taxation is merely a directive to Congress, not a
exempt from taxation. In other words, right enforceable before the courts.
those agencies having their own charter
are treated for tax purposes in accordance A tax adopting a regressive system of taxation is
with the provisions of their respective valid. The Constitution does not really prohibit
charters. the imposition of indirect taxes, which like the
VAT, are regressive. The Constitutional provision
2. The exemption of public properties from simply means that indirect taxes shall be
taxation does not extend to the minimized. The mandate of the Congress is not to
improvements introduced by the present prescribe but to evolve a progressive tax system.
occupants at their expense. (EVAT en banc resolution, Tolentino, et al. vs.
Secretary of Finance, October 30, 1995)
CONSTITUTIONAL LIMITATIONS
1. President’s Derivative Power to Tax
PROVISIONS DIRECTLY AFFECTING
TAXATION The Congress may, by law, authorize the
President to fix within specified limits and subject
to such limitations and restrictions it may impose,
1. Non-Imprisonment for Non-Payment of Poll
tariff rates, import and export quotas, tonnage
Tax
and wharfage dues and other duties or imports
within the framework of the national development
“No person shall be imprisoned for non-
program of the government.” (Art. VIII, Sec.28 [2],
payment of a debt or poll tax.” (Art. III, Sec. 20,
1987 Constitution)
1987 Constitution)
2. Tax Exemption of properties actually,
If acts violative of laws were committed in the
directly, and exclusively used for religious,
issuance and payment of the cedula or community
charitable and educational purposes (Art. VI,
development tax, imprisonment is allowed.
Sec.28 [3], 1987 Constitution)
2. Uniformity in Taxation
The properties exempt from taxation under this
provision are cemeteries, churches, parsonages, or
“The rule of taxation shall be uniform and
convents appurtenant thereto. Exempted from
equitable.” (Art. VI, Sec. 28[1], 1987 Constitution)
real property tax are lands, buildings and
improvements actually, directly and exclusively
Uniformity in taxation means that all articles or
used for religious, charitable or educational
properties of the same class shall be taxed at the
purposes.
same rate. Different articles or other subjects like
transactions, business, rights, may be taxed at
What is meant by actual, direct and exclusive use
different rates provided that the rate (not
of property for charitable, religious and
necessarily the amount) is uniform in the same
educational institutions is the direct and
class everywhere.
immediate and actual application of the property
itself to the purposes for which the charitable
EQUALITY UNIFORMITY institution is organized. It is not the use of the
Accomplished when A tax is considered
income from the real property that is
the burden of the tax uniform when it
falls equally and operates with the same determinative of whether the property is used for
impartially upon all force/ effect in every tax-exempt purposes. (St. Louis Men’s Christian
the persons and place where the subject Association vs. Genher, 47 S.W. 2d77)
property subject to it may be found.
Equitability is All property belonging Doctrine of Usage
achieved when the to the same class shall The rule remains that it is the USE and not the
burden of taxation be taxed alike. ownership that determines the exempt character
falls to those who are
of a property. What is meant by “use” remains a
able to pay better.
litigious issue, but should always be measured
under the constitutional prescription of actually-
Progressive System of Taxation
directly-exclusively purposes.
“Congress shall evolve a progressive system of
taxation.” (Art. VI, Sec. 28[1], 1987 Constitution) -
3. Tax Exemptions granted to Non-Stock, Non-
Tax rates increases as tax base increases.
Profit Educational Institutions
All revenues and assets of non-stock, non-profit

educational institution used actually, directly and
exclusively for educational purposes shall be

exempt from taxes and duties. (Art. XIV, Sec.4[ 3], Each local government unit shall have the power
1987 Constitution) to create its own sources of revenues and to levy
taxes, fees and charges subject to such guidelines
Subject to the conditions prescribed by law, all and limitations as the Congress may provide,
grants, endowments, donation or contributions consistent with the basic policy of local autonomy.
used actually, directly and exclusively for Such taxes, fees and charges shall accrue
educational purposes shall be exempt from tax. exclusively to the local governments. (Art. X, Sec.
(Art. XIV, Sec.4 [4], 1987 Constitution) 5, 1987 Constitution)
ART. XIV, Sec. 4(3) ART. VI, Sec. 28(3) Congress cannot abolish the local government’s
Grantee power to tax as it cannot abrogate what is
Non-stock, non- Religious, expressly granted by the fundamental law.
profit educational educational,
institution charitable 11. Flexible Tariff Clause
institutions
Taxes Covered This refers to the authority given to the president
Income tax, custom Property tax to adjust tariff rates under Section 401 of the
duties, property tax Tariff and Customs Code, which is the enabling
(DECS Order No. law that made effective the delegation of the
137-87) taxing power to the President under the
Constitution.
6. Grant of Tax Exemptions
PROVISIONS INDIRECTLY AFFECTING
General Rule: “No law granting any tax exemption TAXATION
shall be passed without the concurrence of a
majority of all the members of Congress.” (Art. VI, 1. Due Process of Law
Sec. 28[4] of the 1987 Constitution)
“No person shall be deprived of life, liberty or
Except: When a statue provides that certain property without due process of law.” (Art. III,
persons or property is immune from taxation. Sec.1, 1987 Constitution)
7. Special Fund Requisites of Due Process:

a. Substantive limitation – the interest of the
“All money collected on any tax levied for a special public generally as distinguished from those of
purpose shall be treated as a special fund and paid a particular class require the intervention of
out for such purpose only. If the purpose for which the State; and
a special fund was created has been fulfilled or b. Procedural limitation – the means employed
abandoned, the balance, if any, shall be must be reasonably necessary for the
transferred to the general funds of the accomplishment of the purpose and must not
government.” (Art. VI, Sec. 29[3], 1987 be unduly oppressive.
Constitution)
However, due process is violated by any of these
8. Veto Power of the President situations: (VCORP)
a. Where the law is in violation of inherent
“The president shall have the power to veto any limitations;
particular item or items in an appropriation, b. If the tax amounts to a confiscation of property;
revenue or tariff bill but the veto shall not affect c. If the subject of confiscation is outside the
the item or items to which he does not object.” jurisdiction of the taxing authority;
(Art.VI, Sec.27 [2], 1987 Constitution) d. If the law which is applied retroactively
imposes unjust and oppressive taxes;
9. Non-impairment of Jurisdiction of the e. If the law is imposed for a purpose other than
Supreme Court public purpose.
The Supreme Court may review, revise, reverse, 2. Equal Protection of the Law
modify or affirm on appeal or certiorari as the law
or the Rules of court may provide all cases “…nor shall any person be denied the protection of
involving the legality of any tax, impost, the laws. (Art. III, Sec.1, 1987 Constitution)
assessment or toll, or any penalty imposed in
relation thereto. (Art. VIII, Sec. 5, 1987 It merely requires that all persons subjected to
Constitution) such legislation shall be treated alike, under like
10. Grant of Power of Taxation to Local

Government Units

15
circumstances and conditions, both in the (LAP-R)

privileges conferred and in the obligations
imposed. 1. LEVYING/ IMPOSITION (Tax Legislation)
Requisites for a Valid Classification (SPEG) It refers to the enactment of tax laws or statutes.
a. It must be based on substantial Generally, it cannot be delegated. It usually
distinctions. includes the selection of coverage, object, nature,
b. It must apply to both present and future extent and situs (CONES) in taxation, its purpose
conditions. and prescribing the rules in taxation in general.
c. It must apply equally to all members of the
same class.  This is essentially legislative.
d. It must be germane to the purposes of the  This is referred to as the Impact of Taxation.
law.
Courts have no power to interfere in the wisdom,
 Substantial distinction means it must be real, objective, motive or expediency in the passage of a
material, and not superficial distinction. (Hiu tax law, as this is purely legislative in character.
Tsong Pao case) To do so would be tantamount to a violation of
both the letter and spirit of the organic laws by
3. Taxation and the Freedom of Religion which the Philippine Government was brought
into existence to invade a coordinate and
“No law shall be made respecting an independent department of the Government and
establishment of a religion or prohibiting the free to interfere with the legitimate powers and
exercise thereof. The free exercise and enjoyment functions of the Legislature. (Tolentino, et al. vs.
of religious profession and worship without Secretary of Finance, 235 SCRA 630)
discrimination or preference shall forever be
allowed. No religious test shall be required for the 2. ASSESSMENT AND COLLECTION
exercise of civil or political rights.” (Art. III, Sec.5, (Tax Administration)
1987 Constitution)
It is the act of administration and implementation
4. Non-Impairment Clause of tax law by the executive branch through its
administrative agencies. Nonetheless, the
“No law impairing the obligation of contracts shall delegation must pass the completeness and
be passed.” (Art. III, Sec.10, 1987 Constitution) sufficient standard test in order to prevent the
abuse of its exercise.
The obligation or contract is impaired when its
items or conditions are changed by law or by a  This is essentially administrative.
party without consent of the other thereby  Also known as the Incidence of Taxation.
weakening the position of the latter.
This is delegable by virtue of a valid statute. It is
Thus, there is impairment by law when a tax the notice given to a taxpayer regarding his
exemption based on a contract is revoked by a liability and a demand to pay on time.
latter statute.
3. PAYMENT and /or Exercise of Remedies
It may be well to point out that the non-
impairment clause will only be violated if and This signifies an act of compliance by the
when the taxing authority was a party to the taxpayer. This is initially either through the
contract in question. Executive or Legislative Department and
ultimately through the Judiciary.
The rule, however, does not apply utility
franchises or rights since they are subject to This is the response of the people to the revenue
amendment, alteration, or repeal by the Congress bill duly executed by the lawmaking body of the
when the public interest so requires. (Cagayan government in the exercise of its power of
Electric and Light Co., Inc. vs. Commissioner, taxation.
G.R. No. 60216, September 25, 1985)
This is also considered an Incidence of Taxation.
This provision was not really thought of as a
limitation on the power of taxation except in cases
where tax exemption were granted for a valuable
consideration.
4. REFUND
Tax refunds are in the nature of tax exemptions.

They are regarded as in derogation of sovereign
STAGES OF TAXATION authority and to be construed strictissimi juris
against the person or entity claiming the Refers to the duties It is imposed on
exemption. The burden of proof is upon him who payable on goods different subjects
claims the exemption in his favor and he must be imported or exported and objects.
able to justify his claim by the clearest grant of from our country.
organic or statute law (Commissioner of Internal It also pertains to a It is broader in
Revenue vs. Court of Appeals, G.R. No. 104151, book of rates terms because it
March 10, 1995) containing names of includes all kinds of
merchandisers with impositions
corresponding duties including tariff or
DEFINITION, NATURE AND to be paid for. customs duties.
CHARACTERISTICS OF TAXES
TAX pertains to an enforced proportionate TAX TOLL

contribution imposed upon businesses, interests, It is a demand of It is a demand of
transactions, rights, acts, persons, properties and sovereignty. proprietorship.
privileges, within the territorial jurisdiction of the It is one’s support for It is a compensation
taxing authority, exercised by the legislature for a the government. for the use of
public purpose and generally payable in money. somebody else’s
property.
Essential Characteristics of Taxes It is imposed only by It may be imposed
the government based by government or by
a. Taxes are enforced contributions not on governmental private individuals
dependent on the will of the person taxed, not needs. and is determined by
a contract but a positive act of the the cost of property
government; or improvement
b. It is levied by the legislative body of the state; thereon.
c. It is generally payable in money;
d. It is imposed by the State on persons,
property or services within its jurisdiction;
e. It is proportionate in character-taxes must be As to: TAX LICENSE
based on the ability to pay in accordance with Purpose Revenue Regulation
the constitutional mandate to Congress to purposes purposes
evolve a progressive system of taxation; Amount No limit Has limit
f. It is levied for public purpose/s. (useful/non-
useful)
REQUISITES OF A VALID TAX Subject of Businesses, Required for

Imposition interests, the
a. It must not be violative of the constitutional, transactions, commencement
inherent and/or contractual limitations in the rights, acts, of a business or
power of taxation; persons, profession
b. It must be uniform and equitable, not unjust, properties
excessive, oppressive, confiscatory or and
discriminatory; privileges
c. It must be for a public purpose; (BI-
d. The taxing authority must have jurisdiction TRAPPP)
over the object of taxation;
e. It must be proportionate in character; Revocability Nature of Always
f. It is generally payable in money at regular permanence revocable
interval; Effect of It does not It makes the
g. It is levied by the Legislature that has Non- necessarily business illegal
jurisdiction over the object of taxation. compliance make the
act, business
or profession
illegal
TAX AS DISTINGUISHED FROM OTHER Scope Power to tax It does not
includes the include the
FORMS OF EXACTIONS
power to power to tax
license
TAXATION TARIFF

17
When Post-activity Pre-activity

Imposed imposition (no imposition
violation of (there is a
Exemption from Traditional exemptees
the Free violation of
taxes does not are not exempted.
Worship said clause)
include exemption Exemption is
Clause)
from special qualified.
Basis of Current data Data from
assessment
Computation preceding
year or
An imposition of a Added to the main tax
quarter’s
charge on all in case of
data. If new
property, real or improvement at the
business, it is
personal, in a instance of property
based on
prescribed area is a owners. It is
capitalization
tax and not an exceptional both as to
.
assessment although time and locality. A
Source of Taxing power Police power
its purpose is to charge imposed only
Power of the
make a local on the property
Government
improvement on a owners benefited is a
Limitation Subject to Not subject to
street or highway. special assessment
constitutional such
rather than a tax.
, inherent and limitations
contractual because the
limitations interest and
TAX DEBT
welfare of the
public must It is based on law It is based on contract
be It is not assignable It is assignable
safeguarded Non-payment covers Non-payment covers
Nature Self-assessing Not self- imprisonment except no imprisonment
assessing poll tax
Collecting National Local Generally payable in Payable in cash or
power Government Government money kind
Generally not subject Subject to set-off
to set-off
TAX SPECIAL Does not earn Draws interest when
ASSESSMENT interest except when stipulated or when in
Levied on businesses, Levied on land delinquent default
interests, Its prescriptive Prescriptive periods
transactions, rights, periods are those are provided under
acts, persons, provided under Civil Code or Rules of
properties and NIRC Court
privileges Imposed by public A private transaction
(BI-TRAPPP) authority
May be made a Cannot be made the
personal liability of personal liability of General Rule: Taxes are not debts because a tax
the person assessed the person assessed does not depend upon the consent of the taxpayer
because it is the land and there is no express or implied contract to pay
that answers for the taxes.
liability
Based on necessity Based wholly on Exceptions:
with no hope of direct benefits received A tax is considered a debt when:
or immediate benefit  It is secured by a bond.
to the taxpayer  Interest on delinquency is considered as
It is of general It is exceptional in interest on indebtedness.
application application for the  It is a collection being enforced by court
recovery of cost and/or action.
maintenance of  It is subject of a compromise agreement
improvement validly entered into between the government
Power to tax carries Does not carry the and the taxpayer.
with it the power to power to tax  When taxes are considered debts, the
levy special prescriptive periods to be used are those in
assessment the Civil Code and Rules of Court.
AS TO GRADUATION
PROGRESSIVE REGRESSIVE
Tax rate increases as Tax rate decreases
KINDS OF TAXES the tax base as the tax base
increases (e.g. increases
AS TO OBJECT current Philippine
tax system)
PERSONAL PROPERTY
PROPORTIONATE MIXED
Is of fixed amount Imposed on Fixed rate regardless At certain point, it
imposed on property, real or of tax base is progressive, then
individuals, whether personal, in regressive
citizens or not, proportion to its
residing within a value (e.g. real Proportionate is presently referred to as
specified territory, property taxes) community development tax.
without regard to
their property or It is payable in the city or municipality where that
occupation (e.g. poll taxpayer is domiciled.
taxes, community
tax)
PRIVILEGE
Imposed for the exercise of a right or privilege
or of doing business
AS TO BURDEN OR INCIDENCE
DIRECT INDIRECT
Tax for which a Tax primarily paid
taxpayer is directly by persons who can
liable on the shift the burden
transaction or business upon someone else
it engages in (e.g. estate (e.g. VAT)
and donor’s gift tax)
AS TO TAX RATE
SPECIFIC AD VALOREM
Imposed and based on Based on selling
weight or volume price or other
capacity or any other specified value of
physical unit of goods (e.g. real
measurement property tax)
(e.g. excise tax on
alcohol, tobacco
products)
AS TO PURPOSE
GENERAL SPECIFIC
Imposed solely to raise Imposed and
revenue for the collected to achieve a
government (e.g. particular legitimate
internal revenue taxes object of government
by the government) (e.g. additional 1%
tax levied under R.A.
No. 5447)
AS TO SCOPE OR AUTHORITY TO IMPOSE

NATIONAL LOCAL
Imposed by the Levied and collected
national by the local
government government.
- real property tax

-internal revenue - municipal tax
taxes

19
taxpayer other than a producing goods or

mere return of capital. services.
Flow of wealth Fund or property
Service of wealth Wealth
Fruit of the tree Tree
 A mere increase in the value of property is not

income but merely unrealized increase in
capital. The increase in the value of property
NATIONAL INTERNAL REVENUE CODE OF 1997

(NIRC)
as amended
NATIONAL INTERNAL REVENUE TAXES is also known as appraisal surplus or

(Sec. 21) revaluation increment.
1. Income tax
2. Estate and Donor’s tax
3. Value-Added tax Salient Features of the Present Income Tax
4. Other percentage tax System
5. Excise tax
6. Documentary stamp tax Individual Corporate
7. Such other taxes as are or hereafter may be
Income Income
imposed and collected by the BIR.
Taxation Taxation
Tax Schedular Global
Treatment
INCOME TAXATION
Net RC Domestic (DC)
BASIC CONCEPTS Income NRC Resident
Taxation RA Foreign (RFC)
Income Tax is a tax on all yearly profits arising NRA-ETB
from property, possessions, trade or business, or Gross Non-resident
as a tax on a person’s income, emoluments, profits Income NRA-NETB Foreign Corp.
and the like. (61 CJS 1559) It is tax on income, Taxation (NRFC)
whether gross or net. (27 Am. Jur. 208) Income Residence- Residence –RFC
Tax Situs RA,RC Place-NRFC
Income tax is generally classified as an excise tax. Place- NRA, Nationality- DC
It is not levied upon persons, property, funds or NRC
profits but upon the right of a person to receive Citizenship -
income or profits. RC
Personal Individual
Income may be defined as the gain derived from exemptions taxpayers
capital, from labor or from both combined, Exception: N-A
provided it is understood to include profit gained NRA-NETB
through a sale or conversion of capital assets.
(Doyle vs. Mitchell, 247 US 179) Common Features
Pay as you Upon filing Upon filing of
It is any wealth which flows into the taxpayer file system of their ITR their quarterly
other than a mere return of capital (Fisher vs. corporate ITRs
Trinidad) and final
adjustment
Capital – resource of person, which can be used in corporate
producing goods and services. returns
Creditable Withholding agent (source) -
Income Capital Withholding withholds the tax and remits
All wealth, which Fund or property Tax System the same to the BIR.
flows into the which can be used in Tax withheld- creditable
against income tax due.
Final Withholding agent (source) -

withholding withholds the tax and remits a. Direct Tax – the tax burden as well as the
tax system the same to the BIR. tax liability lie in the same person.
Tax withheld- final settlement b. Progressive Tax – the tax rate increases as
of the tax liability on the the tax base increases
income covered. c. Comprehensive – adopts the citizenship
principle, the residence principle, and the
source principle
d. Semi-schedular or Semi-global tax MI-
SCHEDULAR Tax System – taxable income
(i.e. gross income less allowable deductions
INCOME TAX SYSTEMS and exemptions) is subjected to one
graduated tax rates, in case of an individual,
a. GLOBAL TAX SYSTEM. One where the or normal corporate income tax rate, if a
taxpayer is required to lump all the items of corporation.
income earned during a taxable period and
pay under a single set of income tax rules on CRITERIA IN IMPOSING PHILIPPINE
these different types of income. INCOME TAX (Sec.23, NIRC)
b. SCHEDULAR TAX SYSTEM. Provides for a a. CITIZENSHIP PRINCIPLE. A citizen of the

different tax treatment of different types of Philippines is subject to income tax on all
income so that a separate tax return is income derived from sources within and
required to be filed for each type of income without the Philippines, if he is a resident
and the tax is computed on a per return or therein; on income derived from sources
per schedule basis. within, if he is a non-resident citizen
b. RESIDENCE PRINCIPLE. A resident alien
c. SEMI-SCHEDULAR OR SEMI-GLOBAL is taxable only on income derived from
TAX SYSTEM. (i.e. gross income less sources within the Philippines and exempt
allowable deductions and exemptions) One on income derived from sources without the
which is subjected to one graduated tax Philippines.
rates, in case of an individual, or normal c. SOURCE PRINCIPLE. The income of a non-
corporate income tax rate, if a corporation. resident alien is taxable because he derives
income from sources within the Philippines.
Schedular System vs. Global System
TYPES OF PHILIPPINE INCOME
A. Schedular System of Taxation
 System adopted in imposing taxes on the a. Compensation Income – income derived from
income of individual TPs services rendered under an employer-
 Employed where income tax treatment varies employee relationship.
and made to depend on the kind or category b. Professional Income – income derived from
of taxable income of the TP. the exercise of a profession as a means of
 Provides for different tax rules or treatments. living.
 By making it depend on the kind or category c. Business Income – any profit or gains
of taxable income, it means that it classifies derived from rendering services, producing,
or categorizes income. manufacturing, or selling products, farming,
and long term construction contracts.
Important Characteristics or Features d. Passive Income – any gain or profit which
1. Income is classified or categorized. (Sec. 32A) the taxpayer merely waits for it to come in
2. It provides for different tax rules or such as royalties, dividends, winnings and
treatment. (Secs. 24 and 25) prizes, or interest income.
3. Imposes different tax rates known as the e. Capital Gain – gain from dealings in capital
progressive rates of income tax. (Secs. 24 and assets.
25)
SITUS OF INCOME TAX (Sec. 23, NIRC)
B. Global System of Taxation
 System adopted in imposing tax of corporate Quick Glance
TP Taxpayer Source of Income
 Uniform tax rules or treatments Resident Citizen Within & Without
 Does not classify or categorize income. Non-resident Within
Secs. 27 and 28 apply. citizen/OCW
Resident alien Within
FEATURES OF THE PHILIPPINE INCOME Non-resident alien Within
TAX LAW Domestic Corporation Within & Without

21
Foreign Corporation Within 3. The income, gain or profit is received or

(Resident/non-resident) realized during the taxable year; and
4. There is no law which excludes it from
SEC. 23. General Principles of Income Taxation in taxation.
the Philippines. - Except when otherwise provided
in this Code: DOCTRINES ON REALIZATION OF INCOME
a. A citizen of the Philippines residing therein is
taxable on all income derived from sources 1. Severance Test – income is not deemed
within and without the Philippines; realized until the fruit has been plucked from
b. A nonresident citizen is taxable only on the tree. Income is recognized when there is
income derived from sources within the separation of something which is of
Philippines;
exchangeable value (Eisner vs. Macomber, 252
c. An individual citizen of the Philippines who is US 189).
working and deriving income from abroad as
an overseas contract worker is taxable only on 2. Claim of Right Doctrine – a taxable gain is
income derived from sources within the conditioned upon the presence of a claim of
Philippines: Provided, That a seaman who is right to the alleged gain and the absence of a
a citizen of the Philippines and who receives definite unconditional obligation to return or
compensation for services rendered abroad as repay that which would otherwise constitute
a member of the complement of a vessel a gain.
engaged exclusively in international trade
shall be treated as an overseas contract  Illegally acquired income constitutes realized
worker; gain. (Rutkin vs. US)
d. An alien individual, whether a resident or not
of the Philippines, is taxable only on income 3. Control Test/Doctrine of Ownership,
derived from sources within the Philippines; Command or Control of Income) – power to
e. A domestic corporation is taxable on all procure the payment of income and enjoy the
income derived from sources within and benefit thereof. (ex. Prepaid rents)
without the Philippines; and
f. A foreign corporation, whether engaged or not  There is realization of income if the donor
in trade or business in the Philippines, is during a taxable year, detaches the interest
taxable only on income derived from sources coupon from his bond, donates it to somebody
within the Philippines. who receives payment upon maturity.
(Helvering vs. Horst)
Source Rules in Determining Income from Within
and Without 4. Doctrine of Actual Receipt of Income – the
gain must be realized or received.
Type
Interest Residence of the 5. Doctrine of Constructive Receipt of Income.
debtor Income which is credited to the account of or
Income of Place of sale set apart for a taxpayer and which may be
merchandising drawn upon by him at any time is subject to
business tax for the year during which so credited or
Services or Place of performance set apart, although not then actually reduced
compensation income of service to possession. The income must be credited to
Rentals Location of property, the taxpayer without any substantial
real or personal limitation or restriction as to the time or
Royalties Place of use of manner of payment or condition upon which
intangibles payment is to be made.
Gain on sale of real Place of sale
property 6. Economic Benefit Test – any economic benefit
Gain on sale of Place of sale to the employee that increases his net worth
personal property is taxable.
Gain on sale of shares Within Phils.
TAX ACCOUNTING PERIODS
of stock of domestic irrespective of place
1. Calendar period – starts January 1 and ends
corporation of sale
on December 31.
2. Fiscal period – starts on the 1st day of any
REQUISITES FOR TAXABILITY OF INCOME month other than January and ends 12
months thereafter.
1. There must be a closed and completed 3. Short period – income for a period less than
transaction; 12 months is required to be reported when the
2. A gain or profit is derived therefrom;
taxpayer dies or when the taxpayer is under a. Sale of realty (inventory) where the
jeopardy assessment. initial payments do not exceed 25% of the
selling price.
 Taxable income shall be computed on the  This sale is subject to CWT and normal
basis of calendar year if: tax for corporate taxpayer (RA 9337) of
1. annual accounting period is other than 5% to 32% for individual taxpayer. (Sec.
fiscal year; or 24 A, NIRC)
2. TP has no annual accounting period; or
3. he does not keep books; or b. Sale by individuals or real property
4. TP is an individual. considered as capital asset, if initial
payments do not exceed 25% of the selling
METHODS OF REPORTING INCOME AND price.(Sec. 49 C, NIRC)
EXPENSES  This sale is subject to a CGT of 6% based
on the selling price or zonal value
1. Cash method – generally reports income upon whichever is higher.
cash collection and reports expenses upon
payment. If earned from rendering of services, 4. Deferred Payments
income is to be reported in the year when
collected whether earned or unearned. (Sec. They include:
108, NIRC) a. Agreements of purchase and sale which
contemplate that a conveyance is not to be
2. Accrual Method – generally reports income made at the outset, but only after all or a
when earned and reports expense when substantial portion of the selling price has
incurred. If earned from sale of goods, income been paid; and
is to be reported in the year of sale, b. Sales in which there is an immediate
irrespective of collection. (Sec. 106, NIRC) transfer of title, the vendor being
protected by a mortgage or other lien as to
3. Installment Method. Method considered deferred payments.
appropriate when collections of the proceeds
of sales and incomes extend over relatively Such sales under (a) or (b) fall into two classes
long periods of time and there is strong when considered with respect to the terms of
possibility that full collection will not be sale, as follows:
made. Under this method, the TP may report 1. Sale of property on the installment plan,
income over the several taxable years in that is, sales in which the cash or property,
which collections are made based on the terms other than evidence of indebtedness of the
of payment. purchaser, received in payment during the
taxable year in which the sale is made do
Function: to permit the spreading of the not exceed 25% of the selling price; or
income tax over the period during which
payments of the sale price are received. 2. Deferred-payment sales are sales which the
payments received in cash or property other
The income to be reported for the year: than evidences of indebtedness of the
Total collections purchaser during the taxable year in which
during the year
X Gross Profit Rate
the sale is made exceed 25% of the selling
price.
When Installment Method Allowed
5. Percentage of Completion Method
1. Installment Sale of Personal Property
(Sec. 49, NIRC) This is applicable in case of a building,
installation or construction contract covering a
a. Personal property is regularly sold on an period in excess of one year, whereby gross
installment basis by a dealer; income derived from such contract may be
b. Casual sale of personal property on reported upon the basis of percentage of
installment basis where the selling price completion.
exceeds P1,000 and the initial payments
do not exceed 25% of the selling price. In determining the percentage of completion of
a contract, one of the following methods is
 As a rule, in casual sale of personal generally used:
property, if the initial payment exceeds a. The cost incurred under the contract as of
25% of the selling price, the transaction the end of the tax year are compared with
is considered cash sales. (Sec 49 B, NIRC) the estimated total to be performed; or
b. The work performed on the contract as of
2. Installment Sale of Real Property the end of the tax year is compared with
the estimated work to be performed.

23
o Corporations falling under MCIT (2% of gross

income) Under net income taxation, taxable
income is the net income. This applies to
taxpayers other than the above.
o For taxpayers (individuals or corporations)

earning business income, taxable income is:
GROSS INCOME
Gross sales
Gross income means the pertinent items of income Less: Cost of sales
referred to in Section 32(A) of the Tax Code. It Equals : Gross Income
pertains to ALL such gains, profits or income Less: Allowable deductions
derived from any source. Equals: Taxable income
Includes all items in Sec. 32(A) of the tax code but o For taxpayers earning pure compensation income
NOT LIMITED thereto and excludes all items in (individuals), taxable income is:
Sec. 32(B) - exclusions.
Gross compensation
For purposes of computing the income tax on Less: BPE/APE
domestic corporations, however, gross income Premium payment on
means gross sales less sales returns, discounts, health/hospitalization insurance
allowances and cost of goods sold (all business (max of 2,400/yr)
expenses directly incurred). Equals: Taxable income
Net income means gross income less deductions o For taxpayers earning both compensation income
and exemptions. and business income (individuals), taxable income
is:
Taxable income
 Refers to the tax base of income tax Gross Income
(income upon which the tax rate is Less: Allowable deductions
applied to obtain the income tax payable). Equals: Net Income
Less: BPE/APE
 Under Sec. 31 of NIRC, taxable income Equals: (Net) Taxable income
may either refer to gross income (if there
are no deductions or exemptions) or net Formula for computation of business income tax:
income.
Gross Sales (Revenue)
Less: Sales returns, discount and allowances
 Under gross income taxation, taxable Cost of Sales
income is the gross income (tax base is Equals: Gross Income
the gross income). This applies only to:
Less: Allowable deductions [sec. 34 A-J, Sec. 37 for
o NRA-NETB where gross income includes insurance companies]
dividends, interest and royalties, technical - if itemized deduction is opted
assistance and service fees, rental and leasing or
Optional Standard Deduction if not
income and capital gains. Gross income is subject
exceeding 40% -RA 9504 (sec. 34 L) - if OSD is
to final withholding tax of 25%. elected
Equals: Net Income
o NRFC where gross income includes dividends,
interest and royalties, technical assistance and Less: Personal and additional exemptions - Note:
service fees which are all subject to final only for individuals.
withholding tax of 30% (generally). Equals: Net Taxable income
o Corporations electing to be taxed at 15% of its Multiplied by Tax Rate (30% effective Jan. 1, 2009
gross income rather than 30% (a corporation – RA 9337)
Equals: Income Tax Due
whose cost of sales to gross sales ratio is not more
Less: Income tax withheld and/or Tax Credits
than 55%, may opt to be taxed at 15% of its gross Equals: Income tax payable
income subject to certain conditions).
4. Taxable Net Income

x Income Tax Rates
= Income Tax due;
5. Income Tax
– Creditable Withholding and/or Tax Credit
= NET TAXABLE INCOME
GROSS INCOME vs. NET INCOME vs.

TAXABLE INCOME
Items of Gross Income (Sec 32A)
Gross Net Income Taxable 1. Compensation for services
Income Income 2. Gross income from the conduct of trade or
All items of The pertinent Gross business or practice of profession
income less items of gross compensation 3. Gains derived from dealings in property
exclusions. income less personal 4. Interests
specified in and additional 5. Rents
the Tax Code, exemptions 6. Royalties
less (individual 7. Dividends
deductions taxpayers). 8. Annuities
and/or 9. Prizes and winnings
personal and 10. Pensions
additional 11. Partner’s distributive share from the net
exemptions, income of the GPP
if any, 12. Income from whatever source derived
authorized
for such types Exclusions from Gross Income
of income by 1. Proceeds of life insurance paid to the
the Tax Code beneficiary upon death of the insured
or other 2. Amount received by the insured as a return
special laws of premium
(Sec. 31, 3. Gifts, bequests and devices
NIRC). 4. Compensation for injuries or sickness
5. Income exempt under treaty
Gross Income Net Income 6. Retirement benefits, pensions, gratuities
7. Miscellaneous items:
Taxation Taxation
a. Income derived by foreign government
No deductions allowed Deductions are
b. Income derived by the government or its
allowed
political subdivisions
No exemptions can be Exemptions are c. Prizes and awards – in recognition of
granted granted religious, charitable, scientific,
Tax Base: Gross Tax base: Net Income educational,
Income Sec. 31 artistic, literary or civic achievement
Applies to: Applies to: subject
NRA-NETB and RC; NRC; RA; NRA- to two conditions
NRFC. ETB; DC; RFC. d. Prizes and awards in sports competition
e. 13th month pay and other benefits
f. GSIS, SSS, Medicare, Pag-ibig
FORMULA: Income tax is imposed on the NET contributions and Union dues
taxable income computed as follows: (sec. 31-35) g. Gains from the sale of bonds, debentures
or other certificate of indebtedness with
1. ALL income maturity of more than 5 years
– Exclusion h. Gains from redemption of shares in
= GROSS INCOME mutual
fund
2. Gross Income
– Allowable Deductions
= Net Income; (taxable net income in the case of
ITEMS OF GROSS INCOME
corporation)
3. Net Income Item 1.COMPENSATION INCOME.

– Less Personal and Additional Exemptions All remuneration for services performed by an
= Taxable Net Income; employee for his employer under an employer-

25
employee relationship unless specifically excluded discourages charging a fixed fee. The honorarium
under the Tax Code. of a guest lecturer is an example.
It includes salaries, wages, emoluments 3. Fixed or Variable Allowances. In general, fixed

honoraria, bonuses, allowances, (transpo., or variable transportation, representation and
representation, entertainment and the like); other allowances that are received by a public
fees including director’s fees, if the director is, officer, or employee or officer or employee of
at the same time, an employee of the private entity, in addition to the regular
corporation; taxable bonuses and fringe compensation fixed for his position or office, is
benefits except those subject to FBT; taxable compensation subject to withholding tax. (Rev.
pensions and retirement pay; and other Reg. no. 2-98, Sec. 2.78.1; Rev. Reg. 6-82, Sec 2c)
income of similar nature including
compensation paid in kind. Any amount paid specifically, either as advances
or reimbursements for traveling, representation
and other bona fide ordinary and necessary
Basis/Test: The designation/name of the
remuneration upon which it is paid and the expenses incurred or reasonably expected to be
manner of payment is immaterial. What is incurred by the employee in the performance of his
important is that it is derived from employer- duties are not compensation subject withholding
employee relationship. tax, if the following conditions are satisfied:
a. It is for ordinary and necessary traveling
Requisites for Taxability and representation or entertainment
a. Personal services actually rendered. expenses paid or incurred by the
b. Payment is for such services rendered. employee in the pursuit of the employer’s
c. Payment is reasonable. trade, business or profession; and
b. The employee is required to
Tax Base of Compensation Income account/liquidate for the foregoing
Modified gross income expenses.
Formula:
Aggregate compensation income xx Examples:
Less: Health/hosp. premium, if any xx a. Transportation
Adjusted gross income xx b. Representation
Less: Personal Exemptions xx c. Other allowances, such as Cost of Living
Taxable compensation income xx allowances (COLA)
Personal exemptions is comprised of Basic PE of 4. Commission is usually a percentage of total

P50,000 and P25,000 for each qualified dependent sales or on certain quota of sales volume attained
child (not exceeding 4). as part of incentive, such as sales commission.
Health/hospitalization premium is allowed to the 5. Fees are received by an employee for the
extent of P2,400 if aggregate family income does services rendered to the employer including
not exceed P250,000. For married individuals, the director’s fee of the company, fees paid to the
spouse who claims additional personal exemption public officials, such as clerks of court or sheriffs
shall claim the premium deduction. for services rendered in the performance of their
official duty over and above their regular salaries.
CLASSIFICATION OF GROSS
COMPENSATION INCOME 6. Tips and Gratuities is being paid directly to an
employee (by a customer of the employer) which
Revenue Regulations No. 2-98, Section 2.78.1A, are not accounted for by the employee to the
and Section 8 of the NIRC classify gross employer. They are considered taxable income but
compensation income as follows: not subject to withholding tax.
1. Basic Salary or Wage 7. Hazard or Emergency Pay is an additional

Salary refers to earnings received periodically for payment received due to workers’ exposure to
a regular work other than manual labor, such as danger or harm while working. This is normally
a monthly salary of an employee added to the basic salary together with the
overtime pay and night differential pay to arrive
Wages refers to earnings received usually at gross salary.
according to specified intervals of work, as by the
hour, day, or week. 8. Retirement Pay refers to a lump sum payment
received by an employee who has served a
2. Honoraria are payments given in recognition for company for a considerable period of time and has
services performed for which established practice decided to withdraw from work into privacy.
In general, retirement pay is taxable except in the benefits received by heir upon death of
following instances: employee is not taxable.
a. SSS or GSIS retirement pays;
b. Retirement pay due to old age provided 12. Thirteenth Month Pay and Other Benefits. As
that the following requisites are met: a general rule, thirteenth (13th) month pay and
(1) The retirement program is approved other benefits are not taxable if the total amount
by the BIR Commissioner; received is P30,000.00 or less.(NIRC, Sec. 32(7)(e)
(2) It must be a reasonable benefit plan.
Its implementation must be fair and 13. Overtime Pay refers to premium payment
equitable for the benefit of all received for working beyond regular hours of work
employees; which is included in the computation of gross
(3) The retiree should have been salary of employee.
employed for ten (10) years in the
said company; 14. Profit Sharing is the proportionate share in the
(4) The retiree should have been fifty profits of the business received by the employee in
(50) years old at the time of addition to his wages.
retirement; and
(5) It should have been availed of for the 15. Awards for Special Services refers to the
first time. amount received as an award for special services
of employee, or suggestions to employer resulting
9. Separation Pay. It is taxable if voluntary in the prevention of theft or robbery.
availed of. It shall not be taxable if involuntary.
Involuntary separation are the following: 16. Beneficial Payments such as where an
a. Death; employer pays the income tax owed by an
b. Sickness; employee are additional compensation income.
c. Disability;
d. Reorganization/merger of company; and 17. Fringe Benefits not subject to FBT
e. Company at the brink of bankruptcy.
Forms and Measure of Compensation Income
Any payment made by an employer to an
employee on account of dismissal constitutes Forms of Measure of Income
compensation, regardless of whether the Compensation
employer is legally bound by contract, statute, or Cash Amount of money
otherwise, to make such payment. (Rev. Reg. no. received
2-98, sec. 2.78(B)(1)(b). Property or in kind Fair market value of
the property received
10. Pension is a stated allowance paid regularly to (Doctrine of Cash
a person on his retirement or to his dependents on Equivalent)
his death, in consideration of past services, Promissory notes or Not discounted –
meritorious work, age, loss or injury. other evidence of Face Value
indebtedness If the note can be
It is taxable unless the law states otherwise or discounted, the FMV
unless the BIR approves the pension plan of a of note upon receipt
private company. is the fair discounted
value.
11. Vacation and Sick Leave. The following rules
Price is stipulated FMV of the
should be observed in determining whether money
compensation in the
received for vacation and sick leave is taxable or
absence of contrary
not:
evidence.
Condonation of debt* Amount of debt
a. If paid or availed of as salary of an
cancelled
employee who is on vacation or on sick
Premiums paid by Amount of premium
leave notwithstanding his absence from
employer (employee’s paid.
work, it constitutes taxable compensation
family, executor,
income.
administrator or
b. Monetized value of unutilized vacation
estate is the
leave credits of ten (10) days or less which
beneficiary)**
were paid to private employees during the
year and the monetized value of leave
credits paid to government officials and
employees are not subject to income tax *Cancellation, Condonation or Forgiveness of
and to the withholding tax. Indebtedness
c. Terminal leave or money value of
accumulated vacation and sick leave

27
The amount condoned may be considered as On the part of the stockholder, such amount of
compensation income or a donation or a capital debt cancelled, is a taxable income subject to 10%
transaction, depending on the circumstances of Final Tax if the corporation is a DC.
the case.
Tax Effects/Implications/Incidences **Life Insurance Premium

Beneficiary Effects
1. Considered as Compensation Income to the ER: The ER can deduct
EE deductible to the ER The heirs, family, the amount of the
executor or premiums paid a s a
Requisites: administrator of the form of business
a. the cancellation or forgiveness must be estate expense. (Sec 3 A (i)
in consideration or based on account of
services rendered; EE:
If EE is a managerial or
b. The creditor must be the ER, the debtor supervisory EE- subject
must be the EE; to Final Tax (FBT)
c. The ER condoned the debt of the EE in If EE is rank-and-file-

consideration of the services rendered. considered
compensation income
Effects: and is subject to
1. To the ER-creditor, that may be progressive tax rate of
claimed as a deductible expense 5-32%
because this is really a form of Employer ER- cannot claim it as
compensation for services rendered. deductions or expenses
(Sec. 3 A (1) because the insurance
proceeds are but a mere
2. To the EE-debtor, it is compensation return of capital. (Sec.
income taxable (Sec. 32A (1) “in 36 A (4)
whatever form paid”.
EE- Not taxable- no
2. As a Taxable Donation benefit received by the
EE or his family.
If no consideration was given, the obligation was
simply condoned, renounced by the creditor-ER, it Tax Exempt Compensation Income
amounts to a taxable donation. a. De minimis benefits; and
b. Benefits provided for the convenience of the
Effects: employer.
1. If there’s donation, the creditor
becomes the donor. The debtor becomes DE MINIMIS
the donee or the recipient of the The term “de minimis” benefits which are
liberality. exempted from the fringe benefits tax shall, in
general, be limited to facilities or privileges
2. The creditor-donor is subject to donor’s furnished or offered by an employer to his
tax. employees that are of relatively small in value.
These are offered or furnished by the employer
3. It is not subject to income tax. merely as means of promoting the health,
goodwill, contentment or efficiency of his
3. As a Capital Transaction employees.
This may take the form of indirect distribution of Rules on ‘De Minimis’ and ‘Other Benefits’
dividends by a corporation. The creditor must be a The following rules shall be observed in
corporation and the debtor must be a stockholder. determining the taxability of the ‘de minimes’ and
(Sec. 43, Corporation Code) the P30,000 ‘other benefits’ ceiling under Section
32(b)(7)(e) of the Tax Code: (Sec 1, Rev Regs. No

10-2008) Items not included as Compensation Income:
a. For agricultural labor paid entirely in
1. the amount of the ‘de minimis’ benefits products of the farm where the labor is
conforming to the ceiling herein prescribed performed; or
shall not be considered in determining the b. For domestic service in a private home; or
P30,000 ceiling of ‘other benefits’ excluded c. For casual labor not in the course of the
from gross income under 32(b)(7)(e) of the employer’s trade or business; or
Tax Code. d. For services by a citizen or resident of the
2. The excess of the ‘de minimis’ benefits over Philippines for a foreign government or an
their respective ceiling prescribed by these international organization (Sec. 78 [A],
regulations shall be considered as part of NIRC).
the ‘other benefits’ and the employee
receiving it shall be subject to tax only on Tax Implications when Payment is Made for
the excess over the P30,000 ceiling. Services Rendered
3. The MWEs receiving ‘other benefits’ 1. As far as the employer is concerned, it may
exceeding the P30,000 limit shall be taxable be claimed as deductible expense.
on the excess benefits, as well as on his 2. It is an income to the employee.
salaries, wages and allowances, just like an
employee receiving compensation income Requisites for Deductibility
beyond SMW. 1. It is a payment for services rendered;
2. It must arise from EE-ER relationship;
The BIR sets a limit on the value of tax-exempt de 3. It must be reasonable/represents the FV
minimis benefits. Under RR 8-00, as amended by of the services rendered.
RR 10-00, the BIR considers the following as de
minimis benefits:
Item 2. BUSINESS INCOME/INCOME FROM
 10 days monetized unused vacation leave PRACTICE OF PROFESSION
credits;
 medical cash allowance to dependents of Business - any commercial activity engaged in as
employees not exceeding P750 per a means of livelihood or profit of an individual or
semester or P125 per month; group of individuals. Examples: trading,
merchandising, manufacturing and other similar
 rice subsidy of P1,000.00 or one-sack of
activities.
rice per month;
 uniforms and clothing allowance not
Profession - primarily any endeavor or work
exceeding P3,000.00 per year;
requiring specialized training in the field of
 medical benefits not exceeding learning, art, or science engaged in as a means of
P10,000.00; livelihood or profit of an individual or groups of
 laundry allowance of P300 per month; individuals. In general, a practice or profession is
 employee achievement awards in the a service business.
form of tangible personal property other
than cash or gift certificate, with an Income Covered
annual monetary value not exceeding 1. Income derived by Self-Employed from trade
P10,000 received by the employee under or business.
an established written plan; 2. Income derived by professionals from the
 flowers, fruits, books or similar items practice of profession.
given to employees under special
circumstances, e.g. on account of illness, Formula of Gross Income
marriage, birth of a baby, etc.; and The term gross income shall mean gross sales less
 daily meal allowance for overtime work sales returns, discounts and allowances, and cost
not exceeding 25% of the basic minimum of goods sold (Sec. 27A, NIRC) plus any income
wage. from investment and other incidental or outside
operations or sources. (Sec. 43)
Convenience of the Employer Rule
It grants exemption to benefits which are given for Service Business: Gross income is based on gross
the exclusive benefit or convenience of the receipts less returns, allowances, discounts and
employer. When a fringe benefit is given to an cost of services. (Sec. 43)
employee solely for the convenience of the
employer, the fringe benefit is exempt from the In determining gross income, deductions should
fringe benefit tax. The employee will not recognize not be made for depreciation, depletion, selling
the income from the benefit, whether the expenses or losses or for items not ordinarily used
employee is a managerial or supervisory in computing the cost of goods sold.
employee, or a rank and file employee.

29
Item 3. GAINS FROM DEALINGS IN  Amount realized from sale or other

PROPERTY (Sections 39, 40) disposition of property = sum of money
received + fair market value of the
This refers to the income derived from the sale, property (other than money) received.
and/or exchange of assets, which results in gain
because of the excess of the amount or value In computing the gain or loss from the sale or
received by the taxpayer over the determined other disposition of property, the basis shall be as
value of the property he has disposed of. The follows:
general rule is that the entire amount of the gain
or loss arising therefrom is a taxable gain or 1. Property acquired by purchase – its cost, i.e.,
deductible loss. the purchase price plus expenses of acquisition.
2. Property which should be included in the
inventory – its latest inventory value.
The term “dealings in property” refers to the 3. Property acquired by devise, bequest or
disposal through sale or exchange of inheritance – its fair market price or value as of
a. ordinary assets, or the date of acquisition.
b. capital assets. 4. Property acquired by gift or donation – the same
as if it would be in the hands of the donor or at last
If the asset involved is classified as ordinary, the preceding owner by whom it was not acquired by
entire amount of the gain from the transaction gift, EXCEPT that if such basis is greater than the
shall be included in the computation of gross FMV of the property at the time of the gift then,
income [Sec 32(A)], and the entire amount of the for the purpose of determining loss, the basis shall
loss shall be deductible from gross income. [Sec be such FMV.
34(D)]. Allowable Deductions from Gross Income - 5. Property (other than capital asset) acquired for
Losses) less than an adequate consideration in money’s
worth –
• If the property sold is a capital asset (except a) the amount paid by the transferee for the
shares of stock not listed nor traded in a local stock property; or
exchange and real property subject to capital b) the transferor’s adjusted basis at the time of the
gains tax), the rules on capital gains and losses transfer whichever is greater
apply in the determination of the amount to be
included in gross income. 6. Property acquired in a transaction where gain
or loss not recognized
The kind of property involved determines the tax – The basis shall be the same as it would have
implication and income tax treatment, as follows: been in the hands of the transferor increased by
the amount of gain recognized by the transferor on
ORDINARY CAPITAL the transfer.
ASSET ASSET*
(See more discussion in separate section, Capital
Gain from Ordinary Capital Gains Tax)
sale or Gain Gain
exchange Item 4. INTEREST INCOME
Loss from Ordinary Loss Capital
sale or Loss Interest income is the amount of compensation
exchange paid for the use of money, goods, or credit or
Excess of Goes into Net forbearance from such use. Unless exempted by
Gains over computation Capital law, interest income received by the TP, whether
the Losses of Gain or not usurious, is subject to income tax.
Ordinary Net
Income
Interest Income Tax Rate Payee
From any currency 20% DC,
*(except shares of stock not listed nor traded in a local deposit, yield or any RFC,
stock exchange and real property subject to capital gains other monetary benefit RC,
tax)
from deposit substitutes NRC,
and from trust funds and RA,
Computation of Gain or Loss [Sec.40(A)]:
similar arrangements NRA-
derived from Philippine ETB
Amount realized from sale or other
sources.
disposition of property xx
Less: basis or adjusted basis xx From long term deposit 5%- 4- less RC,
GAIN (LOSS) xx or investment in the than 5 NRC,
form of savings, common years; RA,
or individual trust funds,
substitutes, investment 12%-3 to NRA-  If security deposit is to ensure

management accounts less than ETB contract compliance, it is not income
and other investments 4 years; to the lessor until the lessee violates
evidenced by certificates 20%- less any provision of the contract.
in such form prescribed than 3
by BSP years  Must be reported as part of gross
DC, income.
From FCDU deposits 7.5% RFC,
RC, Rental income on the lease of personal property
NRC, located in the Philippines and paid to non-resident
RA taxpayer shall be taxed as follows:
NON- NON-
From foreign currency 10% RC,
RESIDENT RESIDENT
loans granted by FCDUs RA, CORPORATION ALIEN
to residents other than DC,  Vessel 4.5% 25%
OBUs banks or other RFC  Aircraft,
depositary under the machineries
expanded system and other
From foreign currency 10% RC, equipment 7.5% 25%
loans granted by the RA,  Other
OBUs to residents other DC, assets 32.0% 25%
than OBUs or local RFC
commercial banks Items considered likewise as rental income:
including branches of 1. Obligations of lessor to 3rd parties assumed by
foreign banks that may the lessee:
be authorized by BSP to a. real estate taxes on leased premises;
transact business with b. insurance premiums paid by lessee on
OBUs property;
On foreign loans 20% NRFC c. dividends paid by lessee to stockholders
contracted on or after of lessor-corporation;
August 1, 1986; d. interest paid by lessee to holder of bonds
Any interest income from EXEMPT NRC, issued by lessor-corporation.
transactions with NRA,
depositary banks under NRFC 2. Value permanent improvements made by
FCDs lessee that will become property of the lessor
upon the expiration of the lease.
Item 5. RENTAL INCOME Method of Reporting the Value of Permanent

Improvements Introduced by the Lessee:
It is amount or compensation paid for the use or a. Outright Method – recognized as income
enjoyment of a thing or a right and implies a fixed to the lessor at the time when such
sum or property amounting to a fixed sum paid at buildings/improvements are completed at
a stated time for the use of the property. FMV; or
b. Spread Out Method – the lessor spread
Includes all amount or property received over the life (remaining period) of the
from lease contract whether used in lessee, the estimated depreciated value of
business or not. such buildings or improvements, at the
termination of the lease and report as
 Prepaid or advance rental is income for each year of the lease, an
TAXABLE INCOME to the lessor in aliquot part thereof.
the year received, if so received
under a claim of right and without Formula: Annual income from leasehold
restriction as to its use and improvement =
regardless of method of accounting Estimated book value of the leasehold
employed. improvement at the end of the lease
contract
 Security deposit applied to the Remaining term of the lease in years
rental of the terminal month or
period of contract must be
recognized as income at the time it
is applied. Item 6. ROYALTIES

31
It is the payment for the use and exhaustion of c. A change in the shareholder’s equity results
property such as earnings from copyrights, by virtue of the stock dividend issuance.
patents, trademarks, formulas and natural d. Distribution of treasury stocks
e. Dividends declared in the guise of treasury
resources under lease.
stock dividend to avoid the effects of income
taxation (Commissioner vs. Manning, 66
If the recipient of the royalty paid by DC is either SCRA 14)
a NRA-NETB or NRFC, a lower tax rate may be f. Different classes of stock were issued
allowed under an existing rate.
4. Liquidating Dividend - one resulting from the
It is subject to final tax. Royalties (20%) except on distribution by a corporation of all its
books, as well as other literary works and property or assets in complete liquidation or
dissolution.
Taxable income refers to the excess of amount

musical compositions, which is subject to tax at received over cost of the share surrendered.
10%.
Item 7. DIVIDENDS FROM DOMESTIC

Item 8. PRIZES AND OTHER WINNINGS
CORPORATION
-Refers to amounts of money in cash or in kind

 If the recipient is another domestic
received by chance or through luck and are
corporation, it is exempt from tax
generally taxable except if specifically mentioned
 If recipient is a resident citizen= 10% FWTX
under the exclusions from the computation of
 If the recipient is a NRA NETB= 25%FWTX or
gross income under section 32 (b).
a lower rate under an applicable tax treaty.
a. Prizes won by persons in any
tournaments in their individual capacity
Taxpayer Dividend paid by a
are taxable
Domestic Corporation
b. Prizes from charity horse race,
RC 10%
sweepstakes, lotto, and bingo bonanza
NRC 10%
RA 10% from PAGCOR are not taxable
NRA-ETB 20% c. All prizes and awards to athletes in local
NRA-NETB 25% or international sports events whether
DC EXEMPT local or international sanctioned by the
RFC EXEMPT Philippine Commissions are not taxable
NRFC 15%-With tax sparing: d. Loyalty awards granted to employees in
30%-without tax sparing recognition of their years’ of service is
taxable to them if such employees belong
Kinds of Dividends:
1. Cash Dividend - paid in given sum of money to the Rank- and -File category whereas,
2. Property Dividend – one paid by corporation if managerial or supervisory, the award
in securities (not its own stock) or other is not taxable to them but the employer is
property subject to Fringe Benefit Tax
3. Stock Dividend - one paid by a corporation e. Prizes won by a ticket/stub holder in a
with its own stock. It represents transfer of raffle draw, is subject to 20% FWTax and
surplus to capital account. It may be of the
not to income tax
same kind or different from that on which it
is issued. f. Prizes and awards made primarily in
recognition of religious, charitable,
General Rule: (as to stock dividends): scientific, educational, ,artistic, literary,
Not subject to income tax if it represents the or civic achievement BUT ONLY IF:
transfer surplus to capital account. (a) The recipient was selected without
any action on his part to enter the
Exception: If it gives the shareholder an interest
contest or proceedings
different from that which his former stockholdings
represented: (b) He is not required to render
a. Shares later redeemed for consideration by the substantial future services as a
corporation or otherwise conveyed by the condition to receiving the prize or
stockholder to the extent of such consideration; award.
b. Recipient is other than the shareholder;
Summary Rules for Prizes and Winnings:
3. Gains arising from expropriation of

Taxpayer Prizes PCSO All other property constituting as income from
amounting and lotto winnings dealings in property.
to 10,000 winnings and 4. Income derived from illegal sources, such
or less prizes as gambling, theft, embezzlement, and
more smuggling.
than 5. Recovery of damages – taxable.
10,000 6. Bad debts recovery – taxable – if it results
RC, 5-32% EXEMPT 20% in reduction of the taxpayer’s tax liability
NRC, in the previous year. The “Tax Benefit
RA,NRA- Rule” or “Doctrine of Equitable Benefit”
ETB applies in this case.
Item 9. PARTNER’S DISTRIBUTIVE SHARE  must be claimed as a deduction from

FROM THE NET INCOME OF THE GPP the gross income in the preceding year
 the reduction results in a tax benefit
General Professional Partnership – a partnership
formed by persons for the sole purpose of 7. Tax refund- taxable – if it results in
exercising their common profession no part of reduction of the taxpayer’s liability in the
income which is derived from other trade of preceding year.
business.  must be claimed as a deduction from the
gross income in the preceding year
A general professional partnership is tax exempt;  the reduction results in a tax benefit
however, the individual partners are liable to pay
income tax in their individual capacity on their Unrealized foreign exchange gains resulting
share in the net profits of the partnership whether from the fluctuation of the foreign exchange rate
distributed or not. between the time the taxpayer recorded a sale in
its books and the time the related receivable was
In determining his distributive share in the net collected is not taxable income. While for
income of the partnership, each partner shall financial accounting purposes, foreign currency
report as gross income his distributive share in accounts (e.g., receiveables, liabilities, and
the net income of the partnership, actually or deposits) are periodically restated at the save of
constructively received. exchange prevailing at year-end, foreign
exchange gain/losses are taxable or deductible, as
NOTE: Although, general professional the case may be, only in the year of collection,
partnerships are tax exempt said partnerships are payment, or actual conversion of the foreign
still required to file Income Tax Returns for exchange into pesos. (Talan (Subic) Electric, Inc.
Administrative purposes. vs CIR, CTA Case No. 6314, March 17, 2006)
Item 10. ANNUITIES Damage recovery. Compensatory damages, as

constituting returns of capital, are not taxable.
– income derived from a capital amount paid to Thus, amounts received as moral damages for
an insurance company. personal actions (such as alienation of affection,
libel, slander or breach of promise to marry) are
Item 11. PENSIONS not taxable.
– paid for past employment services rendered. Recovered damages representing recoveries of lost
profits are taxable, just as profits are taxable in
the regular course of business. Thus, damages
INCOME FROM WHATEVER SOURCE recovered in patent infringement suits are
DERIVED taxable.
Includes all income not expressly exempted within Bad Debt Recovery
the class of taxable income under our laws,
irrespective of the voluntary or involuntary action Tax Benefit Rule – Bad debts claimed as a
of the taxpayer in producing the gains (Blas deduction in the preceding year(s) but
Gutierrez vs. Collector) subsequently recovered shall be included as part
1. Any economic benefit to the employee, of the taxpayer’s gross income in the year of such
whatever may have been the mode which recovery to the extent of the income tax benefit of
it is implemented i.e. stock option. said deduction.
2. Acquisition and disposition of capital stock
which include sales and retirement of There is an income tax benefit when the deduction
bonds. of the bad debt in the prior year resulted in lesser

33
income and hence tax savings for the company. definition of

(Sec. 4, RR 5- 99) income.
2. Pertain to the 2. Pertain to the
Tax Refund computation of gross computation of
As a general rule, a refund of a tax related to the income. net income.
business or the practice of profession, is taxable 3. Something received 3. Something spent
income (e.g., refund of fringe benefit tax) in the or earned by the or paid in earning
year of receipt to the extent of the income tax taxpayer which do gross income.
benefit of said deduction (i.e., the tax benefit rule not form part of
applies). gross income.
However, the following tax refunds are not to be

included in the computation of gross income:
(EXCEPTIONS) (CAP–IF–FED–VAT) EXCLUSIONS vs. TAX CREDIT

1. Philippine income tax, except the FBT
2. Income tax imposed by authority of any foreign Exclusions Tax Credit
country, if the taxpayer claimed a credit for such Refers to income Refers to an amount
tax in the year it was paid or incurred. received or earned but that is subtracted
3. Estate and donor’s taxes is not taxable as directly from one’s
4. Taxes assessed against local benefits of a kind income because total liability, an
tending to increase the value of the property exempt by law or allowance against
assessed (Special assessments) treaty (De Leon, p. the tax itself, or a
5. Value Added Tax 272). deduction from what
6. Fines and penalties due to late payment of tax is owned.
7. Final taxes
8. Capital Gains Tax CLASSIFICATIONS OF EXCLUSIONS FROM
GROSS INCOME
The enumeration of tax refunds that are not
taxable (income) is derived from an enumeration 1. Under the Constitution
of tax payments that are not deductible from gross
income. If a tax is not an allowable deduction from Income derived by the government or its political
gross income when paid (no reduction of taxable subdivisions - Income derived from any public
income, hence no tax benefit), the refund is not utility or from the exercise of any essential
taxable. governmental function accruing to the
government of the Philippines or to any political
EXCLUSIONS FROM GROSS INCOME subdivision thereof.
Exclusions refer to items or receipts not included 2. Under the Tax Code[Sec. 32 (B)]:
in the determination of the taxable income
because the law or treaty provides that they are The following shall not be included in the
exempt from income tax. computation of the gross income, hence, exempt
from taxation:(LAGCRIM)
EXCLUSIONS vs. DEDUCTIONS 1. Proceeds of life insurance paid to the
beneficiary upon death of the insured
Exclusions Deductions 2. Amount received by the insured as a return of
1. Flow of wealth to the 1. Amounts which premium
taxpayer which are the law allows to 3. Gifts, bequests and devices
not treated as part of be subtracted 4. Compensation for injuries or sickness
gross income for from gross 5. Income exempt under treaty
purposes of income in order to 6. Retirement benefits, pensions, gratuities
computing the arrive at net 7. Miscellaneous items:
taxpayer’s taxable income.
income, due to the a. Income derived by foreign government
following reasons: b. Income derived by the government or its
a. It is exempted by political subdivisions
the fundamental c. Prizes and awards – in recognition of
law; religious, charitable, scientific, educational,
b. It is exempted by artistic, literary or civic achievement subject
statute; to two conditions
c. It does not come d. Prizes and awards in sports competition
within the e. 13th month pay and other benefits
f. GSIS, SSS, Medicare, Pag-ibig contributions

and Union dues a. Those derived under R.A. 7641 (pertains
g. Gains from the sale of bonds, debentures or to private firms without retirement trust
other certificate of indebtedness with fund); or
maturity of more than 5 years b. those received by officials and employees
h. Gains from redemption of shares in mutual of private employers in accordance with a
fund reasonable private benefit plan
1. Proceeds of Life Insurance Requisites:

The amount received by the insured is a mere 1. in the service of the same employer
return of capital, hence, excluded for at least 10 years;
 The insured procured a life insurance on 2. at least 50 years old;
his own life. 3. must be availed of only once;
 If such amounts are held by the insurer 4. plan approved by the BIR.
under an agreement to pay interest
thereon, the interest payments shall be c. separation pay because of death,
included in gross income. sickness, or other physical disability or
for any cause beyond the control of the
NOTE: If the proceeds are retained by the official or employee (e.g. retrenchment);
insurer, the interest thereon is taxable d. social security benefits, retirement
gratuities, pensions and other similar
2. Amount received as return of insurance benefits received by citizens and aliens
premium; who come to reside permanently here
from foreign sources private or public;
The premiums paid are mere return of e. benefits due to residents under the laws
capital. of the U.S. administered by the U.S.
 Any excess between the total premiums Veterans Administration
paid and the total premiums received f. SSS benefits; and
shall be included in the gross income. g. GSIS benefits.
3. Gift, bequest or devise; 7. Miscellaneous items (13FG-PS-GSR)

a. passive income derived in the Philippines
Gifts are excluded because they subject to (e.g. investments in loans, stocks, bonds,
donor’s tax while bequests and devises are or other domestic securities, or from
excluded because these may be subject to interest on deposits in banks) by:
estate tax. i. foreign governments;
ii. financing institutions owned,
NOTE: Income derived from the property as controlled, or enjoying refinancing
gift, bequest or devise is taxable, hence, shall from foreign governments; and
be included in the gross income. iii. international or regional financial
institutions established by foreign
4. Compensation for personal injuries or governments
sickness, whether by suit or agreement; b. income derived from any public utility or
from the exercise of any governmental
 It is excluded because the amount merely function;
serves as an indemnity. c. prizes and awards made primarily in
recognition of charitable, civic
It includes amounts received by virtue of: achievement, literary, artistic, religious,
a. a suit or agreement; or educational, and scientific. (CCLARES)
b. health insurance or accident insurance or
amounts received under Workmen’s Requisites:
Compensation Acts 1. recipient selected without any action
on his part; and
NOTE: The phrase “personal injuries” should 2. recipient not required to render
be given a restrictive meaning to refer only to substantial future services
physical injuries.
d. prizes and awards granted to athletes in
5. Income exempt under treaty; sports competitions and sanctioned by
their national sports association ;
Any income, to the extent required by any e. 13th month pay and other benefits up to
treaty obligation binding upon the P30,000.00;
Government of the Philippines. f. GSIS,SSS, Medicare and union dues of
individuals;
6. Retirement benefits, pension, gratuities;

35
g. gains derived from debt securities with a he/she is assigned., including their holiday pay,
maturity of more than 5 years; overtime pay, night shift differential and hazard
h. gains from redemption of shares in pay.
Mutual Fund
Under RA 9504, MWEs are exempt from income
tax, hence, exempt from withholding tax.
3. Under a Tax Treaty
Exception:
Any income, to the extent required by any treaty An employee who receives/earns additional
obligation binding upon the Government of the compensation such as commissions, honoraria,
Philippines. fringe benefits, benefits in excess of the allowable
statutory amount of P30,000.00, taxable
allowances and other taxable income other than

 RP-Singapore Tax Treaty covers exemption the SMW, holiday pay, overtime pay, hazard pay
from income taxes only. Other taxes like VAT and night shift differential pay shall not enjoy the
are not exempted. It is submitted that the privilege of being a MWE and, therefore, his/her
same is true with respect to the RP-US Tax entire earnings are not exempt from income tax
Treaty (p.151, Q&A in Taxation, Dizon). and, consequently, from withholding tax.
DEDUCTIONS FROM GROSS INCOME

4. Under Special Laws
Nature of Deductions
Prizes received in charity, horse racing, In general, deductions or allowable deductions are
sweepstakes from the PCSO (RA No. 1169). business expenses and losses incurred which the
i. Salaries and stipend in dollars received by law allows to reduce gross business income to
non-Filipinos citizens serving as staff of: arrive at net income subject to tax.
 International Rice Research Institute
(RA No. 2707); BASIC PRINCIPLES:
 Ford Foundation Grants (RA NO. 1. The taxpayer seeking a deduction must point
3538); to some specific provisions of the statute
 Agricultural Department of Southeast authorizing the deduction; and he must be
Asian Fisheries Development Center able to prove that he is entitled to the
(SEAFDEC) (PD No. 246); deduction authorized or allowed. (Atlas
 Population Council of New York (PD Consolidated Mining & Dev. Corp. vs.
No. 246). Commissioner)
ii. Income from bonds and securities:
 For sale in the international market 2. Any amount paid or payable which is
(PD No. 81); otherwise deductible from, or taken into
 Issued by EPZA (PD No. 66). account in computing gross income or for
which depreciation or amortization may be
Income derived from the installment sales of allowed, shall be allowed as deduction only if
houses to their employees and workers or to low- it is shown that the tax required to be
income groups in housing projects or income deducted and withheld therefrom has been
derived from rentals thereof (PD Nos. 745 and paid to the BIR. (Sec. 34[K])
1217 – Housing Program of the government).
3. Deductions are kinds of legislative grace.
Tax Exempt Qualified Senior Citizen (Interstate Transit Lines vs. Commissioner)
They are not presumed but allowable only by
The income of a qualified senior citizen is exempt reason of specific provisions of law and not
from the payment of income tax provided his under any general equitable or constitutional
annual taxable income does not exceed the poverty concept. (Baltimore Dairy Lunch Inc. vs. US.
level of P60,000 per year, except interest income. Hence, they are strictly against the taxpayer.
Compensation of Minimum Wage Earners 4. Deductions must be paid or incurred in

(MWEs) connection with the taxpayer’s trade,
business of profession.
Compensation of MWEs who work in the private
(and public sector not exceeding the minimum in 5. Deductions must be supported by adequate
the non-agricultural sector) and being paid the receipts or invoices (except standard
statutory minimum wage (SMW), as fixed by the deduction).
Regional Tripartite Wage and Productivity Board
(RTWPB)/ National Wages and Productivity  Deductions for income tax purposes partake of
Council (NWPC), applicable to the place where the nature of tax exemptions; hence, if tax
exemptions are to be strictly construed, then it KINDS OF DEDUCTIONS:

follows that deductions must also be strictly
construed. 1. Itemized deductions (Sec. 34(A) to (J))
2. Premium Payments on Health and/or
Cohan Rule Principle: Hospitalization Insurance. (RA 8424 section
Under this principle, taxpayers may use estimates 34M)
when they can show that there is some factual 3. Optional Standard Deductions (OSD), (Sec.
foundation on which to base a reasonable 34(L)
approximation of the expense, i.e., they can prove
that they have made a deductible expenditure but Itemized Deductions
just cannot prove how much that expenditure 1. Ordinary and necessary expenses
was. It is the use of estimates or approximations 2. Interests
of the amount of cash and other asserts where the 3. Taxes
taxpayer lacks records. 4. Losses
5. Bad debts
If there is a showing that expenses have been 6. Depreciation of property
incurred but the exact amount thereof cannot be 7. Depletion of oil and gas wells and mines
ascertained due to the absence of receipts and 8. Charitable and other contributions
vouchers of the expenditures involved, the BIR 9. Research and development
will make estimate of the deduction that may be 10. Pension trust contributions of employees
allowed in computing the taxpayer’s taxable
income bearing heavily against the taxpayer Premium Payments on Health and/or
whose inexactitude is f his own making. The Hospitalization Insurance
disallowance of 50% of taxpayer’s claimed - the only deduction which a compensation income
deduction is valid. earner may claim as a deduction.
All Events Test: Requisites for Deductibility:

The accrual of income and expense is permitted 1. Income must be either business/professional,
when all-events test has been met. The test compensation or both;
requires: 2. TP must be an individual;
1) fixing of right to income or liability to pay; and 3. Family income is not more than P250,000;
2) the availability of the reasonable accurate 4. Deduction is limited to P2,400 per family or
determination of such income or liability. P200 a month.
The test does not demand that the amount of Optional Standard Deduction (OSD) – in lieu of
income or liability be known absolutely, only that the itemized deductions.
a taxpayer has at its disposal the information
necessary to compute the amount with reasonable RA 9504 allows OSD not only to individual
accuracy. (Commission of Internal Revenue vs. taxpayer (other than NRA) but also to
Isabela Cultural Corp., G.R. No. 1772231, corporations (subject to tax under section 27A and
February 12, 2007) 28A1 of the Tax Code.
Situs of Expenses In lieu of the itemized allowable deductions, the
The place of business becomes the basis if business OSD may be deducted from the gross income as
expenses are deductible for Philippine income tax follows: (Sec 34 L, NIRC; RA 9504)
purposes. As a rule business expenses are
deductible only if they are incurred in relation to
TP Rate Base
the business income taxable in the Philippines.
Individual 40% Gross sales or
receipts from
business or
Deductions vs. Exclusions
profession.
Amounts deducted Amounts/items
Corporation 40% Gross Income.
from gross income to exempt from tax by
arrive at net income. virtue of the Tax Code Requisites:
or special law. 1. The TP signified in the return its
intention to elect OSD;
Deductions vs. Personal Exemptions
2. Such election shall be irrevocable for the
Business expenses Personal expenses
taxable year for which the return is made;
Represent cost of Cover personal, living
3. That individual who is entitled to and
doing business or family expenses
claimed the OSD shall not be required to
Both individual and Only individual TPs
submit with his tax return such financial
corporate TPs may are entitled.
statements otherwise required under the
claim.
Code;

37
4. Except when the Commission otherwise shall keep such records pertaining to his
permits, said individual shall keep such gross income.
records pertaining to his gross sales or
gross receipts or the said corporation
5. Arose from fires, storms,
shipwreck, or other
Itemized Deductions and Requisites casualties or from
(quick view) robbery, theft, or
embezzlement;
Allowable Requisites for 6. Not claimed as deduction
for estate tax purposes;
Deduction Deductibility
7. Reported to the BIR
1. Ordinary 1. Must be ordinary and
within 45 days from the
and necessary expenses;
occurrence of such loss.
necessary 2. Paid or incurred within
expenses the taxable year;
5. Bad Debts 1. Valid and subsisting
3. Connected with trade,
debt, legally
business or profession;
demandable The TP is
4. Reasonable in amount
the creditor;
5. Supported by sufficient
2. Debt is ascertained to be
evidence;
worthless and
6. Not contrary to law,
uncollectible as of the
morals, public policy, or
end of the taxable year;
public order.
3. Charged-off or written-
off during the taxable
2. Interest 1. There must be an
year;
indebtedness;
4. Connected with TP’s
2. Indebtedness must be
profession, trade or
that of the taxpayer;
business;
3. indebtedness must be
5. Not sustained in a
connected with the
transaction entered into
taxpayer’s trade,
between members of the
business or exercise of
same family or related
profession;
TPs enumerated in
4. Legal liability to pay
Section 36B;
interest;
5. Interest expense must
6. 1. There must be an
have been paid or
Depreciation exhaustion, wear, and
incurred on such
tear (including
indebtedness during the
reasonable allowance for
taxable year;
obsolescence);
2. It must be reasonable;
3. Taxes 1. It must be paid or
3. It must be charged off
incurred within the
during the year;
taxable year;
4. The asset must be used
2. Connected with TP’s
in profession, trade, or
profession, trade or
business;
business;
5. The asset must have a
3. Imposed directly on the
limited useful life;
TP.
7. Depletion 1. It must be reasonable;
4. Losses 1. Actually sustained by the
2. For the exhaustion, wear
TP during the taxable
and tear of property used
year;
in trade or business;
2. Not compensated by
3. It must be expensed
insurance or other forms
(charged off) during the
of indemnity;
taxable year; and
3. Incurred in connection
4. Schedule of allowance
with trade, profession or
must be attached to the
business;
return
4. Evidenced in a closed
and completed
8. Charitable 1. Contribution or gift must
transaction;
and other be actually paid or maid
contributions within the taxable year;
10. Pension trusts 1. Employer must 2. Given to entity or

have institution specified by
established a law;
pension or 3. Net income of the
retirement plan; institution must not
2. Pension plan inure to the benefit of
must be any private individual or
reasonable; stockholder;
3. Funded by the 4. TP making contribution
employer; must be engaged in
4. Amount trade, profession, or
contributed by business.
the ER must no
longer be 9. Research & 1. Paid or incurred during
subject to his development the taxable year;
control. 2. Connected with trade,
business, or profession.
b. Premium deposits returned to their

policyholders.
Taxpayers who CANNOT Avail of Deductions c. Actual deposits of sums with officers of
from Gross Income: the Government of the Phils. (Sec. 37,
1. Resident and Nonresident Citizens and NIRC).
Resident Aliens whose income is purely
compensation income (except for premium
payments on health and/or hospitalization ITEMIZED DEDUCTIONS
insurance);
2. Non-Resident Aliens not engaged in trade or Itemized deductions are specific business
business in the Philippines (sec 34L, NIRC); operating expenses allowed by the Tax Code to be
and deducted from the Gross Income as provided in
3. Non-Resident Foreign Corporation Section 34 (A) to (J) and Section 34 (M), including
the special deductions allowed to insurance
NOTE: Items #2 and #3 are taxed on gross income. companies under Sec. 37. Generally, these
deductions require supporting documents to
Personal and Additional Exemptions justify reduction from gross income.
It is available only to individuals (business income
and compensation income earners). A. GENERAL BUSINESS EXPENSES
Generally include all ordinary and necessary
NRA-ETB may be entitled to personal exemptions expenses paid or incurred during the taxable year
(only) subject to reciprocity, i.e. in carrying on or which are directly attributable
a. the country of which he is a subject or to, the development, management, operation
citizen has an income tax law; and and/or conduct of the trade, business or exercise of
b. the income tax law of his country allows a profession.
personal exemption to citizens of the
Philippines not residing therein, but Meaning of Ordinary and Necessary
deriving income therefrom and not to
exceed the amount allowed in CTRP. Necessary expenses: expenses which are
appropriate and helpful in the development of
 The personal exemption shall be equal to that taxpayer's business
allowed by the income tax law of his country
to a citizen of the Philippines not residing Ordinary Expenses: expenses which are normal or
therein, or the amount provided in the CTRP, usual in the line of business and surrounding
whichever is lower. circumstances.
Special Deductions The TWO CONDITIONS MUST CONCUR. A

1. Net Operating Loss Carry-Over (NOLCO) court may decide on when an expense is, or is not,
2. Incentives under RA 8525 ordinary, but as much as possible, it will refuse to
3. Special deduction allowed to insurance substitute its judgment for that of the taxpayer on
companies whether domestic or foreign such the necessity of an expense.
as:
a. net additions to reserve funds within a General Foods, Inc., engaged in the manufacture
year; me beverages, filled its income tax return for the

39
fiscal year ending February 28, 1985. It claimed i. Transportation expenses from
therein advertising expenses as a deduction for main office to branch, from
one of its product, "Tang". CIR allowed only 50% branch to main office –
of said deduction, and consequently assessed deductible.
respondent with deficiency income taxes saying ii. Transportation expenses from
that amount of P9,46,246 is not reasonable. May office to home; home to office –
the advertising expense be allowed as a not deductible.
deduction? iii. If a company car is utilized both
for business and personal use –
No, the subject expense for the advertisement of a proportion to the use.
single product is ordinarily large. Therefore, even b. Paid or incurred in the conduct of
of it is necessary, it cannot be considered an trade, business or profession; and
ordinary expense. c. Reasonable and necessary expenses.
Advertising is generally of two kinds: 3. Costs of Materials and Supplies

1) advertising to simulate the current sale me Deductible only to the amount actually
merchandise or use of services and consumed or used in operation during the
2) advertising designed to stimulate the future year.
sale of merchandise or use me services. The second 4. Rentals and/or payment for use and
type involves expenditures incurred, in possession of property
whole or in part, to create or maintain some form a. paid for the continued use or
of goodwill for the taxpayer's trade or business or possession, for purposes of trade,
for the industry or profession me which the business or profession;
taxpayer is a member. If the expenditures are for b. for purposes of trade, business or
the advertising me the first kind, then, except as profession;
to the question me the question me the c. taxpayer has not taken or is not
reasonableness of amount, there is no doubt such taking title or in which he has no
expenditures are deductible as business expenses. equity other than that of a lessee,
If, however, the expenditures are for advertising user or possessor
of the second kind, then normally they should be
spread out over a reasonable period of time. 5. Repairs and Maintenance
Incidental or ordinary repairs –
Said advertising expense is of the second kind. deductible from gross income because it
The protection of brand franchise is analogous to keeps the assets in its ordinary working
the maintenance of goodwill or title to one's condition
property. This was akin to the acquisition me
capital assets and therefore expenses related Extraordinary repairs –
thereto were not to be considered as business are not deductible since major repairs
expenses but as capital expenditures. (CIR vs tend to prolong the life of the asset (they
General Foods, Inc., G.R. No. 143672, April 24, are capital expenditures)
2003)
6. Expenses under Lease Agreements
Kinds of Business Expenses:
7. Professional Fees
1. Compensation for Personal Services Deductible in the year the professional
Actually Rendered. It includes gross-up services are rendered, not in the year
monetary value of fringe benefit they are billed.
furnished or granted to the employee
provided that the final tax has been paid. 8. Representation Expenses
These are entertainment, amusement,
Requisites: and recreation expenses incurred or paid
a. Personal services actually rendered; during the year that are directly
b. Compensation is for such services connected to the development,
rendered; and management, and operation of the trade,
c. Reasonable. business or profession of the TP.
2. Traveling Expenses Requisites:

It includes transportation expenses and a. Paid or incurred during the taxable
meals and lodging (Sec. 65 & 66, Rev. year;
Reg. No.2). b. Directly connected to the
development, management and
Requisites: operation of the trade, business or
a. Paid or incurred here and abroad, profession OR directly related to or
“while away from home”; in furtherance of the conduct of his
trade, business or exercise of a Non-deductible Expenses (Sec. 36)

profession; 1. Personal, living or family expenses;
c. Must not have been paid directly or 2. Any amount paid out for new buildings or for
indirectly to an official of the permanent improvements, or
government (including foreign) or betterments made to increase the value of any
private entity if it constitutes a bribe, property or estate;
kickback or other similar payment; 3. Any amount expended in restoring property
d. Not contrary to law, morals, public or in making good the exhaustion thereof
policy or public order; for which an allowance is or has been made;
e. Duly substantiated by proof; or
f. Must not exceed 1/2% of net sales or 4. Premiums paid on any life insurance policy
1% of net revenue for TPs engaged in covering the life of any officer or employee, or
sales of goods or properties, or sale of of any person financially interested in any
services, respectively. However, if trade or business carried on by the taxpayer,
the TP is deriving income from both, individual or corporate, when the taxpayer is
the allowable deduction shall be directly or indirectly a beneficiary under such
based on an apportionment formula policy.
taking into consideration the
percentage of the net sales/net Litigation expenses incurred in defense or
revenue to the total net sales/net protection of title are not deductible since they are
revenue, but in no case shall exceed capital in nature. They constitute part of the cost
the maximum percentage ceiling. of the property, and are not deductible as
expenses. (Atlas Consolidated Mining &
Dues paid to social, athletic, or sporting Development Corporation vs. CIR, G. R. No. L-
club or organization per officer; to 26911, January 27, 1981)
professional or business organization –
deductible. Capital Expenditure - an expenditure that
benefits not only the current period but also future
Purchase of propriety shares and playing periods. It is not deductible but depreciable,
rights – not deductible EXCEPT, if the taxpayer is a non-profit
proprietary educational institution which may
 Political Campaign Expenses. In the case elect either to deduct the capital expense or
of Cruz vs. CIR, G.R. No. 120721, depreciate it.
February 23, 2005, it was held that
political or electoral contributions are
considered gifts under NIRC and are B. INTEREST
therefore subject to donor’s tax.
Payments for the use of forbearance or detention
 Under the Omnibus Election Code, of money, regardless of the name it is called or
donations or any contribution in cash or denominated.
in kind to any candidate form an elective
position, political party or coalition of Rules on Deductibility Of Interest Expense
parties for campaign purposes is not General Rule: The amount of interest expense
subject to donor’s tax provided that the paid/ incurred within a taxable year of
donor and the done comply with the indebtedness in connection with the taxpayer’s
requirements of filing tax returns of trade, business or exercise of profession (TBE)
contributions with the Comelec [Sec. shall be allowed as a deduction from the
99(c) of the Tax Code] taxpayer’s gross income.
 Donations in kind to politicians, political Limitation: Under Section 34 (B) of the 1997 Tax
parties are subject to 5% withholding tax. Code, as amended, the amount of interest paid or
incurred within a taxable year on indebtedness in
9. Costs/Expenses allowed to private connection with the taxpayer’s profession, trade or
educational institutions. These are costs business is allowed as deduction from gross
incurred for the expansion of school income. However, the taxpayer’s otherwise
facilities. allowable deduction for interest expense should be
reduced by 33% of the interest income subjected to
Private educational institutions may at final tax. This is the rule on interest expense
its option: limitation.
a. Capitalize and claim the annual
depreciation as deduction; Based on the above provision, the amount of
b. Deduct as expenditures during the interest expense equivalent to 33% of interest
taxable year. income subjected to final tax will be non-
deductible, and only the remaining portion of the

41
interest expense can be claimed as expense in the b. Interest on loan paid in advance through
income tax computation. discount by individual TP reporting income on
cash basis.
This limitation on the deductibility of interest c. If indebtedness is incurred to finance
expense was legislated specifically to address the petroleum operations.
tax arbitrage arising from the difference between
the 20% final tax on interest income and the
regular corporate income tax rate (RCIT) under
which interest expense can be claimed as a
deduction.
Tax Arbitrage - It is a strategy by which a

taxpayer takes advantage of the difference in tax
rates or tax systems as the basis for profit. C. TAXES
It is an income tax benefit that accrues to the Pertains to taxes proper which does not include
taxpayer because of the disparity on tax rates surcharges, penalties, or fines incident to
applicable to different types of income. Its purpose delinquency.
is to discourage businessmen who have money
from resorting to borrowing to get a tax Nature and Scope:
advantage. The limitation on interest expense is All taxes, whether national or local paid or
an example of tax arbitrage. accrued within the taxable year, in connection
with the taxpayer’s trade or business except:
Illustration: 1. Philippine income tax;
2. Foreign income tax if claimed as tax credit;
On January 1, 2011, Corporation X borrowed from 3. Estate and donor’s taxes;
a local bank an amount of P500,000 at a 10% 4. Special assessments.
annual interest (resulting to interest
expense). Immediately thereafter, the proceeds of Exceptions:
the loan were placed in a local bank deposit 1. Taxes of shareholder upon his interest as
account which earns a 10% annual interest rate such and paid by the corporation without
(resulting to interest income). reimbursement from him can be claimed
by the corporation as a deduction.
Assuming that the rule on interest expense
2. A corporation paying the tax for the holder
limitation is not yet in place, the interest expense
of its bond or other obligations containing
of P50,000 (10% of P500,000) will result to a tax
a tax-free covenant clause cannot claim
benefit of 30% or P15,000 in 2011; while the
deduction for such taxes paid by it
interest income of P50,000 (10% of P500,000),
pursuant to such covenant (Sec. 80, Rev.
being a passive income will only be subjected to
Reg. No. 2).
final tax of 20% or P10,000. The taxpayer would
derive a net benefit of P5,000 from the combined
TAX CREDIT – the TP’s right to deduct from
effect of a lower rate of final tax liability and a
income tax due the amount of tax he has paid
higher rate of tax deductibility.
to a foreign country, subject to limitations.
Realizing the negative impact of tax arbitrage on
Taxes paid in foreign countries may be
revenue generation, the interest expense
treated as:
limitation was legislated.
1. TAX CREDIT – reduces the tax liability
Reduction of Interest Expense by Interest Income itself
a. TP’s interest expense shall be reduced by an 2. DEDUCTION – merely reduces net
amount equal to thirty-three percent (33%) of income which serves as basis for the tax
interest income earned subject to final tax.
b. Interest incurred or paid by the TP on all Who are entitled to tax credit?
unpaid business related taxes shall be fully 1. Resident Citizens
deductible from gross income and shall not be 2. Domestic Corporations, which include
subject to the limitation on deduction. business partner
3. Members of the professional
Optional Treatment of Interest Expense partnerships
At the option of the taxpayer, interest incurred 4. Beneficiaries of estates and trusts
to acquire property used in trade or business
may be allowed as a deduction or treated as Who are not entitled to tax credit?
capital expenditure. [Sec 34 (B) (3)] 1. Nonresident Citizens,
2. Resident and Nonresident Aliens
Non-deductible Interest 3. Resident and Nonresident Foreign
a. Interest on loan between taxpayers. Corporations
The excess over the net book value immediately

For NRA-ETB and RFC, taxes paid or before the casualty should be capitalized, subject
incurred are allowed as deductions only if to depreciation over the remaining useful life of
and to the extent that they are connected the property.
from income within the Philippines.
In case of a taxpayer, other than a corporation,
Requirements to avail tax credit only the following percentages of the gain or loss
1. total amount of income derived from recognized upon the sale or exchange of a capital
sources without the Philippines; asset shall be taken into account in computing
the net capital gain, net capital loss and net
2. amount of income derived from each income:
country, the tax paid or incurred to which 1. One hundred percent (100%) if the
is claimed as credit; capital asset has been held for not more
3. all other information necessary for the than twelve (12) months.
verification and computation of such 2. Fifty percent (50%) if the capital asset
credits. has been held for more than twelve (12)
months (Sec 39 [B], NIRC)
TAX CREDIT vs. TAX DEDUCTION
Tax Credit Tax Deduction 3. SPECIAL LOSSES

Deductible from gross Deductible from
income Philippine income a. Losses on wash sales of stocks or
tax securities: not deductible because these
Sources: deductible Sources: Foreign are artificial loss
taxes such as business income, war-profits
tax, excise tax, and excess profit tax b. Wagering losses: deductible only to the
percentage tax, and extent of gain/ winnings (Sec. 34[D][6]).
other business-
connected taxes Wash sales – a sale or other disposition of stock or
securities where substantially identical securities
are acquired or purchased within 61-day period,
D. LOSSES beginning 30 days before the sale and ending 30
days after the sale (Sec. 38).
Types of Losses:
General Rule: Losses from wash sales are not
1. CAPITAL LOSSES – deductible only to the deductible.
extent of capital gains
a. losses from sale/ exchange of capital Exception: When the sale is made by a dealer in
assets stock or securities and with respect to a
b. losses resulting from securities transaction made in the ordinary course of the
becoming worthless and which are business of such dealer, losses from such sale is
capital assets deductible.
c. losses from short sale of properties
d. losses due to failure to exercise Elements of Wash Sales:
privilege or option to buy/ sell 1. The sale or other disposition of stock
property resulted to a loss;
2. There was an acquisition or contract or
option for acquisition of stock or securities
2. ORDINARY LOSSES – incurred in the within 30 days before the sale or 30 days
course of trade, business or practice of after the sale; and
profession 3. The stock or securities sold were
substantially the same as those acquired
Total Destruction – total book value (cost within the 61-day period.
less accumulated depression) less any
amount of insurance or c. Abandonment losses in petroleum
compensation received operation and producing wells.
(Sec. 34 [D][7])
Partial Destruction – the replacement
cost to restore the property to its normal In case a contract area where petroleum
operating condition, but in no case shall operations are undertaken is partially or
the deductible loss be more than the net wholly abandoned, all accumulated
book value of the property before the exploration and development
casualty. expenditures pertaining thereto shall be
allowed as a deduction.

43
In case a producing well is abandoned, fires, storms, or other casualties or from

the unamortized cost thereof, as well as robbery, theft or embezzlement;
the undepreciated cost of equipment 3. There has been no substantial change in the
directly used therein, shall be allowed as ownership of the business or enterprise.
deduction in the year the well, equipment 4. not less than 75% in nominal value of the
or facility is abandoned. outstanding issued shares is held by or on
behalf of the same persons; or
d. Losses of mines other than oil and gas 5. not less than 75% of the paid up capital is
wells held by or on behalf of the same person.
The taxpayer’s failure to record in his books the

e. Losses due to voluntary removal of alleged loss proves that the loss had not been
building incident to renewal/ suffered, hence, not deductible (City Lumber vs.
replacements – deductible expense from Commissioner).
gross income.
Loss from Theft or Embezzlement
f. Loss of useful value of capital assets due 1. deductible in the year in which it was
to changes in business conditions – sustained
deductible up to the extent of actual loss 2. no means of determining the actual date of
sustained (after adjustment for embezzlement – year of discovery (Boston
improvement, depreciation and salvage Consolidated Gas Co. vs. Commissioner.,
value). 126F [2d] 437).
3. Modified by the application of the bad debt
g. Losses from sales or exchanges of theory which holds that since the
property between related taxpayers – embezzlement of the funds creates a debtor-
losses of this nature are not deductible creditor relationship the loss is deductible
but gains are taxable. as BAD DEBT in the year when the right of
recovery became worthless.
h. Losses of farmers – if incurred in the
operation of farm business, it is
deductible. E. BAD DEBTS
These are debts due to the taxpayer which are

4. NET OPERATING LOSS CARRY-OVER actually ascertained to be worthless and charged
(NOLCO) off within the taxable year.
It refers to the excess of allowable deductions A debt is valid if there exists the relationship of a
over gross income of the business for any taxable debtor and creditor. It is not necessary that the
year which had not been previously offset as debt shall be due in the sense that it is then
deduction from gross income. collectible. It must be an outstanding obligation,
which if not due at the time, will certainly become
General Rule: it can be carried over as a due at some future date (Budsboro Steel Foundry
deduction from gross income for the next 3 & Machine Co. vs. U.S., 12 AFTR 1948)
consecutive years immediately following the
year of such loss. Where the debt, however, is subject to a
contingency did not occur, there is no valid
Exception: any net loss incurred in a taxable subsisting debt (Evans Clark, 18TC 780)
year during which the taxpayer was exempt
from income tax shall not be allowed as Repayment of debt is essential for the existence of
deduction. the debt. Understanding that the payment of the
alleged debt would never be demanded- there is no
For mines, other than oil and gas well, net debt within the contemplation of law.
operating loss incurred in any of the first ten years
of operation may be carried over as deduction for Exception: even if the debt be uncollectible from
the next five (5) years immediately following the its inception, it is the right of the endorser or
year of such loss provided there is no substantial guarantor to deduct payment which he is
change in ownership required to make upon default of the primary
debtor.
Requirements to avail of NOLCO:
1. The taxpayer was not exempt from income Factors affecting Worthlessness of a Debt
tax in the year of such net operating loss; (2004 Bar)
2. Of property connected with the trade, 1. Bankruptcy or insolvency of the debtor;
business or profession, if the loss arises from 2. Insufficiency of the collateral;
3. Statute of limitation Can CBC claim the write-off of worthless

4. Death of the debtor leaving no assets; securities as ordinary loss deductible from gross
5. Injury of the debtor making it impossible for income?
him to earn a living (Sec.10, Rev. Reg. No. 2;
1955 CCH Fed. Tax Course, par. 502) No. Shares of stock would be ordinary assets only
6. Meager amount involved; to a dealer in securities or a person engaged in the
7. Improbability of success of judicial purchase and sale of, or an active trader (for his
collection; own account) in securities. In the case at bar,
8. Destruction by fire of original invoices
evidencing the indebtedness (Goodwill First CBC Capital, the investee corporation is a
International Rubber Co. vs. Collector, CTA subsidiary corporation of CBC whose shares in
Case No. 468, 8 June 1963). said investee corporation are not intended for
purchase or sale but as an investment; thus
 A taxpayer may not defer deduction to a considered as a capital asset. As a result, any loss
later year of a bad debt. If the charge off therefrom would be a capital loss, not an ordinary
is made in a later year, the deduction loss, to the investor. Capital losses are allowed to
will be disallowed (Collector vs. be deducted only to the extent of capital gains, i.e.,
Goodrich International Rubber Co., 21 gains derived from the sale or exchange of capital
SCRA 1336, 1314). assets, and not from any other income of the
taxpayer.
 Deductible bad debts of Domestic and
Resident Foreign Corporations – only Can the loss of CBC in its equity investment in the
business debts Hongkong subsidiary be deductible as a bad debt?
 Nonresident Foreign Corporation – not No. The shares of stock in question do not
entitled constitute a loan extended by CBC to its
subsidiary (First CBC Capital) or a debt subject to
Equitable Doctrine of Tax Benefit Rule obligatory repayment by the latter, which are
A recovery of bad debts previously deducted essential elements to constitute a bad debt.
from gross income in the preceding year or years Instead it is a long term investment made by CBC.
shall be included as part of the taxpayer’s gross (China Banking Corporation vs. Court of Appeals,
income in the year of such recovery to the extent G.R. No. 125508, July 19, 2000)
of the income tax benefit of said deductions.
Measure of Bad Debts Deductible
NOTE: Securities becoming worthless are not a. Generally the entire amount of the bad debt.
bad debts. b. Not necessarily so in the following instances:
i. Unpaid wages paid in promissory note –
If securities are ascertained to be worthless and amount deductible is the value of the
charged off within the taxable year and are note and not the amount of the unpaid
capital assets, the loss resulting therefrom salary or wages;
shall, in the case of a taxpayer (other than a ii. Distribution of the decedent’s assets-
bank or trust company incorporated under the only the difference between creditor’s
laws of the Philippines a substantial part of claim and property received from the
whose business is the receipt of deposits), be estate;
considered as a loss from the sale or exchange, iii. Account receivable becoming worthless
on the last day of such taxable year, of capital in the hands of the purchaser – only the
assets. amount which represents the purchase
price and not the face value of the note;
iv. Foreclosure of mortgages:
China Banking Corp. (CBC) made a 53% equity iv.a. only the difference between the
investment in the First CBC Capital Ltd., a debt and the proceeds of the sales
Hongkong subsidiary engaged in financing and is generally deductible as bad
investment with deposit-taking function. Upon debts;
the examination of BSP, First CBC was declared iv.b. if no foreclosure occurs and the
insolvent. With BSP's approval, CBC was forced debtor surrenders the property to
to write-off as worthless investments in First CBC the creditor – difference between
in its 1987 ITR and treated as bad debts or as an the basis of the debt and FMV of
ordinary loss deductible from the gross income. the property deductible (Sec. 103,
CIR disallowed the deduction saying that it should Rev. Reg. No. 2).
be classified as "capital loss", there being no v. If creditor buys the mortgaged property
indebtedness to speak of. and credits the debt with the purchase
price even if such price is less than the
indebtedness – no deductible bad debt,
the security taking place of the debt.

45
vi. Debt partially secured by a mortgage is cost or other basis of the property and the rate
deductible only to the extent not covered (usually 1.5 to 2 times the straight line rate)
by mortgage. is applied to the resulting balance. The rate
vii. A debt compromised is deductible to the is applied to the cost (or other basis) for the
extent compromised or the amount first year and to the depreciated book
absolved if the debtor is insolvent.
3. value for each of the succeeding years. The
viii. Unpaid wages, salaries, rents and other book value decreases every year because of
similar income, deductible in full the yearly depreciation expense.
provided the same is returned as
income. 4. Sum-of-the-Years Digit Method: Where larger
depreciation charges are provided in the
earlier years if the life of an asset which
F. DEPRECIATION gradually diminish until the total
depreciation is equal to the cost of the asset.
It is the gradual diminution in the useful (service)
value of tangible property used in trade, 5. Any other method which may be prescribed by
profession or business resulting from exhaustion, the Secretary of Finance upon
wear and tear, and obsolescence. It applies also to recommendation of the Commissioner (De
the amortization of the value of intangible assets, Leon, pp. 370-371)
the use of which in trade or business is definitely
limited in duration (Basilan Estates, Inc. vs. Capital Expenses of a Private Educational
Commissioner, 21 SCRA 17, 5 September 1967). Institution
The capital expenditures of a private educational
Includes: institution may be treated in the following
1. The gradual diminution in the service or options:
useful value of tangible property due from 1. Deduct immediately as expenditures; or
exhaustion, wear and tear and normal 2. Deduct as allowances for depreciation.
obsolescence;
2. Amortization of the value of intangible
assets with definitely limited duration. G. DEPLETION EXPENSE
Who are entitled to deduction? Depletion is the exhaustion of natural resources

General Rule: There shall be allowed as a like mines, oil and gas wells due to production. It
depreciation deduction a reasonable allowance for is similar to depreciation allowance, the purpose
the exhaustion, wear and tear (including of which is to recover the invested capital in the
reasonable allowance for obsolescence) of property property.
used in the trade or business.
Persons entitled to claim depletion allowance
In case of NRA-ETB or RFC, depreciation shall be Annual depletion deduction are allowed only to
permitted only when such property is located in mining entities which own an economic interest in
the Philippines. mineral deposit or those which have capital
investment in the mineral deposit. (Sec. 3, Rev.
In case of property held by one person for life with Regulation No. 5-76).
remainder to another person, the deduction shall
be computed as if the tenant were the absolute In the case of a resident foreign corporation or an
owner of the property, hence, deduction shall be alien individual engaged in trade or business in
allowed to him. the Phils. allowance for depreciation of oil and gas
wells or mines shall be authorized only in respect
In case of property held in trust, the allowable to oil and gas wells or mines located within the
deduction shall be apportioned between the Phils. (Sec. 34 [G, 3], NIRC).
income beneficiaries and the trustees in
accordance with the pertinent provisions of the Economic Interest – interest in minerals in, placed
instrument creating the trust, in the absence of investment therein or secured by operating or
such provision, on the basis of the trust income contract agreement for which income is derived,
allowable to each. and return of capital expected from the extraction
of mineral.
Methods of Depreciation
1. Straight Line Method: the total depreciation NOTE: Mere economic/ pecuniary advantage to be
is spread in equal amounts over the useful life derived when there is no capital investment is
of the asset. involved, does not amount to economic interest.
2. Declining Balance Method: The amount of

depreciation is deducted every year from the H. CHARITABLE & OTHER CONTRIBUTIONS
4. non-government organizations (Sec 34

Kinds of contributions allowed as deduction: [H])shall be deductible only to the extent:
1. Special or contributions deductible in full  in case of a corporation, not in excess of
2. Ordinary or contributions with limit or 5% of taxable income
subject to limitation  in case of an individual, not in excess of
Contributions Deductible in Full 10% of the taxable income
The law specified these contributions as
deductible in full amount. Donations to: In case of NGO’s, it must be accredited or
organized for any of the purpose s enumerated for
1. Philippine government or to any of its agencies, the donation to qualify as deduction, irrespective
or political subdivisions, including fully-owned whether deductible in full or not.
government corporations undertaking priority
activities in: These donations must be properly documented to
a. Science be deductible.
b. Culture
c. Health The amount of any charitable contribution of
d. Human settlements property other than money shall be based on the
e. Education acquisition cost of said property.
f. Economic development
g. Youth and sports development
H. PENSION TRUST CONTRIBUTION
2. Foreign institutions or international
organizations, pursuant to agreements, It is a deduction applicable only to the employer
treaties or commitments entered into by the on account of its contribution to a private pension
Phil. Government or special laws; plan for the benefit of its employees. This
deduction is purely business in character.
3. Donations to certain accredited NGO’s subject
to the following requisites to be deductible in An employer is allowed to deduct from business
full: gross income contributions or payments made to
a. not more than 30% of which should be pension trust in accordance with a “reasonable
used for administration purposes; private benefit plan”. (RA 4917, Sec 32B(6A),
b. the contribution must be utilized not NIRC)
later than the 15th day of the 3rd month
after the close of its taxable year;
c. upon dissolution, a court shall distribute I. RESEARCH AND DEVELOPMENT (R&D)
the assets to another non-profit domestic
corporation (organized for same purpose) Treatment of the R&D Expenditures
or to the state, or to another similar A TP has the option to consider R & D
organization. expenditures that are paid or incurred during the
taxable year in connection with profession, trade
Such NGO is organized and operated or business either as:
exclusively for:
a. Scientific 1. Ordinary and necessary expenses deductible
b. Research from the business gross income in the year
c. Educational the expenses are paid or incurred.
d. Character-building and youth and
sports development 2. Deferred expenses chargeable to the capital
e. Health account but not chargeable to property
f. Social welfare subject to depreciation or depletion.
g. Cultural
h. Charitable purposes If the R & D expenditures are treated as deferred
expenses, such expenses will be allowed as
Partial Deduction - donations to the following: deductions ratably distributed over a period of not
1. Philippine Government or any of its less than 60 months beginning with the month in
agencies or any political subdivision thereof which the TP first realizes the benefits from such
exclusively for public purposes; expenditures. (Sec. 34 I, NIRC)
2. Accredited domestic corporation or
associations organized and operated Expenses not considered as R&D:
exclusively for religious, charitable, 1. Expenditures for the acquisition or
scientific, youth and sports development, improvement of land, or for the
cultural or educational purposes or for the improvement of property to be used in
rehabilitation of veterans; connection with R&D of a character which
3. social welfare institutions; or is subject to depreciation and depletion; and

47
2. Expenditures paid or incurred for the 2. Taxable Trusts

purpose of ascertaining the existence,
location, extent or quantity of any deposit
or ore or other mineral including oil or gas. Taxable Estate- refers to the mass of
properties left by a deceased person and
Premium Payments on Health and/or which is under administration or judicial
Hospitalization Insurance settlement.
It is an amount of premium on health and/or
hospitalization paid by an individual taxpayer, for  Property, rights and obligations of a
himself and members of the family during the person which are not extinguished by his
taxpayer. death and those that accrues thereto;
taxed in the same way as an individual
provided it is irrevocable and earns
OPTIONAL STANDARD DEDUCTIONS (OSD) income; what is taxed is not the property
that constitutes the trust (this was
They may be elected in lieu of itemized deductions already subject to donor’s tax) but the
and merely a privilege enjoyed by certain income of such property.
taxpayers.
Taxable Trusts – trust, the income of which is
 In case of individuals (other than a to be accumulated, or in which the fiduciary
nonresident alien) may elect a standard may, at his discretion, either distribute or
deduction in an amount not exceeding 40% of accumulate income.
his gross sales or gross receipts;
 Arrangement created by agreement
 In case of corporations, they are now given the under which title to property is passed to
option to avail of the OSD at 40% of their another for conservation or investment
gross income (as amended by R.A. 9504). with the income and the corpus/principal
distributed in accordance with the
Unless the taxpayer signifies in his return his directions of the creator.
intention to elect this deduction, he is considered
to have availed of the itemized deductions. Such To be taxable as a separate entity, grantor
election, when made by the qualified taxpayer, is must have absolutely and irrevocably given
irrevocable for the year in which it is made. up control and benefit over the trust.
Itemized deduction vs. OSD. B. Corporation – includes partnerships, no

matter how created or organized, joint stock
In itemized deduction, it must be substantiated by companies, joint accounts, associations or
receipts; while OSD requires no proof of expenses insurance companies except:
incurred because the allowable deduction is 40%  Joint construction venture
of gross sales or receipts.  General professional partnership
 Joint venture for engaging in petroleum,
coal, geothermal and other energy
KINDS OF TAXPAYERS operations pursuant to a consortium
agreement with the government.
Under Sec 22(N), a taxpayer is any person subject
to [income] tax. Income taxpayers, with Domestic – those created or organized in the Phil.
distinction based on the amount of income subject or under its laws.
to tax, or the applicable tax rates, or both, are
classified as follows: Foreign– any corporation created under foreign
laws.
A. Individuals a. Resident foreign – those engaged in trade or
business within the Phil.
Natural Persons b. Non-resident foreign – those not engaged in
1. Resident Citizens trade or business within the Phil.
2. Non-resident Citizens
3. Resident Aliens A. Individual Taxpayers
4. Non-resident Aliens 1. Citizens
a. Engaged in Trade or Business a. Resident citizens (RC) – those citizens of
b. Not engaged in Trade or Business the Philippines residing therein is
taxable on all income derived from
Artificial Persons sources within and without the
1. Taxable Estate Philippines.
2. Aliens
b. Non-resident citizens (NRC) –taxable on
income derived from sources within the a. Resident Aliens (RA) – those whose residence
Philippines, which includes a Filipino is within the Philippines and who is not a
citizens: citizen thereof is taxable only on income
1. Who establish to the satisfaction of derived from sources within the Philippines.
the commissioner the fact of his
physical presence abroad with a  Those who come to the Philippines for a
definite intention to reside therein; definite purpose which in its nature
would require an extended stay, and
2. Who leave the Philippines during the make their home temporarily in the
taxable year to reside abroad, either country become resident aliens.
as an immigrant or for employment  Length of stay is indicative of intention.
on a permanent basis; Aliens who shall have stayed in the
Philippines for more than one year by
3. Who work and derive income from the end of the calendar year are resident
abroad and whose employment aliens.
thereat requires him to be physically
present abroad most of the time (at b. Non-Resident Aliens (NRA) – those whose
least 183 days, need not be residence is not within the Philippines and
continuous) during the taxable year; who are not citizens thereof.
Exceptions: b.1. Non-resident aliens Engaged in trade

or business (NRA-ETB) – those whose
Overseas Filipino Workers – those residence is not within the Philippines
who are physically present abroad and who are not citizens thereof but doing
most of the time during the taxable business therein are taxable only on
year and taxable only on income income from sources within.
derived from sources within the  Trade or Business – includes the
Philippines. performance of the functions of a
public office; but excludes
Seamen – considered as an OFW performance of services by taxpayer
provided the following requirements as an employee.
are met:  A NRA who shall come to the
a. They receive compensation for Philippines and stay for an aggregate
services rendered abroad as a period of more than 180 days during
member of the complement of a any calendar year shall be deemed a
vessel; and non-resident alien doing business in
b. Such vessel is engaged the Philippines (Sec. 22 [G])
exclusively in international notwithstanding (Sec. 25 [A][1],
trade. NIRC).
4. Who is previously considered as a b.2. Non-resident aliens Not engaged in

non-resident and who arrives in the trade or business (NRA-NETB) – those
Philippines at anytime during the whose residence is not within the
taxable year to reside thereat Philippines and who is not a citizen and
permanently shall be considered not doing business therein are liable for
non-resident for the taxable year in income derived from sources within the
which he arrives in the Philippines Philippines.
with respect to his income derived
from sources abroad until the date of
his arrival. 2.Special Class of Individual Employees
NOTE: The taxpayer shall submit a.Minimum Wage Earner (MWE)

proof to the Commissioner to show  Worker in the private sector paid the
his intention of leaving the statutory minimum wage.
Philippines to reside permanently  Employee in the public sector with
abroad or to return to and reside in compensation income of not more than the
the Philippines as the case may be. statutory minimum wage in the non-
agricultural sector where he/she is assigned.

49
NOTES:
1. Minimum Wage Earners shall be exempt 1. Taxable or Business Partnerships
from the payment of income tax on their  All other partnerships no matter how
taxable income. created or organized.
2. The holiday pay, overtime pay, night shift  Includes unregistered joint ventures
differential pay and hazard pay received shall and business partnerships.
likewise be exempt from income tax.
Not taxable when:
a. Undertaking construction projects
3. Corporations b. Engaged in petroleum, coal and
other energy operation under a
Domestic Corporations (DC) – a corporation service contract with the
created or organized in the Philippines or government.
under its laws and is liable for income from
sources within and without. 2. General Co-partnerships (GCP)
 Partnerships which are by law
Foreign Corporations (FC) assimilated to be within the context of,
a. Resident Foreign Corporations (RFC) – and so legally contemplated as
a corporation which is not domestic and corporations. Partnership itself is subject
engaged in trade or business in the to corporate taxation while individual
Philippines is liable for income from partners are considered stockholders
sources within. and, therefore, profits distributed to them
by the partnership are taxable as
NOTES: dividends.
1. In order that a foreign corporation
may be regarded as doing business 3. General Professional Partnerships
within the State, there must be (GPP)- A partnership formed by persons
continuity of conduct and intention for the sole purpose of exercising their
to establish a continuous business, common profession, no part of the income
such as the appointment of a local of which is derived from engaging in any
agent, and not one of a temporary trade or business.
character.
 General Professional Partnership is not
2. “Doing business” includes – considered as a taxable entity for income
i. Soliciting orders, service contracts, tax purposes. The partners themselves,
opening offices, whether called ‘liason’ not the partnership (although it is still
offices or branches; obligated to file an income tax return),
ii. Appointing representatives or are liable for the payment of income tax
distributors domiciled in the in their individual capacity computed on
Philippines or who in any calendar their respective distributive shares of the
year stay in the country for a period partnership profit.
or periods totalling 180 days or more;
iii. Participating in the management, Co-ownerships
supervision or control of any domestic There is co-ownership whenever the
business, firm, entity or corporation ownership of an undivided thing or right
in the Philippines; belongs to different persons.
iv. Any other act or acts that imply a
continuity of commercial dealings or Instances when co-ownership exists:
arrangements, and contemplate to a. Two or more heirs inherit an
that extent the performance of acts or undivided property from a decedent.
works, or the exercise of some of the b. A donor makes a gift or an undivided
functions normally incident to, and in property in favor of two or more
progressive prosecution of, donees.
commercial gain or of the purpose and
object of the business organization. NOTES:
It is not taxable when the activities are limited
b. Non-resident Foreign Corporations merely to the preservation of the co-owned
(NRFC) – a corporation which is not property but co-owners are liable for income tax in
domestic and not engaged in trade or their separate and individual capacities. It is
business in the Philippines is liable for taxable when the income of the co-ownership is
income from sources within. invested by the co-owners in business creating a
partnership.
4. Partnerships
TAXPAYER’S RETURNABLE INCOME AND APPLICABLE TAX
TAXPAYERS INDIVIDUALS CORPORATIONS PARTNERSHIPS ESTATES

AND TRUSTS
Compensation Business Income Trading Income Business
INCOME Profession Business from Income
Business Income Profession
Itemized Itemized Itemized Itemized Itemized
deductions deductions deductions deductions deductions
or or or or or
DEDUCTIONS 40% OSD based 40% OSD based on 40% OSD 40% OSD 40% OSD like
on gross sales or gross income based on based on individual TP
gross receipts gross income gross
from business or receipts Distribution to
profession beneficiaries
Basic P50,000
PERSONAL
EXEMPTIONS Additional Basic P20,000
P25,000 per
child
(maximum of 4)
Schedular (Tax Normal Corporate Normal Tax Schedular
TAX RATE on Individuals) Income Tax 30% Corporate Exempt (Tax on
Or Income Tax (Share of Individuals)
5-32% MCIT (2%) 30% each
Or partner to 5-32%
MCIT (2%) be reported
in his
individual
return)
TAX ON INDIVIDUALS
Summary and Treatment of Income (Quick view)
Taxpayers and Types Within Without Itemized OSD Exemption Tax rate
of Income deduction (Sec (Sec 35)
34L,
RA
9504)
A. Resident Citizen (RC)
Compensation
Income Yes Yes No No Yes Tabular (Sec. 24A)
Income from
Profession Yes Yes Yes or Yes Yes Tabular (Sec. 24A)
Business Income Yes Yes Yes or Yes Yes Tabular (Sec. 24A)
Passive Income* Yes Yes* No No No Final
Tax(Sec.24B,C,D)
*Tabular (Sec 24A)
B. NRC and RA
Compensation
Income Yes No No No Yes Tabular (Sec. 24A)
Income from
Profession Yes No Yes or Yes Yes Tabular (Sec. 24A)
Business Income Yes No Yes or Yes Yes Tabular (Sec. 24A)
Passive Income Yes No No No No Final Tax (Sec
24B,C,D)

51
C. NRA-ETB
Compensation
Income Yes No No No R Tabular (Sec. 24A)
Income from
Profession Yes No Yes No R Tabular (Sec. 24A)
Business Income Yes No Yes No R Tabular (Sec. 24A)
Passive Income Yes No No No No Final Tax (Sec
24B,C,D)
D. NRA-NETB Yes No No No No 25% of Gross Income

and apply Sec. 24 C
&D
E. Special taxpayers
employed by: Yes No No No No 15% of gross income
1. Regional Head office Apply Sec. C & D,
of Multi-national and 25% for other
Corporation assigned in income
the Phils.
2. Offshore Banking
Units
3. Petroleum Service
Contractor
Sec 24 A = Normal tabular Rate for Individual TP Sec. 24B= Tax rate for passive
income
Sec. 24C= Tax rate for sale of shares of stock outside the stock exchange Sec. 24 D= Tax rate for sale of
real property
Sec. 34 A to K = Itemized Deductions Sec. 34L, RA 9504= OSD of 40%
of gross sales or receipts
R= Subject to Reciprocity
Tax Base and Tax Rates (Quick View)

Category of Income RC RA NRC NRA-EBT NRA-NETB
All sources Within Within Within Within
1.Compensation, Business, Based on Taxable Income GIW
Profession Schedular Normal Tax Rate (Sec. 24A) 25%
2. Prizes of P10,000 or less
3.Proprietary Not
Educational/hospital applicable
4. Cinematographic film and the GIW 25%
like
5.Interest,royalty,
winnings/prizes except prizes Gross income within – 20% FWT
of P10,000 & below GIW
6.Royalties-books, literary, Gross income within – 10% FWT 25%
musical
7.Interest (long term E X E M P T
investment) –savings, common In case of pretermination, remaining maturity of;
or individual trust funds, 4 years to less than 5 years = 5%
deposit substitute investment 3 years to less than 4 years = 12%
management account in Less than 3 years = 20%
denomination of P10,000 or as
prescribed by the BSP
8. Cash/property dividends GIW = 10% FWT GIW =
20%
9. Interest (FCDS) GIW = 7.5% FWT E X E M P T
10. Capital gains on shares (not Net capital gains within=5%(not over P100,000): 10% (in excess of
traded in stock exchange P100,000)
11. Sale of shares (traded in ½ of 1% of the selling Price, Business Tax
stock exchange)
12. Capital gains on sale of real Gross sales price or FMV, whichever is higher, 6%
property

53
13.Winnings on Phil. EXEMPT

Sweepstakes/lotto
All passive income derived by RC outside the Phils. are subject to normal (schedular) tax in the Phils. (Sec
24A)
Taxation of Individual’s Business Income
Classification Source Tax base Tax rate

RC Within/without GI – (Ded + PE) 5% to 32%
NRC Within only GI – (Ded + PE) 5% to 32%
RA Within only GI – (Ded + PE) 5% to 32%

NRA-ETB Within only GI – (Ded + PE, 5% to 32%
subject to reciprocity)
NRA-NETB Within only Gross income 25%
 Personal Exemption (PE) is P50,000 for TP and P25,000 per qualified dependent child, maximum of four (4)
 Deduction comes in the form of itemized or 40% optional standard deduction (except for NRA-ETB)
INDIVIDUAL TAXPAYERS Schedular tax rates apply to all classes of

individuals, with the exception of non-resident
A. Natural Persons aliens not engaged in trade or business. Should
1. Resident Citizens NRANETB earn “other income,” such is subject to
2. Non-resident Citizens a 25% final tax.
3. Resident Aliens
4. Non-resident Aliens Rules on Situs
a. Engaged in Trade or Business 1. Only resident citizens are taxable on income
b. Not engaged in Trade or Business within and without.
2. Resident aliens, nonresident citizens and
B. Artificial Persons nonresident aliens are taxable on income
1. Taxable Estate within only.
2. Taxable Trust
Taxable Income
Categories of Income of Individuals
1. Compensation Income Pro-forma computation of income subject to
2. Income from Trade, Business or Practice of schedular tax rates:
Profession
3. Passive Income Compensation Income P xxx
4. Capital Gains Less: Personal Exemptions (xxx)
Health/Hosp. Insurance (xxx)
Classification of Taxes on Individuals Net Taxable Compensation P xxx
1. Normal (Schedular) graduated tax; Business Income xxx
2. Passive income tax; Less: Business expenses (xxx)
3. Capital gains Tax. Net Business Income xxx
Net Professional Income xxx
Tax Rates on NET Ordinary or Other Income Other Income:
(Schedular Rates) Capital gains not subject to FWT xxx
,Passive income w/o for RC xxx
Income But Tax Plus Of Total taxable income P xxx
over less Excess (Subject to schedular tax rates)
than Over
Net Business Income and Net Professional
10,000 5%
Income are computed as follows:
10,000 30,000 500 10% 10,000
30,000 70,000 2,500 15% 30,000 Gross Business / Professional Income P xxx
70,000 140,000 8,500 20% 70,000 Less: Itemized Deductions [OR]
140,000 250,000 22,500 25% 140,000 Optional Standard Deduction (xxx)
250,000 500,000 50,000 30% 250,000 Net Business / Professional Income P xxx
500,000 125,000 32% 500,000
Passive Income  Interest on government securities

(taxable effective January 1, 1998).
Passive income is an income earned from allowing  Interest on saving deposit, time deposits
others to use one’s rights, or game of chance or and deposit substitutes subject to 20%
investment, which the TP merely waits for the final tax.
income to come in.
Dividend Income - corporate profit set aside,
Rules: declared and distributed by the director of a
1. This is subject to Final Tax. corporation to be paid to stockholders on
2. Once subjected to Final tax, it is no longer demand or at a fixed time. Under the Tax Code,
included in the taxable income subject to any distribution made by a corporation to its
normal (schedular) tax. stockholders, whether in money or property out
3. Deductions and exemptions do not apply to of its earnings and profits accrued since 1 March
items subject to final tax. 1913.
4. All passive income derived by a resident
citizen outside the Philippines are subject to Kinds of Dividends:
normal/schedular tax in the Philippines.
(Sec. 24A) 1. Cash Dividend - paid in given sum of money
5. The share of a partner in a general business
partnership is to be treated as dividend 2. Property Dividend – one paid by corporation in
income, subject to Final Tax of 10%. securities (not its own stock) or other property
6. Prizes earned within amounting to P10,000
or less are subject to normal tax, while 3. Stock Dividend - one paid by a corporation
winnings earned within are generally with its own stock. It represents transfer of
subject to passive income tax of 20%. surplus to capital account. It may be of the
7. Sweepstakes and lotto winnings in the same kind or different from that on which it is
Philippines are tax-exempt. issued.
(Refer to the above summary for the
applicable Tax Base and Tax Rate) General Rule (as to stock dividends): Not
subject to income tax if it represents the
Examples of Income Subject to Final Tax: transfer surplus to capital account.
a. Interest income from bank deposit
b. Royalties Exception: If it gives the shareholder an
c. Dividend received from domestic interest different from that which his former
corporation by individual or NRFC stockholdings represented:
d. Prizes amounting to more than a. Shares later redeemed for
Php10,000.00 consideration by the corporation
e. Winnings (except sweepstakes and lotto) or otherwise conveyed by the
f. Partner’s share from the net income stockholder to the extent of such
after tax of business partnership, joint consideration;
account, joint venture or consortium b. Recipient is other than the
shareholder;
Passive Investment Income. An income subject to c. A change in the shareholder’s
final withholding tax. equity results by virtue of the
Consequences: stock dividend issuance.
 The withholding agent withholds the tax and d. Distribution of treasury stocks.
remits the same to the BIR. e. Dividends declared in the guise of
 The recipient is not required to include the treasury stock dividend to avoid
income in his gross income. Neither is the the effects of income taxation
taxpayer required to include it in the taxable (Commissioner vs. Manning, 66
income (CIR vs. PAL, 504 SCRA 90) SCRA 14)
 Taxpayer is not required to file if his income f. Different classes of stock were
consists solely of income subject to final tax. issued.
 The tax withheld constitutes final settlement
of the tax liability on the income. 4. Liquidating Dividend - one resulting from
the distribution by a corporation of all its
Interest Income – amount of compensation paid property or assets in complete liquidation or
for the use of money or forbearance from such dissolution. Taxable income refers to the
use. excess of amount received over cost of the
 Includes such interest arising from share surrendered.
indebtedness- business or non-business,
legal or illegal, usurious or not.

55
Giver Recipient Taxable PERSONAL EXEMPTIONS

(tax rate) / Personal exemptions are the arbitrary amounts
Exempt allowed by the law as a deduction from the gross
compensation income and/or net business income
Domestic Domestic/RFC Tax EXEMPT
and/or professional income as the case may be, for
Domestic RC, NRC, RA 10% (effective
personal, living or family expenses. These are
taxable year
considered to be the equivalent of the minimum
2000)
subsistence.
Domestic NRA-ETB 20%
Domestic NRA-NETB 25%
Kinds of Personal Exemptions
Domestic NRFC 15% Subject to
allowance for 1. Basic Personal Exemption (BPE)- deductible
tax credit allowance allowed to the individual TP
regardless of status.
Royalty Income – it is the payment for the use and
exhaustion of property such as earnings from 2. Additional Personal Exemption (APE) –
copyrights, patents, trademarks, formulas and deductible allowance in addition to the BPE
natural resources under lease. allowed for qualified dependent children of an
individual TP.
 Included in the gross income IF derived
from sources OUTSIDE the Philippines The new RA 9504 provides for BPE- P50,000 for
because those from sources within are each individual taxpayer without classifying the
subject to final withholding tax. individual TPs into single, head of the family and
married, and APE – P25,000 for each qualified
 If the recipient of the royalty is paid by dependent child (not exceeding four).
DC is either a NRA-NETB or NRFC, a
lower tax rate may be allowed under an TPs Allowed for Personal Exemption
existing treaty.
The following individual TPs with compensation
Rental Income – amount or compensation paid for or business income in the Phils. are entitled to
the use or enjoyment of a thing or a right and personal exemption:
implies a fixed sum or property amounting to a
fixed sum paid at a stated time for the use of the 1. Citizens of the Phils., whether resident or
property. nonresident;
2. Resident aliens;
Prizes and Winnings. These refer to the amount of 3. Estates and trusts;
money in cash or in kind received by chance or 4. NRA-ETB, subject to reciprocity.
through luck and are generally taxable except
specifically mentioned under the “exclusions” from  NRA-ETB can claim BPE if his country grants
the computation of gross income under Section 32 personal exemption to Filipinos not residing
(B). therein but who derives income in that
country (reciprocity). The exemption shall be
 Prizes derived from sources within not the lesser amount between that allowed in his
exceeding Php 10,000 is included in the gross country and that allowed in the Philippines.
income; if over Php 10,000, it is subject to final
tax on passive income. TPs not Allowed for Personal Exemption
1. NRA-ETB in the Phils. - not enjoying
 Winning from sources within is subject to final reciprocity clause;
tax on passive income EXCEPT PCSO and 2. NRE-NETB in the Phils;
lotto winnings that are exempt. 3. Corporations;
4. Partnerships.
 Prizes and winnings from sources without is
included in the gross income. TPs Entitled to APE
1. RC;
Capital Gains Tax 2. NRC;
These taxes are imposed on sales or exchanges of 3. RA, provided that the qualified
properties not used in business. dependent children are living with him in
the Phils.
(Refer to Dealings in Property section)
Requisites for APE
The dependent must be;
1. a TP”s child, whether legitimate, illegitimate
or legally adopted;
2. chiefly dependent upon the TP for support; vi. In public railway, skyways and bus fare for
3. living with the TP; the exclusive use and enjoyment of the senior
4. not married; not gainfully employed, and not citizen; and
more than 21 years old. (Sec 35B) vii. Exemption from the 12% VAT on their
purchases of goods and services.
Additional Personal Exemption (APE) - P25,000
for each qualified dependent child. NOTE: In 2009, the Supreme Court ruled that the
20% Senior Citizen discount may be claimed as a
a. Limited to four (4) children only which special allowable deduction from gross income and
includes legitimate, illegitimate, or legally may no longer be claimed as a tax credit.
adopted.
b. Husband shall claim the APE unless: Under Article XIV of the Tax Treaty,
1. he waives his right to claim; or compensation income for services done in the
2. he is disqualified; or Philippines may be EXEMPT from income tax, if
3. he has no income; or the –
4. he is a NRC or RA and his income is
derived purely from sources without. a) Recipient of income is present in the
c. In case of separated parents, the proper Philippines for a period not exceeding 183
claimant is the custodian of the children. days in the aggregate during the calendar
period;
b) The remuneration is paid by or on behalf, of
Premium Payments for Health/Hospitalization an employer who is not a resident of the
Insurance (PPHHI) Philippines; and
c) The remuneration is not borne by a
These are the actual premium payments for permanent establishment which the employer
health and/or hospitalization insurance taken by has in the Philippines.
an individual TP for himself or for his family
allowed as deduction at an amount not exceeding The following are also exempt under treaty:
P2,400 per family or P200 a month whichever is a) Income of any kind to the extent required by
lower during the year provided that their family any treaty obligation binding the Philippine
total gross income does not exceed P250,000 for Government (International Comity)
the calendar year. (Sec 34M) b) Salaries of officials of the United Nations
c) Salaries of consular officers (US citizens) in
the US Embassy (exempt from all kinds of
Exemption of Estates and Trusts is P20,000 (Sec. taxes)
62)
Tax Credit
Tax Incentives Available to Senior Citizens The tax withheld by source shall be applied as a
(RA 9257): reduction of the tax liability of the TP in the
i. Individual income tax provided that their taxable year or quarter in which the income was
annual taxable income does not exceed the earned or received.
poverty level as determined by the NEDA for
the corresponding taxable year; TPs Entitled to Tax Credit
ii. Twenty percent (20%) discount on their 1. Resident Citizens
purchase of goods and services; 2. Domestic Corporations, which include
iii. From all establishments relative to the business partner
utilization of services in hotels, inns, 3. Members of the professional partnerships
restaurants, recreation centers; 4. Beneficiaries of estates and trusts
iv. On admission fees to theaters, cinema,
concert halls, circuses, carnivals and other TPs Not Entitled to Tax Credit
places of culture, leisure and amusement for 1. Nonresident Citizens,
their exclusive use and enjoyment; 2. Resident and nonresident Aliens
v. On medical and dental services, professional 3. Resident and Nonresident Foreign
fees of attending doctors, diagnostic and Corporations
laboratory fees such as but not limited to x-
rays, computerized tomography scan and Tax Credit for Taxes Paid to foreign Country
blood tests, in all private hospitals and Taxes paid by an individual to a foreign country
medical facilities in accordance with rules and shall be subject to the following rules:
regulations to be issued by the DOH, in a. An alien individual shall not be allowed
coordination with the Philippine Health the tax credits against the tax for the
Insurance Corporation; taxes paid to foreign countries. (Sec. 24C
3b). Reason: It is because he shall be taxed
on income derived from within the
Philippines only.

57
Individual TPs receiving purely compensation

b. At the option of the TP, the income tax paid income, regardless of amount, from only one
by RC to any foreign country may be employer in the Philippines for the calendar year
treated as an item of deduction or tax whose income tax has been withheld correctly by
credit. the said employer shall not be required to file BIR
Form 1700 if the tax due per computation equals
c. The total amount of the credit shall not tax withheld.
exceed the same proportion of the tax
against which such credit is taken, which In lieu of BIR Form 1700, the Annual Information
the TP’s taxable income from sources Return of Income Taxes Withheld on
without the Philippines bears to his entire Compensation and FWTs filed by their employers,
taxable income for the same taxable year. duly stamped “received” by BIR, shall be
(Sec. 34 C 4b). tantamount to the substituted filing of ITR by said
employees.
Limitations on Tax Credit Rules:
1. One foreign country only TAXATION OF TAXABLE ESTATES AND
The tax credit allowed is whichever is TRUSTS
lower between:
The taxable income of the estate/trust shall be
a. Income tax paid to the foreign determined in the same manner and basis as in
country, or the case of individual TPs. (Sec. 60)
b. Taxable income from Rules for Taxable Estates

foreign country X Phil. 1. An estate is taxable only if it is under judicial
Taxable income from income tax settlement.
all sources 2. It is taxed based on net income at the
graduated tax rates applicable to
2. Two or More Foreign Countries individuals.
The same formula is used as that of one 3. Any income to be distributed currently to the
foreign country except that the heirs is allowed as deduction (in addition to
allowable tax credit will be the lower of those allowed under Sec. 34) from gross
the following: income of the estate (Sec. 61).
a. actual tax paid to foreign country; 4. The amount of income allowed as a deduction
b. Limit on tax credit computed shall be included in computing the taxable
using individual taxable income income of the heir.
from foreign country (as 5. Personal exemption allowed to the estate is
numerator); or P20,000 (Sec. 62)
c. Limit on tax credit computed
using total taxable income from If the heirs contribute to the estate money,
foreign country (as numerator) property, or industry with intention to divide the
profits between/among them, an unregistered
Individual Income Tax Returns partnership is created and the estate becomes
liable for the payment of corporate income tax
The following individual TPs are required to file (Evangelista vs. Collector, G.R. No. L-9996,
ITR that should be filed in triplicate: October 15, 1957; Oña vs. Commissioner, G.R. No.
L-19342, October 15, 1957)
1. RC on his income from all sources.
2. NRC on his income within the Phils. Estates not under Judicial Settlement
3. RA on his income within. An estate, the settlement of which is not the object
4. NRA-ETB engaged in trade or business or of judicial testamentary or intestate proceedings
profession in the Phils. is not a taxable entity. The income there of is
taxable directly to the heir or beneficiary. These
Individual TPs Not Required to file ITR are subject to income tax as co-ownership.
1. If gross income does not exceed his total
BPE and APE The tax treatment of co-ownership is similar to
2. Purely compensation income earner general professional partnership. Hence, the tax
derived from within and the pertinent liability on income is levied directly on the co-
income tax has been correctly withheld. owners. The co-ownership income and deductions
3. Sole income subjected to FWT. are simply apportioned to the co-owners to the
4. If exempt from income tax. extent of their respective interests therein,
Substituted Filing of ITR regardless of whether such income is distributed

or not.
 An unregistered partnership is created

TRUST is a legal arrangement whereby the owner when the heirs invested the common
of the property (trustor) transfers ownership to a properties and income and placed them
person (trustee) who is to hold and control the under a single management (Oña vs.
property belonging to the owner’s instructions, for Commissioner 45 SCRA 74).
the benefit of a designated person(s)  Subject to income tax as a corporation.
(beneficiaries).
Rules for Taxable Trusts INCOME TAX OF CORPORATIONS

1. The trust acquires tax personality if it is
an irrevocable trust amounting to a Taxes on Corporate Income (Quick View)
complete divestment of the grantor of
control over corpus and income.
2. All current distributions are allowed as
Kinds Sources Tax base Tax rate
deduction from gross income of the trust DC Within Taxable NCIT-30%,
but to be reported as income of and income, or or
beneficiary (One-layer-taxation regime). Without Gross MCIT –
3. Personal exemption is P20,000 income 2%, if
4. In case of two or more trusts of the same applicable
grantor and the same beneficiaries, the RFC Within Taxable NCIT-30%,
tax is computed based on the consolidated income, or or
income and each trustee is liable to said Gross MCIT –
tax in an amount which the taxable income 2%, if
income of the trust administered by him applicable
bears to the consolidated taxable income NRFC Within Gross 30%
[Sec. 60(c)(2)]. income
5. Employee’s Trust is tax exempt. Any
amount distributed to the employee is
taxable to him upon distribution but only Special Domestic Corporations
for that portion which exceeds the
amount contributed by him. Classifications Applicable
6. The net taxable income shall be taxed by Tax
using the graduated schedular rate based 1. Proprietary educational 10% of net
on Sec. 24A. institutions (except those taxable
whose gross income from income
CO-OWNERSHIP unrelated sources exceeds
50% of their total GI)
It exists whenever the ownership of an undivided
thing or right belongs to different persons. 2. Nonprofit hospitals 10% of net
taxable
Not considered as a separate taxable entity or a income
corporation as defined in Section 22 (B) of the 3. GOCCs NCIT
NIRC. 4. Exempt government Tax exempt
organizations
For income tax purposes, the individual co-owners (GSIS, SSS, PHIS, PCSO)
in a co-ownership report their share of the income
of their property owned in common by them in
their individual tax returns for the year. Special Resident Foreign Corporations
Co-ownership Due To Death of a Decedent Classifications Applicable Tax

for Income
1. Before partition of property W/in
General Rule: Not subject to income tax if 1. International carriers 2 ½ % of
owners are limited to the preservation of the Philippine gross
property and the collection of income billings
therefrom.
2. Offshore banking units 10% of GI
 Each co-owner is taxed individually on his
3. Branch remittances 15% of
distributive share.
remittance
 Before the partition and distribution of the
4. Regional area Tax exempt
estate of the deceased, all the income
headquarters
thereof belongs in common to all heirs.
5. Regional operating HQ 10% of taxable
income
2. After partition of property

59
Special Nonresident Foreign Corporations
Classifications Applicable
tax (income 4. Net capital
gains on sale or 30% Not Not
within)
exchange or taxable taxable
Cinematographic Film
disposition of land
owner, lessor/distributor 25% of GI
and/or, buildings
outside the Phils.
Lessor of machinery,
lands or buildings FMV,
equipment, aircraft and 7 ½ % of GI
located in the whichever
others
Phils. is higher
Lessor of vessels chartered 4 ½ % of GI
by Philippine nationals
Tax Rules on Dividend Income

Passive Income Tax
Giver Recipient Tax
Passive Income Domesti Nonresiden DC RC
Within c t Foreign NRC 10% Final Tax
RA
and DC NRA-ETB 20% Final Tax
Resident DC NRA-NETB 25% Final Tax
Foreign DC DC Tax Exempt
1. Interest from DC RFC Tax Exempt
depository bank 7.5% Tax exempt DC NRFC 15% Final tax
under the FCDS FC Individual or
2. Royalties, Corporate TP
yield on 20% NCIT
monetary
substitutes, Classification of Corporate TPs
trust funds 1. Domestic Corporation (DC)
and similar 2. Foreign Corporation
arrangements a. Resident Foreign
. b. Nonresident Foreign
3. Interest on NCIT
currency bank 20% Income Taxes of Corporations
deposit 1. Normal Corporate Income Tax (NCIT) =
30% based on net taxable income
2. Minimum Corporate Income Tax = 2% of
Capital Gains Tax Gross Income
3. Gross Income Tax (GIT) – optional, if
requirements are met.
Domestic RFC NRFC
4. Capital Gains Tax – on sale of real property
1. Capital gains or on sale of shares of stock
on sale of shares 5. Final Tax on Passive Income
of stock not
traded in the local Domestic Corporation
stock exchange:
Net capital Gain Tax Payable:
Not over 1. Regular Tax or NORMAL CORPORATE
P100,000 INCOME TAX RATE = 30%
Excess of 5% 5% 5%
P100,000 Tax formula for normal tax:
10% 10% 10% Gross Income (ALL income items
EXCEPT passive income subject to final
2. Percentage tax tax and capital gain with capital gain tax)
on sale of shares ½ of 1% of ½ of ½ of Less:
of stock traded in selling 1% of 1% of Allowable deductions for expenses and
the local stock price selling selling losses
exchange. price price
Taxable Income subject to normal tax
3. Capital gains
on sale or 6% of Same 30%
2. MINIMUM CORPORATE INCOME TAX
exchange or selling as DC final
(MCIT) – imposed on domestic and resident
disposition of price or tax
foreign corporations
 If they have been in their fourth year of c. legitimate business reverses – includes
operation, and substantial losses sustained due to fire,
 Incurred a net loss or zero taxable robbery, theft or embezzlement, for other
income, or a normal income tax that is economic reasons as determined by the
Secretary of Finance
lesser than minimum income tax. Section

27[A]. LIMITATIONS
(Corporations exempt from the MCIT):
Tax Rate: 2% of gross income or taxable base a. The MCIT shall apply only to domestic and
pertinent to a trading/merchandising concern resident foreign corporations subject to the
or a service entity normal corporate income tax (income tax
rates under Sec 27[A] of the CTRP).
Tax Base: GROSS INCOME b. In the case of a domestic corporation whose
operations or activities are partly covered by
NOTE: Gross income excludes passive income the regular income tax system and partly
subject to final tax. Other income and covered under a special income tax system,
extraordinary income are included since R.R. the MCIT shall apply on operations covered
9-98 provides that gross sales include sales by the regular corporate income tax system.
contributory to income taxable under the c. In computing for the MCIT due from a
regular corporate tax. resident foreign corporation, only the gross
income from sources within the Philippines
Rationale behind MCIT: Congress intend to shall be considered for such purposes.
put a stop to the practice of corporations
which, while having large turnovers, report The imposition of MCIT is not violative of due
minimal or negative net income resulting in process for the following reasons:
minimal or zero income taxes year in and year
out, through under-declaration of income or 1. MCIT is imposed on gross income and not
over-deduction of expenses otherwise called capital. Thus, it is not arbitrary or confiscatory.
tax shelters.
2. It is not an additional tax imposition but is
Normal Corporate Income Tax (NCIT) vs. imposed in lieu of normal net income tax and only
Minimum Corporate Income Tax (MCIT). if said tax is suspiciously low.
Under the NCIT, the taxable income of a 3. There is no legal objection to a broader tax base
corporation during each taxable year is multiplied or taxable income resulting from the elimination
with the applicable rate which is currently 30%. of all deductible items and, at the same time,
The taxable income arrived at by deducting all the reduction of the applicable tax rate. Inasmuch as
applicable allowable deductions under the NIRC deductions are a matter of legislative grace,
from the gross sales or receipts (less returns, Congress has the power to condition, limit or deny
discounts and allowances). deductions from gross income in order to arrive at
Under the MCIT, tax is imposed on a corporation the net that it chooses to tax. (CREBA vs. The
at the rate of 2% based on gross income. The gross Hon. Executive Secretary Alberto Romulo, et al.,
income is defined as gross sales or receipts less G.R. No. 106756, March 9, 2010)
returns, discounts and allowances and cost of
goods sold. Cost of goods sold shall include all MCIT is imposed beginning on the fourth
business expenses directly incurred to produce the taxable year immediately following the year
merchandise to bring them to their present in which such corporation commenced its
location and use. Thus, there are limited business. The taxable year in which the
deductions available. business operations commenced shall be the
year when the corporation registers with the
RELIEF from MCIT (ProForRev) BIR.
The Secretary of Finance is authorized to suspend
the imposition of the MCIT on any corporation Carry Forward of the Excess Minimum Tax
which suffers losses because of:  Any excess of MCIT over the normal income
a. prolonged labor dispute – losses arising from tax can be carried forward on an annual basis.
a strike staged by the employees which lasted  The excess can be credited against the normal
for more than six (6) months within a taxable income tax due in the next three (3)
period and which has caused the temporary immediately succeeding taxable years.
shutdown of business operations;  Any amount of the excess MCIT which cannot
b. force majeure - “acts of God”, such as be credited against the normal income tax due
lightning, earthquake, storm, flood and the in the next 3-year period shall be forfeited.
like and also includes armed conflicts; or

61
For purposes of applying the minimum 4. A 0.9 percent (0.9%) ratio of the Consolidated
corporate income tax, the term “gross income” Public Sector Financial Position (CPSFP)
means gross sales less sales returns, to GNP.
discounts and allowances and cost of goods The option to be taxed based on gross income shall
sold. be available only to firms whose ratio of cost of
sales to gross sales or receipts from all sources
“Cost of goods sold” shall include all business does not exceed fifty-five percent (55%).
expenses directly incurred to produce the The election of the gross income tax option by the
merchandise to bring them to their present corporation shall be irrevocable for three (3)
location and use. consecutive taxable years during which the
corporation is qualified under the scheme.
 Trading or Merchandising Concern –
“cost of goods sold” shall include the TAX ON PASSIVE INCOME & DEALINGS IN
invoice of cost of the goods sold, plus PROPERTY
import duties, freight in transporting the
goods to the place where the goods are Passive Income Subject To Final Tax
actually sold including insurance while a. Interest Income – on any currency bank
the goods are in transit. deposit, yield or any other monetary benefit
from deposit substitutes, trust funds and
 Manufacturing Concern – “cost of goods similar arrangements
manufactured and sold” shall include all Final Rate:
costs of production of finished goods, such 20%
as raw materials used, direct labor and
manufacturing overhead, freight cost, b. Capital gains realized from the sale of
insurance premiums and other costs shares of stock not traded in the stock
incurred to bring the raw materials to the exchange (Tax treatment is the same as
factory or warehouse. that of individuals)
Final Rate:
 Sale of Service – “gross income” means Not over Php100,000 - 5%
gross receipts less sales returns, Amount in excess of Php100,000 – 10%
allowances, discounts and cost of
services. ‘Cost of services’ shall mean all c. Under The Expanded Foreign Currency
direct costs and expenses necessarily Deposit System (EFCDS)
incurred to provide the services required Final Rate:
by the customers and clients including 7.5%
(A) salaries and employee benefits of
personnel, consultants and specialist d. Dividends received from another domestic
directly rendering the service and (B) cost corporation (Intercorporate Dividend)
of facilities directly utilized in providing Final Rate:
the service such as depreciation or rental Exempt
of equipment used and cost of supplies:
Provided, however, That in the case of e. Capital gains realized from the sale,
banks, ‘cost of services’ shall include exchange, or disposition of lands and/or
interest expense. buildings (not actually used in the business
corporation and are treated as capital
Allowable Deductions assets)
1. Itemized Deductions (see discussion on Tax base: Gross selling Price or FMV
Itemized Deductions) whichever is higher, of such land and/or
2. Optional Standard Deduction (see discussion buildings
on Optimized Standard Deduction) Final Rate:
6%
Gross Income Tax (GIT) (Sec. 27)
The President, upon the recommendation of the f. Royalties of any kind derived from sources
Secretary of Finance, may effective January 1, within the Philippines
2000, allow corporations the option to be taxed at Final Rate:
fifteen percent (15%) of gross income as defined 20 %
therein, after the following conditions have been
satisfied: a. Taxation on Capital Gains (see
1. A tax effort ratio of twenty percent (20%) of further discussion on Taxation on
Gross National Product (GNP); Capital Gains of Individuals; tax
2. A ratio of forty percent (40%) of income tax treatment is the same as that of
collection to total tax revenues; individuals)
3. A VAT tax effort of four percent (4%) of GNP;
and
1. Capital gains realized from the sale

of shares of stock traded in the stock MINIMUM CORPORATE INCOME TAX (MCIT)
exchange OR GROSS INCOME TAX (GIT)
2. Income from sale of property  that of domestic corporations is equally
situated in the Philippines applicable to resident foreign corporations,
both as to concepts and computations, except

3. Income from the sale, exchange, or that RFCs are taxed only on income from
other disposition of other capital sources within the Philippines.
assets
b. Tax on proprietary educational TAX ON CERTAIN INCOME
institutions. 1. Interest Income – on any currency bank
deposit, yield or any other monetary benefit
TAX EXEMPT EXCHANGES from deposit substitutes, trust funds and
(Sec 40 C2) similar arrangements and royalties
Final Rate:
No gain or loss shall be recognized if in pursuance 20%
of a plan of merger or consolidation –
2. Income derived under the expanded foreign
(a) A corporation, which is a party to a merger or currency deposit system
consolidation, exchanges property solely for stock Final Rate:
in a corporation, which is a party to the merger or 7.5%
consolidation; or
(b) A shareholder exchanges stock in a 3. Capital gains from the sale of shares of stock
corporation, which is a party to the merger or not traded in the stock exchange –
consolidation, solely for the stock of another 5% on the first P100,000 net capital gain
corporation also a party to the merger or 10% in excess of the P100,000
consolidation; or
(c) A security holder of a corporation, which is a 4. Intercorporate Dividends
party to the merger or consolidation, exchanges Exempt
his securities in such corporation, solely for stock
or securities in such corporation, a party to the 5. Capital gains realized from the sale, exchange,
merger or consolidation. or disposition of lands and/or buildings
6% of the gross selling price or FMV
No gain or loss shall also be recognized if property whichever is higher
is transferred to a corporation by a person in
exchange for stock or unit of participation in such 6. Income on time deposits that is pre-
a corporation of which as a result of such exchange terminated before the fifth year:
said person, alone or together with others, not 4 years to less than 5 years – 5%
exceeding four (4) persons, gains control of said 3 years to less than 4 years – 12%
corporation: Provided, That stocks issued for If less than 3 years – 20%
services shall not be considered as issued in return
for property. International Carriers
Tax Rate and Base – 2.5% on Gross Philippine
(Refer to discussion under DEALINGS IN Billings (GPB).
PROPERTY section.)
GPB refers to the amount of:
TAXATION ON RESIDENT FOREIGN  gross revenue derived from carriage of
CORPORATION persons, excess baggage, cargo and mail
originating from the Philippines in a
continuous and uninterrupted flight,
Resident Foreign Corporations are those created
irrespective of the place of sale or issue and
and organized under a foreign law and engaged in
the place of payment of the ticket or passage
business in the Philippines. These are taxed
document
ONLY on income realized WITHIN THE
 gross revenue from tickets revalidated,
PHILIPPINES.
exchanged and/or indorsed to another
international airline if the passenger boards a
NOTE: Whether or not it is licensed to do business
plane in a port or point in the Philippines
in the Philippines, it is taxed on its income
 for flights which originate from the
realized within the Philippines. Even if all the
Philippines, but transshipment of passenger
stockholders and incorporators are Filipinos, it
takes place at any port outside the
will still be classified as a foreign corporation if the
Philippines on another airline, the gross
entity is organized under a foreign law (outside) of
revenue consisting of only the aliquot portion
the country.
of the cost of the ticket corresponding to the

63
leg flown from the Philippines to the point of  Tax Rate and Base – 15% based on the total
transshipment [R.R. 15-2002] profits applied or earmarked for remittance
 In the case of International Shipping, GPB without any deduction for the tax component
means: gross revenue whether for passenger,  Non-taxable activities – activities which are
cargo or mail originating from the Philippines registered with the Philippine Economic Zone
up to final destination, regardless of the place Authority
of sale or payments of the passage or freight  Income NOT TREATED AS BRANCH
documents. PROFITS unless effectively connected with
the conduct of trade or business in the
If an international air carrier maintains flights Philippines:
to and from the Philippines, it shall be taxed at i. interests, dividends, rents, royalties,
the rate of 2½% of its Gross Philippine Billings, including remuneration for technical
while international air carriers that do not have services
flights to and from the Philippines but ii. salaries, wages premiums, annuities,
nonetheless earn income from other activities in emoluments
the country will be taxed at the normal rate of iii. other fixed or determinable annual,
such income. (South African Airways vs. periodic or casual gains, profits, income
Commissioner of Internal Revenue, G.R. No. iv. capital gains received during each
180356, February 16, 2010) taxable year from all sources within the
Philippines
NOTE: A foreign airline company selling tickets
in the Philippines through their local agents  The branch profit remittance tax is imposed
shall be considered a foreign corporation engaged whether the head office of the foreign
in trade or business in the country. The absence corporation is located in a tax treaty country,
of flight operations within the Philippines cannot in a tax haven or other non-treaty country.
alter the fact that the income received was  The branch profit remittance tax is imposed
derived from activities within the Philippines. only on the profits remitted by a Philippine
The test of taxability is the source, and the source branch to the head office of a foreign
is that activity which produced the income. corporation. Should the branch of a domestic
corporation remit profits to its head office, the
Offshore Banking Units authorized by the Bangko transaction is not subject to the branch profit
Sentral ng Pilipinas (BSP) [Sec. 28 (A) (4) as remittance tax.
amended by R.A. 9294 (2004)], supplemented by
R.A. 9337] Regional or Area Headquarters and Regional
Covers ONLY income derived by offshore banking Operating Headquarters of Multinational
units from foreign currency transactions with: Companies
 non-residents,  Regional or area headquarters - not subject
 other offshore banking units to income tax
 local commercial banks including branches  Regional operating headquarters - 10% of
of foreign banks that may be authorized by their taxable income
the Bangko Sentral ng Pilipinas (BSP) to
transact business with offshore banking TAXATION ON
units NON-RESIDENT CORPORATIONS
Tax Rate: Exempt from all taxes, except net These are corporations created and organized
income from such transactions as may be specified under a foreign law, not engaged in business in the
by the Secretary of Finance, upon Philippines. It has no branch or office here but
recommendation by the Monetary Board to be derives fixed or determinate income from sources
subject to the regular income tax payable by banks WITHIN THE PHILIPPINES.
Exception: Interest income derived from foreign Tax on Certain Income

currency loans granted to residents other than 1. Interest on foreign loans
offshore banking units or local commercial banks, Final withholding tax of 20%
including local branches of foreign banks that may
be authorized by the BSP to transact business 2. Intercorporate Dividends
with offshore banking units, shall be subject only 15% subject to the Tax Sparing Rule
to a final tax at the rate of 10%.
3. Capital gains from sale of shares of stock not
Branch Profit Remittance Tax traded in the stock exchange
(Sec. 28[A][5]) 5% on the first P100,000 net capital gain
 Taxable transaction – any profit remitted by 10% in excess of the P100,000
a branch to its head office
corporation, by permitting earnings and profits to

accumulate instead of being divided or
SPECIAL TYPES OF NON-RESIDENT distributed. Only domestic and closely-held

FOREIGN CORPORATIONS corporations are liable for IAET.
Exception: The said tax shall not apply to:
1. Non-resident cinematographic film owners, (BIG-JEP2)
lessors or distributors - 25% of gross income a. Banks and other non-bank financial
from all sources within the Philippines intermediaries;
2. Non-resident Owners or Lessors of Vessels
Chartered by Philippine Nationals - 4.5% of b. Insurance companies;
gross rentals, lease or charter fees from leases
or charters to Filipino citizens or corporations, c. Publicly-held corporations;
as approved by the Maritime Authority
3. Non-resident Owners or Lessors of Aircraft, d. Taxable Partnerships;
Machineries and Other Equipment - 7.5% of
gross rentals or fees. e. General professional partnerships;
f. Non-taxable Joint Ventures; and

IMPROPERLY ACCUMULATED
EARNINGS TAX g. Enterprise duly registered with the
(IAET) Philippine Economic Zone Authority (PEZA)
under R.A. 7916, and enterprises registered
Sec. 29, as implemented by R.R. 2-2001 which pursuant to the Bases Conversion and
prescribes rules governing the imposition of IAET] Development Act of 1992 under R.A. 7227, as
These are profits of a corporation that are well as other enterprise duly registered under
permitted to accumulate instead of being special Economic zones declared by law which
distributed by a corporation to its shareholders for enjoy payment of special tax rate on their
the purpose of avoiding the income tax with registered operations or activities in lieu of
respect to its shareholders or the shareholders of other taxes, national or local. (RR 02-2001)
another corporation.
Evidence of Purpose to Avoid Income Tax
Rate: 10% of the Improperly Accumulated Taxable The fact that any corporation is a mere holding
Income (in addition to other taxes) company or investment company shall be prima
facie evidence of a purpose to avoid the tax upon
Taxable Income its shareholders or members
Adjusted by: Income exempt from tax
Income excluded from gross The fact that the earnings or profits of a
income corporation are permitted to accumulate beyond
Income subject to final tax
the reasonable needs of the business shall be
Amount of NOLCO deducted
determinative of the purpose to avoid the tax upon
Adjusted Taxable Income
Less: Dividends actually or its shareholders or members unless the
constructively paid corporation, by the clear preponderance of
Income tax paid for the taxable evidence, shall prove the contrary.
year
Improperly Accumulated Taxable Income Improperly Accumulated Taxable Income
X Tax Rate (10%) Taxable income adjusted by:
Improperly Accumulated Earnings Tax a. Income exempt from tax;
b. Income excluded from gross income;
c. Income subject to final tax; and
 For corporations using the calendar basis the d. The amount of net operating loss carry-over
accumulated earnings tax shall not apply on deducted;
IAE as of Dec. 31, 1997. And reduced by the sum of:
 For fiscal year basis, the tax shall not apply to a. Dividends actually or constructively paid; and
the 12-month period of fiscal year 1997-1998. b. Income tax paid for the taxable year.
 IAE as of the end of a calendar or fiscal year
period on or after Dec. 31, 1998 shall be subject to “Reasonable needs of the business”
the 10% tax on such IAE  To determine the “reasonable needs” of the
business in order to justify an accumulation of
WHO ARE COVERED earnings, the courts of the United states have
General Rule: The IAE tax shall apply to every invented the so called “Immediacy Test”
corporation formed or availed for the purpose of which construed the words “reasonable
avoiding the income tax with respect to its needs” to mean the immediate needs of the
shareholders or the shareholders of any other business, and it was generally held that if

65
corporation did not prove an immediate need avoided by the legislature shall be indirectly
for the accumulation of the earnings and violated since the dividend that should have been
profits, the accumulation was not for the received from the first corporation and should
reasonable needs of the business and the have been included as part of the income of the
penalty apply (Manila Wine Merchants, Inc. second corporation is withheld. As such, the
vs. CIR, 127 SCRA 483). second corporation cannot declare to its
stockholders the dividend income that should
 American cases likewise hold that investment have been received from the first corporation.
of the earnings and profits of the corporation
in stock or securities of an unrelated business
usually indicates an accumulation beyond the EXEMPTION FROM
reasonable needs of the business (Manila
TAX ON CORPORATIONS
Wine Merchants, Inc. vs. CIR, 127 SCRA
(Section 30, NIRC)
483).
 “In determining whether accumulations or 1. Labor, agricultural and horticultural

earnings or profits in a particular year are organization not organized for profit
within the reasonable needs of a corporation, Requisites:
it is necessary to take into account prior a. Have no income inuring to the benefit of
accumulations, since accumulations prior to any member;
the year involved may have been sufficient to b. Educational or instructive in character;
cover the business needs and additional and
accumulations during the year involved c. For the betterment, improvement of their
would not reasonably be necessary (Basilan products and development of higher
Estates, Inc vs. CIR, 21 SCRA 17). degree of efficiency
 Includes the reasonably anticipated needs of 2. Mutual savings bank and cooperative bank
the business; such as: Requisites:
a. For working capital requirement; a. Has no capital stock represented by
b. Reserve for future expansion; shares; and
c. Reserve for employees’ retirement benefit; b. Whose earnings less only the expenses of
d. Investment in affiliates’ customers’ operation are distributable wholly among
business and other related enterprise; and the depositors
earnings retained for sinking fund.
3. Beneficiary society is exempt from tax only if
operated for the exclusive benefit of the
ABC Corp., a domestic corporation is 100% owned
members such as fraternal organization
by XYZ Co., also a domestic corporation. For the
operating under the lodge system
taxable year 2000, the unrestricted retained
earnings of the first corporation exceeded 100% of
4. Cemetery Company
its paid-in capital. Despite this, it failed to declare
Requisites:
dividends in favor of XYZ Co. The Commissioner
a. If it is owned by and operated exclusively
assessed an improperly accumulated earnings tax
for the benefit of its lot owners; and
against ABC Corp. The latter contended that as
b. If it is not operated for profit
the intention of the law in imposing the IAET is to
force a corporation to declare dividends, so that
5. Religious, charitable, scientific, athletic or
the individual stockholders receiving them may be
cultural corporation, or corporation for the
taxed on the income so received, it cannot be
rehabilitation of veterans
deemed to have violated the law, considering that
Requisites:
intercorporate dividends are not taxable.
a. It must be non-stock and organized and
Rule on the validity of this argument.
operated for one or more of the specified
purposes; and
No, ABC Corp’s contention is untenable. The
b. No part of its net income or assets shall
improperly accumulated earnings tax is being
belong to or inure to the benefit of any
imposed in the nature of a penalty to the
member
corporation for the improper accumulation of its
earnings, and as a form of deterrent to the
6. Business League
avoidance of tax upon shareholders who are
supposed to pay dividends tax on the earnings
7. Civic League – those not organized for profit
distributed to them by the corporation. When
but operated exclusively for purposes
corporations do not declare dividends, income
beneficial to the community; entitled to
taxes are not paid on the undeclared dividends
exemption compromise
received by the shareholders.
While it is true that intercorporate dividends are
not taxable, nonetheless, the evil sought to be
8. A non-stock and non-profit educational FRINGE BENEFIT TAX (FBT)

institution. [Educational corporations may (Sec. 33 B, NIRC)
include associations whose sole purpose is the
instruction of the public but associations
formed to disseminate controversial or Fringe Benefit Tax- It is a monetary burden
partisan propaganda are not educational imposed by the sovereignty on any good, service,
within the meaning of the law.] or other benefits furnished or granted by an
employer, in any cash or in kind, in addition to
9. Government educational institution basic salaries, to an individual employee other
than a rank and file employee.
10. Mutual Insurance Companies and like
organizations [The income of the company The employer (individual, professional
must be derived solely from assessments, dues, partnership, or corporation, whether taxable or
and fees collected from members.] not), or the government and it’s instrumentalities
are liable to remit the fringe benefit tax to the BIR
11. Cooperative associations acting as sales agents once fringe benefit is given to a managerial or
for farmers or others [It must be established supervisory employee.
that for their own account they have no net
income.] The fringe benefit tax is a final tax on the
employee’s income to be withheld by the employer
(Sec. 33(A); Sec 57(A), NIRC). The withholding
TAXATION OF PARTNERSHIPS AND
and remittance of FBT shall be made on a
GENERAL PROFESSIONAL quarterly basis.
PARTNERSHIPS
Fringe Benefits - means any good, service, or
General Rule: Partnerships, no matter how other benefit furnished or granted by an
created, are subject to corporate income tax. employer, in cash or in kind, in addition to basic
salaries, to an individual employee (except rank
General co-partnerships (GCPs) - the partnership and file employees) such as, but not limited to the
itself is subject to corporate taxation. The following:
individual partners are considered stockholders (HEV-HIM-HEEL)
and, therefore, profits distributed to them by the 1. Housing
partnership are taxable as dividends. 2. Expense Account
3. Vehicle of any kind
Exception: 4. Household personnel, such as maid, driver
General Professional Partnerships (GPPs) as such and others
are not subject to income tax. GPP means: 5. Interest on loan at less than market rate
1. a partnership formed by persons for the sole to the extent of the difference between the
purpose of exercising their common profession; market rate and actual rate granted.
and 6. Membership fees, dues and other expenses
borne by the employer for the employee in
2. no part of the income of which is derived from social and athletic clubs and similar
engaging in any trade or business [Sec. 22 (B), organizations
NIRC] 7. Expenses for foreign travel
8. Holiday and vacation expenses
 GPPs, however, are required to file returns of 9. Educational assistance to the employee or
their income for the purpose of furnishing his dependents;and
information as to the share in the net income of 10. Life or health insurance and other non-life
the partnership which the partners shall insurance premiums or similar amounts
include in their individual returns. on excess of what the law allows.
 Members of the GPP are liable for income tax The fringe benefit covered by Sec 33 refers to those
only in their separate and individual capacity. enjoyed by managerial and supervisory
Each partner shall report as gross income his employees.
distributive share, actually or constructively
received, in the net income of the partnership. Managerial employee - one who is vested with 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 - those who, in the interest

of the employer, effectively recommend such
managerial actions if the exercise of such

67
authority is not merely routinary or clerical in

nature but requires the use of independent GROSSED UP
YEAR RATE
judgment. DIVISOR
1998 66% 34% FWT
All employees not falling within any of the above 1999 67% 33% FWT
definitions are considered rank-and-file 2000 68% 32% FWT
employees. onwards
Classification of Fringe Benefits SPECIAL TREATMENT OF FRINGE

BENEIFTS; Deductibility to the Taxable Income
For taxation purpose, fringe benefits maybe of the Employer
classified as follows:
1. Fringe benefits to rank and file employees are General Rule: The amount of taxable fringe
taxable as compensation income subject to benefit and the fringe benefits tax shall constitute
normal tax rate , except allowable deductions from gross income of the
a. De minimis benefits, and employer.
b. Benefits provided for the convenience of
the employer; Exception: If the basis for computation of the fringe
benefits tax is the depreciation value, the zonal value
2. Fringe benefit to managerial employees are or the fair market value, only the actual fringe
taxable with final fringe benefit tax of 32%, benefits tax paid shall constitute a deductible
except expense for the employer. The value of the fringe
a. De minimis benefits, and benefit shall not be deductible and shall be presumed
b. Benefits provided for the to have been tacked on or actually claimed as
convenience of the employer. depreciation expense by the employer. Provided,
however, that if the aforesaid zonal value or fair
3. Allowances which are fixed in amounts and market value of the said property is greater than its
are regularly received by the employee as part cost subject to depreciation, the excess amount shall
of his monthly compensation income shall not be allowed as a deduction from the employer's gross
be treated as taxable fringe benefit but as income as fringe benefit expense. (Sec. 2.33[D], Rev.
compensation income. Reg. No. 3-98)
Person liable: The EMPLOYER (as a withholding TAXABLE FRINGE BENEFITS:

agent), whether individual, professional
partnership or a corporation, regardless of 1. Housing
whether the corporation is taxable or not, or the General Rule: the value to the employee of
government and its instrumentalities quarters and meals given by the employer
shall be subject to tax.
Tax rate: 32% (from January 1, 2000 onwards) of the
Grossed up Monetary Value (GMV) of fringe benefits. Exception: if living quarter/meals are
furnished to an employee for the convenience
In the case of aliens, the tax rates to be applied on of the employer.
fringe benefit shall be as follows:
1. NRA-NEBT 25% 2. Expense Account
2. Aliens employed by regional HO 15% General Rule: fixed and variable
3. Aliens employed by OBU 15% transportation, representation and other
4. Aliens employed by Petroleum Service allowances are taxable.
5. Contractors and Subcontractors
Exception: if incurred or reasonably expected
“GMV” of the fringe benefit represents: to be incurred by employee in the performance
1. the whole amount of income realized by the of his duties, subject to the following
employee which includes the net amount of conditions:
money or net monetary value of property a. ordinary and necessary in the pursuit of
which has been received; plus employer’s business and paid or incurred
2. the amount of fringe benefit tax thereon by employee;
otherwise due from the employee but paid by b. liquidated or substantiated by receipts or
the employer for and in behalf of the other adequate documentation.
employee.
3. Motor Vehicle of any kind
“GMV” of the fringe benefit shall be determined by
dividing the monetary value of the fringe benefit
by the grossed up divisor. The Grossed up divisor
is the difference between 100% and the applicable 4. Household Expense
rates.
Expenses for employees which are borne by General Rule: the cost of life or health
the employer for household personnel, such as insurance and other non-life insurance
salaries of household help, personal driver of premiums borne by the employer are taxable
the employee, or other similar personal fringe benefit.
expenses (like payment for homeowners
association dues, garbage dues, etc.) shall be Exceptions:
taxable as fringe benefits. a. cost of premiums borne by the employer
for the group insurance of employees;
5. Interest on loan at less than market rate to b. contributions of the employer for the
the extent of the difference between the benefit of employee to the SSS, GSIS, and
market rate and actual rate granted similar contributions arising from
If the employer lends money to his employee provisions of any existing law.
free of interest or a rate lower than 12%, such
interest foregone by the employer or the Stock Options are Subject to Fringe Benefit – The
difference of the interest assumed by the basis is the difference between the fair market
employee and the rate of 12% shall be treated value and the exercise price at the time of exercise.
as taxable fringe benefit.
NON-TAXABLE FRINGE BENEFITS:
The rule shall apply to installment payments A. Fringe benefits not considered as gross
or loans with interest rate lower than 12% income:
starting January 1, 1998. 1. if it is required or necessary to the
business of employer
6. Membership fees, dues, and other expenses 2. if it is for the convenience or advantage of
borne by the employer for the employee in employer
social and athletic clubs and similar
organizations B. Fringe Benefit that is not taxable under Sec.
32 (B) – Exclusions from Gross Income
7. Expenses for Foreign Travel
General Rule: fixed and variable C. Fringe benefits not taxable under Sec. 33
transportation, representation and other Fringe Benefit Tax:
allowances are subject to FBT. 1. Fringe Benefits which are authorized and
exempted under special laws, such as the
Exception: if incurred or reasonably expected 13th month Pay and Other Benefits with
to be incurred by employee in the performance the ceiling of P30, 000.
of his duties, subject to the following 2. Contributions of the employer for the
conditions: benefit of the employee to retirement,
a. ordinary and necessary in the pursuit of insurance and hospitalization benefit
employer’s business and paid or incurred plans;
by employee; 3. Benefits given to the Rank and File
b. liquidated or substantiated by receipts or Employees, whether granted under a
other adequate documentation. collective bargaining agreement or not;
and
8. Holiday and Vacation Expenses 4. De minimis benefits –These are facilities
and privileges of relatively small value
9. Educational Assistance to the employee or his and are offered or furnished by the
dependents employer to his employees merely as
General Rule: taxable fringe benefit means of promoting their health,
goodwill, contentment or efficiency. De
Exceptions: minimis benefits shall not be subject to
a. education/study is directly connected income tax, hence not subject to
with employer’s trade or business; withholding tax on compensation income
b. with a written contract that employee of both managerial and rank and file
shall remain employed with the employer employees.
for a period of time mutually agreed upon
by the parties; or The excess of the de minimis benefits over
c. the assistance was provided through a their respective ceilings prescribed shall be
competitive scheme under the considered as part of other benefits and the
scholarship program of the company employee receiving it will be subject to tax
employer. only on the excess over the P30,000 ceiling.
(R.R. 10-2008)
The term “Rank and File Employees” shall mean

all employees who are holding neither managerial
10. Insurance Premium

69
nor supervisory position as defined in the Labor The housing fringe benefits shall use the following
Code. formula:
Fringe benefits given to a rank-and-file employee HOUSING FBT BASE

are treated as part of his compensation income PRIVILEGE
subject to income tax and withholding tax on
compensation income, which must be withheld Lease of residential MV= 50% X rental
and deducted by his employer from the property for payments
compensation income of his employee. residential use of
employees. Where:
Basic Rules on FBT MV= monetary value
1) Fringe benefits given to supervisory or of the FB
managerial employee is subject to the FBT.
Assignment of MV= [5% (FMV or
2) Fringe benefits given to rank and file residential property ZV, whichever is
employee (whether under a collective for use of employees. higher) x 50%]
bargaining agreement or not) is NOT subject
to FBT but part of compensation income Where:
subject to income tax. ZV=Zonal Value MV=
Value of the land and
3) No FBT shall be imposed when the fringe improvement, as
benefit is required by the nature of, or declared in the Real
necessary to the trade, business or profession Property Declaration
of the employer, or when the fringe benefit is Form.
for the convenience or advantage of the
employer. (CONVENIENCE OF THE FMV = Fair Market
EMPLOYER RULE) Value as determined
by the Commissioner
4) De minimis benefit, whether given to rank of Internal Revenue.
and file employee or to supervisory or
managerial employee is not subject to FBT.
Purchase of MV= 5% X AC X 50%
residential property
VALUATION OF FRINGE BENEFITS
on installment bases Where:
The following are the general rules applicable in
for the use of AC = Acquisition
the valuation of fringe benefits:
employees. Cost, exclusive of
interest.
CONDITION VALUATION
(Monetary Value) Purchase of MV= FMV or ZV,
Rule 1: If the Benefit The value is the residential property whichever is higher.
(FB) is granted in amount granted or and ownership is
money, or is directly paid for. transferred in the
paid for the employer. name of the
employees.
Rule 2: If the FB is The value of the FB
granted or furnished by shall be equal to the
the employer in property FMV of the Nontaxable Housing Fringe Benefit
other than money and property as
ownership is transferred determined in The following housing benefits are not subject to
to the employee. accordance with fringe benefit tax:
SEC. 6 (E) of the
Code (Authority of 1. Housing privilege of the Armed Forces of the
the Commissioner Philippines (AFP) officials – i.e., those of the
to Prescribed Real Philippine Army (PA), Philippine Navy (PN)
Property Values). or Philippine Air Force (PAF);
Rule 3: If the FB is
granted or furnished by The value of FB is 2. A housing unit, which is situated inside or
the employer in property equal to the adjacent to the premises of a business or
other than money but depreciated value of factory. A housing unit is considered adjacent
ownership is not the property. to the premises of the business if it is located
transferred to the within the maximum of fifty (50) meters away
employee. from the perimeter of the business premises;
and
Housing Fringe Benefits
3. Temporary housing for the employee who Expenses of the employee which are borne by the
stays in a housing unit for three (3) months or employer for household personnel, such as
less. salaries of household help, personal driver of the
employee, or other similar personal expenses (like
Motor Vehicle payment for homeowners association dues,
garbage dues etc.) shall be treated as taxable
The Motor vehicle fringe benefits shall use the fringe benefits.
following formula;
MOTOR VEHICLE FRINGE BENEFIT

PREVILEGE TAX BASE The following are treated as taxable fringe
benefits:
Purchase of motor MV = AC
vehicle in the name AC = Acquisition Cost 1. Expenses incurred by the employee but
of the employee paid by his employer;
2. Expenses paid by the employee but

Cash is given to the MV = Cash received by reimbursed by his employer. However, if
employee for the the employee the above expenditures are duly receipted
purchase of the for and in the name of the employer and
vehicle; ownership is However, please note these do not partake the nature of a
placed in the name that if the cash given personal expense attribute to the
of the employee. by the employee is employee whether or not the same are
subject to WTW, it duly receipted for in the name of the
shall not be FBT, employer.
anymore.
3. Personal expenses of the employee (like
Purchase of car in MV = AC/5 purchase of groceries for the personal
installment basis, consumption of the employee and his
the ownership which Where: family members) pad for or reimbursed
is placed in the AC = Acquisition Cost, by the employer to the employee whether
name of the exclusive of interest or not the same are duly receipted for in
employee. the name of the employer.
Representation and transportation allowances

Employer shoulders MV = Amount that are fixed in the amounts and regularly
a portion of the shouldered by the received by the employees as part of their monthly
purchase price, the employer. compensation income shall be considered as
ownership of which taxable compensation income subject to
is placed in the Withholding Tax on Wages.
name of the
employee. Interest on Loan at lesser than Market Rate
The following rules are applicable regarding the

Employer owns and MV = (AC/5) X 50% cost of money whenever an employee borrowed
maintains a fleet of money from his employer.
motor vehicles for
the use of the 1. If the employer lends money to his
business and the employee free of interest or at a rate
employees. lower than 12% per year, such interest
foregone by the employer of the difference
of the interest assumed by the employee
and the 12% rate shall be treated as
Employer leases and MV = 50% x rental
taxable fringe benefit.
maintains a fleet of payment
motor vehicles for
2. The benchmark interest rate of 12%
the use of the
shall remain in effect until revised by a
business and the
subsequent regulation.
employees.
3. This regulation shall apply to
installment payments or loans with
interest rate lower than 12% starting
Household Expenses
January 1, 1998.

71
Membership Fees, Dues and other Expenses
Membership fees, dues and other expenses borne

by the employer for the employee in social and
athletic clubs or other similar organizations.
DE MINIMIS
The entire expenditures shall be treated as a
taxable fringe benefits of the employee in full. The term “de minimis” benefits which are
Expenses for Foreign Travel exempted from the fringe benefits tax shall, in
general, be limited to facilities or privileges
Reasonable business expenses which are paid for furnished or offered by an employer to his
by the employer for the foreign travel of his employees that are of relatively small in value.
employee for the purpose of attending business
meetings or conventions shall not be treated as These are offered or furnished by the employer
taxable fringe benefits. merely as means of promoting the health,
goodwill, contentment or efficiency of his
In this instance, the following rules shall apply: employees.
a. Inland travel expenses (such as expenses
for food, beverages and local
transportation), except lodging cost in a Rules on ‘De Minimis’ and ‘Other Benefits’
hotel for similar establishments)
amounting to an average of US$300.00 or The following rules shall be observed in
less per day, shall not be subject to fringe determining the taxability of the ‘de minimis’ and
benefit tax. The expense should be the P30,000 ‘other benefits’ ceiling under Section
supported by documents proving the 32(b)(7)(e) of the Tax Code: (Sec 1, Rev Regs. No
actual occurrences of the meetings or 10-2008)
conventions.
1. the amount of the ‘de minimis’ benefits
b. Cost of economy and business class conforming to the ceiling herein prescribed
airplane ticket shall not be subject to shall not be considered in determining the
fringe benefit tax. However, 30% of the P30,000 ceiling of ‘other benefits’ excluded
cost of the first class airplane ticket shall from gross income under 32(b)(7)(e) of the Tax
be subject to fringe benefit tax. Code.
2. The excess of the ‘de minimis’ benefits over

In the absence of documentary evidence showing their respective ceiling prescribed by these
that the employee’s travel abroad was in regulations shall be considered as part of the
connection with business meetings or conventions, ‘other benefits’ and the employee receiving it
the entire cost of the ticket, including cost of hotel shall be subject to tax only on the excess over
accommodations and other expenses incident the P30,000 ceiling.
thereto shouldered by the employer, shall be
treated as taxable fringe benefits. 3. The MWEs receiving ‘other benefits’
exceeding the P30,000 limit shall be taxable
Traveling expenses, which are paid by the on the excess benefits, as well as on his
employer for the travel of the family members of salaries, wages and allowances, just like an
the employee, shall be treated as taxable fringe employee receiving compensation income
benefits of the employee. beyond SMW.
The exemption of any fringe benefit from the

fringe benefit tax shall not be interpreted to mean
exemption from any other income tax imposed
under the Code except if the same is likewise
expressly exempted from any other existing law.
Thus, if the fringe is exempted from the fringe
benefit tax, the same may, however, still form part
of the employee’s gross compensation income
subject to income tax. Hence, it is likewise subject
to a withholding tax on compensation income
payment. (Rev. Reg. No. 3-98)
Fringe Benefits Tax on Special Aliens
RECIPIENT OF FRINGE BENEFITS TAX RATE TAX BASE
1. Nonresidential alien individual (not engaged in the 25% FBT on the Monetary Value of
trade or business in the Philippines) GMV of the FB the FB divided by
75%
1) 2. a. Alien individual employed by regional or area 15% FBT on the Monetary Value of
headquarters of a multinational company or by regional GMV of the FB the FB divided by
operating headquarters f a multinational company. 85%
b. Alien individual employed by an offshore banking
unit of a foreign bank established in the Philippines;
3. Alien individual employed by a foreign service

contractor or by a foreign service subcontractor engaged 15% FBT on the Monetary Value of
in petroleum operation in the Philippines. GMV of the FB the FB divided by
85%
Any of their Filipino individual employees who are 15% FBT on the Monetary Value of
employed and occupying the same position as those GMV of the FB the FB divided by
occupied or head by the alien employers. 85%
4. Employees in special economic zones, including Clark Subject to the normal Monetary value of the
Special Economic Zone and Subic Special Economic and rate or the special FB divided by 85% or
Free Trade Zone. rates of 15% as 75%
provided above
4. Real property used in trade or business of the

taxpayer.
CAPITAL GAINS TAX/
DEALINGS IN PROPERTY
The term “dealings in property” refers to the

disposal through sale or exchange of
Ordinary Assets- are those assets that are
a. ordinary assets, or
primarily used in the ordinary course of trade or
b. capital assets.
business.
Sec. 39 - Capital Gains and Losses
Examples of Ordinary Assets:
1. Inventory intended for sale in the normal
Types of Property
course of business;
Ordinary assets shall refer to all real properties
a. Merchandise inventory
specifically excluded from the definition of capital
(finished goods, in process and
assets under Sec. 39(A)(1) of the Code, namely:
raw materials)
b. Real estate being held or being
1. Stock in trade of a taxpayer or other real
sold by real estate dealers; and
property of a kind which would properly be
c. Securities held or being sold by
included in the inventory of the taxpayer if on
dealers in securities.
hand at the close of the taxable year; or
2. Real property held by the taxpayer primarily
2. Real property used in business including
for sale to customers in the ordinary course of
real property held for rent.
his trade or business; or
3. Real property used in trade or business (i.e.,
3. Assets used in business subject to
buildings and/or improvements) of a
depreciation, such as equipment. (Sec
character which is subject to the allowance for
39A1, NIRC)
depreciation provided for under Sec. 34(F) of
the Code; or

73
Capital assets shall refer to all real properties Ordinary gain is the gain derived from the
held by a taxpayer, whether or not connected with sale or exchange of ordinary assets including
his trade or business, and which are not included gains from performance of services and
among the real properties considered as ordinary business. There is ordinary gain if the
assets under Sec. 39(A)(1) of the Code. business income is greater than the business
operating expenses. An ordinary loss is the
Capital Assets are those assets that are not excess of business expenses and losses over
primarily used in the ordinary course of trade or the business income of the taxpayer derived
business. from the sale or exchange of ordinary assets.
Examples of Capital Assets: Capital gain is the excess of value received

a. Stock and securities held by tax payers over the determined cost from the sale or
other than dealers in securities; exchange of a capital asset. A capital loss
b. Interest in partnership and joint refers to the excess of the determined cost
venture; over the value received from the sale or
c. Goodwill; exchange of a capital asset.
d. Real property not used in trade or
business like residential house and lot ; Long Term Capital Gain vs. Short Term Capital
and Gain
e. Investment property.
Long term capital gain arises from sale or
Shares of stock are ordinary assets only to a dealer exchange of capital asset held for more than 12
in securities. months.
Short term capital gain arises from sale or
Shares of stock, like the other securities defined in exchange of capital asset held for 12 months or
the NIRC, would be ordinary assets only to a less.
dealer in securities or a person engaged in the
purchase and sale of, or an active trader (for his Net Capital Gain vs. Net Capital loss
own account) in, securities. In the hands, however,
of another who holds the shares of stock by way of Net Capital Gain is the excess of the gains over
an investment, the shares to him would be capital the losses on sale or exchanges of capital assets
assets. When the shares held by such investor during the taxable year.
become worthless, the loss is deemed to be a loss
from the sale or exchange of capital assets. (China Net Capital loss means the excess of the losses
Banking Corp. vs. Court of Appeals, et al., G.R. over the gains on sales or exchanges of capital
No. 125508, July 19, 2000) assets during the taxable year.
* Change of purpose Two conditions for a capital gain or a capital loss

- when a taxpayer purchases a property for one to result.
purpose and subsequently change his purpose for
holding the property, the determining factor in Section 29(d)(4)(B) of the NIRC conveys that the
classifying the asset held is the purpose of the loss sustained by the holder of the securities,
time of sale. which are capital assets (to him), is to be treated
as a capital loss as if incurred from a sale or
Example: exchange transaction.
Miss Cruz purchased a tract of land in Baguio city
with an intention to construct a residential house. A capital gain or a capital loss normally requires
She held the land for 5 yrs, but because of the the concurrence of two conditions for it to result:
sudden increase in the market price of the land, (1) There is a sale or exchange; and
she subdivided it into lots and promoted the sale (2) the thing sold or exchanged is a capital asset.
of lots.
When securities become worthless, there is
If the land were sold before its conversion to sub- strictly no sale or exchange but the law deems the
divided lots, the transaction would be a capital loss anyway to be "a loss from the sale or exchange
asset. However, upon the subdivision of the land, of capital assets". A similar kind of treatment is
the lots became inventory (use in business). given by the NIRC on the retirement of certificates
Therefore, Miss Cruz’s original purpose would no of indebtedness with interest coupons or in
longer be the basis of classifying the land. It would registered form, short sales and options to buy or
now be classified as ordinary asset. sell property where no sale or exchange strictly
exists. In these cases, the NIRC dispenses, in
Types of Gains from Dealings in Property effect, with the standard requirement of a sale or
exchange for the application of the capital gain
Ordinary Gain (Loss) vs. Capital Gain (Loss) and loss provisions of the code. (China Banking
Corp. vs. Court of Appeals, et al., G.R. No. 125508, 1. If the property was acquired by purchase
July 19, 2000) on or after March 1, 1913, the basis is
acquisition cost. (March 1, 1913 refers to
Computation of the Amount of Gain or Loss
When a taxpayer sells a real or personal property,

he should deduct its cost from its selling price to the date of the first Income Tax Law in
measure the gain or loss from the sales the Philippines)
transaction (Sec. 40, NIRC). 2. The fair market price or value as of the
date of acquisition, if the same was
acquired by inheritance; or
3. If the property was acquired by gift, the
The gain from the sale or other disposition of basis shall be the same as if it would be
property shall be the excess of the amount realized in the hands of the donor or the last
therefrom over the basis or adjusted basis for preceding owner by whom it was not
determining gain, and the loss shall be the basis acquired by gift, except that if such basis
or adjusted basis for determining determining loss is greater than the fair market value of
over the amount realized. The amount realized the property at the time of the gift then,
from the sale or other disposition of property shall for the purpose of determining loss, the
be the sum of money received plus the fair market basis shall be the fair market value; or
value of the property received. 4. If the property was acquired for less than
adequate consideration in money or
Special rules in Determining Acquisition Cost money’s worth, the basis of such property
(Cost Basis) is the amount paid by the transferee for
the property; or
Section 40B of the NIRC provides the following 5. The basis as defined in subsection (c) (5)
special rules in determining the basis (cost) of of section 40 NIRC, if the property was
property given for purposes of computing the gain acquired in transaction or loss is not
or loss on exchange of property. recognized under subsection (c) (2) of
section 40 NIRC.
HOLDING PERIOD OF CAPITAL ASSET
APPLY HOLDING PERIOD

Individual Taxpayer Holding Period Reportable Gain or Loss
Held for 12 mos. or less 100%
Held for more than 12 mos. 50%
Corporate Taxpayer HOLDING PERIOD NOT APPLICABLE
Capital gain and losses are to be reported in full mount regardless of the
number of years the capital asset is held.

75
Summary Treatment
LOSSES OF INDIVIDUAL vs. CORPORATION
Ordinary Loss Can be deducted from net capital gain if ordinary

gain is not enough to absorb it.
Individual
Taxpayer NOLCO Apply three year rule; can be deducted from ordinary
income or (net) capital gain.
Capital Loss Apply holding period. Deductible from capital gain
only
NCLCO Apply 1 year rule; subject to limit. Deductible from
net capital gain only.
Ordinary loss or NOLCO The same as individual taxpayer

Corporate Capital loss No holding period. Deductible from capital gain only.
Taxpayer NCLCO Net capital los carry-over (NCLCO) is not applicable.
Basis for Determining Gain or Loss
Selling Price or Fair Market Value

Received
Acquisition cost when purchased

Less
Fair market value (FMV) at date of

inheritance
Cost of Property Given
FMV at date of donation, or
acquisition cost of donor, whichever
is lower
= Gain or Loss Amount paid by the transferee, if

acquired for less than an adequate
consideration
Basis of Property Exchange

(a) A corporation, which is a party to a merger or
General Rule : Except as herein provided, upon consolidation, exchanges property solely for stock
the sale or exchange of property, the entire in a corporation, which is a party to the merger or
amount of the gain or loss, as the case may be, consolidation; or
shall be recognized. (b) A shareholder exchanges stock in a
corporation, which is a party to the merger or
Exception- No gain or loss shall be recognized if consolidation, solely for the stock of another
in pursuance of a plan of merger or consolidation. corporation also a party to the merger or
(Sec 40 C2) consolidation; or
(c) A security holder of a corporation, which is a
TAX EXEMPT EXCHANGES party to the merger or consolidation, exchanges
(Sec 40 C2) his securities in such corporation, solely for stock
or securities in such corporation, a party to the
No gain or loss shall be recognized if in pursuance merger or consolidation.
of a plan of merger or consolidation –
No gain or loss shall also be recognized if property 1st Issue : Whether or not the assessment on
is transferred to a corporation by a person in income tax is valid on the ground that the
exchange for stock or unit of participation in such exchange of properties does not fall under the tax-
a corporation of which as a result of such exchange free exchange as provided in Sec. 34 (C)(2), now
said person, alone or together with others, not Sec. 40 (C)(2) of the NIRC.
exceeding four (4) persons, gains control of said
corporation: Provided, That stocks issued for Ruling:
services shall not be considered as issued in return No. It is evident from the categorical
for property. language of Section 34 (c) (2) of the 1993 NIRC
(now Sec. 40 c2) which provides that gain or loss
Four Transactions Covered will not be recognized in case the exchange of
property for stocks results in the control of the
1. Properties for stocks – in accordance with a transferee by the transferor, alone or with other
plan for merger or consolidation. transferors not exceeding four persons. Rather
2. Stocks for Stocks- in accordance with a plan than isolating the same as proposed by the CIR,
for merger or consolidation. FDC's 61.03% control of FLI's should, therefore,
3. Securities for stocks- in accordance with a be appreciated in combination with the new
plan for merger or consolidation. shares issued to FAI which represents 9.96%
4. Exchange of property for corporate control. control of said transferee corporation. Together
FDC's 61.03% and FAI's 9.96% clearly add up to
Commissioner of Internal Revenue vs. Filinvest 70.99% ownership of FLI. Since the term "control"
Development Corporation, (G.R. No. 163653, July is clearly defined as "ownership of stocks in a
19, 2011) corporation possessing at least fifty-one percent of
the total voting power of classes of stocks entitled
Facts: to one vote" under Section 34 (c) (6) [c] of the 1993
On 3 January 2000, FDC received from NIRC, the exchange of property for stocks between
the BIR a Formal Notice of Demand to pay FDC FAI and FLI clearly qualify as a tax-free
deficiency income and documentary stamp taxes, transaction under paragraph 34 (c) (2) (now Sec 40
plus interests and compromise penalties for (c)(2) of the Tax Code) of the same provision.
deficiency income taxes which were assessed on Inasmuch as the combined ownership of FDC and
the taxable gain supposedly realized by FDC from FAI of FLI's outstanding capital stock adds up to
the Deed of Exchange it executed with FAI and a total of 70.99%, it stands to reason that neither
FLI, on the dilution resulting from the of said transferors can be held liable for deficiency
Shareholders’ Agreement FDC executed with income taxes the CIR assessed on the supposed
RHPL as well as the “arm’s-length” interest rate gain which resulted from the subject transfer.
and documentary stamp taxes imposable on the
advances FDC extended to its affiliates. FAI B. Theoretical Interest. Inter-company advances
similarly received from the BIR a Formal Letter of not subject to interest.
Demand for deficiency income assessed on the Filinvest Development Corporation
taxable gain purportedly realized by FAI from the extended advances in favor of its affiliates and
Deed of Exchange it executed with FDC and FLI. supported the same with instructional letters and
cash and journal vouchers. The BIR assessed
A. Transfer of properties in exchange of shares of Filinvest for deficiency income tax by imputing an
stocks. (Tax-free exchanges, Sec 40 C, NIRC) “arm’s length” interest rate on its advances to
The owner of 80% of the outstanding affiliates. Filinvest disputed this by saying that
shares of respondent Filinvest Alabang, Inc. the CIR lacks the authority to impute theoretical
(FAI), respondent Filinvest Development interest and that the rule is that interests cannot
Corporation (FDC) is a holding company which be demanded in the absence of a stipulation to the
also owned 67.42% of the outstanding shares of effect.
Filinvest Land, Inc. (FLI). On 29 November 1996,
FDC and FAI entered into a Deed of Exchange 2nd ISSUE: Can the CIR impute theoretical
with FLI whereby the former both transferred in interest on the advances made by Filinvest to its
favor of the latter parcels of land in exchange of affiliates?
FLI’s shares of stock. As a result of the exchange,
FLI’s ownership structure was changed. Ruling:
NO. Despite the seemingly broad power
Stockholder % of Shares % of Shares of the CIR to distribute, apportion and allocate
Held Prior to Held After the gross income under (now) Section 50 of the Tax
the Exchange Exchange Code, the same does not include the power to
FDC 67.42% 61.03% impute theoretical interests even with regard to
(Diluted) controlled taxpayers’ transactions. This is true
FAI 0 9.96% even if the CIR is able to prove that interest
expense (on its own loans) was in fact claimed by
the lending entity. The term in the definition of

77
gross income that even those income “from The disposition of real property made by
whatever source derived” is covered still requires individuals, estates and trusts, and domestic
that there must be actual or at least probable corporation shall be taxed according to
receipt or realization of the item of gross income classification whether or not the property is used
sought to be apportioned, distributed, or allocated. in trade or business.
Finally, the rule under the Civil Code that “no
interest shall be due unless expressly stipulated 1. By Individual - 6% final tax
in writing” was also applied in this case. Tax Base: Whichever is the highest among:
a. Selling price
Preferential Tax Treatment for Capital Gain b. FMV as determined by CIR (zonal value)
(Loss) c. FMV as determined by the City or
Provincial Assessor (assessed value)
The tax rules for gains or losses from sales or
exchange of capital assets over ordinary assets are Exemption: Capital gains from sale of
as follows: principal residence if-
1. Net capital gain is added to ordinary gain but a. The proceeds are utilized in acquiring
net capital loss is not deductible from new residence within 18 calendar
ordinary gain. months from the date of sale;
2. Net ordinary loss is deductible from net b. Commissioner is notified within 30
capital gain. days from the sale or disposition;
3. Capital losses are deductible only to the c. The exemption can be availed of once in
extent of the capital gain. every 10 years;
4. For the individual, the reportable percentages d. The 6% capital gains tax due on the
of capital gain or loss hall be: presumed capital gains shall be
a. 100% if the capital asset is held for one deposited in interest bearing account
year or less than one year (short term) with an authorized bank under an
(Sec 39B2, NIRC) escrow agreement.
b. 50% if the capital asset is held for more
than one year (long term). 2. By corporation – 6% final tax on sale of
5. There is a net capital loss carry-over on the lands and/or buildings not used in the
net capital asset’s loss in a taxable year which business.
may be deducted as a short-term capital loss
from the net capital gain of the subsequent
taxable year; provided that the following Sale of Principal Residence
conditions shall be observed:
a. The taxpayer is other than a A principal residence is the family home of the
corporation; individual taxpayer. It refers to the dwelling
b. The amount of loss does not exceed the house, including the land on which it is situated,
income before exemptions at the year wherein an individual including his family resides
when the loss was sustained (Sec. 39D, as a permanent dwelling, or whenever absent,
NIRC; EO No. 37); and wherein the individual intends to return. (Sec. 2.1,
c. The holding period should not exceed Rev. Reg. No. 14-2000)
twelve months. (Sec. 39D, NIRC)
It is the residential address of a natural person as
certified by the Barangay Chairman who has
Capital Gains or Losses Sustained by a jurisdiction over the place, or the Building
Corporation Administrator (in lieu of said Punong Barangay) if
the residence is a condominium or the individual
When a capital gain or capital loss is sustained by taxpayer’s address as indicated in the latest
a corporation, the following rules shall be income tax return.
observed:
1. There is no holding period; hence there is no As a general rule, the sale of principal residence is
capital loss carry-over. subject to a capital gains tax of 6% based on the
2. Capital gains and losses are recognized to the selling price or zonal value, whichever is higher.
extent of their full amount.
3. Capital losses are deductible only to the
extent of capital gains. Dealings in Shares of Stocks of Philippine
4. Net capital losses are not deductible from Corporations
ordinary gain or income but ordinary losses
are deductible from net capital gains These transactions refer to the sale of equity
securities of other corporations which are
classified as either capital assets or ordinary
Dealings in Real Property assets.
Stocks classified as capital assets are stocks and stocks, bonds, exchanges, bullions, coined money,
securities held by a taxpayer other than dealers in bank notes, promissory notes, or other securities
securities. If sold, these securities are subject to as licensed by the SEC.
capital gains tax (final tax).
The gain (loss) from sale of securities held by
Dealers in securities include all persons who for dealers in securities are ordinary income (loss)
their own account are engaged in the sale of subject to normal tax
SALE OF SHARES OF STOCK

Traded in stock exchange:
Stocks held by dealers in Inventory Percentage tax of ½ of 1% of the
securities selling price
and
subject to normal tax based on
taxable income
Not traded in stock exchange:
5% if the net capital gain is not over

P100,000; an
Stocks not held by dealers in Capital asset 10% on any amount in excess of
securities P100,000
Filing and payment of capital gains

tax – within 30 days after each
transaction
Traded in stock exchange:
½ of 1% of the selling price

(exempt from capital gains tax)
Fling and payment of percentage tax

– within 5 days from the date
withheld by the broker
WITHHOLDING TAXES - FWT and CWT
Final Withholding Taxes on Passive Income under BIR Form 1601- F

(Quick view)
RATE ON RATE ON
NATURE OF INCOME INDIVIDUAL CORPORATE
PAYEE PAYEE
1. Interest on foreign loans payable to Non-resident foreign corporation 20%
2. Interest and other income payments on foreign currency transactions 10%
payable to OBU’s an FCDU’s
3. Cash or property dividend payment by domestic corporation to citizen 10%
and resident aliens

79
4. Cash or property dividend payment by domestic corporation to
nonresident foreign corporation
 Without reciprocity rule 30%
 With reciprocity rule 15%
5. Cash or property dividend payment by domestic corporation to 20%
nonresident alien, doing business in the Philippines
6. Distributive share of individual partner in general commercial 10%
partnership
7. Share of nonresident alien in the distributable income of general 20%
commercial partnership
8. All kinds of royalty payments to citizen, resident alien, nonresident 20% 20%
alien doing business in the Philippines, domestic and resident foreign
corporation except royalty income on books and cinematographic
films
9. On prizes exceeding P10,000 and other winnings paid to individuals 20%
10. Branch remittance by all corporations except PEZA, SBMA and CDA 15%
registered
11. Gross rentals , lease and charter fees paid to nonresident lessor of 4.5%
foreign vessels
12. Gross rentals, lease and charter fees paid to nonresident lessor of 7.5%
foreign aircraft, machinery and equipment
13. On payments to oil exploration service contractors/subcontractors 8% 8%
14. Payments to citizen or alien employed by Foreign Petroleum Service 15%
Contractors/ Sub-contractors, Offshore Banking Units and Regional
or Area Headquarters and Regional operating Headquarters of
15. Payments to NRA not doing business in the Phils. except on sale of 25%
shares of stock and real property.
16. Payment to nonresident individuals/foreign corporate 25% 25%
cinematographic film owners/lessors or distributors
17. Other payments to NR-FC 30%
18. Royalties paid to NRA-ETB on cinematographic films and similar 25%
works.
19. Final tax on interest or other payments upon tax-free covenant bonds, 30%
mortgages, deeds of trust or other obligations under Sec. 57C of NIRC.
20. Royalties paid to citizens, RAs and NRA-ETB in the Phils. on books, 10%
other literary works and musical composition.
21. Tax informer’s cash reward 10% 10%
Tax Rates on Interest Paid on Deposits and Yield on Deposit Substitutes (BIR Form 1602)
NATURE OF INTEREST INCOME Rate on Individual Rate on

Payee Corporate Payee
1. on peso savings deposit 20% 20%
2. on peso time deposits 20% 20%
3. on deposit substitutes 20% 20%
4. on government securities 20% 20%
5. on pre-terminated long term deposit:
less than 3 years 20% 20%
3 years to less than 4 years 12% 20%
4 years to less than 5 years 5% 20%
6. on foreign currency deposits 7.5% 7.5%
CREDITABLE WITHHOLDING TAXES
INCOME PAYMENTS SUBJECT TO EXPANDED WITHHOLDING TAX SYSTEM AND TAX RATES
(BIR FORM 1601E)
Nature of Income Rate on Individual TP Rate on Corporate
Payee
1. Professional talent fees (lawyers, CPAs, etc.)
2. Professional entertainers, professional

athletes and movie, stage, radio, television
and musical directors:
 annual income does not exceed P720,000 10%
 annual income exceeds P720,000 15%
3. Management and technical consultants 10%

3. Bookkeeping agents and agencies 10%
4. Insurance agents and adjusters 10%
5. Fees of directors who are not employees of the 15%
company

81
6. Real property rentals 5% 5%

7. Cinematographic film rentals 5% 5%
8. Prime contractors/subcontractors 2% 2%
9. Income distribution to beneficiaries of estates 15%
and trusts.
10. Brokers and agents 10% 10%
11. Income payments to partners of general
professional partnership
 P720,000 and below
 Exceeds P720,000 15%
12. Payments by credit card companies 0.5% 0.5%
Payments by government unit to
 Local suppliers 1% 1%
 Suppliers of services 2% 2%
13. Income payments by top 5,000 corporation to 1% 1%
their local suppliers
14. Additional payments to government personnel 15%
from importers, shipping and airline
companies for overtime services.
WITHHOLDING TAXES Under the CWT system, taxes withheld on certain

payments are intended to equal or al least
Withholding taxes is a systematic way of collecting approximate the tax due of the payee on said
taxes at source, an indispensable method of income.
collecting taxes to ensure adequate revenue for the
government. The income recipient is still required to file his ITR
(Sec. 51), either to report the income and/or pay
The withholding tax agent who is usually an the difference between the Tax withheld and the
employer or a person from whom the income is tax due on the income.
derived withholds the appropriate amount of taxes
from TPs. A tax withheld on income payments covering the
expanded withholding tax from compensation
Withholding Tax at Source income is creditable in nature. (Sec 57B)
Part of tax system which collects through
withholding agents (payor) or employers the
appropriate income taxes due as they are earned Persons Required to Deduct and Withhold
and before earnings are paid to the payees or 1. In general, any juridical person, whether or
employees. not engaged in business or trade.
2. an individual, with respect to payments
Classification of Withholding Tax at Source made in connection with his trade or
business. For taxable sale, exchange or
1. Final withholding Tax (FWT) transfer of real property, individual buyers
2. Creditable Withholding Tax (CWT) who are not engaged in trade or business are
also constituted as withholding agents.
FWT vs. CWT 3. All government offices including GOCCs, as
well as provincial, city and municipal
Final Withholding Tax (FWT) governments.
Under the FWT system, the amount of income tax Time of Withholding
withheld by the withholding agent is constituted The obligation of the payor to deduct and withhold
as a full and final payment of the income tax due the tax arises at the time an income is paid or
from the payee on the said income. payable, whichever comes first. The term
“payable” refers to the date the obligation becomes
The liability for the payment of the tax rests due, demandable or legally enforceable.
primarily on the payor as a withholding agent.
The payee is not required to file an ITR for the

particular income, the final tax on which has been
withheld. (Sec. 79B, NIRC) CIR vs. Asian Transmission Corporation,
(G.R. No. 179617, January 26, 2011)
Creditable Withholding Tax (CWT)
 Taxpayer need not prove its losses in a claim it presented its income tax return showing the
for refund of excess income tax payments. incurred losses. It must be noted that the CTA
 In a claim for refund of excess CWT, the earlier ruled that the burden of proof as to whether
taxpayer-claimant need not prove actual the taxpayer incurred net losses from its
remittance of the CWT to the BIR. operations rests on the BIR. This is the reason why
the BIR is authorized by law to examine the books
Facts: and accounting records to ascertain the
Respondent Asian Transmission Corp. truthfulness of the taxpayer’s declaration in its
(ATC) filed a claim for refund of its excess CWT for income tax return.
taxable years 2000 and 2001. The CTA denied the
claim for 2000 because the amount was carried Rizal Commercial Banking Corporation vs.
forward by ATC to the following year, despite Commissioner of Internal Revenue,
having indicated in its 2000 ITR its option to claim (G.R. No. 170257, September 7, 2011)
the same as a tax credit certificate. However, the
CTA granted the claim for 2001. Facts:
Petitioner CIR appealed to the Supreme RCBC is a private domestic commercial
Court and argued that ATC failed to prove actual bank engaged in general banking operations. On
remittance of the CWT to the BIR, and that ATC 15 August 1996, RCBC received a Letter of
failed to establish the losses it had incurred in the Authority (LOA) covering all internal revenue
period subject of the claim. taxes from 01 January 1994 to 31 December 1995.
RCBC executed a Waiver of the Defense of
Issue: Is ATC entitled to the refund? Prescription up to 31 December 2000. Respondent
issued on 27 January 2000 a Formal Letter of
Ruling: Demand (FLD).
Yes. For a claim for a tax credit certificate On 24 February 2000, RCBC filed a
or refund to be granted, the taxpayer must protest. On 20 November 2000, RCBC filed a
establish that: petition for review before the CTA. Following the
• The claim for refund was filed within 2 years as reinvestigation requested, RCBC received another
prescribed in Section 230 (now 229) of the Tax FLD on 06 December 2000 which drastically
Code; reduced the amount previously assessed. On the
• The income upon which the taxes were withheld same date, RCBC paid all tax deficiencies except
were included in the return of the recipient; and the assessments for deficiency Final Tax on FCDU
• The fact of withholding is established by a copy Income and DST, which remained to be subjects of
of the statement (BIR Form 1743-A) duly issued its petition for review.
by the payor (withholding agent) to the payee The CTA-1st Division upheld the
showing the amount paid and the amount of tax assessment for the remaining deficiency taxes and
withheld. ordered the RCBC to pay the amount. RCBC
elevated the case to the CTA En Banc but the
ATC complied with all 3 requirements. petition was denied for lack of merit.
There is no further need to prove actual
remittance of the withholding taxes to the BIR, as Issues:
remittance is the responsibility of the withholding 1. Whether or not the petitioner, by paying the
agent and not of the taxpayer-claimant. The other tax assessments covered by the waiver, is
payors are constituted as withholding agents of rendered estopped from questioning the validity of
the BIR and the taxes they withhold are held in the said waivers; and
trust for the government. In the event that they
commit fraud against the government by not 2. Whether or not the petitioner, as payee-bank,
remitting the taxes withheld, such act should not can be held liable for deficiency onshore tax, which
prejudice the claimant. is mandated by law to be collected at source in the
The Certificates of Creditable Tax form of FWT.
Withheld at Source issued by the withholding
agents of the government are prima facie proof of Ruling:
actual payment by ATC to the government itself
through said agents. 1st Issue: Yes. RCBC is estopped from questioning
Finally, ATC has fulfilled its duty to the validity of the waivers. RCBC averred that the
establish the amount of its losses. Other than the waiver executed by it is invalid for failure to
bare assertion that ATC must establish its losses, indicate acceptance of the CIR. Petitioner further
the CIR failed to point to any circumstance or argues that the principle of estoppel does not
evidence that would cast doubt on ATC’s sworn signify a clear intention on its part to give up its
declaration that it incurred losses in 2000 and right to question the validity of the waivers.
2001. Estoppel is clearly applicable to the case.
The Supreme Court agreed that the A party is precluded from denying his own acts,
taxpayer bears the burden to establish the losses, admissions, or representations to the prejudice of
but then the taxpayer has fulfilled this duty when the other party in order to prevent fraud and

83
falsehood. RCBC’s partial payment of the revised does not res upon general ownership but rather
assessments issued within the extended period they are privilege tax imposed on the act of
impliedly admitted the validity of the waivers. passing ownership of property.
TWO TYPES OF GRATUITOUS TRANSFERS

2nd issue: Yes. Petitioner is liable for the payment 1. Donation Mortis Causa- transmission of
of deficiency onshore tax on interest income properties by operation of law (succession) due
derived from foreign currency loans, pursuant to to the death of the owner (without
Sec 24(e)(3) of the Tax Code of 1993. consideration).
RCBC contended that because the  Subject to Estate Tax if transfer was
onshore tax was collected in the form of a FWT, it effected upon the death of the transferor.
was the borrower, constituted by law as the
withholding agent, that was primarily liable for 2. Donation Inter Vivos- transfer effected during
the remittance of the said tax. the lifetime of the owner without consideration.
Petitioner erred in citing RR 2-98 because  Subject to Donor’s tax if transfer was made
the same governs collection at source on income during the lifetime of the donor
paid only on or after January 1, 1998. Hence, said
regulations obviously does not apply in the case. KINDS OF TRANSFER TAXES
The liability of the withholding agent is 1. Estate Tax
independent from that of the petitioner. The 2. Donor’s Tax
former cannot be made liable for the tax due
because it is the petitioner who earned the income ESTATE TAX
subject to withholding tax. The liability for the tax
remains with the petitioner because the gain was It is the tax on the privilege of transmitting
realized and received by him. properties upon death and to the special privilege
The withholding agent is liable only
that a person is given in controlling to a certain
insofar as he failed to perform his duty to withhold
extent the disposition of his properties to take
the tax and remit the same to the government.
effect upon his death.
While the payor-borrower can be held accountable
for its negligence in performing its duty to
 It accrues as of the death of the decedent
withhold the amount of tax due on the transaction,
notwithstanding the postponement of the
petitioner, as the taxpayer and the one which
actual possession or enjoyment of the
earned income on the transaction, remains liable
estate by the beneficiary. The accrual of
for the payment of tax as the taxpayer shares the
the tax is distinct from the obligation to
responsibility of making certain that the tax is
pay the same.
properly withheld by the withholding agent, so as
 The statute in force at the time of death
to avoid any penalty that may arise from the non-
governs the estate taxation.
payment of the withholding tax due.
 The transfer of the property of a decedent
Taxpayer bank cannot evade its liability
to his heirs and beneficiaries takes place
for foreign currency deposit unit onshore tax by
at the moment of death without any
shifting the blame on the payor-borrower as the
interruption.
withholding agent. As such, it is liable for payment
 It is imposed on the transfer of the
of deficiency onshore tax on interest income
decedent‘s estate to his lawful heirs and
derived from foreign currency loans, pursuant to
beneficiaries based on the fair market
now Section 24(c) (3) of the National Internal
value of the net estate at the time of the
Revenue Code.
decedent’s death.
REASONS JUSTIFYING THE IMPOSITION OF

ESTATE TAX
1. Benefit-Received Theory – considers the

service rendered by the government in the
distribution of the estate of the decedent, either
by law or in accordance with his wishes. For
the performance of these services and other
benefits that accrue to the estate and the heirs,
the State collects the tax.
TRANSFER TAXES 2. Privilege Theory/ State Partnership Theory –

inheritance is not a right but a privilege
TRANSFER TAXES are taxes imposed upon the granted by the state, and large estates have
gratuitous disposition of private property. They been acquired only with the protection of the
are not property taxes because their imposition State. Consequently, the State as a passive
and silent partner in the accumulation of
property has the right to collect the share Over But Tax Plus Excess
which is properly due to it. Not shall Over
Over be
3. Ability to Pay Theory – receipt of inheritance
- 200K Exempt - -
which is in the nature of an unearned wealth
or windfall, place assets into the hands of the 200K 500K 0 5% 200K
heirs and beneficiaries thereby creating an 500K 2M 15K 8% 500K
ability to pay the tax and thus contributes to 2M 5M 135K 11% 2M
government income. 5M 10M 465K 15% 5M
10M - 1,215K 20% 10M
4. Redistribution of Wealth Theory - the receipt of
inheritance is a contributing factor to the Legend: K - Thousand
inequalities in wealth and incomes. The M - Million
imposition of death tax reduces the property
received by the successor, thus helping bring CLASSIFICATION OF DECEDENT
about a more equitable distribution of wealth
in society. The tax base is the value of the a. Resident decedent-(Resident/Non-resident
property and the progressive scheme of citizen/Resident Alien;
taxation is precisely motivated by the desire to b. Non-resident decedent- Non-resident Alien.
mitigate the evils of inheritance in the present
form. GROSS ESTATE
Only properties within the CONTROL of the
NATURE OF ESTATE TAX decedent
A. Resident alien and citizen:
1. Tax on the right to transfer property at death  All properties, real or personal, tangible
and on certain transfers which are made by or intangible, wherever situated.
law equivalent to testamentary dispositions
and is measured by the value of the property; B. Non-resident alien:
2. It is imposed on the basis of the net estate  only properties situated in the
considered as a unit. The first Php200,000 of Philippines
the net estate is exempt.  With respect to intangible personal
3. Estate tax is not a property tax but rather an property, its inclusion is subject to the
excise tax. rule of reciprocity.
4. It is an excise tax and its object is to the
shifting of economic benefits and enjoyment of INTANGIBLE PROPERTIES HAVING SITUS IN
property from the dead to the living. THE PHILIPPINES (Sec. 104, NIRC)
1. Franchise which must be exercised in the
Philippines;
ESTATE TAX FORMULA: 2. Shares, obligations or bonds issued by any
corporation or “sociedad anonima” organized
Gross Estate or constituted in the Philippines in accordance
Less: Deductions (Sec. 86) with its laws;
Net Estate before share of surviving spouse 3. Shares, obligations or bonds issued by any
Less: Share of surviving spouse foreign corporation eighty-five percent (85%)
Net Share before special deductions of the business of which is located in the
Less: Special Deductions
Philippines;
Family Home
Standard Deduction (P1M) 4. Shares, obligations or bonds issued by any
Medical Expenses foreign corporation, if such shares, obligations
Taxable Net Estate or bonds have acquired a business situs in the
X Tax Rate (Sec. 84) Philippines;
Tax Due 5. Shares or rights in any partnership, business
Less: Estate Tax Credit (Sec.86 [E] or 110 [B]) or industry established in the Philippines.
Tax Payable
RULE OF RECIPROCITY applies only to
intangible personal property of non-resident alien.
Estate Tax Rates
No tax shall be collected in respect of intangible
personal property:
a. if the decedent at the time of his death was a
citizen and resident of a foreign country which
at the time of his death did not impose a transfer
tax in respect of intangible personal

85
property of citizens of the Philippines not GROSS ESTATE AND NET ESTATE
residing in that foreign country(Total
Exemption) OR Composition of the Gross Estate of a Decedent
b. if the laws of the foreign country of which D Real Tangible Intangible

the decedent was a citizen and resident at E Property Property Personal
the time of his death allows a similar C Property
exemption from transfer taxes in respect of E
intangible personal property owned by D
Without
Without
Without
With
With
With
Filipino citizens not residing in that foreign E
in
in
in
country. (Partial Exemption) [Sec 104] N
T
R
SITUS OF AN INTANGIBLE PERSONAL E
PROPERTY S
I
General Rule: The situs of an intangible personal D
property is at the domicile or residence of the E
owner. This is known as the principle of "mobilia N
sequuntur personam."
Included
Included
Included
Included
Included
Included
T
Exception: D
1. when it is inconsistent with express E
provisions of statute, or C
E
2. when justice does not demand that it should D
be, as when the property has in fact a situs E
elsewhere. N
T
N
GROSS ESTATE VIS-À-VIS NET ESTATE O
N
Net taxable estate means gross estate less R
allowable deductions and special exemptions. E
S
Gross estate I
Less: deductions/exemptions D
E Included*
Excluded
Excluded
Net estate
Included
Included
excluded
N
 The computation of the gross estate is not T
only the body of the property but it
includes the yields or fruits of such D
property. E
C
Example: E
The apartment owned by the decedent D
inclusive of all the rental income E
therefrom up to the time of death. Cash N
in bank inclusive of all interests income T
earned up to the time of death.
Intangible personal properties are included in the
gross estate of a non-resident decedent if they are
located in the Philippines unless exempted on the
basis of the Principle of Reciprocity.
Other Items Included in Gross Estate
Properties not Owned by the Decedent which Still

Form Part of the Gross Estate
1. DECEDENT’S INTEREST
Gross estate for purposes of estate taxation of
Filipinos, whether residents or non-
DETERMINATION OF residents shall include the value of real
property and personal property wherever
situated to the extent of the interest of the Exception: In case of bona fide sale for an
decedent at the time of his death. adequate and full consideration in money or
money’s worth.
2. TRANSFER IN CONTEMPLATION OF Amount included in the GE: interest therein
DEATH
4. TRANSFER UNDER GENERAL POWER OF
It is the thought of death as the controlling APPOINTMENT
motive which induces the disposition of the
property for the purpose of avoiding the tax.  Will work to relieve the heir from the
imposition of the estate tax upon his
Requisites: death
1. It must be a transfer for insufficient  The two transfers will be taxed but once.
consideration or without consideration.
2. The enjoyment or possession will not vest A power of appointment is the right to
on the transferee before the transferor’s designate the person or persons who will
death. succeed to the property of the prior decedent.
Includes: It may be exercised by the decedent:

1. transfer by trust or otherwise, in a. By will; or
contemplation of, or intended to take b. By a deed executed in
effect in possession or enjoyment at or contemplation of, or intended to take
after his death; or effect in possession or enjoyment at, or
2. transfer by trust or otherwise, with after his death;
retention or reservation of c. By deed under which he has
a. the possession or enjoyment of or the retained for his life or any period not
right to the income or fruits from the ascertainable without reference to his
property, or death or for any period which does not in
b. the right, either alone or in fact end before his death:
conjunction with any person, to 1. The possession or enjoyment of, or
designate the person who shall the right to the income from, the
possess or enjoy the property or the property; or
income there from 2. The right, either alone or in
conjunction with any person, to
Exception: In case of bona fide sale for an designate the persons who shall
adequate and full consideration in money or possess or enjoy the property or the
money's worth income therefrom; except in case of
a bona fide sale for an adequate and
Amount included in the GE: interest therein full consideration in money or
money's worth.
Circumstances Taken into Account:
1. Age and state of health of the decedent at Exception: In case of bona fide sale for an
the time of gift, especially where he was adequate and full consideration in money and
aware of a serious illness; money’s worth
2. Length of time between the gift and the
date of death; Amount included in the GE: interest therein
3. Concurrent making of a will or making a
will within a short time after the transfer General Power Of Appointment – when it
authorizes the donee to appoint any person he
3. REVOCABLE TRANSFER pleases, including himself, his spouse, his
estate, his executor or administrator, and his
a. With reserved power to alter, amend, creditor thus having full dominion over the
revoke or terminate -transfer, by trust or property as though he owned it.
otherwise, where the enjoyment thereof
was subject to any change through the Special Power Of Appointment – when the
exercise of a power (in whatever capacity donee can appoint only among a restricted or
exercisable) by the decedent alone or by a designated class or persons other than
the decedent in conjunction with any himself.
other person (without regard to when or
from what source the decedent acquired  Properties passing under a general power of
such power, to alter, amend, revoke or appointment(GPA) exercised by the decedent
terminate; form part of his gross estate because the
b. Or where any such power is relinquished
in contemplation of the decedent's death.

87
decedent still has the control to dispose said c. passed under a general power of
properties upon his death. appointment for a consideration in money
or money's worth.
5. PROCEEDS OF LIFE INSURANCE
Exception: In case of bona fide sale for an
 Proceeds of life insurance are not subject adequate and full consideration in money or
to income tax money’s worth.
 Proceeds may or may not be included as
part of gross estate depending on the Amount to be included in the GE:
designation of the beneficiary. The excess of the fair market value (FMV), at
the time of death, of the property otherwise to
The following shall form part of the gross be included on account of such transaction,
estate: over the value of the consideration received
 When the beneficiary is the estate of the therefore by the decedent.
deceased, his executor or administrator,
irrespective of whether or not the insured Formula:
retained the power of revocation; or FMV (at the time of death) less value
 When the beneficiary is other than the received
decedent’s estate, executor or
administrator, when designation of
beneficiary is revocable, that is, when the 7. PRIOR INTEREST
designation of the beneficiary is not
expressly made irrevocable. – All transfers, trusts, estates, interests,
rights, powers and relinquishment of powers
The proceeds of life insurance are NOT made, created, arising, existing, exercised or
TAXABLE in the following cases: relinquished before or after the effectivity of
a. proceeds of a group insurance policy the Tax Code.
taken out by the company for its
employees; Doctrine of Three-year Presumption
b. accident insurance proceeds;  The law does not specify the number of years
c. amount receivable by any beneficiary prior to decedent’s death within which a
irrevocably designated in the policy of transfer can be considered in contemplation
insurance by the insured; death. (BIR Ruling No. 261, September 2,
d. proceeds of insurance policies issued by 1987) But in Sec. 85(B), January 1, 1998,
the GSIS to the government official and there is a presumption of relinquishment of
employees; power to transfer if made within three years
e. benefits accruing under the SSS law; prior to the death of the decedent.
f. proceeds of life insurance payable to heirs  When doctrine applies:
of deceased members of military a. When it is admitted or shown that the
personnel. transfer have been made in
contemplation of death; or
NOTE: WHEN the designation of the b. Where it is made 1) within 3 years prior
beneficiary is not clear, the policy is to the death of the decedent 2) without
considered as revocable, thus the proceeds full and adequate consideration and 3) it
paid to the beneficiary shall still form part of affects the interest(s) of any one
the gross estate of the decedent. beneficiary of a value at the time of such
death in excess of Php2,000 then to the
If the insured named a third person as his extent of such excess, It may however be
beneficiary in his life insurance policy, and shown that the relinquishment was not in
the policy is IRREVOCABLE, the premium contemplation of death (Sec. 85[3]).
paid is a gift from the insured to the
beneficiary, which may be subject to a donor’s EXEMPTION OF CERTAIN ACQUISITIONS
tax. If the premium is paid on installment, it AND TRANSMISSIONS (Sec. 87)
is an additional gift which may again be
covered by a donor’s tax. 1. the merger of usufruct of the owner of the
naked title;
6. TRANSFER FOR INSUFFICIENT 2. the transmission or delivery of the inheritance
CONSIDERATION or legacy of the fiduciary heir or legatee to the
fideicommissary;
Applies when the decedent’s property is 3. the transmission from the first heir, legatee or
transferred: donee in favor of another beneficiary, in
a. in contemplation of death, accordance with the will of the predecessor;
b. revocable transfers, or
4. all bequests, devises, legacies, or transfers to ultimately passes (Lorenzo vs. Posadas, G.R.
social welfare, cultural and charitable No. L-43082, June 18, 1937).
institutions no part of the net income of which
inures to the benefit of any individual; Q. Do funds deposited in a joint saving account
provided that not more that 30% of said subject to survivorship agreement form part of
bequests, legacies or transfers shall be used the gross estate of the decedent (“Husband
by such institutions for administration and/or Wife Account”)?
purposes. (Sec. 87, NIRC) A. The funds are considered the exclusive property
of the surviving spouse. The survivorship
agreement not having been executed for an
Illustration: unlawful purpose, its “winner-takes-all”
W for life feature is permitted by the Civil Code which
considers the same as a mere obligation with a
G Tee MERGER term. Being the separate property of the wife,
they form no part of the estate of the decease
spouse.
S Q. H and W opened a joint savings account with

Metro Bank. In 2008 H died. Is W required to
include the money in the joint savings account
 G (grantor) is subject to donor’s tax in the gross estate of H subjects to estate tax?
 W is subject to income tax A. Yes. One-half (1/2) of the money in the joint
 Transmission of full ownership to S is tax account should be included in the gross estate
exempt. of H because that belongs to H and the
 T (trustee) remaining half belongs to W. A joint account is
different from a survivor’s account or
commonly referred to as the “and/or” account.
RULES OF VALUATION If H and W maintained this kind of account in
 FMV of all properties as of the time of death the bank, W need not report half of the money
(Sec. 88, NIRC) in the said account for estate tax purpose.
 Real property- higher value between the FMV
determined by the CIR and the FMV as shown DEDUCTIONS FROM ESTATE
in the schedule of values fixed by the
Provincial and City Assessors A. For RESIDENT ALIENS AND CITIZENS
 Personal Property recently acquired-purchase 1. Expenses, Losses, Indebtedness, Taxes,
price may indicate FMV etc. (ELIT)
 Shares of stocks- the FMV will depend on a. funeral expenses;
whether or not the shares are traded in b. judicial expenses;
the stock exchange c. claims against estate;
 Traded shares- arithmetic mean between d. claims against insolvent persons;
highest and lowest quotation e. unpaid mortgages;
 Unlisted shares: f. taxes;
Common shares-Book Value g. casualty losses
Preferred shares-Par value 2. Transfers for Public Use;
3. Vanishing Deduction;
Q. In determining the net value of the estate, is it 4. Family Home;
proper to deduct the compensation due to 5. Standard Deduction of P1 million;
trustees? 6. Medical Expenses;
A. A trustee is entitled to receive a fair 7. Amounts Received by Heirs under R.A.
compensation for his services. But it does not 4917 (Retirement Benefits)
follow that his compensation may be deducted 8. Share of Surviving Spouse in Conjugal or
in arriving at the net value of the estate. There Community Property.
is no statute which requires trustees’
commission to be deducted. Though a B. For NON-RESIDENT ALIEN-DECEDENT
testamentary trust has been created, it does (V-USE)
not appear that the testator intended that the 1. Expenses, Losses, Indebtedness, Taxes
duties of his executors and trustees should be (ELIT)
separated. The compensation of a trustee 2. Transfers for Public Use;
earned not in the administration of the estate 3. Vanishing Deduction;
but in the management thereof for the benefit 4. Share of Surviving Spouse in Conjugal or
of the legates or devises, does not come Community Property
properly within the class for exempting
administration expenses. Trust is created for
the benefit of those to whom the property

89
2.1. their administration;

I. FUNERAL EXPENSES 3.1. the payment of debts of the estate;
Actual funeral expenses or 5% of the gross 4.1. the distribution of the estate among the
estate; or P200,000, whichever is lowest. heirs
Requisites for deductibility: Judicial expenses may include the following:

1. incurred up to the time of interment; 1. fees of executor or administrator
2. not borne or defrayed by relatives and friends; 2. attorney’s fees
3. supported by receipts or invoices or other 3. court fees
evidence. 4. appraiser’s fee
5. clerk hire
Actual funeral expenses not confined to its 6. costs of preserving and distributing the estate
ordinary or usual meaning. They include: 7. costs of storing or maintaining property of the
a. mourning apparel of the surviving spouse and estate; and
unmarried minor children of the deceases 8. brokerage fees for selling property of the
bought and used on occasion of the burial; estate.
b. expenses for the deceased’s wake, including
food and drinks; Q: May the notarial fee paid for the extrajudicial
c. publication charges for death notices; settlement and the attorney’s fees in the
d. telecommunication expenses incurred in guardianship proceedings be allowed as
informing relatives of the deceased; deductions from the gross estate of decedent in
e. cost of burial plot, tombstones, monument or order to arrive at the value of the net estate?
mausoleum but not their upkeep. In case the A: Yes. These are considered as judicial expenses,
deceased own a family estate or several burial which are in effect expenses of administration.
lots, only the value corresponding to the plot Administration expenses, as an allowable
where he is buried is deductible; deduction from the gross estate of the decedent,
f. interment and/or cremation fees and charges; are construed to include all expenses essential to
and the collection of assets, payment of debts, or
g. all other expenses incurred for the distribution of property to the persons entitled
performance of the rites and ceremonies thereto. (CIR vs. CA and Pajonar, G.R.. No.
incident to interment. (RR No. 2- 2003) 123206, March 22, 2000)
NOTE: Expenses included in R.R. No. 2-2003 refer III. CLAIMS AGAINST THE ESTATE
to those incurred before and during the burial.
Expenses incurred after the interment, such as for These are debts or demands of a pecuniary
prayers, masses, entertainment, or the like are not nature which could have been enforced against
deductible. Any portion of the funeral and burial the deceased in his lifetime and could have
expenses borne or defrayed by relatives and been reduced to simple money judgments.
friends of the deceased are not deductible.
Requisites for deductibility:
II. JUDICIAL EXPENSES 1. the liability represents a personal obligation
of the deceased existing at the time of his
Refer to the expenses incurred in the death except unpaid obligations incurred
testamentary or intestate proceedings for the incident to his death;
settlement of the estate. It includes those 2. it was contracted in good faith and for
incurred during the settlement of the estate adequate and full consideration in money or
but not beyond the last day prescribed by law, money’s worth;
or the extension thereof, for the filing of the 3. the claim must be valid in law and enforceable
estate tax return (six months after death). in court;
4. the indebtedness must not have been
Requisites for deductibility: condoned by the creditor or the action to
a. incurred during the settlement of the estate collect must not have been prescribed.
b. incurred not beyond the last day prescribed 5. the debt instrument must be notarized;
by or the extension thereof, for the filing of 6. if the loan was contracted within three (3)
estate tax return years before the death of the decedent, the
c. incurred for the benefit of the estate administrator or executor shall submit a
d. supported by receipts or invoices or by a statement under oath showing the disposition
sworn statement of account issued and of the proceeds of the loan.
signed by the creditor For estate tax purposes, the actual claims of
creditors may be fully allowed as deductions from
gross estate despite the fact that said claims were
Those incurred in the: reduced or condoned through compromise
1. inventory taking of assets comprising the agreements entered into by the estate with its
gross estate; creditors.
There is no law, nor any legislative intent in the Requisites for deductibility:
tax laws, which disregards the date-of-death 1. arose from fire, storm, shipwreck or other
valuation principle and particularly provides casualty, robbery, theft or embezzlement;
that post-death developments and particularly 2. not compensated by insurance or otherwise;
provides that post-death developments must be 3. not claimed as deduction in an income tax
considered in determining the net value of the return of the taxable estate;
estate. 4. incurred during the settlement of the estate;
5. incurred before the last day for the payment
Moreover, the term “claims” required to be of the estate tax (six months after the
presented against a decedent’s estate is generally decedent’s death)
construed to mean debts or demands of a
pecuniary nature which could have been enforced A casualty loss to estate property during the
against the deceased in his lifetime or liability period of administration gives rise not only to a
contracted by the deceased before his death. deduction from the gross estate for estate tax
purposes but also a deduction from the gross
Therefore, the claims existing at the time of income in determining the taxable income of the
death are significant to, and should be made the estate which is under judicial settlement.
basis of the determination of allowable However, the estate cannot claim the deduction
deductions. (Rafael Arsenio S. Dizon vs. CTA, et for both purposes. It can either choose to deduct
al., G.R. No. 140944, May 6, 2008) such losses from the gross income or from the
gross estate for purposes of the estate tax.
IV. CLAIMS AGAINST INSOLVENT PERSONS VIII. VANISHING DEDUCTIONS/PROPERTY

PREVIOUSLY TAXED
1. The amount of said claims has been
initially included as part of the GE; It operates to ease the harshness of
2. The incapacity of the debtors to pay their successive taxation of the same property
obligations is proven, not merely alleged. within a relatively short period of time (up
to 5 years) occasioned by the untimely death
V. UNPAID MORTGAGES INCLUDE: of the transferee.
In effect, it reduces his gross estate tax.
1. The value of the property mortgaged to the
extent of the decedent’s interest therein, Requisites (DIP-IN)
undiminished by such mortgage or 1. Death - the present decedent died within
indebtedness, is included in the GE; five years from transfer of the property
2. The indebtedness must have been from a prior decedent;
contracted bona fide and for an adequate 2. Inclusion of the property - the property
and full consideration in money or money’s formed part of the GE located in the
worth; Philippines of the prior decedent, or of the
3. Verification must be made as to who was taxable gift of the donor within 5 years
the beneficiary of the loan proceeds. prior to the present decedent’s death;
4. If found to be merely an accommodation 3. Previous taxation of the property - the
loan, the value of the unpaid loan must be estate tax or donor’s tax on the gift must
included as a receivable of the estate. have been finally determined and paid;
5. If there is a legal impediment to recognize 4. Identity of the property - the property
the same as receivable, said unpaid must be identified as the one received from
mortgage shall not be allowed as a the prior decedent, or something acquired
deduction. in exchange therefore; and
5. No previous vanishing deduction on the
VI. TAXES property was allowed to the estate of the
prior decedent.
These include those taxes that accrued as of
the death of the decedent AND unpaid as of Limitations as to amount of deduction allowable:
the time of death. a. Value of property – limited by the value of the
property previously taxed as finally
determined for the purpose of the prior
The following are not deductible:
1. income tax on income received after the death transfer tax or the value of the property in the
of the decedent; present decedent’s GE, whichever is lower
2. property taxes not accrued after death; b. Deduction for mortgage or other lien – the
3. estate tax initial value in (a) above shall be reduced by
the total amount paid, if any, by the present
VII. LOSSES

91
decedent on any mortgage or other lien on the characterized by permanency, that is, the place
property to which, whenever absent for business or
c. Deduction for ELIT and TPU – the value as pleasure, one still intends to return (domicile).
reduced in (b) above shall be further reduced
by an amount which bears the ratio to the Requisites:
amounts allowed as deductions for ELIT and 1. said family home must be the actual
TPU (Transfer for Public Use) as the amount residential home of the decedent and his
otherwise deductible for property previously family at the time of his death;
taxed bears to the value of the decedent’s GE. 2. said fact must be certified to by the
d. Percentage of deductions barangay captain of the locality where it is
located;
If the present decedent died within the following 3. the total value of the family home must be
period after the date of prior decedent’s death or included as part of the GE of the decedent;
after the date of donation, the vanishing deduction and
shall be the value in (c) multiplied by the following 4. the amount deductible is the current FMV
rates: but not to exceed 1 million pesos
More than But not more Rate NOTE: A person may constitute only one
than family home.
- 1 yr 100%
1 yr 2 yrs 80% XI. STANDARD DEDUCTION
2 yrs 3 yrs 60%  1 million pesos
3 yrs 4 yrs 40%  Without need of substantiation
4 yrs 5 yrs 20%
5 yrs - 0% XII. MEDICAL EXPENSES
Format of computation: Requisites:

Value Taken 1. incurred within one year prior to death of
Less: Mortgage paid by present decedent, the decedent;
if any 2. duly substantiated with receipts for
services rendered by the decedent’s
Initial Basis
attending physicians, invoices,
Less: Proportionate deductions:
statements of account duly certified by
the hospital and such other supporting
Initial basis X (ELIT+ TPU)
documents; and
Gross Estate
3. for a maximum amount of P500,000
Final Basis
X Rate of Vanishing Deduction
NOTE: Approval of the court where a
Vanishing Deduction
probate/intestate proceeding is pending is not
a mandatory requirement in the collection of
IX. TRANSFER FOR PUBLIC USE estate taxes. On the contrary, the
probate/intestate court is prohibited from
Requisites: delivering any distributive share to any party
1. the disposition is in a last will and unless there is certification from the
testament; Commissioner that the estate taxes are
2. to take effect after death; already paid.
3. in favor of the government of the
Philippines or any political subdivision XIII. AMOUNT RECEIVED BY HEIRS UNDER
thereof; and REPUBLIC ACT NO. 4917
4. for exclusively public purpose
Any amount received by the heirs from the
NOTE: This should also include bequests, devices, decedent’s employer as a consequence of the
or transfers to social welfare, cultural and death of the decedent employee in
charitable institutions. accordance with R.A. 4917 is allowed as a
deduction provided that the amount of the
separation benefit is included as part of the
gross estate of the decedent.
X. FAMILY HOME
XIV. NET SHARE OF THE SURVIVING
The dwelling house including the land on SPOUSE IN THE CONJUGAL
which it is situated, where the husband and PARTNERSHIP OR COMMUNITY
wife, or head of the family and members of PROPERTY
their family reside, as certified to by the
Barangay Captain of the locality. It is
After deducting the allowable deductions c. Intangible personal property of non-resident

appertaining to the conjugal or community decedent under the Principle of Reciprocity
properties included in the gross estate, the d. Amount received for war damages
share of the surviving spouse must be e. Amount received from the US Veterans
removed to ensure that only the decedent’s Administration
interest in the estate is taxed. f. Proceeds of life insurance and benefits
received by members of the GSIS and SSS.
EXCLUSIONS FROM ESTATE
FILING OF NOTICE OF DEATH
a. Real, personal and intangible personal
properties belonging to a nonresident  Notice of Death should be filed in all cases of
decedent located outside of the Philippines. transfers subject to tax or exempt but the
b. Proceeds of life insurance if payable to a gross value of the estate exceeds twenty
designated beneficiary under an irrevocable thousand pesos (P20,000).
policy.
c. Property held in trust or in fiduciary capacity  The executor, administrator or any of the
for others. legal heirs, as the case may be, within two (2)
d. Property belonging exclusively to the surviving months after the decedent's death, or within a
spouse (capital of the husband or paraphernal like period after qualifying as such executor or
property of the wife). administrator, shall give a written notice
thereof to the Commissioner.
TAX CREDIT FOR ESTATE TAXES
PAID IN A FOREIGN COUNTRY ESTATE TAX RETURN
General Rule: The estate tax shall be credited with A return which is filed within six (6) months from
the amounts of any estate tax imposed by the the decedent's death.
foreign country.
Extension of time to file: The Commissioner or any
Limitations: Revenue Officer shall have authority to grant, in
a. For estate taxes paid to one foreign country meritorious cases, a reasonable extension not
The amount of the credit in respect to the tax exceeding thirty (30) days for filing the return.
paid to any country shall not exceed the same
proportion of the tax against which such An estate tax return is required to be filed:
credit is taken, which the decedent’s net 1. When the estate is subject to estate tax;
estate situated within such country taxable 2. When the estate is not subject to estate tax
under the NIRC bears his entire net estate. but the gross estate exceeds P200,000;
3. Regardless of the amount of the gross estate,
Tax Credit Limit: where the gross estate consists of registered
Net Estate, Foreign Philippine or registrable property such as motor vehicle
X
Entire Net Estate Estate Tax Due or shares of stock or other similar property for
which a clearance from the BIR is required as
b. For estate taxes paid to two or more foreign a condition precedent for the transfer of
countries ownership thereof in the name of the
 The total amount of the credit shall not transferee. (Sec 90)
exceed the same proportion of the tax
against which such credit is taken, NOTE: When the gross estate exceeds P2M, the
estate tax return shall be supported with a
which the decedent’s net estate situated statement duly certified by a Certified Public
outside the Philippines taxable under the Accountant (CPA) stating:
NIRC bears to his entire net estate. 1. The itemized assets of the decedent with its
corresponding gross value at the time of his
Entire Tax Credit Limit: death, or in the case of a non-resident, not
Net Estate outside the Philippine citizen of the Philippines, that part of his
X
Phils. Estate Tax Due gross estate situated in the Philippines;
Entire Net Estate
EXEMPTION OF CERTAIN
ACQUISITIONS AND TRANSMISSIONS 2. The itemized deductions from the gross
estate;
a. The first Php200,000.00 of the gross estate 3. The amount of tax due, whether paid or still
b. Retirement benefits of employees of private due and outstanding.
firms from private pension plan approved by
the BIR Where to file:

93
a. Resident decedent: accredited agent bank, or

Revenue District Officer, Collection Officer, or Deficiency means
duly authorized Treasurer of the city or
municipality in which the decedent was 1. The amount by which the tax imposed exceeds
domiciled at the time of his death or if there the amount shown as the tax by the executor,
be no legal residence in the Philippines, with administrator, or any of the heirs upon his
the Office of the Commissioner. return; but the amounts so shown on the return
b. Non-resident decedent: the Revenue District shall first be increased by the amounts
Office (RDO) where the executor or previously assessed (or collected without
administrator is registered assessment) as a deficiency and decreased by
a. if not registered, with the RDO having the amount previously abated, refunded or
jurisdiction over the executor or otherwise repaid in respect of such tax; or
administrator’s legal residence 2. If no amount is shown as the tax by the
b. if there is no executor or administrator, executor, administrator, or any of the heirs
with the Office of the Commissioner upon his return, or if no return is made by the
executor, administrator, or any heir, then the
Payment of Estate Tax amount by which the tax exceeds the amounts
General Rule: at the time the return is filed (pay- previously assessed (or collected without
as-you-file) assessment) as a deficiency; but such amounts
previously assessed or collected without
Exception: When the Commissioner finds that the assessment shall first be decreased by the
payment on the due date of the estate tax or of any amounts previously abated, refunded or
part thereof would impose undue hardship upon otherwise repaid in respect of such tax.
the estate or any of the heirs he may extend the
time for payment of such tax or any part thereof DONOR’S TAX
 not to exceed five (5) years, in case the estate
is settled through the courts, Donor’s tax is not a property tax, but is a tax
 or two (2) years in case the estate is settled imposed on the transfer of property by way of gift
extrajudicially inter vivos.
NOTE: It is a valid transfer of property from one person
The executor, administrator or beneficiary, as the to another without compensation or consideration
case may be, is required to furnish a bond in such therefore (Prentice Hall Federal Tax Course).
amount not exceeding double the amount of tax
and with such sureties as the Commissioner  The donor’s tax law was enacted not only to
deems necessary. prevent estate tax avoidance, but also to
prevent income tax avoidance by reducing
The CIR shall deny the application for extension yearly income and thereby escaping the effect
where the request for extension is by reason of: of the progressive rates of the income tax
 negligence, (Smith vs. Shaughnessy, 318 US 176).
 intentional disregard of rules and regulations,
 or fraud on the part of the taxpayer,  Gift tax is not a property tax but an excise tax
imposed on the privilege of the owner to give.
Liability for Payment It is not a tax on property as such because the
1. Primarily liable: the executor or imposition does not rest upon general
administrator before distributing the net ownership. (Bromley vs. McCaughn, 280 U.S.
estate to the heirs 124)
2. Subsidiarily liable: the heir or beneficiary to NOTE: The spouses are co-owners of conjugal
the extent of his share in the inheritance property. (Art. 174, Civil Code) Thus, a gift
made by the spouses of conjugal property shall
3. The liability of 2 or more executors of be deemed separate donations by the husband
administrators shall be several. and the wife in proportion to their respective
interests. In other words, there will be two
donations made and two separate
computations of donor’s taxes. (Tang Ho vs.
Discharge of Executor or Administrator from Board of Tax Appeals, 97 Phil. 889)
Personal Liability
The executor or administrator, upon payment of BASIC PRINCIPLES
the amount of which he is notified by the CIR upon  It does not apply unless and until there is a
prior application therefrom, shall be discharged completed gift.
from personal liability for any deficiency in the
tax thereafter found to be due and shall be entitled  The transfer is perfected from the moment the
to a receipt or writing showing such discharge. donor knows of the acceptance of the donee.
 Donative intent is not, however, required in

 It is completed by the delivery of the donated transfers of property for less than adequate
property, either actual or constructive. and full consideration. In such a case, donative
intent is superfluous. (Perez vs. Commissioner,
 Renunciation by the surviving spouse of his/her CTA Case 1707, Feb. 10, 1909).
share in the conjugal partnership or absolute
community after the dissolution of the  If the value of the personal property donated
marriage is subject to donor’s tax. exceeds Php5, 000.00, the donation and
acceptance shall be made in writing.
 General renunciation by an heir, including the Otherwise, the donation is void and therefore
surviving spouse, of his/her share in the not taxable.
hereditary estate is not subject to tax, unless
specifically and categorically donee in favor of Q. What constitutes a gift for gift tax purposes?
identified heir/s to the exclusion or A.
disadvantage of the other co-heirs in the 1. Transfer of property without consideration
hereditary estate (direct donation)-with donative intent.
. 2. Sales and exchanges if the consideration
 The donation of a movable may be made orally received is lower than the FMV of the
or in writing. An oral donation requires the property transferred (indirect or deemed
simultaneous delivery of the thing or of the gift).
document representing the right donated.  The amount of donation is the
difference between the consideration
 If the value of the personal property donated received and FMV of property
exceeds Php5,000.00, the donation and the transferred.
acceptance shall be made in writing. Otherwise  No deemed gift if property
the donation shall be void (Art.748, Civil Code). transferred is a real property subject to
6% capital gains tax
 In order that donation of immovable may be
valid, it must be made in a public document “CONSIDERATION”
specifying therein the property donated and Means that when the transferor gives something
the value of the charges which the donee must away and does not at the same time replace it with
satisfy. money of equal value or some goods or services
capable of being valuated in money, he is deemed
 The acceptance may be made in the same deed to have made a gift within the taxing law
of donation or in a separate public instrument (Commissioner vs. Bristol, 121 F(2d) 129).
but it shall not take effect unless it is done
during the lifetime of the donor. And if  Consideration must be measurable in money
accepted in a separate instrument, the donor or money’s worth. Mere legal consideration is
shall be notified thereof in authentic form and not sufficient.
this step shall be noted in both instruments  The consideration must flow to the donor;
(Art.749, Civil Code). mere detriment to the done does not satisfy
the purpose of the statute.
 The donor and the donee must have the
capacity to donate and accept donation Q. When does gift occur?
respectively. A. A gift occurs when the donor surrenders
CONTROL over the property. If the donor
 All persons who may contract and dispose of retains unlimited power to revoke a gift, no gift
their property may make a donation. But the has occurred. If the donor does not relinquish
donee, unlike the donor, need not be control over the property during his lifetime
capacitated. Minors and others who cannot (i.e. right of possession, enjoyment, income),
enter into a contract may become donees. The the donation is a donation mortis causa subject
acceptance, however, shall be done through to the estate tax.
their parents or legal representatives.
 Donations may even be made to conceived and REQUISITES OF VALID DONATION
unborn children and the same may be accepted (CIDA)
by those persons who would legally represent
them if they were already born. 1. capacity of the donor to make donation;
2. donative intent or intent to make a gift on the
 Under the Tax Code however, donation has a part of the donor;
broader meaning. It extends to sales or 3. delivery, whether actual or constructive; and
exchanges for less than adequate and full 4. acceptance of the gift by the done.
consideration in money or money’s worth (Sec.
100, NIRC). Donation for Political Purposes

95
In the case of Cruz vs. CIR, G.R. No. 120721, children, and therefore, donation to him shall not
February 23, 2005, it was held that political or be considered as donation made to stranger.
electoral contributions are considered gifts under
NIRC and are therefore subject to donor’s tax. Donations made between business organizations
 Under the Omnibus Election Code, donations and those made between an individual and a
or any contribution in cash or in kind to any business organization shall be considered as
candidate form an elective position, political donation made to a stranger.
party or coalition of parties for campaign
purposes is not subject to donor’s tax provided Intangible Personal Properties with Situs in the
that the donor and the donee comply with the Philippines - same in estate tax subject to the
requirements of filing tax returns of reciprocity rule
contributions with the Comelec [Sec. 99(c) of
the Tax Code] TRANSFERS WHICH MAY BE CONSTITUTED
AS DONATION
 Donations in kind to politicians, political
parties are subject to 5% withholding tax. a. Sale/exchange/transfer of property for
insufficient consideration
Q. Why is inheritance that has been renounced A sale, exchange or transfer of property for less
for purposes of donor’s tax exempt? than an adequate and full consideration
A. When one of the heirs renounces his share, the constitutes an indirect gift to the extent of the
sane becomes the property of the person to difference where there is no donative intent to
whom the benefit is given and is additional make a gift except in transfers involving real
inheritance of the latter and not donation property classified as capital asset. Where the
from the former. Nothing is received by the consideration or selling price is fictitious in a
heir who makes a renunciation of his share Deed of Sale, the entire value of the property
(BIR Ruling 65-092) transferred shall be subject to donor’s tax.
Tax basis In a sale where the purchase price is payable

The tax for each calendar year shall be computed in installments at a certain rate of interests,
on the basis of the total net gifts made during the the difference between the purchase price
calendar year in accordance with schedule of tax agreed upon by the parties and the fair market
rates prescribed in the law. (Sec. 99 (A), NIRC) value of the property when the purchase was
paid in full is not subject to donor’s tax.
Donor’s Tax Rates
Over But Tax Plus Excess Example: S sold to B a property considered as
Not shall Over ordinary asset for Php200,000.00 which has a
Over be fair market value of Php750,000.00. There is a
- 100K Exempt - - donation of Php.550,000.00 which is subject to
100K 200K 0 2% 100k donor’s tax
200K 500K 2K 4% 200K
500K 1M 14K 6% 500K b. Condonation/Remission of Debt
1M 3M 44K 8% 1M The cancellation and condonation of
3M 5M 204K 10% 3M indebtedness may amount to: a) payment of
5M 10M 404K 12% 5M income tax; b) of donor’s tax; or c) of a capital
10M - 1,004K 15% 10M transaction.
i. If an individual performs services to the

NOTE: When the donee or beneficiary is a creditor, who in consideration thereof
stranger, the tax payable by the donor shall be cancels the debt, income to that amount is
thirty percent (30%) of the net gifts. realized by the debtor as compensation for
his services. Thus, he has realized
compensation income subject to income
STRANGER - A person who is not a: tax.
1. brother, sister (whether by whole or haif
blood), spouse, ancestor, and lineal ii. If, however, a creditor merely desires to
descendant; or benefit the debtor and without any
2. a relative by consanguinity in the collateral consideration or exchange of service
within the 4th civil degree thereof cancels the debt, the amount of the
debt so cancelled is a gift from the creditor
NOTES: to the debtor. To the debtor, this is not a
A legally adopted child is entitled to all the rights gift given out of pure liberality or
and obligations provided by law to legitimate generosity. It started out as an obligation
on his part and when condoned to him such
is a remuneratory donation subject to
income tax. The creditor on the other hand,

shall be subject to donor’s tax if the DETERMINATION OF GROSS GIFT
amount of debt condoned exceeds
Php100,000.00. a. For a resident donor-Real properties, tangible
and intangible personal properties wherever
iii. If a corporation to which a stockholder is located.
indebted condones the debt, the b. For a non-resident donor- Real properties,
transaction has the effect of payment of a tangible or intangible properties located in the
cash dividend in advance. This is a capital Philippines.
transaction. (Sec. 50, rev. Reg. No.2)
COMPOSITION OF GROSS GIFT
Other Transactions Covered by Donor’s Tax:
a. Remuneratory donations
Only properties upon which the donor divests
b. Condonations of debt
himself of CONTROL during his lifetime.
c. Sale of ordinary assets for insufficient
a. Real, intangible and tangible personal
consideration
properties, or mixed located in the
d. Creation of an irrevocable trust
Philippines, and outside the Philippines,
Under the enumeration above, donative
depending on the kind of donor,
intent is not necessary because there are some
b. Franchise which must be exercised in the
instances where donor’s tax is imposed
Philippines
notwithstanding the absence of donative
c. Shares, obligations or bonds issued by any
intent. Such as, where the property, other
corporation or sociedad anonima organized in
than real property classified as capital assets,
the Philippines in accordance with our laws.
is transferred for less than an adequate and
d. Shares, obligations or bonds issued by any
full consideration in money or money’s worth,
foreign corporation, 85% of the business of
then the amount by which the FMV of the
which is located in the Philippines.
property exceeded the value of the
e. Shares, obligations or bonds issued by any
consideration shall, for the purpose of the
foreign corporation if such shares, obligations
donor’s tax, be deemed a gift, and shall be
or bonds have acquired a business situs in the
included in computing the amount of gifts
Philippines.
made during the calendar year.
f. Shares or rights in any partnership, business
or industry established in the Philippines.
TRANSFER FOR LESS THAN
ADEQUATE AND FULL CONSIDERATION Properties subject to donor’s tax when donated:
a. Real and personal property, whether tangible
or intangible, or mixed wherever situated,
General Rule: Where property is transferred for where the donor is a resident or citizen of the
less than an adequate and full consideration. Philippines at the time of the donation and
b. Real and personal property whether tangible
Exception: Transfer of real property classified as or intangible, situated in the Philippines
capital assets are subject to capital gains tax. where the donor is a non-resident alien at the
time of the donation
NET GIFTS
These refer to the economic benefit that accrues to Excluded: Real and personal property situated
the donee. outside the Philippines where the donor is a non-
resident alien at the time of the donation.
 If a done will be given a property he will be
required to assume the mortgage thereon, the
net gift would be the difference between the
FMV of the property donated minus the
mortgage assumed. Rule on intangible properties owned by a non-
 Tax Base-Cumulative net gifts during the resident (not a citizen) donor:
calendar year General Rule: intangible personal property
located in the Philippines belonging to a non-
Amount included in the Net Gift: resident donor, who is not a citizen of the
 The excess of the FMV of the property over the Philippines, is included in the gross gift under the
consideration received shall be deemed a gift. “Reciprocity Clause”
 Some sales of property may be undervalued
intentionally or inadvertently by the parties Except:
thereof. In such situation, the difference a. If the donor at the time of the donation was a
between the true value of the property and the resident of a foreign country which at the time
consideration reflected in the sale will be of giving the gift did not impose a transfer tax
considered as a donation. ( Perez vs. Comm., of any character in respect of intangible
CTA Case No. 1707, February 10, 1909)

97
personal property of citizens of Philippines not 2. If not listed in the stock exchange- The
residing in that foreign country; or book value of the stock at the date of
b. If the laws of the foreign country of which the donation or the date nearest thereto.
donor was resident at the time of donation c. Real property- The current and FMV thereof
allow a similar exemption from transfer taxes as determined by the CIR or the FMV as
of very character in respect of intangible shown in the schedule of values fixed by
personal property owned by citizens of the provincial or city assessor, whichever is
Philippines nit residing in that foreign country. higher, is considered as the FMV as in the
case of the estate tax.
Q. d. Money- The amount thereof is the valuation.
a. X, a non-resident citizen, donated a
property abroad worth 200K to a relative TAX CREDIT FOR DONOR’S TAXES PAID IN A
here (resident citizen). Is the donation FOREIGN COUNTRY
taxable?
b. X, a non-resident alien, donated a property Rule: The donor’s tax imposed by the Tax Code
worth 200K and located in the Philippines upon a donor who was a citizen or a resident at the
to a done abroad. Is the donation taxable? time of donation shall be credited with the amount
c. X, a resident alien, donated shares of stocks of any donor’s taxes imposed by the foreign
of a domestic corporation worth 200K to his country.
brother abroad who is getting married in
two (2) months from date of donation. Is the Limitations:
donation taxable? a. For donor’s tax paid to one foreign country
d. X, a resident citizen, gave a wedding ring The amount of the credit in respect to the tax
(a set of computer valued at 75K) to his paid to any country shall not exceed the same
legitimate daughter on account of her proportion of the tax against which such
marriage within the taxable period. Is the credit is taken, which the net gifts situated
gift subject to Dowry deduction? within such country taxable under the NIRC
e. Are corporations subject to donor’s tax? bears his entire net gift.
A. Tax Credit Limit:

a. The donation is taxable. X, a NRC is Net Gifts in a foreign Philippine
taxed on all donations made within or country X Donor’s Tax
without the Philippines, if the gift given Entire Net Gifts Due
is more than 100K.
b. The donation is taxable. X, a NRA is b. For donor’s taxes paid to two or more foreign
taxed on any donation located in the countries
Philippines, if the value of the gift is more The total amount to the credit shall not exceed
than 100K. the same proportion of the tax against which
c. The donation is taxable, shares of stocks such credit is taken, which the net gifts
of a domestic corporation are considered situated outside the Philippines taxable
property located in the Philippines. under the NIRC bears to this entire net gifts.
Whoever is the donor, if the value
donated is more than 100K, it is taxable. Entire Tax Credit Limit:
d. No. The gift is not subject to dowry Net Gifts Outside the Philippine
deduction, because the gift is exempt Phils. X Donor’s Tax
from donor’s tax. (WHY? Less than 100K) Entire Net Gifts Due
If the value of the gift is more than 100K,
then, the dowry deduction of 10K is
applicable. EXEMPTIONS OF GIFTS FROM DONOR’S TAX
e. Yes. Corporations are also subject to gift Exemptions under the Tax Code:
tax. They are considered gifts to 1. Gifts made by a resident:
strangers; hence the tax rate is 30%. a. dowries
 gifts on account of marriage
VALUATION OF GIFTS MADE IN PROPERTY  before its celebration or
 within one year thereafter by parents
a. Personal property-The FMV thereof at the time to each of their legitimate,
of the gift is considered the amount of the gift. illegitimate or adopted children
b. Shares of Stock  to the extent of the first P10,000
1. If listed in the stock exchange- The average b. gifts made for the use of the national
(mean) of the highest quoted price and the government or any entity created by any
lowest quoted price at the date of the of its agencies which is not conducted for
donation or the date nearest to the date of profit, or to any political subdivision of
donation. said government;
c. gifts in favor of educational, charitable,

religious, cultural or social welfare NOTE: Deductions from gross gift will depend on
corporation, institution, foundations, the classification of the DONOR.
trust or philanthropic organization,
research institutions or organizations, For resident or citizen donor and non-resident not
accredited NGO, provided that not more a citizen donor (RC/NRC/RA/NRA)
than 30% of said gift shall be used by such a. Gifts made to or for the use of the National
donee for administrative purposes Government or any entity created by any of its
(can be deleted) agencies which is not conducted for profit.
b. Gifts in favor of educational and/or charitable
Requirements: and/or Religious Corporation, institution,
a. not more than thirty percent (30%) of foundation, trust, or philanthropic
the said gift should be used for organization or research institution or
administrative purposes; organization. Provided, however, that not
b. the donee must be a non-stock, non- more than 30% of said gift shall be used by
profit organization or institution; such donee for administration purposes.
c. the donee organization or institution
should be governed by trustees who do  These organizations/institutions may be
not receive any compensation; a school, college or university and/or
d. the said donee should not be charitable corporation incorporated as a
authorized to receive dividends; and non-stock entity, paying no dividends,
e. said donee denotes all its income to governed by trustees who receive no
the accomplishments and promotion compensation, and devoting all its
of its purposes. income, whether students’ fees or gifts,
donations, subsidies or other forms of
2. Gifts made by a non-resident alien: philanthropy to the accomplishment and
Only gifts mentioned in letters (b) and (c) are promotion of the purposes enumerated in
exempt. its Articles of Incorporation.
c. Encumbrances on the property donated, if
Exemptions under Special Laws: assumed by the donee.
1. donations to Philippine government for d. The first 100K of the net gifts within the year.
scientific, engineering and technological e. Those provided under special laws.
research, invention and development (R.A.
1606) For resident or citizen donor only (RC/NRC/RA)
2. donations to social welfare, cultural, and  Dowries or gift made on account of marriage
charitable organizations (P.D. 507; R.A. 1916) and before its celebration or within one year
3. donations to the International Rice Research thereafter, by parents to each of their
institute (R.A. 2707) legitimate, recognized natural or adopted
4. donations to Ramon Magsaysay Award children, to the extent of 10K.
Foundation (R.A. 3076)  Gifts from Conjugal Partnership Property
5. donations to the National Museum, the made by the spouse:
National Library and the archives of the The gift is taxable one-half to each donor’s
National Historical Institute (P.D. 373) spouse. The reason is that they are considered
6. donations to the Southern Philippines co-owners of conjugal properties. Neither may
Development Administration (P.D. 690) donate any community property
or conjugal partnership property without the

7. donations to the Intramuros Administration consent of the other, except gifts of moderate
(P.D. 1616) value for charity or on occasion of family
8. donations to Development Academy of the rejoicing or distress.
Philippines (DAP)
9. donations to Integrated Bar of the Philippines  Donation between husband and wife during
(IBP) marriage:
The gift is not taxable, as it is declared void by
ALLOWABLE DEDUCTIONS FROM GROSS law. This rule, however, does not apply to
GIFT: donations mortis causa or to moderate gifts
The tax code imposes the donor’s tax on net gifts, which the spouses may give each other on
implying that from the gross gifts are allowable occasion of any family rejoicing. This
deductions. Nowhere in the law on donation is prohibition applies to persons living together
there a provision entitled “ Deductions from gross as husband and wife without valid marriages.
gifts”. – What the law has is a provision entitled
“Exemptions on certain gifts”. These exemptions  If husband and wife jointly donate, they
should be taken to mean the deductions allowed by are considered separate and distinct tax
law to arrive at the taxable net gifts. payers for purposes of the donor’s tax.

99
treasurer of the city or municipality where the

 Void donations are not subject to donor’s donor is domiciled at the time the transfer, or
tax. Thus, donations of real property sans  If there be no legal residence in the
a public instrument is void- (no donor’s Philippines, with the Commissioner.
tax).
b. Non-resident donor
Donations with encumbrances:  Philippine Embassy or Consulate in the
The encumbrance on the property donated is country where he is domiciled at the time of
deductible from the donor’s tax if the tax is the transfer, or
assumed by the donee.  Directly with the Office of the Commissioner
Gift Splitting -It is a tax scheme to reduce donor’s

taxes in a given year by spreading the gift over the VALUE ADDED TAX
numerous years. This results in view of the fact (VAT)
that donor’s taxes are computed on the basis of the
total net gifts made during the calendar year. This VAT is a tax on consumption levied on sale,
process is not prohibited because it is considered exchange, barter or lease of goods or properties or
as tax avoidance. services in the Philippines and on importation of
goods in to the Philippines whether for
TRUST ARRANGEMENTS consumption or sale.
 Irrevocable trusts are taxed as donation upon
transfer of property to the trustee CHARACTERISTICS OF VAT
 Trust income is subject to income tax but the (1996 Bar)
incidence of the tax depends on the provision
on distribution
1. It is a tax on value added of a taxpayer.
 Transfer of divided interest will make the
2. It is collected through the tax credit method.
usufructuary liable to income tax. Merger of
3. It is a transparent form of sales tax.
the usufruct in the owner of the naked title is
4. It is a broad-based tax on consumption of
not subject to estate tax.
goods, properties or services in the
Philippines. (“Broad-based” means that every
Other implications of inter vivos gift
sale of goods, properties or services at the
 Splitting of gifts during the calendar year to
levels of manufacturers or producers and
avoid cumulative effect of the donor’s tax.
distributors is subject to value added tax.)
 Property donated is not subject to income tax
5. It is an indirect tax.
in the hands of the done but the income from
6. The Philippines adopted the “tax-inclusive
said property is taxable.
method.” (This means that sale of goods by the
 Encumbrances on the property reduces the
supplier must be subject to value added tax in
value of the taxable gift.
order to entitle the buyer who is also subject
to VAT to credit the input tax from the output
DONOR’S TAX RETURN tax on his taxable sales.)
7. There is no cascading in the value added tax
To be filed within thirty (30) days after the gift is system.
made. The return shall be under oath in duplicate NOTE: Tax pyramiding means tax upon a tax.
setting forth:
Nature of VAT:
a. Each gift made during the calendar year a. It is an indirect tax; hence, amount of the tax
which is to be included in computing net gifts; may be shifted or passed on to the buyer.
b. The deductions claimed and allowable;  IMPACT OF TAX is on the seller upon
c. Any previous net gifts made during the same whom the tax has been imposed
calendar year;
d. The name of the donee;  INCIDENCE OF TAX is on the final
e. Relationship of the donor to the donee; and consumer, the place at which the tax the
f. Such further information as may be required tax comes to rest.
by rules and regulations made pursuant to b. It is a privilege tax; hence, the tax is imposed
law. not on the goods, properties or services as
such, but on the sale, barter, exchange or
NOTE: The tax is paid at the time the return is lease of goods or properties, or the sale or
filed within said period. performance of services for a fee,
remuneration, etc.
FILING OF RETURN AND PAYMENT OF TAX c. It is a uniform tax computed at the rate of 0%
a. Resident Donor or 12% of the gross selling price of goods or of
 To an accredited agent bank, RDO, revenue gross receipts realized from the sale of
Collection Officer or duly authorized services.
d. It is an ad valorem tax because it is based on (CESI)

the gross selling price or gross value in money, 1. Sale of commodities or goods (in the course of
or gross receipts derived from the transaction. trade of business).
e. It is a tax on the value added by every seller 2. Exportation (in the course of trade or
as the goods, properties or services pass along business).
the distribution chain, unless the seller is 3. Sale of services (in the course of trade or
exempt. business).
4. Importation (whether or not in the course of
TAX CREDIT METHOD trade or business.
(sometimes called “invoice method”)
IN THE COURSE OF TRADE OR BUSINESS
This refers to the manner by which the value Regular conduct or pursuit of a commercial or an
added tax of a taxpayer is computed. The input economic activity, including transactions
taxes shifted by the sellers to the buyer are incidental thereto, by any person, regardless of
credited against the buyer’s output taxes when he whether or not the person engaged therein is a
in turn sells the taxable goods, properties or non-stock, non-profit private organization
services. (Sec. 105 and 110 [A], NIRC) (irrespective of the disposition of its net income
and whether or not it sells exclusively to members
DESTINATION PRINCIPLE or their guests) or government entity.
(Cross Border Doctrine)
The Cross Border Doctrine states that no VAT VAT ON SALE OF GOODS OR PROPERTIES
shall be imposed to form part of the cost of goods
destined for consumption outside of the territorial Requisites or Elements of Taxable Sale of Goods
border of the taxing authority. Hence, actual and/or Properties:
export of goods and services from the Philippines 1. There must be actual or deemed sale of goods
to a foreign country must be free of VAT; while, or services for valuable consideration in the
those destined for use or consumption within the Philippines;
Philippines shall be imposed with twelve percent 2. The sale must be made by a taxable person in
(12%) VAT. It is also known as the destination the course or furtherance of his business;
principle. 3. For the use consumption in the Philippines;
4. Not exempt from VAT under the Tax code.
PERSONS LIABLE
(Sec. 108, NIRC) TAX BASE and TAX RATE: 12% of the gross
selling price or gross value in money of the goods
1. Any person (Individual, trust, estate, or properties sold, bartered or exchanged, such tax
partnership, corporation, joint venture, to be paid by the seller or transferor.
cooperatives or association) who, in the course
of trade or business, sells, barters, exchanges, Gross Selling Price- the total amount of money or
leases goods or properties, or who undertakes its equivalent which the purchaser pays or is
transactions that are deemed sale for VAT obligated to pay, including any excise tax, to the
purposes. seller in consideration of the sale, barter or
2. Any person who renders selected service, exchange of goods, excluding VAT (Sec. 106,
unless exempted. NIRC).
3. Any person who imports goods whether for
business or non-business purposes. Gross receipts from lease of property covered by
4. It includes all those formerly liable to pay the the VAT law are subject to VAT regardless of the
taxes replaced by VAT except those under place where the contract of lease was executed, if
Section 103. the property on lease is located in the Philippines.
5. Franchise grantees of radio and/or television
broadcasting, whose gross annual receipts for GOODS or PROPERTIES include all tangible and
the preceding calendar do not exceed 10 M and intangible objects which are capable of pecuniary
who has registered under the VAT system. estimation and shall include, among others:
6. In the strict sense, it refers only to: (TEMPR)
manufacturer, producers, wholesalers, 1. Real properties primarily for sale to
retailers, traders, importers, sellers and customers or held for lease in the ordinary
lessors of properties (real and personal) and course of trade or business;
persons rendering selected services like 2. The right or privilege to use patent, copyright,
brokers, contractors, etc. design or model, plan, secret, formula or
7. Taxable Person- refers to any person liable for process, goodwill, trademark, trade brand, or
his payment of VAT whether or not registered other like property;
under the VAT system. 3. The right or privilege to use in the Philippines
of any industrial, commercial, or scientific
TRANSACTIONS COVERED BY VAT equipment;

101
4. The right or privilege to use motion pictures, enterprise to be used in manufacturing,

films, tapes, and discs; and processing, packing or repacking in the
5. Radio, television, satellite transmission and Philippines of the said buyer’s goods, paid
cable transmission time (Sec. 106, NIRC). for in acceptable foreign currency and duly
accounted for in accordance with BSP rules;
SALE OF REAL PROPERTIES held primarily for 3. Sale of raw materials or packaging
sale to customers or held for lease in the ordinary materials (RM/PM) to an export-oriented
course of trade or business of the seller shall be enterprise whose export sales exceed 70% of
subject to VAT. the total annual production;
1. Residential lot with gross selling price 4. Sale of gold to the BSP;
exceeding Php 1.5 million; 5. Those considered export sales under E.O.
2. Residential house and lot or other residential No. 226 (Omnibus Investment Code of 1987)
dwellings with gross selling price exceeding and other special laws;
Php 2.5 million. 6. The sale of goods, supplies, equipment and
fuel (GSEF) to persons engaged in
NOTE: Whether the instrument is nominated as a international shipping or international
deed of absolute sale, deed of conditional sale or transport operations.
otherwise. NOTE: Importations of GSEF by such
persons are VAT-exempt.
SALE OF REAL PROPERTY ON INSTALLMENT
PLAN CONSIDERED EXPORT SALES
The real estate dealer shall be subject to VAT on Without actual exportation, the following shall
installment payments including interest and be considered CONSTRUCTIVELY
penalties, actually and/or constructively received EXPORTED for purposes of these provisions:
by the seller. 1. sales to bonded manufacturing warehouses
of export-oriented manufactures;
 The initial payments of which in the year of the 2. sales to export processing zones;
sale do not exceed twenty-five percent (25%) of 3. sales to registered export traders operating
the gross selling price. bonded trading warehouses supplying raw
materials in the manufacture of export
Gross Selling Price (in case of sale or exchange of products under guidelines to be set by the
real property)- the consideration stated in the board in consultation with the BIR and
sales document of the FMV whichever is higher. If BOC;
the VAT is not billed separately in the document 4. sales to diplomatic missions and other
of sale, the selling price or the agencies and/or instrumentalities granted
consideration stated therein shall be deemed to be tax immunities of locally manufactured,
inclusive of VAT. assembled or repacked products, whether
paid for in foreign currency or not.
b. Foreign Currency Denominated Sales

SALE OF REAL PROPERTY ON A DEFERRED  sales to whom: non-resident
PAYMENT BASIS  of what: goods assembled or
The transaction shall be treated as cash sale manufactured in the Philippines.
which makes the entire selling price taxable in the  except: automobiles and non-essential
month of the sale. goods (jewelries, perfumes, yachts, etc.)
 to whom delivered: resident of the
 The initial payments of which makes the Philippines.
entire selling price taxable of which in the  Paid for in acceptable foreign currency
year of the sale exceed twenty-five percent  Duly accounted for in accordance with the
(25%) of the gross selling price. BSP rules
ZERO-RATED SALES c. Effectively Zero-Rated Transactions

OF GOODS OR PROPERTIES Sales to whom: persons or entities exempted
under special laws or international
a. Export Sales (ANEGEI) agreements to which the Philippines is a
1. Direct importation - the sale and actual signatory
shipment of goods from the Philippines to a
foreign country, paid for in acceptable Effectively zero-rated sales of goods and
foreign currency or its equivalent in goods properties:
or services and accounted for in accordance Refer to the sale by a VAT registered person
with BSP rules; to a person or entity who was granted indirect
2. Indirect importation - the sale of raw tax exemption under special laws or
materials to a non-resident buyer for international agreements. This shall be
delivery to a resident local export-oriented
limited to the local sale of goods and registration by a person who voluntarily
properties to said persons and/or entities. registered in spite of being exempt.
d. Approval of a request for cancellation of
Except for actual export sale, other cases of registration of one who commenced
zero-rated sales shall require prior business with the exception of gross sales
application with the RDO for effective zero- or receipts exceeding Php1.5M, but who
rating. Without an approved application for failed to exceed this amount during the
effective zero-rating, the transaction first 12 months of operation.
otherwise entitled to zero-rating shall be 2. Not subject to output tax – the VAT shall not
considered exempt. apply to goods existing as of the occurrence of
the following:
TRANSACTIONS DEEMED SALE a. Change of control of a corporation by the
acquisition of the controlling interest of
1. Transfer, use or consumption not in the such corporation by another stockholder or
course of business of (1) goods or properties for groups of stockholders.
sale (2) goods to be used in the course of b. Change in the trade or corporate name of
business. the business.
a. When the VAT-registered person c. Merger or consolidation of a corporation.
withdraws goods from his business for his
personal use. VAT ON IMPORTATION OF GOODS
b. A domestic corporation instead of selling
all its products to an exclusive dealer TAX BASE and TAX RATE: 12% based on:
distributed some of its employees – 1. Total value used by the BOC in determining
subject to VAT, because the articles could tariff and customs duties, plus customs
have been used in trade. duties, excise taxes, if any, and other charges;
or
2. Distribution or transfer: 2. Landed cost in case the valuation used by the
a. to shareholders or investors as share in BOC is based on volume and quantity. Landed
the profits of the business; cost consists of the invoice amount, customs
Property dividends which are distributed duties, freight, insurance and other charges
by the company to its shareholders and and also excise tax, if any.
declared out of retained earnings shall be
subject to VAT based on the market value Same rule applies to technical importation of
or zonal valuation, whichever is higher, goods sold by a person located in a Special
at the time of receipt to creditors in Economic Zone to a customer located in a customs
payment of debt or obligation. territory (Rev. Reg. No. 16-2005 Sec. 4, 107-1).
3. Goods consigned and not sold within 60 days
from date of consignment. Consigned goods
returned by the consignee within the 60-day
period are not deemed sold.
4. Retirement from or cessation of business with Technical Importation
respect to inventories of taxable good Sale of goods by a PEZA registered enterprise to a
(including capital goods) then existing buyer from the customs territory shall be treated
whether or not the business is continued by as a technical importation. Such buyer shall be
the new owner or successor. treated as an importer thereof and shall be
imposed with the corresponding import taxes.
CHANGES IN OR CESSATION OF STATUS OF
VAT-REGISTERED PERSON Importer refers to any person who brings goods
into the Philippines, whether or not made in the
1. Subject to tax – the VAT provided for in Sec. course of trade or business. It includes non-exempt
100 shall apply to goods originally and capital persons or entities who acquire tax-free imported
goods which exist as of the occurrence of the goods from exempt persons, entities or agencies.
following:
a. Change of business activity value-added TRANSFER OF GOODS BY TAX EXEMPT
taxable status to exempt status. PERSONS
b. Approval of a request for cancellation of Where the importer is exempt from VAT and such
registration due to reversion to exempt goods imported were subsequently sold,
status for failure to go beyond Php1.5M transferred or exchanged in the Philippines to a
sales for 2 consecutive taxable years. non-exempt person or entity, the non-exempt
c. Approval of a request for cancellation of purchaser, transferee or recipient shall be
VAT-registration due to a desire to revert considered as the importer and shall be liable for
to exempt status after the lapse of 2 VAT due on such importation.
consecutive years from the time of VAT-

103
VAT ON THE SALE OF SERVICE AND USE OR Investments or the Export Development
LEASE OF PROPERTIES Council in processing, converting or
manufacturing goods;
Sale or Exchange of Services – performance of all 6. Transport of passengers and cargo by air or
kinds of services in the Philippines for a fee, sea vessels from the Philippines to a foreign
remuneration or consideration whether in kind or country;
in cash (refer to Sec. 108, NIRC for complete list). 7. Sale of power or fuel generated through
renewable sources of energy.
TAX BASE and TAX RATE: 12% of the gross
receipts derived from the sale or exchange of NOTE: The sale of power or fuel is the one being
services, including the use or lease of properties subject to 0% and not the operation or
maintenance of such energy sources.
Gross Receipts- the total amount of money or its
equivalent representing the contract price, Zero-Rated VAT Transaction vs. Exempt
compensation, service fee, rental or royalty Transaction
including the amount charged for materials
supplied with the services and deposit applied as A zero-rate sale of goods, properties and/or
payments for services rendered and advance services (by a VAT-registered person) is a taxable
payments actually or constructively received transaction for VAT purposes, but shall not result
during the taxable period for the services in any output tax. However, the input tax on
performed or to be performed for another person, purchase of goods, properties or services related to
excluding VAT. such zero-rated sale, shall be available as tax
credit or refund in accordance with existing
ZERO-RATED SALES OF SERVICES regulations. Under this type of sale, no VAT shall
(POSIST-R) be shifted or passed-on by VAT-registered
sellers/suppliers form the Custom Territory on
their sale, barter or exchange of goods, properties
1. Processing, manufacturing or repacking of
or services to the subject registered Freeport Zone
goods
enterprises.
for: persons doing business outside the
A VAT-exempt transaction, on the other hand,
Philippines
refers to the sale of goods, properties or services or
the use or lease of properties that is not subject to
when: the goods are subsequently exported
VAT (output tax) under Section 109 of the Tax
Code. The seller/supplier is not allowed any tax
credit of VAT (input tax) on purchases related to
such exempt transaction. (Revenue Memorandum
Circular No, 50-2007)
ZERO-RATED EXEMPT
 paid for in acceptable foreign currency
All VAT is removed Removes the VAT
AND duly accounted for in accordance
from the goods, only at the exempt
with the BSP rules;
activity or stage
transaction.
2. Services other than those provided in No.2(a)
The taxpayer can The taxpayer is not
rendered to:
claim the refund or entitled to credit or
a. persons engaged in business outside the
input taxes passed on refund of the input tax
Philippines or;
to him by the passed on to him by
b. non-resident persons not engaged in
supplier, etc. or the supplier, etc.
business
credit such input
c. when the services were rendered
taxes on his non-zero-
d. paid for in acceptable foreign currency
rated transactions.
duly accounted for in accordance with
BSP rules Generally, taxable It is not taken into
3. Services rendered to exempt entities under sales are taken into account in
special laws and international agreements to account in determining turn-over
which the Philippines is a signatory; determining turn- or VAT registration
4. Services rendered to persons engaged over sales or sale for purposes.
exclusively in international shipping/ VAT registration
international air transport operations; purposes.
5. Those performed for an enterprise whose
export sales exceed 70% of the annual
production, by subcontractors and/or VAT EXEMPT TRANSACTIONS
contractors duly accredited by the Board of
VAT exempt transactions in general
It is the transaction where the sale of goods, 6. Services by agricultural contract growers and
properties or services and the use or lease of milling for others of RiCo Su (rice, corn grits,
properties are not subject to VAT (Output tax) and sugar cane);
the seller or lessor is not allowed to any tax credit
on VAT (input tax) previously paid. 7. Medical, dental, hospital and veterinary
services except those rendered by
The person making the exempt sale or lease of professionals;
goods, properties or services shall not bill any
output tax to his customers because the said 8. Educational services rendered by government
transaction is not subject to VAT. On the other educational institutions and private
hand, a VAT-registered purchaser or lessee of educational institutions accredited by DepEd,
goods, properties or services which are exempt CHED, TESDA;
from VAT is not entitled to any input tax on such
purchase or lease despite the issuance of a VAT 9. Services rendered pursuant to an employer-
invoice or receipt. employee relationship;
EXEMPT TRANSACTIONS: 10. Services rendered by regional or area

1. Sale/ importation of agricultural and marine headquarters established by Multinational
food products in their original state; livestock Corporations;
and poultry generally used for human
consumption; 11. Transactions exempt under special laws and
international agreements to which the
NOTE: Products are considered in their Philippines is a signatory except those under
original state even if they have undergone P.D. 529;
simple processes of preparation or preservation
for the market freezing, drying, salting, 12. Sales by agricultural cooperatives registered
broiling, roasting, smoking, and stripping and in good standing with the Cooperative
(FreD’S BroSS) Development Authority (CDA) to:
 their members – whether or not the
Rice, corn grits, sugar cane, molasses are cooperative is the producer
always considered in their original state (RiCo  non-members – only if the cooperative is a
SuMo) producer, whether in its original state or
processed form
2. Sale/ importation of fertilizers; seeds, seedlings  importation of direct farm inputs,
and fingerlings; fish, prawn, livestock and machineries and equipment, including
poultry feeds; spare parts thereof, to be used directly and
exclusively in the production and/or
3. Importation of personal and household effects, processing of their produce shall also be
provided: exempt.
a. The effects belong to residents returning NOTE: Sale or importation or agricultural

to/or non-residents coming to resettle in food products in their original state is exempt
the Philippines. from VAT irrespective of the buyer or seller
b. The effects are exempt under Tariff and thereof;
Customs Code.
13. Gross receipts from lending activities by
4. Importation of professional instruments and credit of multi-purpose cooperatives
implements, wearing apparel, domestic registered with the CDA;
animals except vehicle, vessel, aircraft and
machinery used to manufacture any 14. Sales by non-agricultural, non-electric and
merchandise in commercial quantity, provided: non-credit cooperatives registered with the
a. the effects belong to persons coming to CDA, provided that the share capital
settle in the Philippines contribution of each member does not exceed
b. accompanying such persons or arriving Php15,000 and regardless of the aggregate
within 90 days before or after their capital and net surplus ratably distributed
arrival among members
c. the effects are for their own use and not  importation of these cooperatives of
for sale machineries and equipment, including
d. evidence should be produced before the spare parts thereof, to be used by them
Commissioner that the change or are subject to VAT;
Residence is bona fide
15. Export sales by persons who are not VAT-
5. Services subject to percentage tax; registered;

105
16. Sale of real property NOTES:

Sales exempt: A VAT registered person may elect that the
a. not primarily held for sale to customers or exemption shall not apply to his sales of goods,
held for lease in the ordinary course of properties or services. Once election is made, it
trade or business; shall be irrevocable for a period of three (3) years
b. utilized for low-cost housing counted from the quarter when the election was
c. utilized socialized housing; made, except for franchise grantees of radio and
d. residential lot valued at Php1.5 million TV broadcasting whose annual gross receipts for
and below; the preceding year do not exceed Php10 million
e. house and lot and other residential where the option is perpetually irrevocable. (Rev.
dwellings valued at Php2.5 million and Reg. No. 4-2007).
below;
f. two or more adjacent residential lots VAT-registered person may elect so that an input
where the aggregate value does not tax may be deducted from the output tax as input
exceed Php1.5 million tax credit unlike in exempt transactions where it
is not subject to output tax and the seller is not
Even if the real property is not primarily held allowed any tax credit of input tax on purchases.
for sale to customers or held for lease in the
ordinary course of trade or business but the The imposition of VAT on toll fees cannot be
same is used in the trade or business of the deemed a “tax on tax” as toll fees are not taxes.
seller, the sale thereof shall be subject to VAT Toll fees, which are collected by private tollway
being a transaction incidental to the operators as reimbursement for the costs and
taxpayer’s main business expenses incurred in the construction,
maintenance, and operation of tollways as well as
17. Lease of residential units if the monthly to insure the operators a reasonable margin of
rental income, are not assessed and collected by the BIR
 less than Php12,800, regardless of the and do not go to the general coffers of the
aggregate rentals received by the lessor government.
 exceeds Php12,800 but the aggregate
rentals received by the lessor do not Although toll fees are charged for the use of public
exceed Php1.5 million, however the same facilities, they are not government exactions that
shall be subject to 3% percentage tax; can be properly treated as tax.
18. Sale/ importation, printing, publication of Even if toll fees were deemed as a “user's tax,”
books and any newspaper, magazine, review VAT on tollway operations still cannot be held as
or bulletin, which appear at regular intervals a “tax on tax” due to the nature of VAT as an
with fixed price for subscription and which are indirect tax. Tollway operators, as the seller of
not devoted principally for paid services, are directly liable for the VAT. VAT is
advertisements; assessed against the tollway operators' gross
receipts and not necessarily on the toll fees.
19. Sale/ importation, or lease of passenger or Although operators may shift the VAT burden to
cargo vessels and aircraft including engine, tollway users, it will not make the latter directly
equipment and spare parts thereof for liable for the VAT as the shifted VAT simply
domestic or international transport becomes part of the toll fees.
operations weighing 150 tons and above;
In this connection, the Court held that it cannot
20. Importation of (GSEF) goods, supplies, be bound by the discussion in Manila
equipment and fuel by persons engaged in International Airport Authority vs. CA which
international shipping and air transport equated “terminal fees” to a “user's tax” as the
operations; case's discussion on toll roads and toll fees was
made, not to establish a rule that tollway fees are
21. Services of banks, non-bank financial user's tax, but to make the point that airport lands
intermediaries performing quasi-banking and buildings are properties of public dominion
activities; and that the collection of terminal fees for their
use does not make them private properties.
22. Sale or lease of goods, properties or services
where the gross annual sales and/or receipts (DIAZ vs. SECRETARY OF FINANCE, JULY 19,
do not exceed P1, 919,500. 2011)
Any person exempt as aforementioned from
the payment of VAT and who is not a VAT- PHILHEALTH’s services are not VAT-exempt.
registered person shall pay a tax equivalent to Those exempted from VAT are those engage in the
three percent (3%) of his gross quarterly sales performance of medical, dental, hospital and
or receipts. veterinary services except those rendered by
professionals.
INPUT TAX – the value-added tax due from or

PHILHEALTH is not actually rendering medical paid by a VAT-registered person in the course of
service but merely acting as a conduit between the his trade or business on importation of goods or
member and their accredited and recognized local purchase of goods or services, including lease
hospitals and clinics. It merely provide and or use of property, from a VAT-registered person.
arranges for the provision of pre-need health care
services to its members for a fixed prepaid fee for OUTPUT TAX – the value-added tax due on the
a specified period of time; that it then contracts the sale or lease of taxable goods or properties by any
services of physicians, medical and dental person required to register
practitioners, clinics and hospitals to perform such
services to its enrolled members; and that it enters SOURCES OF INPUT TAX
into contract with clinics, hospitals, medical
professionals and then negotiates with them a. Purchase or importation of goods (a) for sale or
regarding payment schemes, financing and other (b) for conversion into or intended to form part
procedures in the delivery of health services. of a finished product for sale, including
packaging materials or (c) for use as supplies
As PHILHEALTH does not actually provide in the course of business or (d) for use as raw
medical and/or hospital services, as provided materials supplied in the sale of services, or (e)
under Section103 on exempt transactions, but for use in trade or business for which deduction
merely arranges for the same, its services are not for depreciation or amortization is allowed
VAT-exempt. (Commissioner of Internal Revenue under the Tax Code.
vs. Philippine Health Care Providers Inc., G.R. No. b. Purchase of services in which a VAT has
168129, April 24, 2007) actually been paid
c. Purchase of real properties for which a VAT
Gross receipts derived from sales of admission has actually been paid
tickets in showing motion pictures is not subject to d. Transactions deemed sale for VAT purposes
VAT. The legislative intent is not to impose VAT e. Transitional input tax
on persons already covered by the amusement tax. f. Presumptive input tax
g. Transitional input tax credits allowed under
The repeal by the Local Government Code of 1991 the transitory and other provisions under VAT
of the Local Tax Code transferring the power to regulations
impose amusement tax on cinema/theater
operators or properties to the local government did
not grant nor restore the said power to the
national government nor did it expand the
coverage of VAT. The power to impose amusement
tax on cinema/theater operators or properties Creditable Input Tax
remains with the local government.
(Commissioner of Internal Revenue vs. SM Prime It is any input tax on the following transactions
Holdings, Inc., G.R. Ni. 185305, February 26, evidenced by a VAR invoice or official receipt
2010) issued by a VAT-registered person shall be
creditable against output tax:
Distinguish VAT-exempt transactions from VAT- a. Purchase/Importation
exempt entities. 1. for sale; or
2. for conversion into or intended to form part
An exempt transaction involves goods or services of a finished product for sale including
which, by their nature, are specifically listed in packaging materials; or
expressly exempted from VAT under the Tax 3. for use as supplies in the course of
Code, without regard to the tax status – VAT- business; or
exempt or not – of the party to the transaction. 4. for use as materials supplied in the sale of
services; or
An exempt party, on the other hand, is a person or 5. for use in trade or business for which
entity granted VAT exemption under the Tax deduction for depreciation or amortization
Code, a special law or an international agreement is allowed; or
which the Philippines is a signatory, and by virtue b. Purchase of services on which a VAT has
of which its taxable transactions become exempt actually been paid creditable to:
from VAT. (Commissioner of Internal Revenue vs. 1. the purchaser upon consummation of the
Seagate Technology, G.R. No. 153866, February sale and on importation of goods and
11, 2005) properties
2. the importer upon payment of the VAT
prior to the release of the goods from
custom’s custody
INPUT AND OUTPUT TAX 3. to the purchaser, lessee or licensee upon
payment of the compensation, rental,

107
royalty or fee, in case of purchase of  12% of the total value used by the Bureau
services or lease or use of properties of Customs in determining tariff and
customs duties, excise taxes and other
Q: When may property dividends be subject to charges; or
VAT?  12% of the landed cost plus excise taxes
A: Property dividends which constitute stocks in where the customs duties are determined
trade or properties primarily held for sale or on the basis of the quantity or volume of
lease declared as retained earnings on or after the goods
January 1, 1996 and distributed by the  such tax shall be paid by the importer
company to its shareholders shall be subject to prior to the release of the goods from
VAT based on the zonal value or fair market Customs’ custody
value at the time of distribution whichever is
applicable. 3. for the Sale of Services and Use or Lease of
Properties
TRANSITIONAL INPUT TAX  12% of the “gross receipts” derived from
the sale or exchange of services
Transitional input tax on the inventory on hand as
of the effectivity of the VAT registration of: RULES on Input Tax on Capital Goods:
1. Taxpayers who became VAT-registered a. if the aggregate acquisition cost of the capital
persons upon exceeding the minimum goods, excluding VAT, exceeds P1, 000,000;
turnover of Php1.5 million in any 12-month and
period; or b. where such goods are purchased or imported
in a calendar month for use in trade or
2. Voluntarily registers as a VAT payer even if business for deduction for depreciation is
turnover does not exceed Php1.5 million; allowed;
c. then, the input tax shall be spread evenly over
3. Whichever is higher between: a period of 60 months, commencing from the
a. 2% of the value of the beginning inventory month the acquisition was made
on hand; or d. provided, however, that if the estimated
b. Actual VAT paid on such goods, materials useful life of such goods is less than 5 years,
and supplies then the input VAT shall be spread over such
shorter period.
The amount is creditable against the output tax of
a VAT-registered person. Deductions or Exclusions from Gross Sales/
Receipts
1. Discounts
Presumptive Input Tax a. Must be determined and granted at the
time of sale
Persons engaged in the: b. Expressly indicated in the invoice
1. Processing of sardines, mackerel and milk; c. The amount thereof forms part of the gross
2. Manufacturing refined sugar, cooking oil and sales duly recorded in the books of the
packed noodle-based instant meals. seller
 The presumptive input tax shall be 4% of d. The grant of which does not depend upon
the gross value in money of their the happening of a future event
purchases of primary agricultural
products which are used as inputs to their 2. Sales Returns and Allowances
production. a. A proper credit or refund was made
 The amount is creditable against the b. The sales previously recorded as taxable
output tax of a VAT-registered person. sales
Allocation of Input Tax on Mixed Transactions

DETERMINATION OF OUTPUT/INPUT TAX;
A VAT-Registered person also engaged in non-
VAT PAYABLE; Computation of VAT Payable or
vatable transactions shall be allowed tax credit as
EXCESS INPUT CREDIT TAX
follows:
a. total input tax directly attributable to vatable
1. for the Sale of Goods or Properties transactions;
 12% of the “gross selling price” or gross b. a ratable portion of any input tax which
value in money (effective February 1, cannot be directly attributed to either
2006) activity.
NOTE: Such tax shall be paid by the seller or EXCESS Output (O) or Input (I) Tax
the transferor. a. if, O > I ; then, the excess shall be paid by the
VAT-registered person
2. for the Importation of Goods
b. if, I > O; then, the excess shall be carried over allocated proportionately on the basis of the
to the succeeding quarters or quarters, volume of sales
provided: b. in case of a person making zero-rated and non
1. the input tax carried over from the zero-rated sales, the input tax shall be
previous quarter shall not exceed 70% of allocated ratably between his zero-rated and
the output VAT non zero-rated sales
2. the input tax attributable to zero-rated
sales may, at the option of the taxpayer, be Who may claim for refund or apply for issuance of
refunded or credited against other internal Tax Credit Certificate (TCC)
revenue taxes 1. The purchaser of the domestic goods or
3. The excess input tax to be carried over properties upon consummation of the sale and
from the preceding month or quarter shall on the importation of said goods or properties;
be reduced by: 2. The importer upon payment of VAT prior to
a. amount of claim for refund or tax credit the release of goods from customs custody;
for VAT 3. The purchaser of services or the lessee or the
b. other adjustments, such as purchase licensee upon payment of the compensation,
returns or allowances rental, royalty or fee.
c. input tax attributable to exempt sales
Period to file claim or apply for issuance of TCC
Substantiation of Input Tax Credits  Any VAT-registered person whose sales of
1. In cases involving claims for refund of input goods, properties or services are zero-rated or
VAT, the claimant must substantiate its claim effectively zero-rated may, within two (2) years
by presenting duly registered official receipts after the close of the taxable quarter when the
and invoices. sales were made, apply for the issuance of a
2. It is important to present in evidence the TCC or refund of the creditable input tax or
invoices pertaining to the taxable sales and paid attributable to such sale.
the corresponding input VAT.
 The CIR shall grant a refund or issue the tax
REFUND OR TAX CREDIT OF credit certificate for creditable input taxes
EXCESS INPUT TAX within 120 days form the date of submission of
complete documents in support of the
Refunds or Tax Credits for Zero-Rated or appliaction filed. The taxpayer affected may,
Effectively Zero-Rated Sales within 30 days from the receipt of the decision
a. taxpayer must be VAT-registered; otherwise, denying the claim or after the expiration of the
the transaction is exempt which does not 120-day period, appeal the decision or the
entitle him to any refund or tax credit; unacted claim with the Court of Tax Appeals.
b. application for a tax credit certificate or
refund must be made within 2 years after the Manner of Giving Refund
close of the taxable quarter when the sales Refunds shall be made upon warrants drawn by
were made; the CIR or by his duly authorized representative
c. to the extent that the input tax has not been without the necessity of being countersigned by
applied against output tax. the Chairman of Commission on Audit, the
d. the transactions are paid for in an acceptable provisions of the Administrative Code of 1987 to
foreign currency and duly accounted for in the contrary notwithstanding: Provided, that
accordance with BSP rules. refunds under this paragraph shall be subject to
e. in the case of a person whose registration is post audit by the Commission on Audit.
cancelled due to retirement from or cessation
of business, or due to changes in or cessation INVOICING REQUIREMENTS
of status, the application may be made within
2 years from the date of cancellation. A VAT-registered person is required to issue:
f. in other appropriate cases, the Commissioner 1. a VAT invoice for every barter, sale or
shall grant refund or issue the tax credit exchange of goods or properties; and
certificate for creditable input taxes within 2. a VAT official receipt for every lease of goods or
120 days from the date of submission of properties and for every sale, barter of or
complete documents in support of the exchange or services.
application
The VAT invoice or VAT official receipt shall state
Rules where the taxpayer is engaged in zero-rated the following:
or effectively zero-rated transactions and also in 1. A statement that the seller is a VAT
taxable or exempt sales registered person, followed by his Tax
a. the amount of the creditable input tax due or Identification Number (TIN);
paid which cannot be directly and entirely 2. The total amount which the purchaser pays or
attributed any one of the transactions shall be is obliged to pay to the seller with the

109
indication that such amount includes the properties and services subject to VAT, if the
VAT, provided that: aggregate amount of actual gross sales or
a. the amount of the tax shall be shown as a receipts exceed Php1.5 million for any twelve
separate item in the invoice or receipts; month period;
b. if the sale is except from VAT, the term
“VAT-exempt sale” shall be written or 2. A person required to register as VAT taxpayer
printed prominently on the invoice or but failed to register;
receipt
c. if the sale is subject to zero percent (0%) 3. Any person who imports goods; and
VAT, the term “zero-rated” shall be
written or printed prominently on the 4. Professional practitioners (R.A. 7716 and
invoice or receipt 9010)
d. the date of transaction, quantity, unit
cost and description of the goods or Services of Professional Practitioners are
properties or nature of the service; subject to:
3. In the case of sales in the amount of one a. VAT if the gross professional fees exceed
thousand pesos or more where the sale on Php1.5 million for a 12-month period; or
transfer is made to a VAT-registered person, b. 3% Percentage Tax if the gross
the name, business style, if any, address and professional fees does not exceed Php1.5
TIN of the purchaser, customer or client. million for a 12-month period
Consequences of Issuing Erroneous VAT Invoice “Professional Practitioners” include

or VAT Official Receipt 1. Certified Public Accountants;
1. If a person who is not a VAT-registered person 2. Insurance Agents (life or non-life);
issues an invoice or receipt showing his TIN, 3. Other professional practitioners required
followed by the word “VAT”: to pass the government examinations.
a. The issuer shall, in addition to any liability
to other percentage taxes, be liable to: WITHHOLDING OF VAT
i. The tax imposed in Sec. 106 or 108 (Sec 114 [C ])
without the benefit of any input tax
credit The Government or any of its political
ii. A 50% surcharge under Sec. 248 (B) subdivisions, instrumentalities or agencies,
b. The VAT shall, if other requisite including GOCCs shall, before making payment
information required under subsection (b) on account of purchase of goods and services
hereof is shown on the invoice or receipt, deduct and withhold a final VAT at the rate of 5%
of the gross payment thereof.
be recognized as an input tax credit to the
purchaser under Sec. 110. The payment for lease or use of properties or
property rights to non-resident owners shall be
2. If a VAT-registered person issues a VAT subject to 10% withholding tax at the time of
invoice or VAT official receipt for a VAT- payment.
exempt transaction, but fails to display
prominently on the invoice or receipt the term
“VAT-exempt sale”, the issuer shall be liable COMPLIANCE REQUIREMENTS
to account for the tax imposed in Sec. 106 or
(INTERNAL REVENUE TAXES)
108 as if Sec. 109 did not apply.
ADMINISTRATIVE REQUIREMENTS
FILING OF RETURN AND PAYMENT OF VAT
Registration Requirements
Every person liable to pay VAT shall file a
Any person who, in the course of trade or business,
quarterly return of the amount of his gross sales
sells, barters, or exchanges goods or properties or
or receipts within twenty-five (25) days following
engages in the sale or exchange of services shall be
the close of each taxable quarter.
liable to register if:
 The payment of the VAT shall be made on a
a. His gross sales or receipts for the past twelve
monthly basis.
(12) months, other than those that are exempt
under Sec 109 (1) (a) to (w) of the NIRC, have
 Taxable quarter shall mean the quarter that is
exceeded P 1,919,500.
synchronized to the income tax quarter of the
b. there are reasonable grounds to believe that
taxpayer (i.e., the calendar year or fiscal year)
his gross sales or receipts for the next twelve
months, other than those that are exempt
Required to File a VAT Return
under Sec. 109 (1) (A) to (w) of the NIRC will
1. Every person or entity who in the course of his
exceed P 1,919,500.
trade or business, sells or leases goods,
The taxpayer requesting for transfer shall file the

Annual Registration Fees Application for Update Form with the old RDO,
The taxpayer must pay: copy-furnished the new RDO. It shall be the duty
1. upon registration; and of the old RDO to transfer the accountabilities of
2. every year thereafter the taxpayer to the new RDO where he is
3. on or before January 31 transferring. Both the new and the old RDO shall
4. an annual Registration Fee - Five Hundred be responsible in notifying the taxpayer concerned
Pesos (Php500.00) that the transfer of registration has already been
5. for every separate or distinct establishment or effected.
place of business
6. paid to an authorized agent bank Cancellation of Registration
7. located within the revenue district, or to the The cancellation of registration of the taxpayer
Revenue Collection Officer, or duly authorized may either pertain to cancellation of business
Treasurer of the city or municipality where registration and/or TIN. The cancellation of the
each place of business or branch is registered. former shall not automatically cancel the latter.
Registration of each type of internal revenue tax TIN is cancelled upon:

A taxpayer engaged in business is required to a) Death of an individual;
register each type of internal revenue tax for b) Dissolution, merger or consolidation of
which he is obligated to file a return and pay the juridical person;
corresponding tax. c) Discovery of a taxpayer having multiple TINs;
and
New VAT Exemption Thresholds d) Payment of estate tax by the heirs,
(Revenue Regulations No. 16-2011), (effective administrator or executor (TIN of the estate).
January 1, 2012)
The cancellation of business registration may be
OLD NEW granted on the following instances:
Sale of residential P 1,500,000 P 1,919,500 a) Closure/Cessation of business operation;
lot b) Dissolution of corporation/partnership;
Sale of residential P 2,500,000 P 3,199,200 c) Merger/Consolidation;
house and lot or d) Death of an individual.
other residential
dwellings Suspension of Business Operation
The CIR is empowered to suspend the business
operations and temporarily close the business
Sale or lease of P 1,500,000 P 1,919,500
goods or
establishment of any person (natural or juridical)
properties or the
for duration of not less than five (5) days for any of
performance of
the following violations:
services
a. In the case of VAT-registered person
Lease of P P
residential units 10,000/mo. 12,800/mo.
1. Failure to issue receipts or invoices:
regardless of the
2. Failure to file VAT return; and
amount of
3. Understatement of taxable sales or
aggregate rentals
receipts by 30% or more.
received
b. Failure of a VAT-registered person to register
by the lessor during
the Year
NOTE: The temporary closure does not apply to
exporters who fail to register.
Transfer of Registration
In case a taxpayer transfers his place of business Changes in or Cessation of Status of a VAT-
or his head office or branches, changes his registered Person:
registration information, or ceases to be liable to a 1. Subject to tax – the VAT provided for in Sec.
tax type, he must update his registration status. 100 shall apply to goods originally and capital
goods which exist as of the occurrence of the
Other Updates following:
The registration of employees of the transferring a. Change of business activity value-added
employers shall simultaneously be transferred to taxable status to exempt status.
the new RDO once the transfer of registration of b. Approval of a request for cancellation of
the employer is effected. registration due to reversion to exempt
status for failure to go beyond Php1.5M
Transfer of Business Registration sales for 2 consecutive taxable years.
c. Approval of a request for cancellation of
VAT-registration due to a desire to revert

111
to exempt status after the lapse of 2 These are reports prepared by the taxpayer
consecutive years from the time of VAT- showing to internal revenue officers an
registration by a person who voluntarily enumeration of taxable amounts and description
registered in spite of being exempt. of taxable transactions, allowable deductions,
d. Approval of a request for cancellation of amounts subject to tax and the tax payable by the
registration of one who commenced taxpayer to the government.
business with the exception of gross sales
or receipts exceeding Php1.5M, but who INDIVIDUAL TAX RETURN
failed to exceed this amount during the
first 12 months of operation. Who are required to file?
2. Not subject to output tax – the VAT shall not 1. Resident citizen;
apply to goods existing as of the occurrence of 2. Non-resident citizen on income from within the
the following: Phils.;
a. Change of control of a corporation by the 3. Resident alien on income from within the
acquisition of the controlling interest of Phils.;
such corporation by another stockholder or 4. NRAETB on income from within the Phils.;
groups of stockholders. 5. An individual (citizen or alien) engaged in
b. Change in the trade or corporate name of business or practice of a profession within the
the business. Phils. regardless of the amount of gross income;
c. Merger or consolidation of a corporation. 6. Individual deriving compensation income
concurrently from two or more employers at
NOTE: Agencies can refuse to do business with any time during the taxable year;
vendors who fail to submit a TIN. 7. Individual whose pure compensation income
derived from sources within the Philippines.
NOTE: (Please see discussion on INVOICING exceeds P60, 000;
REQUIREMENTS above) 8. If the income tax withheld from the
compensation income was erroneous;
Exhibition of certificate of payment at place of 9. Citizens working abroad receiving income from
business sources within the Philippines.
The certificate shall be kept conspicuously
exhibited in plain view in or at the place of
business; and in case of a peddler or other persons
not having a fixed place of business, the same shall Return of Husband and Wife
be kept in the possession of the holder  the income taxes of husband and wife are
computed separately
thereof, subject to the production upon demand of  but they are required to file only one income
any internal revenue officer. tax return to include both their incomes.
 when it is not practicable to file one return,
Continuation of business of deceased person then they may file separate returns.
No additional payment that is required for the  these returns will then be consolidated by the
residue of the term which the tax was paid, BIR for verification purposes.
Provided: Return of Parent to Include Income of Children

1. the person/s interested in the estate General Rule: The income of the unmarried minor
2. should submit to BIR or regional or revenue shall be included in the income tax return of his
District Office parent.
3. inventories of goods or stocks had at the time
of such death Exception:
4. within 30 days from death of the decedent 1. when the donor’s tax has been paid on such
 This requirement is also applicable in the property; or
case of transfer of ownership or change of 2. where the tansfer of such property is exempt
name of the business establishment. from donor’s tax.
Removal of business to other location Return of Persons Under Disability

Any business which has paid the annual The income tax return of any person who is
registration fee, subject to the rules and handicapped or disabled shall be filed by:
regulations prescribed by the Sec. of Finance, upon 1. his duly authorized agent, or
recommendation of the CIR, be removed and 2. representative, or
continued in any other place without the payment 3. by his guardian, or
of additional tax during the term for which the 4. any other person charged with the care of his
payment has been made. person or property.
TAX RETURNS If the return filed is erroneous, false or fraudulent,

the statutory taxpayer and his representative or
guardian shall assume the tax liability including Except where the Commissioner otherwise
all the penalties imposed relative thereto. permits, the return shall be filed:
 If person has legal residence or place of
Who are NOT required to file? business in the Philippines – with an
1. Individual whose gross income does not exceed authorized agent bank, Revenue District
total personal and additional exemptions; Officer, Collection Agent or duly authorized
2. An individual with respect to pure compensation Treasurer of the city or municipality in which
income, derived from such sources within the such person has his legal residence or
Philippines, the income tax on which has been principal place of business in the Philippines
correctly withheld; Provided, That an individual  If there be no legal residence or place of
deriving compensation concurrently from two or business in the Philippines - with the Office of
more employers at any time during the taxable the Commissioner.
year shall file an income tax return (R.A. 9504);
3. Individual whose sole income has been Taxable Year of Corporations
subjected to final withholding income tax; 1. Calendar period – starts January 1 and
4. A minimum wage earner or an individual who ends on December 31.
is exempt from income tax pursuant to the 2. Fiscal period – starts on the 1st day of any
provisions of this Code and other laws, general month other than January and ends 12
or special. (R.A. 9504) months thereafter.
Where to File: The Corporation is not allowed to change its

Except where the Commissioner otherwise accounting period employed without prior
permits, the return shall be filed: approval from the CIR.
 If person has legal residence or place of
business in the Philippines – with an Extension of Time to File Return
authorized agent bank, Revenue District  The CIR may, in meritorious cases, grant a
Officer, Collection Agent or duly authorized reasonable extension of time for the filing of
Treasurer of the city or municipality in tax return.
which such person has his legal residence or  The request must be filed on or before the 1st
principal place of business in the Philippines; day of the period for filing returns.
 If there be no legal residence or place of
business in the Philippines - with the Office of
the Commissioner. Return of Corporation Contemplating Dissolution
or Reorganization
When to File: Within 30 days after the adoption of a resolution
The return of any individual specified above shall or plan for dissolution or reorganization or within
be filed on or before the fifteenth (15th) day of the period prayed for by the taxpayer and allowed
April of each year covering income for the by the CIR.
preceding taxable year.
Return on Capital Gains Realized from Sale of
CORPORATE RETURNS Shares of Stock not Traded in the Local Stock
Exchange
Requirements:
1. The tax return of a taxable corporation shall be General Rule: Within 30 days after each sale or
filed by: disposition of shares of stock.
a. the president, or
b. vice-president, or In case of installment sale:
c. other principal officers  the return shall be filed within 30 days
2. Shall be sworn to by such officer and by the following the receipt of the first down
treasurer or assistant treasurer. payment and
 within 30 days following the subsequent
Declaration of Quarterly Corporate Income Tax installment payments.
(Quarterly Summary Declaration)  shall be filed with the Authorized Agent Bank
It shall be filed within 60 days following the close (AAB) in the Revenue District where the
of each quarter. seller or transferor of stocks is registered.
 In places where there are no AAB, the return
Final Adjustment Return (Annual Corporate will be filed directly with the Revenue
Income Tax Return) Collection Officer or Authorized City or
It shall be filed on or before April 15 or on or before Municipal Treasurer.
the 15th day of the 4th month following the close of
the fiscal, as the case may be. Returns of Receivers, Trustees in Bankruptcy, or
Assignees
Where to file both returns? These persons operating the property or business
of a corporation should make returns of net income

113
as and for such corporation, in the same manner 2. the second installment, on or before July 15
and form as such organization is required to make following the close of the calendar year.
returns.
If any installment is not paid on or before the date
The tax due on income as returned by them shall fixed for its payment, the whole amount of the tax
be assessed and collected in the same manner as if unpaid becomes due and payable, together with
done directly against the organizations of whose the delinquency penalties.
businesses or properties they have custody or
control. ESTATE TAXES
Return of General Partnerships General Rule: at the time the return is filed (Pay-
While this is not subject to income tax since the As-You-File Principle)
partners are the ones liable to pay income tax in
their separate and individual capacities, it is Exception: When the Commissioner finds that the
nonetheless required to file, in duplicate, a return payment on the due date of the estate tax or of any
setting forth the items of gross income and of part thereof would impose undue hardship upon
deductions allowed by the Tax Code, and the the estate or any of the heirs he may extend the
names, TINs, addresses and shares of each of the time for payment of such tax or any part thereof
partners.  not to exceed five (5) years, in case the estate
is settled through the courts;or
The net income declared in this return shall be the  two (2) years in case the estate is settled
basis in determining the distributive share of each extrajudicially.
partner, who in turn should report such
distributive share as part of his gross income. NOTES:
The executor, administrator or beneficiary, as the
Fiduciary Returns case may be, is required to furnish a bond in such
Guardians, trustees, executors, administrators, amount not exceeding double the amount of tax
receivers, conservators and all persons or and with such sureties as the Commissioner
corporations, acting in any fiduciary capacity, deems necessary.
should render, in duplicate, a return of the income The CIR shall deny the application for extension
of the person, trust or estate for whom or where the request for extension is by reason of:
 negligence,
which they act in case such person, estate or trust  intentional disregard of rules and regulations,
has a gross income of twenty thousand pesos  or fraud on the part of the taxpayer,
(Php20,000) or over during the taxable year.
ESTATE TAX RETURN (please refer to Estate Liability for Payment

Tax section) 1. Primarily liable: the executor or
administrator before distributing the net
DONOR’S RETURN (please refer to Donor’s tax estate to the heirs
section) 2. Subsidiarily liable: the heir or beneficiary to
the extent of his share in the inheritance
TAX PAYMENTS 3. The liability of 2 or more executors of
administrators shall be several.
INCOME TAXES
SAFEGUARDS IN THE NIRC FOR PAYMENT
When and Where to Pay (Sec. 56, NIRC): OF THE ESTATE TAX
The return of any individual specified above shall
be filed on or before the fifteenth (15th) day of I. Duties of Certain Officers and Debtors
April of each year covering income for the
preceding taxable year. A. Executor or Administrator- must ensure
payment shall be made of the amount which
 The total amount of tax imposed shall be paid he is notified before he shall be discharged
by the person subject thereto at the time the from personal liability (Sec. 92, NIRC)
return is filed. B. Judge - No judge shall authorize the
executor or judicial administrator to deliver
When the tax due is in excess of Two thousand a distributive share to any party interested
pesos (Php2,000) in the estate unless a certification from the
The taxpayer other than a corporation may elect Commissioner that the estate tax has been
to pay the tax in two (2) equal installments in paid is shown.
which case: C. Registers of Deeds- shall not register in the
1. the first installment shall be paid at the time Registry of Property any document
the return is filed; and transferring real property or real rights
therein unless a certification from the CIR Pay-As-You-File

that the tax due thereon had been paid. -the return shall be filed within 30 days after the
D. Lawyer, Notary Public, Or Any date the gift is made and the tax due thereon shall
Government Officer - intervening in the be paid at the time of filing.
preparation or acknowledgment of
documents regarding partition or disposal  The donor’s tax is paid upon filing of return.
of donation inter vivos or mortis causa, NO extension is allowed as compared to estate
legacy or inheritance, shall have the duty of tax.
furnishing the CIR or any internal revenue
officer of the place where he may have his Where to Pay:
principal office, with copies of such a. Resident Donor
documents and any information whatsoever  To an accredited agent bank, RDO, revenue
which may facilitate the collection of the Collection Officer or duly authorized
tax. treasurer of the city or municipality where the
E. Debtor of the deceased - shall not pay his donor is domiciled at the time the transfer, or
debts to the heirs, legatee, executor or  If there be no legal residence in the
administrator of his creditor, unless the Philippines, with the Commissioner.
certification of the CIR that the tax had b. Non-resident Donor
been paid is shown; but he may pay  Philippine Embassy or Consulate in the
them without said certification if the credit country where he is domiciled at the time of
is included in the inventory of the estate of the transfer, or
the deceased.  Directly with the Office of the Commissioner
F. Corporation – will not transfer to the new
owners of shares, bonds, obligation or rights VAT
without certification from the commissioner
that the tax actually due thereon had been Every person liable to pay VAT shall file a
paid (Sec. 97, NIRC). quarterly return of the amount of his gross sales
G. Bank – when it has the knowledge of the or receipts within twenty-five (25) days following
death of a person who maintained a joint the close of each taxable quarter.
account, it shall not allow any withdrawal  The payment of the VAT shall be made on a
by the surviving depositor without the monthly basis.
above certification (Sec.97, NIRC).  Taxable quarter shall mean the quarter that is
synchronized to the income tax quarter of the
II. Restitution of tax upon satisfaction of taxpayer (i.e., the calendar year or fiscal year)
outstanding obligations
Return shall be filed with and tax paid (except as
If after the payment of the estate tax, new the Commissioner otherwise permits):
obligations of the decedent shall appear, and 1. to an authorized agent bank, or
the persons interested shall have satisfied 2. Revenue Collection Officer, or
them by order of the court, they shall have a 3. duly authorized Treasurer of the city or
right to the restitution of the proportional municipality within the revenue district where
part of the tax paid. the taxpayer is registered or required to
register.
DONOR’S TAX
TAX REFUNDS
WHERE
REMEDY WHAT TO FILE TO FILE GROUNDS PRESCRIPTIVE PERIOD
OR
APPEAL

115
1. File refund Written claim for BIR Collection of taxes 2 yrs. from date of payment
refund is either:  Corporate TP- from the
1. erroneous filing of Final Adjusted
2. excessive Return
3. wrongful
4. unlawful  Doctrine of
Supervening Event not
applicable
Exceptions:
1.for equitable
considerations
2. the issue is similar to
one pending before the SC
 Mergers, etc.: 2 year

period from 30 days
after approval of such
plan.
2. Appeal BIR Petition for review CTA Questions of fact, 30 days from receipt of BIR
Decision under Rule 42 law, or both decision but within the 2-
yr. period.
Gibbs vs CTA
 Inaction of the BIR is
deemed to be a denial.
 File the petition within
the 2-yr. period.
3. Appeal CTA Petition for review SC Questions of law: 15 days from receipt of
Decision en banc on certiorari under Exception: decision of CTA en banc.
Rule 45 When pivotal
factual issues are
raised for the first
time on appeal to
arrive at a just
and fair decision.
(Abra Valley
College vs.
Aquino)
TAX REMEDIES
NIRC, AS LOCAL GOVERNMENT CODE TARIFF AND CUSTOMS CODE (PD 1464)
REMEDIES AMENDED BY (RA 7160)
RA 8424
Government Taxpayer LOCAL GOVERNMENT TAX REAL PROPERTY TAX Governm Taxpayer
Gov’t. Taxpayer Gov’t. Taxpayer ent
A. ADMINISTRATIV 1.Distraint A. Before Payment 1.Distraint 1. Question Ordinance 1. Levy 1. Appeal Assessment
E (Sec 207-212) 1. Protest (Sec 175) (Sec. 187) (Sec. 258) (Sec. 226) 1. Lien 1. Refund
(Extra-judicial) 2. Lien (Sec. 219) 2. Compromise (TCC,
3. Levy (Sec. 207 2. Lien 2. Protest (Sec. 195) 2. Lien 2. Payment under Protest 1204) 2. Protest
B) B. After Payment (Sec. 173) (Sec. 257) (Sec. 252)
1. Refund 1. 3. Refund (Sec. 196) 2. Seizure 3. Abandonment
2. Credit 3. Levy 3. Refund (Sec. 253) (2301)
(Sec 176)
APPEAL APPEAL Appeal Payment Refund PROTE
B. JUDICIAL 1. Civil Action Ordinance Protest Refund Civil ↓ ↓ ↓ 1. Civil Seizure ST
Protest Refund Civil Action ↓ ↓ ↓ Action 60days 30 days 2 yrs Action
2. Criminal Action ↓ ↓ 30 days 60 days 2 yrs ↓ ↓ ↓ Collecto Paymen
30 days 2 years ↓ ↓ ↓ LBAA LT LT r t
↓ ↓ SJ LT LT ↓ ↓ ↓ 2. ↓ ↓
BIR BIR ↓ ↓ ↓ 30days 60 days 60days Criminal 15 days 15days
↓ ↓ 30 days 30 days 30 days/ ↓ ↓ ↓ Action ↓ ↓
30 days (2 yrs) CBAA LBAA LBAA CC Collecto
30 days (2 yrs.) ↓ ↓ ↓ ↓ ↓ ↓ ↓ r
↓ ↓ RTC RTC RTC 30days 30days 30days 30days ↓
CTA CTA ↓ ↓ ↓ ↓ ↓ ↓ ↓ 15days
↓ ↓ 30 days 30 days 30 days CTA CBAA CBAA CTA ↓
15 days 15 days ↓ ↓ ↓ ↓ ↓ ↓ ↓ CC
↓ ↓ CTA CTA CTA 15 ays 30 days 30days 15days ↓
SC SC ↓ ↓ ↓ ↓ ↓ ↓ ↓ 30days
15 days 15 days 15 days SC CTA CTA SC ↓
↓ ↓ ↓ ↓ ↓ CTA
SC SC SC 15 days 15days ↓
↓ ↓ 15days
SC SC ↓
SC
PRESCRIPTIVE With prior assessment 5 yrs – No 5 yrs – No 3-yr
PERIOD Not false/Not fraudulent: (Sec. 203) Fraud Fraud period
Assessment – 3 yrs from filing of tax from
COLLECTION/ return or last day whichever is later. 10 yrs. – 10 yrs. – final
ASSESSMENT Collection – 5 years Fraud Fraud paymen
False/Fraudulent/Failure to file t
(Sec 222) (Sec. 194) (Sec. 270) (Sec.
Assessment – 10 yrs from discovery 1603)
Collection – 5 yrs. from assessment As
Without prior assessment: amende
Collection: d by RA
Not false/Not fraudulent – 5 years 9315
False/fraudulent/failure – 10 yrs.
from discovery

117
TAX REMEDIES
(under the NIRC)
(QUICK VIEW)
TAXPAYER’S REMEDIES 2. Deficiency Assessment - made by the tax

assessor himself whereby the correct amount
ASSESSMENT of the tax is determined after an examination
It is a formal notice to the taxpayer stating that or investigation is conducted.
the amount thereon is due as a tax and containing
a demand for the payment thereof. The liability is determined and assessed for
the following reasons:
An assessment contains not only a computation of a. amount ascertained exceeds that which is
tax liabilities but also a demand for payment shown as the tax by the taxpayer in his
within a prescribed period (Alhambra Cigar vs. return;
Collector, 1959). b. no amount of tax is shown in the return;
and
An affidavit, which was executed by revenue c. taxpayer did not file any return at all
officers stating the tax liabilities of a taxpayer and
attached to a criminal complaint for tax evasion, 3. Illegal and Void Assessment – tax assessor
cannot be deemed an assessment that can be has no power to assess at all
questioned before the CTA (CIR vs. Pascor Realty, 4. Erroneous Assessment – assessor has the
June 1999). power to assess but errs in the exercise
thereof.
Assessment contains not only computation of tax 5. Jeopardy Assessment – tax made by an
liabilities but also a demand for payment within a authorized Revenue Officer without the
prescribed period. (CIR vs. Pascor, 309 SCRA 402) benefit of complete or partial audit, in the
light of the Revenue Officer's belief that the
This action necessarily involves: assessment and collection of a deficiency tax
1. the computation of the sum due; will be jeopardized by delay caused by the
2. giving notice to that effect to the taxpayer; taxpayer's failure to:
and a. comply with the audit and investigation
3. the making, simultaneously with or sometime requirements to present his books of
after the giving of notice, of a demand upon accounts and/or pertinent records, or
him for the payment of the tax deficiency b. substantiate all or any of the deductions,
stated. exemptions or credits claimed in his
return
Notice of assessment is presumed valid. If the
taxpayer contested such a determination, the Delinquent Tax
burden of proving the determination wrong,  When the self-assessed tax per return filed on
together with the corresponding burden of first the prescribed date was not paid at all or was
going forward with evidence is on the taxpayer. only partially paid, or
(Cyanamid Philippines, Inc. vs. CA, 322 SCRA  The deficiency tax assessed by the BIR
639) became final and executory.
Requisites of a Valid Assessment: Deficiency Tax

1. It must be made within the prescriptive  The amount by which the income tax as
period to assess (Sec. 203) determined by the BIR exceeds the amount
2. There must be a preliminary assessment shown as tax per return, or
previously issued except in those instances
allowed by law (Sec. 228)  If no amount is shown or if no return is made,
3. The TP must be informed in writing about the then the amount by which the tax as
facts and the law on which the assessment is determined by the BIR exceeds the amounts
based (Sec. 228; CIR vs. Azucena T. Reyes, previously assessed (or collected without
2006) assessment) as a deficiency.
4. It must be served upon TP or any of his
authorized representatives (Gabriel vs. CIR,
2004) DELINQUENCY DEFICIENCY
Failure to pay the tax The amount still due
Assessment Notice is a formal demand sent to the due on the date fixed and collectible from
taxpayer requiring payment within a specified by law or indicated in a taxpayer upon
time of the tax due from him including interest the assessment notice audit or
and civil penalties. or letter of demand investigation
Kinds of Assessments:
1. Self-Assessment - one in which the tax is
assessed by the taxpayer himself.

119
Distinctions between REMEDIES IN THE COLLECTION of Deficiency Tax and Delinquency Tax
DELINQUENCY TAX DEFICIENCY TAX

Can immediately be collected administratively Can be collected also through administrative and
through the issuance of the warrant of distraint and judicial remedies but has to go through the
levy, and by judicial action. process of filing the protest against the
assessment by the taxpayer and denial of such
protest.
The filing of a civil action for its collection in the The filing of a civil action at the ordinary court
ordinary court is a proper remedy. for collection may be subject of a motion to
dismiss. In addition, a petition for review must
be filed with the CTA within the 30 days to toll
the running of the prescriptive period.
assessment arrived to by the Provincial and

Means Employed in the Assessment of Taxes (Sec. City Assessors, which fair value is higher
6, CTRP)
(PEE BITS PA) shall be the basis for computing any internal
1. Examination of tax returns revenue tax
2. Use of the best evidence obtainable  Authority of the Commissioner to inquire into
3. Inventory taking, surveillance and use of Bank Deposit Accounts – this is
presumptive gross sales and receipts notwithstanding any contrary provision of RA
4. Termination of taxable period No. 1405; applies to bank deposits of a
5. Prescription of real property values decedent to determine his gross estate and to
6. Examination of bank deposits to determine any taxpayer who entered into compromise
the correct amount of the gross estate due to financial incapacity to pay tax liability
7. Accreditation and registration of tax agents. (with written waiver in his privilege under RA
8. Prescription of additional procedural or No. 1045 on the latter case)
documentary requirements.  Authority to Accredit and Register Tax
Agents – denied accreditation by CIR may
POWER OF THE COMMISSIONER TO MAKE appealed to Sec. of Finance who shall rule
ASSESSMENTS AND PRESCRIBE within 60 days from receipt of such appeal;
ADDITIONAL REQUIREMENTS FOR TAX inaction of the Secretary shall be deemed
ADMINISTRATION AND ENFORCEMENT approval of application of accreditation
 Authority of the Commissioner to Prescribe
 Examination of returns and determination of Additional Procedural or Documentary
tax due – assessment of the correct amount of Requirements
tax, even if the taxpayer fails to file a return;
taxpayer may amend the tax return within 3 POWER OF THE COMMISSIONER TO OBTAIN
years from date of filing, provided that no INFORMATION, AND TO
investigation yet has been done. SUMMON/EXAMINE, AND TAKE TESTIMONY
 Failure to Submit Required Returns, OF PERSONS
Statements, Reports and other Documents –
CIR shall assess the proper tax and make or  Authority to examine any book, paper, record
amend the return based on the best evidence or other data relevant to the inquiry
obtainable, which shall be prima facie correct  Authority to obtain information such as, but
and sufficient for all legal purposes not limited to, costs and volume of production,
 Authority to Conduct Inventory-taking, receipts or sales and gross incomes, and
surveillance and to Prescribe Presumptive financial statements of taxpayers
Gross Sales and Receipts  Authority to summon person liable to tax or
 Authority to Terminate taxable period – in required to file a return, or any person having
cases when taxpayer is retiring from business, custody of books of accounts relating to
or is intending to leave the country or to business of the person liable to tax
remove his property therefrom or to hide his  Authority to take such testimony of the person
property, or is performing any act tending to concerned, under oath, as may be relevant or
obstruct collection of taxes; CIR shall request material to such inquiry
immediate payment of the tax.  Authority to cause revenue officers and
 Authority of the Commissioner to employees to make a canvass of any revenue
Prescribe Real Property Values – CIR’s district or region and inquire concerning all
assessment shall be compared to the persons therein who may be liable to pay any
internal revenue tax
e. Assessment must be directed to the right

When is an assessment deemed made? party (Republic vs. Dela Rama, G.R. No. L-
It is not the issue date of the demand and/or notice 21108, Nov. 29,1966)
that is the reckoning point in prescription but
rather it is the date when the demand letter or Prescriptive Periods for the Assessment of Taxes
notice of assessment is released, mailed or sent to
the taxpayer that constitutes an actual General Rule: Three years after the date the
assessment (Basilan Estates Inc., vs. CIR, 21 return is due or filed, whichever is later.
SCRA 17).
Exceptions:
An assessment notice which is not served upon the 1. failure to file a return: ten (10) years from the
taxpayer or any of his authorized representatives date of the discovery of the omission to file the
is not valid and the failure to protest the same return;
within the period provided by law (30 days from 2. false or fraudulent return with intent to evade
receipt of the assessment) will the tax: ten (10) years from the date of the
not make the assessment final, executory and discovery of the falsity or fraud;
incontestable. (Estate of the late Juliana Diez vda. 3. agreement in writing: to the extension (not
De Gabriel vs. CIR, G.R. No. 155541, January 1, reduction) of the period to assess between the
2004). Commissioner and the taxpayer before the
expiration of the three year period.
Significance of Assessment on the Part of the
Government: NOTE: The extended period agreed upon can
a. In the proper pursuit of judicial and further be extended by a subsequent written
extrajudicial remedies to enforce taxpayer agreement made before the expiration of the
liabilities and certain matters that relate to it, extended period previously agreed upon.
such as the imposition of surcharges and 4. waiver or renunciation of the original three (3)
interests year limitation, signed by the taxpayer.
b. In the application of Statute of Limitations
c. In the establishment of tax liens and Exceptions to the Prescriptive Periods
d. In estimating the revenues that may be (on Assessment and Collection)
collected by the government in the coming
year (Mamalateo, Victorino Reviewer on 1. False or fraudulent return, omission to file a
Taxation 2004) return (Section 222(a), NIRC)
2. If there is an agreement in writing to extend
Significance of Assessment on the Part of the the period to assess or to collect (Section
Taxpayer: 222(b) and (d), NIRC)
a. Assessment informs the taxpayer that he or
she has tax liabilities.
b. The issuance of assessment is vital in Computation of Year
determining the period within which to
protest it. A year should be computed based on the
Administrative Code. Section 31 of the
Principles Governing Tax Assessments: Administrative Code of 1987 provides that a “year”
a. Assessments are prima facie presumed shall be understood to be 12 calendar months.
correct and made in good faith. All Under the Civil Code, a year is equivalent to 365
presumptions are in favor of tax assessment days whether it be a regular year or a leap year.
(Cagayan Robina Sugar Milling Co. vs. CA, Under the Administrative Code of 1987, however,
G.R. No. 122451, Oct. 12, 2000) a year is composed of 12 calendar months and the
b. Assessments should not be based on number of days is irrelevant. There obviously
presumptions no matter how logical the exists a manifest incompatibility in the manner of
presumption might be, must be based on computing legal periods under the Civil Code and
actual facts (CIR vs. Benipayo, G.R. No. L- the Administrative Code of 1987. For this reason,
13656, Jan. 31, 1962) Section 31, Chapter VII, Book I of the
c. Assessment is discretionary on the part of the Administrative Code of 1987, being the more
Commissioner (Meralco Securities Corp. vs. recent law, governs the computation of legal
Savellano, G.R. No. L-36181 and L-36748, Oct periods. (Commissioner of Internal Revenue vs.
23, 1992) Primetime Property Group, Inc., G.R. No. 162155,
d. The authority vested in the Commissioner to August 28, 2007)
assess may be delegated but the power to
make final assessments cannot be delegated
(City Lumber Inc. vs. Domingo, G.R. No. L-
18611, June 30, 1966)

121
FRAUDULENT b. reimburse the government for the expenses in

FALSE RETURN
RETURN investigating and the loss resulting from the
It merely implies a It is intentional and taxpayer’s fraud.
decision from the deceitful with the aim
truth or fact whether of evading the correct Penalty of 25% of the amount due for:
intentional or not. tax due. 1. failure to file any return and pay the tax due
thereon;
Requisites of a tax return for purposes of starting 2. filing a return with the wrong agent of the
the running of the period of limitation BIR, unless otherwise authorized by the CIR
 the return is valid – it has complied 3. failure to pay the deficiency tax within the
substantially with the requirements of the time prescribed for its payment in the notice
law; and of assessment;
 the return is appropriate – it is a return for 4. failure to pay the full or part of the tax as
the particular tax is required by law. shown on the return on or before the due date.
NOTE: A defective tax return is the same as if no Penalty of 50% of the amount due for:
return was filed at all. 1. willful neglect to file the return within the
period prescribed by the Code,
AMENDED RETURN allowed when: 2. false or fraudulent return is willfully made
1. the amendment is made within 3 years from
the date of filing the original return; and NOTE: In case the taxpayer, without notice
2. no notice of audit or investigation of such from the Commissioner or his duly authorized
return has, in the meantime, been actually representative, voluntarily files a return, only
served upon the taxpayer. 25% surcharge shall be imposed for late filing
and late payment for the tax in lieu of the 50%
Effect on Prescription: surcharge.
 The prescriptive period starts to run from the
filing of the original return, if the same is 3. person not VAT registered issues an invoice or
sufficiently complete to enable the CIR to receipt showing his TIN, followed by the word
intelligently determine the proper amount of “VAT”
tax to be assessed.
 However, where the amended return is INTEREST
substantially different from the original, the a. Deficiency interest
right to assess is counted from the filing of the  20% per annum from the date prescribed
amended return. for its payment until the full payment
thereof
Grounds for suspension of the running of b. Delinquency interest
prescriptive period for assessment and collection  Interest of 20% or the Manila Reference
1. when the Commissioner is prohibited from rate, whichever is higher, required to be
making the assessment or beginning the paid in case of failure to pay:
distraint or levy or proceeding in court, and 1. the amount of the tax due on any
for sixty days thereafter; return required to be filed;
2. when the taxpayer requests for a 2. amount of the tax due for which
reconsideration which is granted by the return is required;
Commissioner; 3. the deficiency tax or any surcharge or
3. when the taxpayer cannot be located in the interest thereon, on the date
address given by him in the return, unless he appearing in the notice and demand
informs the Commissioner of any change in of the CIR
his address;
4. when the warrant of distraint or levy is duly
served, and no property is located; and Methods of Collection of Internal Revenue Taxes:
5. when the taxpayer is out of the Philippines.
1. Self-Assessment System
GENERAL PROVISIONS ON A system which relies on the honesty of
ADDITIONS TO THE TAX taxpayers.
 It follows the pay-as-you-file principle

CIVIL PENALTIES OR SURCHARGE AND
INTEREST
 It is anchored on voluntary compliance
Surcharges – not really a penalty as used in
criminal law but a civil administrative sanction
designed primarily to: 
It is complimented by BIR Audit –
a. protect the State revenue, and taxpayers’ honesty but not as yet.
2. Withholding Tax System
The payor of the income is mandated by law to  The examination must terminate
withhold the tax. within 120 days
There are two types of withholding tax : Issuance of Letter of Authority

a. Creditable Withholding Tax- it is an Letter of Authority - official document that
advance payment of the tax due which will empowers a Revenue Officer to examine and
be determined upon filing of the return. scrutinize a taxpayer’s books of accounts and other
This type of withholding tax compliments accounting records, in order to determine the
the self-assessment system. taxpayer’s correct internal revenue tax liabilities.
b. Final Withholding Tax – The tax withheld
is a final settlement of the payee’s tax Period: Letter of Authority must be served to the
liability. The withholding agent becomes concerned taxpayer within thirty (30) days from
directly liable in case of non-payment. its date of issuance otherwise it shall be null and
void.
ASSESSMENT PROCESS
 Revenue officer is allowed only 120 days from
I. TAX AUDIT - Examination of books of the date of receipt of a letter of authority by
accounts and other accounting records of the taxpayer to conduct the audit and submit
taxpayers by revenue officers to determine the the required report of investigation.
correct tax liability.
Who may issue Letter of Authority (LOA)?
Objectives of Audit: 1. Commissioner - for those units reporting
1. To ensure that correct taxes are collected directly to him;
from every taxpayer 2. Regional directors - for taxpayers covered by
2. To deter the commission of tax evasion his particular region. If the Commissioner has
(economic theory) already issued a LOA to investigate a
3. To let taxpayers realize that tax evasion is particular taxpayer, the Regional director
a serious crime which picks the pockets of shall desist from issuing another LOA for the
honest taxpayers same taxpayer.
4. To enhance voluntary compliance – Except:
Taxpayers should realize that non- a. cases involving civil or criminal tax fraud
compliance is easily detected and severe under the jurisdiction of the tax fraud
penalties are imposed division of the enforcement service;
b. policy cases under audit by Special Teams
Legal Basis of Audit: in the National Office. (RAMO 36-99)
 Section 6(A), NIRC – “After a return has been
filed as required under the provisions of this NOTE: If the taxpayer does not submit the
Code, the Commissioner or his duly documents or information requested by the
authorized representative may authorize the BIR, the person may be required to testify or
examination of any taxpayer and the the document may be summoned and required
assessment of the correct amount of tax: to be presented to the BIR.
Provided, however; That failure to file a
return shall not prevent the Commissioner What are the cases which need not be covered by
from authorizing the examination of any a valid LOA?
taxpayer.”  Cases involving civil/criminal tax fraud which
fall under the jurisdiction of the tax fraud
Procedure in Conducting Audit: division of the Enforcement Services; and
 Service of Audit Notice (LA or TVN) to the  Policy cases under audit by the special teams
taxpayer within 30 days in national offices (RAMO 36-99)
 The LA must contain the following:
1. Name, address and TIN of taxpayer; Q. Can the BIR issue LOA more than once within
2. Name and designation of Revenue a taxable year?
Officers A. NO. BIR officer are allowed to issue LOA only
3. Scope of the examination (Tax period and once. EXCEPT:
type of tax/es) 1. when BIR determines that there is fraud
4. Approving official or irregularities committed by taxpayer
 Any erasure on the LA will render it 2. taxpayer itself requests for an
void examination of his accounts
 The taxpayer must submit its Books 3. when there is a need to verify the
of Accounts and related accounting withholding taxes required by the BIR
records in his principal place of 4. when capital gains tax must be verified
business

123
POWER OF THE COMMISSIONER TO ASSESS b. whether the taxpayer agrees with his
DEFICIENCY TAX BASED ON BEST findings.
EVIDENCE OBTAINABLE
If the taxpayer is not amenable, the taxpayer shall
Sec. 6 (B) of R.A. 8424 empowers the be informed in writing by the Revenue District
Commissioner to assess the proper tax and make Officer or by the Chief of the Division of the
or amend the return based on the best evidence discrepancies in the taxpayer’s liability for the
obtainable (from his own knowledge and from such purpose of informal conference, in order to afford
information as he can obtain through testimony or the taxpayer with an opportunity to present his
otherwise) when: side of the case.
1. a report required by law as a basis for the
assessment of any national internal revenue NOTE: If the taxpayer fails to respond within 15
tax shall not be forthcoming within the time days from date of receipt of the notice for informal
fixed by laws or rules and regulations; or conference, he shall be considered in default.
2. there is reason to believe that any such report
is In such a case, the Revenue District Officer of the
i. false Chief of the Division shall endorse the case to the
ii. incomplete Assessment Division for review and issuance of
iii. erroneous deficiency tax assessment, if warranted.
The return made by the Commissioner, in this Requisites of an agreement waiving the statute of
instance, shall be prima facie correct and limitations:
sufficient for all legal purposes. 1. Entered before the expiration of the 3-year
period for assessment of the tax;
2. In writing;
II. NOTICE OF INFORMAL CONFERENCE 3. Signed by taxpayer;
This notice pertains to the preparation of 4. Must specify a definite agreed date between
tentative findings and holding of informal within which to assess and collect taxes;
conference. 5. Signed and accepted by the CIR or his duly
authorized representative;
A Notice of Informal Conference is a written 6. Date of acceptance must be indicated. (RMC
notice informing the taxpayer that the No. 06-05)
findings of the audit conducted on his book of
accounts and accounting records indicate that
additional taxes of deficiency assessment III. ISSUANCE OF PRELIMINARY
have to be paid. ASSESSMENT NOTICE (Pan)
It is a communication issued by the Regional
If, after the culmination of an audit, a assessment Division, or any other concerned
Revenue Officer recommends the imposition BIR office, informing a taxpayer who has been
of deficiency tax assessments, this audited of the findings of the BIR officer
recommendation is communicated by the following the review of these findings.
Bureau to the taxpayer concerned during an
informal conference called for this purpose. It must show in detail:
The taxpayer shall then have fifteen (15) days 1. amount to be paid
from the date of his receipt of the Notice for 2. the facts and law on which the proposed
Informal Conference to explain his side. assessment is based
3. jurisprudence
Matters are taken up during the Informal 4. demand to pay
Conference:
1. Discussion on the merits of the assessment NOTE: absent of any of the information above-
2. Attempt of taxpayer to convince the examiner mentioned would make the PAN void.
to conduct a re-investigation and/or re-
examination REPLY TO PAN
3. Evaluate if submission of the waiver of the If the taxpayer disagrees with the findings
statute of limitations is necessary - because stated in the PAN, he shall then have 15 days
evaluation may extend beyond three years from his receipt of the PAN to file a written
4. Taxpayer to advise the examiner if position reply contesting the proposed assessment.
paper will be submitted.
Exceptions to Issuance of PAN
Soon after the completion of the tax audit, the a. When the finding for any deficiency tax is
revenue officer will render a written report the result of mathematical error in the
stating: computation of the tax appearing on the
a. the factual and legal basis of his findings; face of the tax return filed by the taxpayer;
b. when a taxpayer who opted to claim a deficiency tax liabilities, inclusive of penalties. It
refund or tax credit of excess creditable shall be sent personally or through registered
withholding tax for a taxable period was mail.
determined to have carried over and
automatically applied the same amount DISPUTED ASSESSMENT
claimed against the estimated tax
liabilities for the taxable quarter or REMEDIES OF A TAXPAYER
quarters of the succeeding taxable year;
c. when a discrepancy has been determined 1. Administrative Remedies
between the tax withheld and the amount a. before payment
actually remitted by the withholding i. protest
agent; ii. entering into a compromise
d. when an excise tax due on excisable b. after payment – filing of claim for refund
articles has not been paid; or or tax credit within two years from date
e. when an article locally purchased or of payment regardless of any supervening
imported by an exempt person, such as, cause.
but not limited to vehicles, capital
equipment, machineries, and spare parts, 2. Judicial Remedies
has been sold, treated or transferred to a. civil action
non-exempt persons. (Rev. Reg. No. 12-99) i. appeal to CTA – within 30 days from
receipt of decision on the protest or
from the lapse of 180 days due to
IV. ISSUANCE OF FORMAL ASSESSMENT inaction of the Commissioner;
NOTICE (FAN) and Letter Of Demand ii. action to contest forfeiture of chattel;
Final Assessment Notice (FAN) is a declaration and
of deficiency taxes issued to a taxpayer who iii. action for damages
fails to respond to a pre-assessment notice b. criminal action
within the prescribed period of time, or whose i. Filing of criminal complaint against
reply to the PAN was found to be without erring BIR official and employee; and
merit. ii. Injunction – when the CTA in its
opinion, considers that the collection
An assessment contains not only a computation by the BIR may jeopardize taxpayer
of tax liabilities, but also a demand for
payment within a prescribed period. The
ADMINISTRATIVE REMEDIES
ultimate purpose of assessment is to ascertain
the amount that each taxpayer is to pay. An
Taxpayer’s Remedies Against an Assessment:
assessment is a notice to the effect that the
Remedy before payment – This comes in the form
amount therein stated is due as tax and a
of administrative protest which can either be:
demand for payment thereof. (Tupaz vs. Ulep,
1. Request for reconsideration, or
1999)
2. Request for re-investigation
The formal letter of demand shall be issued by
Remedy after payment – Claim for refund of
the Commissioner or his duly authorized
erroneously paid taxes pursuant to Section 204
representative. The letter of demand calling for
and Section 229
the payment of the taxpayer’s deficiency taxes
shall state:
1. the FACTS, PROTESTING ASSESSMENT
2. the LAW, RULES and REGULATIONS or
JURISPRUDENCE on which the Protest is a vital document which is a formal
assessment is based, declaration of resistance of the taxpayer. It is a
3. OTHERWISE, the formal letter of demand repository of all arguments. It can be used in court
or assessment notice shall be VOID. (RR 12- in case of administrative remedies have been
99) exhausted. It is also formal act of the taxpayer
questioning the official actuation of the CIR. This
NOTE: A follow-up letter/demand letter for is equivalent to a pleading.
payment of taxes is considered a notice of
assessment (Republic vs. CA and Nielson & Co. 1. File a request for reinvestigation or
April 30, 1987). reconsideration within 30 days from receipt of
the assessment.
If the taxpayer fails to respond within 15 days
from date of receipt, he shall be considered in
default.
In such a case, a formal letter of demand and FAN REQUEST FOR REINVESTIGATION
shall be issued, calling for payment of the

125
It is a plea for re-evaluation of an assessment been submitted, otherwise, the assessment

on the basis of newly- discovered or additional shall become FINAL (cannot be appealed) (Sec.
evidence that a taxpayer intends to present in 228 NIRC)
the reinvestigation. It involves a question of
fact or law or both. NOTE: Such documents which the taxpayer feels
would be necessary to support his protest and not
REQUEST FOR RECONSIDERATION what the Commissioner feels should be submitted,
It is a plea for re-evaluation of the assessment otherwise, taxpayer would always be at the mercy
on the basis of existing records without need of the BIR which may require production of such
of additional evidence. It involves a question documents which taxpayer could not produce.
of fact or law or both. (Revenue Regulation No. (Standard Chartered Bank vs. CIR, CTA Case No.
12-85) 5696, August 16, 2001)
Request for Reconsideration vs. Request for A protest is considered validly made if it satisfies
Reinvestigation the following conditions:
1. It is made in writing, and addressed to the
A request for reconsideration involves re- Commissioner of Internal Revenue.
evaluation of assessment based on existing 2. It contains the information the following
records, while a request for reinvestigation information (from RR 12-85):
entails presentation of newly-discovered or  Name of the taxpayer and address for the
additional evidence. immediate past three taxable years
 Nature of request whether reinvestigation
The latter suspends the running of the or reconsideration specifying newly-
prescriptive period while the former does not. discovered evidence he intends to present if
(Revenue Regulation 12-85) it is a request for reinvestigation
 The taxable periods covered
Q: What kind of protest shall toll the running  Assessment number
of the prescriptive period?  Date of receipt of assessment notice or letter
of demand
A: A request for reinvestigation, and not a  Itemized statement of the findings to which
request for reconsideration, will suspend the the taxpayer agrees as a basis for
running of the period to collect. A computing the tax due, which amount
reinvestigation, which entails the reception should be paid immediately upon the filing
and evaluation of additional evidence, will of the protest. For this purpose, the protest
take more time than a reconsideration of a tax shall not be deemed validly filed unless
assessment, which will be limited to the payment of the agreed portion of the tax is
evidence already at hand; this justifies why paid first
the former can suspend the running of the  The itemized schedule of the adjustments
statute of limitation on collection of the with which the taxpayer does not agree
assessed tax, while the letter cannot.
 A statement of facts and/or law in support
(Commissioner of Internal Revenue vs. of the protest.
Philippine Global Communication, Inc., G.R.
No. 167146, October 31, 2006 reiterating BPI 3. It states the FACTS, applicable LAW, RULES
vs. CIR, G.R. No. 139736) and REGULATIONS or JURISPRUDENCE
on which his protest is based, otherwise the
 Under Section 228 of the 1997 Tax Code,
protest shall be considered void and without
the taxpayer had 30 days to appeal the
force and effect.
denial of its protest to the CTA. Since the
4. It is filed within the period prescribed by law
denial of the administrative protest on
August 4, 2005, it had until September 3,
2005 to file a petition for review before the RENDITION OF DECISION BY
CTA Division. It filed one, however, on COMMISSIONER
October 20, 2005, hence, it was filed out of
time because a motion for reconsideration 1. Denial of Protest
of the denial of the administrative protest CIR’s actions equivalent to denial of protest:
does not toll the 30-day period to appeal to a. Filing of criminal action against taxpayer
the CTA. (Fishwealth Canning
Corporation vs. b. Issuing a warrant of distraint and levy
CIR, G.R. No. 179343, January 21, 2010)
2. Inaction by Commissioner
2. Within 60 days from filing of protest, all
relevant supporting documents should have
REMEDIES OF TAXPAYER TO
ACTION BY COMMISIONER 1. The taxpayer may appeal to the Court of Tax

Appeals within thirty days from the lapse of
1. If the Commissioner DENIES THE PROTEST the 180-day period, or
filed by the taxpayer- he may appeal to the 2. He may wait until the Commissioner decides
Court of Tax Appeals within (30) thirty days on his protest before he elevates his case.
from receipt of the decision denying the protest.
In case the Commissioner failed to act on the
Where there is a request for reconsideration, disputed assessment within the 180-day period
from date of submission of documents, a taxpayer
final demand letter from BIR is considered a
can either: 1) file a petition for review with the
decision on a disputed or protested assessment
which is therefore appealable to the CTA (CIR Court of Tax Appeals within 30 days after the
vs. Isabela Cultural Corp, July 11, 2001). expiration of the 180-day period; or 2) await the
final decision of the Commissioner on the disputed
assessments and appeal such final decision to the
The 30-day period to appeal is jurisdictional Court of Tax Appeals within 30 days after receipt
and failure to comply therewith would bar the of a copy of such decision.
appeal and deprive the CTA of jurisdiction to However, these options are mutually exclusive,
entertain and determine the correctness of the and resort to one bars the application of the other.
assessment (RCBC vs. CIR, G.R. No. 168498, As such, where a taxpayer after availing the first
April 24, 2007). option, i.e., filing a petition for review which was
however filed out of time, it cannot successfully
Alternative remedies of TP against CIR’s resort to second option, i.e., awaiting the final
inaction: decision on the disputed assessment because of the
Commissioner’s inaction. (RCBC vs. Commission
a. To file a petition for review with the CTA of Internal Revenue, G.R. No. 168498, April 24,
within 30 days after the expiration of the 2007)
180-day period to act.
b. To await the final decision of the CIR (till The taxpayer was given this option so that in case
kingdom come) and appeal within 30 days his protest is not acted upon within 180 days, he
after receipt of a copy of the decision. may be able to seek immediate relief and need not
wait for an indefinite period of time for the
These options are mutually exclusive. Resort to Commissioner to decide. But if he chooses to wait
one bars the application of the other. (RCBC vs. for a positive action on the part of the
CIR, G.R. 168498, April 24, 2007) Commissioner, then the same could not result in
the assessment becoming final, executory and
2. If the Commissioner did NOT ACT UPON demandable. (Lascona Land Co vs. CIR, January
THE PROTEST within one hundred and 4, 2000)
eighty days from the time the documents
were submitted - the taxpayer may When does the 30-day period to appeal commence
either: to run?
The 30-day period starts when the taxpayer
 Appeal to the CTA within thirty days receives the decision of the Commissioner denying
from the lapse of the 180- day period OR the protest.
 Wait until the Commissioner decides The appealable decision is the decision of the
before he elevates the case to the CTA Commissioner denying the protest, NOT the
warrants of distraint or levy. (Advertising
Effect of Failure to Protest Associates vs. CA December 26, 1984)
If #1 occurs and the taxpayer does not file a
protest within the prescribed period, the  The decision of the Commissioner must
assessment becomes FINAL, EXECUTORY and categorically state that his action on the
DEMANDABLE. But if #2 occurs and the taxpayer disputed assessment is final; otherwise period
does not file a protest within the prescribed period, to appeal will not commence to run.
the assessment DOES NOT become FINAL,
EXECUTORY and DEMANDABLE. NOTE: A Division of the CTA shall hear the
appeal. (Sec. 11, RA 1125 as amended by RA 9282
[2004])
Inaction by Commissioner
In cases of inaction by the Commissioner, Section
228 of the Tax Code merely gave the taxpayer an If the taxpayer is not satisfied with the CTA
OPTION: Division’s ruling, what is his REMEDY?

127
He may file a Motion for Reconsideration before I. Distraint of Property

the same Division of the CTA within fifteen (15)
days from notice thereof (Sec. 11, RA 1125 as The collection of taxes is enforced on the goods,
amended by RA 9282 [2004]). chattels or effects and other personal property,
including stocks and other securities, debts,
 A party adversely affected by a resolution of a credits and interest and rights to personal
Division of the CTA on a motion for property.
reconsideration may file a Petition for Review
with the CTA en banc (Sec. 18, RA 1125 as WHO may Effect Distraint?
amended by RA 9282 [2004]). a. Commissioner or his duly authorized
representative, if the amount involved is
If the taxpayer is not satisfied with the decision of more than P1,000,000.00
the CTA en banc, what is his REMEDY? b. Revenue District Officer, if the amount
A party adversely affected by a decision or ruling involved is P1,000,000.00 or less
of the CTA en banc may file with the Supreme
Court a verified petition for review on certiorari Requisites of Distraint:
pursuant to Rule 45 of the 1997 Rules of Court 1. the taxpayer must be delinquent (except in
(Sec. 19, RA 1125 as amended by RA 9282 [2004]). constructive distraint) in the payment of
tax;
Effect of failure to appeal: The decision shall be 2. there must be a subsequent demand for its
final, executory and demandable. payment (assessment);
3. the taxpayer fails to pay the tax at the time
COLLECTION OF TAXES required; and
4. the period within which to assess or collect
Prescriptive Period for the Collection of Taxes the tax has not yet prescribed.
1. If there is an assessment, the period shall be
five (5) years from the date of assessment Kinds of Distraint
(Section 222(c), NIRC). This rule is believed to 1. Actual Distraint
cover by implication regular assessments, 2. Constructive Distraint
otherwise, the period to collect an assessment
issued under normal circumstances will be ACTUAL CONSTRUCTIVE
imprescriptible. DISTRAINT DISTRAINT
2. In the absence of an assessment, and a return Made only on the Made on the property
was filed as long as it is not false or fraudulent, property of a of any taxpayer
the period is five (5) years from the date the tax delinquent taxpayer whether delinquent
is due. or not
3. If no return was filed, the period to collect is There is taking of The taxpayer is
within ten (10) years from the date of discovery possession. merely prohibited
of the omission to file without need for an from disposing of his
assessment (Evangelista vs. Collector, October property.
15, 1957; Section 222(a), NIRC). Effected by leaving a Effected by requiring
4. If the return filed was false or fraudulent, list of distraint the taxpayer to sign a
collection maybe resorted to without need of property or by service receipt of the property
assessment within ten (10) years from of a warrant or or by the revenue
discovery of the fraud or falsity (Ungab vs. distraint or officer preparing and
Cusi, 97 SCRA 887; Section 222(a), NIRC). garnishment leaving a list of such
property
An action filed by Bureau of Customs against a An immediate step for Not necessarily so
bonding company to collect on a bond used to collection of taxes
secure payment of taxes is not a tax collection case
but rather a simple case of enforcement of a ACTUAL DISTRAINT
contractual liability. Hence, appellate jurisdiction There is taking of possession of the property from
over the case properly lies with the Court of the taxpayer by the government.
Appeals rather than the Court of Tax Appeals
(Phil. British Assurance Co., Inc. vs. Republic of It is resorted to when at the time required for
the Philippines, G.R. No. 185588, February 2, payment, a person fails to pay his delinquent tax
2010) obligation.
Effected by:
ADMINISTRATIVE REMEDIES a. leaving a list of the distrained property, or
OF THE GOVERNMENT b. by service of a warrant of distraint or
garnishment
Procedure: 1. sign a receipt covering property

a) Goods, effects, chattels and other personal distrained
property 2. obligate himself to preserve the same
1. a copy of an account of the property intact and unaltered
distrained, signed by the officer, shall be 3. not to dispose of the property in any
left either from the owner or the person manner, without the authority of the
from whom the property was taken or at Commissioner
the dwelling or place of business of such b) Where taxpayer or person in possession
person and with someone of suitable age refuses to sign:
and discretion 1. distraining officer shall prepare a list of
2. statement of the sum demanded the property distrained
3. time and place of sale 2. in the presence of 2 witnesses, leave a
copy in the premises where the property
b) Stocks and other Securities is located (Sec. 206, NIRC).
By serving a copy of the warrant upon the
taxpayer AND upon the president, manager, LIEN DISTRAINT
treasurer or other responsible officer of the Directed against the Need not be directed
issuing corporation, company, association property subject to against the property
the tax subject to the tax
c) Debts and Credits Regardless of the Property seized must
1. leaving a copy of the warrant with owner of the property be owned by the
the person owing the debts or having taxpayer.
in his possession such credits or his
agent II. Summary Levy on Real Property and Sale of
2. warrant shall be sufficient authority Property
to pay the Commissioner the amount
of such debts or credits It refers to the act of seizure of real property in
order to enforce the payment of taxes.
d) Bank accounts (garnishment)
1. serve a warrant of garnishment upon the The requisites for the exercise of the remedy of
taxpayer AND upon the president, levy are the same as in the remedy of distraint.
manager, treasurer or other responsible
officer of the bank When: before, simultaneously or after the
2. bank shall turn over to the Commissioner distraint of personal property belonging to the
so much of the bank accounts as may be taxpayer
sufficient (Sec. 208, NIRC)
Effected by:
NOTE: Report on the Distraint by the distraining a. writing upon an authenticated certificate
officer must be submitted within 10 days from showing:
receipt of the warrant to the Revenue District 1. the name of the taxpayer
Officer and to the Revenue Regional Director. The 2. amounts of the tax and penalty due
Order of Distraint may be lifted by the 3. description of the property upon which
Commissioner or his representative. (Sec. 207 (a), levy is made
NIRC)
b. written notice of the levy shall be mailed to
CONSTRUCTIVE DISTRAINT or served upon:
The type of distraint wherein the owner is merely 1. the Register of Deeds of the province or
prohibited from disposing of this property city where the property is located, and
 issued even when there is no actual tax 2. the delinquent taxpayer
delinquency 3. if he is absent from the Philippines, to
 availed of when taxpayer is: his agent or the manager of the
a. retiring from any business subject to tax; business in respect to which the
b. intending to – liability arose
b.1. leave the Philippines; or 4. if there be none, to the occupant of the
b.2. remove his property therefrom; or property in question
b.3. hide or conceal his property; or
The remedy by distraint and levy may be repeated

c. he performs any act tending to obstruct the if necessary until the full amount, including all
proceedings for collecting the tax due expenses, is collected.
Procedure: Procedure:
a) Require the taxpayer or any person having a) Internal revenue officer shall prepare a duly
control of the property to authenticated certificate showing the name of

129
taxpayer, amounts of tax and penalty due, in the barrio or district in which the
enforceable throughout the Philippines real estate lies and
b) Officer shall write upon the certificate a  by publication once a week for 3 weeks
description of the property upon which levy is in a newspaper of general circulation
made in the municipality or city where the
c) Written notice of levy shall be mailed or property is located
served upon
1. the Register of Deeds where the property b. sale at public auction to the highest
is located and bidder
2. the taxpayer or agent/manager of the  at the main entrance of the municipal
business in respect to the tax liability or to building or city hall, or
the occupant of the property  on the premises to be sold, as the
d) If personal property of taxpayer is not officer conducting the proceedings
sufficient to satisfy the tax due, levy on real shall determine and as the notice shall
property shall proceed within 30 days after specify
distraint.
e) Report on levy c. disposition of proceeds of sale
1. by levying officer In case the proceeds of the sale exceed the
i. submitted within 10 days from claim (taxes, penalties, and interest) and
receipt of warrant cost of the sale, the excess shall be turned
ii. submitted to the Commissioner or his over to the owner of the property.
representative
2. by the Revenue Regional Director-- Redemption by the Taxpayer
consolidated report, as may be required Within 1 year from the date of sale, that is, from
by the Commissioner the registration of the registration of the deed of
sale. By the taxpayer or anyone for him by paying
f) The warrant may be lifted by the the full amount of:
Commissioner or his representative  Taxes
 Penalties
Sale of Property  Interests, and
1. In case of distrained property:  Costs of sale
a. notification specifying the time and place
of sale and the articles distrained shall be Pending redemption of the property sold, the
exhibited owner shall:
 in not less than 2 public places (one 1. not be deprived of the possession of the
place shall be at the office of the property
Mayor) 2. be entitled to the rents and other income
 in the municipality or city where the thereof
distraint is made
IV. Forfeiture of Government for Want of Bidder
b. The time of sale shall not be less than 20
days after notice to the owner or Effected when:
possessor of the property and the 1. there is no bidder for the real property in the
publication or posting of such notice public sale, or
2. if the amount of the highest bid is
c. Sale of the property at insufficient to pay the taxes, penalties and
 public auction to the highest bidder for costs
cash, or
 through duly licensed commodity or The Register of Deeds concerned shall:
stock exchanges, with the approval of 1. Upon registration of the declaration for
the CIR forfeiture, transfer the title of the property to
the government
2. In case of levied property: 2. Without the necessity of an order from a
a. advertisement of the time and place of competent court
sale of the taxpayer’s property or so
Enforced by:
much thereof as may be necessary to 1. In case of personal property
satisfy the claim within 20 days after the  seizure and
levy, and it shall cover a period of at least  sale or destruction of the property
30 days
 posting a notice at the main entrance 2. In case of real property
of the municipal building or city hall  judgment of condemnation and
and in a public and conspicuous place
 sale in a legal action or proceeding, civil b. rejection of an offer of compromise: final

or criminal, as the case may require and binding unless revoked or set aside by
the Commissioner
Redemption of the Property Sold
 Same as that of redemption in case of sale Compromise of CIVIL CASES
 The one-year period starts from the date of Grounds:
registration of the declaration of forfeiture. a. when a reasonable doubt as to the validity of
 If the property is not redeemed, the forfeiture the claim against the taxpayer exists
shall become absolute b. when the financial position of the taxpayer
demonstrates a clear inability to pay the
V. Tax Lien assessed tax
A legal claim or charge on property of the Limitation as to amount:

taxpayer as security for the payment of some 1. In case of financial incapacity: 10% of the basic
debt or obligation. It accrues when the assessed tax
taxpayer neglects or refuses to pay his tax 2. Other cases: 40% of the basic assessed tax
liability after demand with interests, penalties,
and costs that may accrue in addition thereto. The approval of the Evaluation Board (composed
of the CIR and the Deputy Commissioners) is
Extent – upon all property and rights to required when:
property belonging to the taxpayer attaches 1. The basic tax involved exceeds P1,000,000; or
not only from the time the warrant was served 2. The settlement offered is less than the MCR
BUT from the time tax was due and
demandable. NOTE: The MCR may be less than the prescribed
rates of 10%, 20% or 40%, as the case may be,
The lien is not valid against any mortgagee, provided it is approved by the Evaluation Board.
purchaser, or judgment creditor until notice of
such lien shall have been filed in the register of Limitation as to coverage:
deeds of the province or city where the property 1. With respect to the liability of the taxpayer for
is located. But it is effective against third surcharges as their imposition is mandatory
persons only when notice of such lien is filed by 2. In cases finally decided by the courts
the Commissioner in the Register of Deeds in
the province/ city where the property is Compromise in CRIMINAL VIOLATIONS
situated. (Sec. 219) General Rule:
All criminal actions may be compromised.
NOTE: Superior to judgment claim of private
property. Exceptions:
a. those already filed in court
VI. Compromise And Abatement b. those involving fraud
Compromise is a contract whereby the parties Extent of discretion:

by reciprocal concessions, avoid litigation or 1. before the complaint is filed with the
put an end to one already commenced prosecutor’s office: The Commissioner has full
Requisites: discretion to compromise except those
1. the taxpayer must have a tax liability; involving fraud;
2. there must be an offer (by the taxpayer of 2. after the complaint is filed with the
an amount to be paid him) prosecutor’s office but before the information is
3. there must be acceptance (by the filed with the court: The Commissioner can still
Commissioner or taxpayer as the case may compromise provided the prosecutor
be) of the offer in the settlement of the consented;
original claim; 3. after the information is filed with the court:
The Commissioner is no longer permitted to
Officers authorized to compromise: compromise with or without the consent of the
1. Commissioner of Internal Revenue is the prosecutor.
only official vested with such power and
discretion;
2. Subordinate officials may preliminarily
enter into compromise. Remedies when taxpayer refuses or fails to abide
by a tax compromise:
Effects: 1. enforce the compromise
a. acceptance of an offer of compromise: not a. judicial compromise can be enforced by
final and may be reviewed by the mere execution
Commissioner; b. extrajudicial can only be enforced by
court action

131
2. regard it as rescinded and insists upon d. Failure to file a timely appeal to the CTA on
original demand (Art. 2041, NCC) the final decision of the CIR or his authorized
representative on the disputed assessment.
Compromise Penalty
It is an amount which the taxpayer pays to Defenses Precluded by Final and Executory
compromise a tax violation Assessments:
1. invalidity or illegality of the assessment; and
 paid in lieu of criminal prosecution. 2. prescription of the government’s right to
assess
A taxpayer cannot be compelled to pay a
compromise penalty. B. Civil actions filed with the CTA
The fact that no civil action was filed before
If he does not want to pay, the CIR must institute the ordinary courts to collect the tax liability
a criminal action. is no ground for claiming that the right to
collect had already prescribed.
ABATEMENT pertains to the cancellation of the
tax liability. The answer filed by the government in the CTA
General Rule: The power to compromise and abate is tantamount to the filing of a civil action for
cannot be delegated by the CIR. collection the regular court and has the effect of
tolling the prescriptive period (Hermanos, Inc. vs.
Exceptions: CIR, 29 SCRA 552).
a. assessments issued by regional offices
involving basic taxes of Php500,000 or less; and II. Criminal Actions
b. minor criminal
Prescriptive Period for the Filing of Criminal
Grounds: Action: five (5) years from the day of the
1. When the tax assessed or any portion thereof commission of the violation, and if not known,
appears to be unjustly or excessively from the discovery thereof and the institution of
demanded, or judicial proceedings for its investigation and
2. When the administration and collection costs punishment.
involved do not justify the collection of the
amount due Grounds for Interruption of the Period:
1. When proceedings are instituted against
JUDICIAL REMEDIES OF THE the guilty persons – It begins to run again
GOVERNMENT if the proceedings are dismissed for
reasons not constituting jeopardy.
I. Civil Actions 2. When the offender is absent from the
Philippines
These are actions instituted by the government
to collect internal revenue taxes. It includes Two (2) common crimes punishable under the Tax
filing by the government with the probate court Code:
claims against the deceased taxpayer. 1. Attempt to evade or defeat a tax
Any person who willfully attempts in any
Enforced by: manner to evade or defeat any tax or the
1. filing a civil case for the collection of a sum of payment thereof shall, in addition to other
money with the proper regular court (i.e. penalties provided by law, upon conviction
MTC or RTC); or thereof, be punished.
2. filing an answer to the petition for review
filed by the taxpayer with the CTA The conviction or acquittal shall not be a bar
to the filing of a civil suit for the collection of
A. Civil actions filed with ordinary courts taxes.
Resorted to only when tax becomes:
1. delinquent 2. Failure to file return, supply correct and
2. collectible accurate information, pay tax, withhold and
remit tax and refund excess taxes withheld
on compensation
COLLECTIBILITY arises when:
a. Self-assessed tax shown in the return was Any person required under the Tax Code:
not paid within the date prescribe by law; a. to pay any tax make a return
b. Final assessment is not protested b. keep any record
administratively within 30 days from date of c. supply correct and accurate
receipt; information
c. Non-compliance with the condition laid in d. withhold or remit taxes withheld
the approval of protest;
e. refund excess taxes withheld on  It must be strictly construed against the

compensation claimant and such claimant has the burden of
f. who willfully violates these proving that the following requirements were
duties at the time or times required by met:
law shall be punished upon conviction 1. There must be a written claim for refund filed
in addition to other penalties. by the taxpayer with the Commissioner
This is mandatory requirement; in the
Prima Facie Evidence of a False or Fraudulent Return absence of this requirement, the
1. substantial under-declaration of taxable Commissioner is without any authority to
sales, receipts or income OR a substantial refund (Andrea Vda. De Aguinaldo vs.
overstatement of deduction, as determined by Commissioner, 13 SCRA 269).
the Commissioner pursuant to the rules and
regulations promulgated by the Secretary of 2. The claim for refund must be a categorical
Finance; demand for reimbursement
While payment protest is not necessary,
2. failure to report sales, receipts or income in an the claim for refund must categorically
amount exceeding 30% of actual deductions demand for reimbursement of the
constitutes substantial overstatement of overpaid amount.
deductions.
3. It must be filed with the commissioner within
NOTES: two years (2) after the payment of the tax or
No civil or criminal action for the recovery of penalty;
taxes or the enforcement of any fine, penalty
or forfeiture under this Code shall be filed in General Rule: from the date of payment,
court without the approval of the regardless of any supervening cause that may
Commissioner. arise after payment:
The approval of the Commissioner required Exceptions:

for the judicial enforcement of tax liability is Corporate Income tax - where a corporation
not jurisdictional; lack of such approval paid quarterly income taxes in any of the first
merely affects the cause of action or capacity 3 quarters during the taxable year but incurs
to sue. a net loss during the taxable year, the 2-year
period for the filing of the claim for refund or
When the civil action arising out of a tax credit shall be counted from the date of the
delinquency is extinguished by prescription, it filing of the annual corporate ITR.
is still possible for such tax to be collected by
criminal action inasmuch as actions of this Income tax paid in installments - where the
kind prescribe only after the lapse of 5 years tax paid had been paid in installment, the
counted from the discovery of the crime. taxes are deemed paid, for purposes of
determining the commencement of the 2-year
An assessment is not necessary before a period for filing a written claim for the refund
criminal charge can be filed provided there is or credit therefore on the date the last
a prima facie showing of a willful attempt to installment was paid (CIR vs. Prieto, No. L-
evade taxes. 11976, August 29, 1961).
3. Recurrence of understatement of income or NOTE:

overstatement of deductions for more than A return filed showing an overpayment shall be
one taxable year. considered as a written claim for credit or refund.
In case of payments effected through the

withholding tax system, it is from the end of the
taxable year then, or when the taxability falls
TAX REFUND
due, that the two-year prescriptive period starts to
Grounds: run (Gibbs vs. CIR, No. L-17406, November 29,
1. tax is collected erroneously or illegally 1965).
2. penalty is collected without authority
3. sum collected is excessive 4. Show Proof of Payment
Proper Person to Claim Refund or Credit - the

Requisites: person to whom the tax is imposed by the statute
 Claim for refund partakes of the nature of an (Weatern Minolco Mining Corp. vs. Plana, CTA
exemption which cannot be allowed unless Case No. 3011, May 21, 1982).
granted in the most categorical language.

133
The withholding agent (of nonresident foreign Ironcon Builders and Development Corporation,
corporations) is constituted the agent of both the G.R. No. 180042, February 8, 2010)
Government and the taxpayer. With respect to the
collection of and/or withholding of the tax, he is the Proper Party to Claim a Refund for the Excise
government’s agent, and with regard to the filing Taxes Paid
of the necessary income tax and the payment of
the tax to the Government, he is the agent of the The proper party to question, or claim a refund or
taxpayer. Hence, it may be assessed for deficiency tax credit of an indirect tax is the statutory
withholding tax at source; as Philippine taxpayer, which is Petron in this case, as it is the
counterpart, it is therefore the proper entity who company on which the tax is imposed by law and
should claim for the refund (CIR vs. Wander which paid the same even if the burden thereof
Philippines, No. L-68375, April 15, 1988). was shifted or passed on to another.
Prescriptive Period for the Filing of Claims for Excise tax on petroleum is an indirect tax.
Tax Refunds Although the burden to pay an indirect tax can be
passed on to the purchaser of the goods, the
General Rule: Both the administrative and liability to pay the indirect tax remains with the
judicial claims must be filed within two years from petroleum manufacturer or seller. When the
the filing of the tax returns subject to a claim. manufacturer or seller decides to shift the burden
of the excise tax to the tax-exempt purchaser, the
Exception: Claims involving refunds of excess tax becomes a part of the price of the commodity.
input VAT must be filed with the Bureau of Thus, in this case, the petroleum manufacturer
Internal Revenue (BIR) and with the courts within who is the statutory taxpayer is the proper party
two years from the close of the taxable quarter to claim refund. (Silkair (Singapore) PTE. Ltd. vs.
when the relevant sales were made regardless of Commissioner of Internal Revenue, G.R. Nos.
when the input VAT was paid under Sec. 112 of 171383 & 172379, November 14, 2008)
the Tax Code. (Commissioner of Internal Revenue
vs. Mirant Pagbilao Corporation, G.R. No. 172129, Silkair should have timely submitted a valid
September 12, 2008) exemption certificate to Petron in order that
Petron will not pass on the excise tax to petitioner.
Q: Are all refunds in the nature of tax exemptions?
It should have invoked its tax exemption to Petron
A: No. A tax refund may only be considered as a
before buying the aviation
tax exemption when it is based either on a tax-
jet fuel. Petron, however, remains the statutory
exemption statute or a tax-refund statute. Tax
taxpayer on those excise taxes. (Ibid.)
refunds or tax credits are not founded principally
on legislative grace, but on the legal principle of
Failure to indicate a choice to avail of either the
quasi-contracts against a person’s unjust
tax refund or tax credit in the annual ITR is not
enrichment at the expense of another. The
fatal to a claim for refund and should not bar the
erroneous payment of tax as a basis for a claim of
availment of such remedy. While a taxpayer is
refund may be considered as a case of solutio
required to mark its choices in the form provided
indebiti, which the government is not exempt from
by the BIR, this requirement is only for the
its application and has the duty to refund without
purpose of facilitating tax collection. A taxpayer
any unreasonable delay what it has erroneously
that makes a choice expresses certainty or
collected. (Commissioner of Internal Revenue vs.
preference and this demonstrates clear diligence.
Fortune Tobacco Corp., G.R. No. 167274-75, July Conversely, a taxpayer that makes no choice
21, 2008) expresses uncertainty or lack of preference and
hence shows simple negligence or plain oversight.
(CIR vs. PERF Realty Corporation, G.R. No.
163345, July 4, 2008)
Taxes withheld on certain payments under the
creditable withholding tax system are but
intended to approximate the tax due from the
Quantum of Proof Required to Prove a Claim for
payee. The withheld taxes remitted to the BIR are
Tax Refund.
treated as advance on the actual tax liability of the
taxpayer, subject to adjustment at the proper time Only the preponderance of evidence threshold as
when the actual tax liability can be fully and applied in ordinary civil cases is needed to
finally determined. Even if the law does not substantiate a claim for tax refund proper.
expressly state that Ironcon’s excess creditable (Commissioner of Internal Revenue vs. Mirant
VAT withheld is refundable, it may be the subject Pagbilao Corporation, G.R. No. 172129,
of a claim for refund as an erroneously collected September 12, 2008)
tax. Substantial justice dictates that the
government should not keep money that does not To determine the validity of taxpayer’s claim as to
belong to it at the expense of citizens. (CIR vs. unutilized input VAT, an invoice would suffice
provided the requirements under Section 113 and
237 of the Tax Code are met. Sales invoice are Internal Revenue vs. Bank of the Philippine
recognized commercial documents to facilitate Islands, G.R. No. 178490, July 7, 2009)
trade or credit transactions. They are proofs that
a business transaction has been concluded, hence, PERIOD TO FILE REFUND OF UNUTILIZED
should not be considered bereft of probative value. INPUT VAT
(AT&T Communications Service Philippines, Inc. (ADMINISTRATIVEANDJUDICIAL)
vs. Commissioner of Internal Revenue, G.R. No. RECKONING OF THE TWO-YEAR PERIOD
182364, August 3, 2010 )
Atlas Ruling:
Tax Credit is a claim for issuance of a tax credit For practical reasons, the reckoning of the two-
certificate, showing an amount owing from the year prescriptive period for filing a claim for
government to the taxpayer which the latter is refund of input VAT on zero-rated sales is from the
legally authorized to credit or offset against date of filing of the return and the payment of tax
national internal taxes payable by him, except due. (Atlas Consolidated Mining and Development
withholding taxes. Corporation vs CIR. G.R. Nos. 141104 & 148763,
June 8, 2007)
TAX REFUND TAX CREDIT
There is actual The reimbursable Mirant Ruling:
reimbursement of amount is applied The reckoning point of the two-year prescriptive
the tax. against the sum that period commences from the close of the taxable
may be due of quarter when the relevant sales were made
collectible from the pertaining to the input VAT regardless of whether
taxpayer. the said tax was paid or not. Sections 204 (C) and
229 of the 1997 NIRC cannot apply for a claim for
IRREVOCABILITY RULE refund of excess input VAT on zero-rated sales
A corporation entitled to a tax credit or refund of considering that it is not a case of erroneous
the excess estimated quarterly income taxes paid payment or illegal collection of taxes. (CIR vs.
has two options: (1) to carry over the excess credit; Mirant Pagbilao Corp., G.R. No. 172129,
or (2) to apply for the issuance of tax credit September 12, 2008)
certificate or to claim cash refund. If the option to
carry over the excess credit is exercised, the same Aichi Ruling:
shall be irrevocable for the taxable period. To Following the ruling in Mirant case, reckoning
facilitate tax collection, these remedies are in the point of the two-year prescriptive period shall be
alternative and the choice of one precludes the from the close of the taxable quarter when the
other. This is known as the irrevocability rule and sales were made. Section 112(A) which states
is embodied in the last sentence of Section 76 of “within 2 years xxx apply for the issuance of a tax
the Tax Code. credit certificate or refund” refers to applications
for refund/credit filed with the CIR and not to
Under Section 76 of the NIRC, the application of appeals made to the CTA. The 120—30 day period
the option to carry-over the excess creditable tax under Section 112 (D) is crucial in filing an appeal
is not limited only to the immediately following to the CTA. Section 229 does not apply to
taxable year but extends to next succeeding refunds/credits of unutilized input VAT of zero-
taxable years. The clear intent in the amendment rated sales. In computing legal periods, the
under Section 76 is to make the option, once Administrative Code of 1987 prevails over the
exercised, irrevocable for the “succeeding taxable Civil Code. (Commissioner Internal Revenue vs.
years.” Aichi Forging Company of Asia, Inc., G.R. No.
184823, October 6, 2010)
Thus, once the taxpayer opts to carry-over the
excess income tax against the taxes due for the REMEDIES OF THE GOVERNMENT
succeeding taxable years, such option is FOR NON-PAYMENT OF TAXES
irrevocable for the whole amount of the excess
income tax, thus, prohibiting the taxpayer from 1. Administrative remedies
applying for a refund for the same excess income a. tax lien
tax in the next succeeding taxable years. b. distraint (actual and constructive)
(Asiaworld Properties Philippine Corporation vs. c. levy and sale of property of a delinquent
Commissioner of Internal Revenue, G.R. No. taxpayer
171766, July 29, 2010) d. forfeiture of property
e. suspension of business operations
The evident intent of the legislature in adding the f. penalties and fines
last sentence to Section 76 is to keep the taxpayers g. compromise and abatement
from flip-flopping on its options and therefore, get
rid of confusion and complication as regards 2. Judicial Remedies
taxpayers’ excess tax credits. (Commissioner of a. civil action
b. criminal action

135
A: Yes. It is settled that good faith and honest

NOTES: belief that one is not subject to tax on the basis
One or all of the remedies may be pursued of previous interpretations of government
simultaneously in the discretion of revenue agencies tasked to implement that tax law are
authorities. sufficient justification to delete the imposition
of surcharges and interest. (Tambunting
Distraint or levy NOT availed of where the Pawnshop, Inc. vs. Commissioner of Internal
amount of tax involved is NOT MORE than Revenue, G.R. No. 179085, January 21, 2010)
P100.
C. Interest:
3. Enforcement of Administrative Fine a. Deficiency interest
20% per annum from the date prescribed
STATUTORY OFFENSES AND PENALTIES for its payment until the full payment
thereof
A. Penalties and fines:
Refer to: b. Delinquency interest
a. surcharges Interest of 20% or the Manila Reference
b. deficiency and delinquency interest rate, whichever is higher, required to be
c. compromise penalty paid in case of failure to pay:
1. the amount of the tax due on any
B. Surcharges – not really a penalty as used in return required to be filed;
criminal law but a civil administrative 2. amount of the tax due for which return
sanction designed primarily to: is required;
a. protect the State revenue, and 3. the deficiency tax or any surcharge or
b. reimburse the government for the interest thereon, on the date
expenses in investigating and the loss appearing in the notice and demand of
resulting from the taxpayer’s fraud. the CIR
Penalty of 25% of the amount due for: D. Compromise:

1. failure to file any return and pay the tax Similarities of compromise and compromise
due thereon; penalty:
2. filing a return with the wrong agent of the 1. They both imply mutual agreement.
BIR, unless otherwise authorized by the
CIR 2. A compromise penalty cannot be imposed
3. failure to pay the deficiency tax within the in the absence of a showing that the
time prescribed for its payment in the taxpayer consented thereto.
notice of assessment;
4. failure to pay the full or part of the tax as 3. The CIR has no power to impose and
shown on the return on or before the due collect the compromise penalties in the
date absence of a compromise agreement
validly entered into between the taxpayer
Penalty of 50% of the amount due for: and the CIR.
1. willful neglect to file the return within the
period prescribed by the Code,
2. false or fraudulent return is willfully made COMPROMISE
COMPROMISE
PENALTY
NOTE: In case the taxpayer, without Definition
notice from the Commissioner or his duly An amount of money An amount of money
authorized representative, voluntarily paid by the taxpayer paid to compromise a
files a return, only 25% surcharge shall be to settle his civil tax violation that he
imposed for late filing and late payment of liability for tax has committed, which
the tax in lieu of the 50% surcharge. assessed may be subject of
criminal prosecution
3. person not VAT registered issues an Basis of amount paid
invoice or receipt showing his TIN, Basic tax assessed Gross sales or
followed by the word “VAT” receipts during the
year of the tax due
Q: Taxpayer argues against liability Minimum amount
surcharges and interest – that it was in good The limitation Depends on the
faith in not paying documentary stamp taxes, depends on the legal nature of the tax
having relied on the ruling of the CIR and the grounds used by the violation and the
CTA that pawn tickets are not subject to taxpayer minimum amount is
documentary stamp taxes. Is he correct? generally not less
than P1,000
It includes:
 Authority to examine any book, paper,
record or other data relevant to the
ORGANIZATION AND FUNCTION OF
inquiry
THE BUREAU OF INTERNAL REVENUE  Authority to obtain information such as,
but not limited to, costs and volume of
Headed by a Commissioner of Internal Revenue production, receipts or sales and gross
and four (4) Deputy Commissioners. incomes, and financial statements of
taxpayers
Each Deputy Commissioner is the head of the  Authority to summon person liable to tax
Operations Group, Legal and Inspection Group, or required to file a return, or any person
Resource and Management Group, and having custody of books of accounts
Information Systems Group, respectively. relating to business of the person liable to
tax
NOTE: Two more Deputy Commissioners were  Authority to take such testimony of the
appointed in 2003 as head of the Prosecution person concerned, under oath, as may be
Group and the Special Concerns Group. Hence, relevant or material to such inquiry
there are already six (6) Deputy Commissioners.  Authority to cause revenue officers and
employees to make a canvass of any
 Together with the Commissioner and Deputy revenue district or region and inquire
Commissioners are the thirteen (13) Assistant concerning all persons therein who may
Commissioners. be liable to pay any internal revenue tax
 Supporting them are the nineteen (19) 3. Power to inquire into bank deposits of
Revenue Directors, one hundred fifteen (115) taxpayers
Revenue District Officers, two (2) Large Notwithstanding any contrary provisions of
Taxpayers Audit and Investigation Divisions the Bank Secrecy Law and other general or
and two (2) Large Taxpayers District Offices special laws, the CIR is authorized to inquire
and thousands of revenue officers conducting into the bank deposits of:
the audit of taxpayers’ books of accounts and a. A decedent to determine his gross estate;
accounting records. and
b. Any taxpayer who has filed an
Powers and Duties of the BIR application for compromise of his tax
liability under Section 204 (A) (2) of the
1. To assess and collect national internal taxes, Tax Code by reason of financial
fees, and charges; incapacity to pay his tax liability
2. To enforce all forfeitures, penalties and fines
connected therewith;
3. To execute judgment in all cases decided in its
by the CTA and the ordinary courts; and
4. To effect and administer the supervisory and
police powers conferred upon it by the Tax
Code or other special laws (Sec. 2, NIRC).
POWERS OF THE COMMISSIONER OF 4. Power to assess and collect the correct amount
INTERNAL REVENURE (CIR) of tax
After the return is filed, the Commissioner or
1. Power to interpret tax laws and decide tax his duly authorized representative may
cases authorize the examination of any taxpayer
Exclusive and original jurisdiction of the and the assessment of the correct amount of
Commissioner, subject to review of the tax.
Secretary of Finance (Sec. 4, NIRC).
For reasons of public policy based on the
The authority of the Secretary of Finance lifeblood theory, the assessment made by the
shall be without prejudice to the power of the CIR id prima facie presumed correct.
CIR to make rulings or opinions in connection
with the implementation of the provisions of The burden of proof to show the incorrectness
internal revenue laws, including ruling on the or inaccuracy of such assessment or its details
classification of articles of sales and similar lies on the taxpayer, contrary to the usual
purposes (Commissioner vs. Josefina Leal, presumptions of good faith and innocence.
G.R. No. 113459, Nov. 18, 2002).
5. Power to allow withdrawal of any return
2. Power to examine books and other accounting statement or declaration, although the same
records to obtain information may be amended

137
Any return, statement or declaration filed in

any office authorized to receive the same shall
not be withdrawn.
However, the same may be modified, changed,

or amended within 3 years from the date of
such filing, provided no notice for audit or
investigation of such return, statement or
declaration has, in the meantime, been
actually served upon the taxpayer (Sec. 6[A],
NIRC).
Retroactivity of BIR Rulings:
General Rule: Prospective.
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; and
3. Where the taxpayer acted in bad faith.
Q: Does the Commissioner of Internal Revenue

have the power to reclassify registered cigarette
brands and adjust their tax rates?
A: No. Reiterating its August 20, 2008 ruling in
British American Tobacco v. Camacho (G.R. No.
163583), the Court held that the BIR is devoid of
power to review, for purposes of updating tax
classifications, the current net retail prices of
cigarettes that are already registered. The
passage by the BIR of Revenue Regulations No. 9-
2003 which provides for a periodic review of the
current net retail prices of new cigarettes and an
update of their classification, as well as the
subsequent Revenue Regulation No. 22-2003
which implemented the revised tax classification
of certain new brands, unjustifiably emasculate
the operation of Section 145 of the NIRC because
they authorize
Commissioner of Internal
the
LOCAL GOVERNMENT CODE OF 1991
Revenue to update the tax (As amended)
classification of new brads
every two years or earlier subject only to its
issuance of the appropriate Revenue Regulations.
The Court stressed that nowhere in the law is such
authority granted to the BIR. (Secretary of
Finance vs. La Suerte Cigar and Cigarette
Factory, G.R. No. 166498, June 17, 2009)
LEGAL BASIS OF LOCAL GOVERNMENT

UNIT’S (LGU) POWER TO TAX
1. CONSTITUTIONAL BASIS – Not inherent

(SEC. 5, ARTICLE X, 1987, 1987 – Exercised only if delegated by law or
CONSTITUTION) – Each local government Constitution; and
unit shall have the power to create its own – Not absolute; subject to limitations provided for
sources of revenue and to levy taxes, fees and by law
charges subject to such guidelines and
limitations as the congress may provide, NOTE: Under the present Constitutional Rule,
consistent with the basic policy of local “where there is neither a grant nor a prohibition
autonomy. Such taxes, fees, and charges shall by a statute, the tax power must be deemed to
accrue exclusively to the local governments. exist although Congress may provide statutory
limitations and guidelines. The basic rationale is
2. REPUBLIC ACT NO. 7160, SEC. 129 to safeguard the viability and self-sufficiency of
(LOCAL GOVERNMENT CODE) – Each local local government units by directly granting them
government unit shall exercise its power to general and broad powers.”
create its own sources of revenue and to levy (Manila Electric Co. vs. Province of Laguna, G.R.
taxes, fees, and charges subject to the No. 131359, May 5, 1999).
provisions herein, consistent with the basic
policy of local autonomy. Such taxes, fees, and A. Grant of Local Taxing Power under the Local
charges shall accrue exclusively to the local Government Code (Sec. 132, LGC)
governments.
Section 132 Local Taxing Authority- The power to
NOTE: Under the present constitutional impose a tax, fee, or charge or to generate revenue
regime/administration, the constitution grants under this Code shall be exercised by the
local governments the power to tax to the extent Sanggunian of the LGU concerned through an
that no antecedent legislation is needed before appropriate ordinance.
they can levy taxes. However, the congress may
issue guidelines and limitations consistent with B. Authority to Prescribe Penalties for Tax
the policy of local autonomy. Violations (Sec. 516, LGC)
FUNDAMENTAL PRINCIPLES 1. The Sanggunian is authorized to

(Sec. 130, LGC) prescribe fines or other penalties for
violations of tax ordinance subject to the
1. Taxation shall be uniform in each local following limitations:
government unit. – In no case shall fines be less than
P1,000 nor more than P5,000;
2. Taxes, fees, and charges shall be: – Nor shall the imprisonment be
 -be equitable and based as much as less than one (1) month nor more than six
possible on the taxpayer’s ability to pay; (6) months.
 -be levied and collected for public
purposes; 2. Such fine or other penalty shall be
 -not be unjust, excessive, oppressive or imposed at the discretion of the court.
confiscatory;
 -not to be contrary to law, public policy, 3. The Sangguniang Baranggay may
national economic policy, or restraint of prescribe a fine of not less than P100 nor
trade. more than P1,000.
3. The collection of local taxes, fees, charges, and

other impositions shall in no case be left to C.Authority to Grant Local Tax Exemptions
any private person; (Sec. 192, LGC)
LGUs may, through ordinances duly approved

grant tax exemptions, incentives or reliefs under
such terms and conditions as they may deem
4. The revenue collected shall inure solely to the necessary.
benefit of, and subject to disposition by, the
LGU levying the tax or other imposition Such authority does not apply to regulatory fees
unless otherwise specifically provided; and because they are levied under the police power of
the LGUs.
5. Each LGU shall, as far as practicable, evolve
a progressive system of taxation. D.Withdrawal of Tax Exemption Privileges
(Sec. 193, LGC)
NATURE OF TAXING POWERS OF LGUs

139
Tax exemptions granted to, or presently enjoyed 2. Those imposing a fee or tax not specifically
by all persons, whether natural or juridical, enumerated under the LGC or taxed under
including government-owned or –controlled the provisions of the NIRC or other applicable
corporations, except local water districts, laws (Sec. 186, LGC).
cooperatives duly registered under R.A. 6938, non-
stock and non-profit hospitals and educational Requisites of a VALID ORDINANCE:
institutions were withdrawn upon the effectivity  Satisfy the requirements of procedural and
of the LGC. substantive due process
 Public hearing is required with quorum,
E.Authority to Adjust Local Tax Rates voting and approval and/or veto requirements
(Sec. 191, LGC) complied with (Secs. 53-55, LGC).
 Publication of ordinance within 10 days from
LGUs may adjust rates of tax ordinances approval for 3 consecutive days in a
prescribed in the LGC but subject to the following newspaper of general circulation and/or
limitations: posting at least 2 conspicuous and publicly
1) Not oftener than once every five (5) years; accessible places.
and
2) In no case shall such adjustment exceed LOCAL TAXING AUTHORITY
10% of the rates fixed under the LGC.
Power to Create Revenues Exercised thru LGUs
F.Residual Taxing Power (Sec. 186, LGC) 1. Power to prescribe penalties for tax violations
and limitations thereon;
Local government units exercise the power to levy 2. Power to grant local tax amnesty ;
taxes, fees or charges on any base or subject NOT: 3. Power to adjust local tax rates (Sec. 129,
1. Specifically provided by the Local Government LGC);
Code 4. Exercise of the residual taxing powers
2. Taxed under the provisions of the National (Sec. 186, LGC).
Internal Revenue Code, as amended, and
3. Other applicable laws Procedure for Approval and Effectivity of Tax
Ordinance
Conditions: The sangguniang panlalawigan, sangguniang
1. The taxes, fees, or charges shall not be panlungsod, or sangguniang bayan shall enact an
unjust, excessive, oppressive, ordinance;
confiscatory or contrary to declared
national policy; and The said ordinance shall be presented to the
2. The ordinance levying such taxes shall provincial governor, or city or municipal mayor, as
not be enacted without any prior public the case may be;
hearing conducted for the purpose.
The respective local chief executive shall approve
Limitations of the Residual Power or veto it:
1. Constitutional limitation on taxing power  If he approves it, he shall affix his
2. Common limitations prescribed in Sec. 133 signature on each and every page thereof;
of the LGC  If he vetoes it, he shall return the same
3. Fundamental principles governing the with his objections to the sanggunian,
exercise of the taxing power of the LGU’s which may proceed to reconsider the
prescribed under Sec. 130 of the LGC same.
The respective sanggunian may override the

4. The ordinance levying such residual taxes veto of the local chief executive by two-thirds
shall not be enacted without any prior (2/3) vote of all its members, thereby making
public hearing conducted for the purpose the ordinance or resolution effective for all
and legal intents and purposes;
5. The principle of preemption.
The local chief executive shall communicate
G.Authority to Issue Local Tax Ordinances the veto to the sanggunian within 15 days in
(Sec. 132, LGC) the case of a province, and 10 days in the case
of a city or a municipality; otherwise, the
This is exercised by the Sanggunian of the LGU ordinance shall be deemed approved as if he
concerned through an appropriate ordinance. had signed it.
Kinds of Ordinance: NOTE: Ordinances enacted by the

1. Those imposing a fee or tax specifically sangguniang barangay shall, upon approval
authorized by the LGC for the LGUs to by the majority of all its members, be signed
impose. by the punong barangay.
acquisition of property of the FMV in the case the

Within 10 days after approval, certified true monetary consideration involved in the transfer is
copies of all provincial, city, and municipal tax not substantial, whichever is higher.
ordinances or revenue measures shall be
published in full for three (3) consecutive days Time of Payment: within sixty (60) days from the
in a newspaper of local circulation. date of the execution of the deed or death of
decedent.
In the absence of newspapers of local
circulation, the ordinance or measure may be Person Liable to Pay:
posted in at least two (2) conspicuous and 1. Seller;
publicly accessible places. 2. Donor;
3. Transferor; or
NOTE: Respective local treasurers shall be 4. Executor or administrator
furnished with the copies of the ordinance or
revenue measures for public dissemination. B. Tax on Business of Printing and Publication
(Sec. 136, LGC)
PRINCIPLE OF PREEMPTION OR Transaction Taxed:

EXCLUSIONARY PRINCIPLE Tax on the business of persons engaged in the
printing and/or publication of books, cards,
Where the national government elects to tax a posters, leaflets, handbills, certificates, receipts,
particular area, it impliedly withholds from the pamphlets, and other similar nature
local government the delegated power to tax the Except: printing and/or publishing of books or
same field. This doctrine primarily rests upon the other reading materials prescribed by DepED,
intention of congress. Conversely, should congress CHED or TESDA
allow municipal corporations to cover fields of
taxation it already occupies then the doctrine of Tax Rate:
pre-emption will not apply (Victoria Milling Co., 1. not more than fifty percent (50%) of one
Inc. vs. Municipality of Victorias, et al, G.R. no. l- percent (1%) of the gross annual receipts
21183, 27 September, 1968). for the preceding calendar year;
Principle Of Pre-Emption Applies To The 2. In case of newly started business:

Following:  Tax shall not exceed one-
a. Taxes levied under the NIRC; twentieth (1/20) of one percent
(1%) of the capital investment
b. Taxes, fees, and other charges imposed under  In the succeeding calendar year,
the tariff and customs code; and regardless when the business
started to operate, the
c. Taxes, fees, and other charges under special tax shall be based on the gross
laws. receipts for the preceding
calendar year, or any fraction
thereof
SPECIFIC TAXING POWER OF LGUs

C. Franchise Tax (Sec. 137, LGC)
TAXING POWERS OF PROVINCES
(Secs. 134-141, LGC) 1. Tax on businesses enjoying a franchise, at a
rate not exceeding 50% of 1% of the gross
annual receipts for the preceding calendar
A. Tax on Transfer of Real Property Ownership
year based on incoming receipt, or realized,
(Sec. 135, LGC)
within its territorial jurisdiction.
2. In the case of newly started business, the
Transaction Taxed:
tax shall not exceed 1/20 of 1% of the capital
Tax on sale, donation, barter or any other mode of
investment. In the succeeding calendar year,
transferring ownership or title to real property
regardless of when the business started to
Except: The sale, transfer, or other disposition of
operate, the tax shall be based on the gross
real property pursuant to the Comprehensive
receipts for the preceding calendar year, or
Agrarian Reform Law of 1988 shall be exempt
any fraction thereof.
from this tax.
D. Tax on Sand, Gravel and Other Quarry
Tax Rate:
Resources (Sec. 138, LGC)
Not more than fifty percent (50%) of one percent
(1%) of the total consideration involved in the

141
1. Levy and collect not more than 10% of fair NOTE: A line of profession does not become
market value in the locality per cubic meter of exempt, even if conducted with some other
ordinary stones, sad, gravel, earth, and other profession for which the tax has been paid.
quarry resources extracted from public lands
or from the beds of seas, lakes, rivers, 5. Professionals exclusively employed in the
streams, creeks, and other public waters government shall be exempt from the
within its territorial jurisdiction. payment of this tax.
2. The permit to extract sand, gravel and other
quarry resources shall be issued exclusively F. Amusement Tax (Sec. 140, LGC)
by the Provincial Governor, pursuant to
the ordinance of the Sangguniang 1. Levy an amusement tax to be collected from
Panlalawigan. the proprietors, lessees, or operators of
3. The proceeds of the tax shall be distributed as theatres, cinemas, concert halls, circuses,
follows: boxing stadia, and other places of amusement
a. Province – 30%; at a rate of not more than 30% of the gross
b. Component city or municipality receipts for admission fees.
where the sand, gravel and other
quarry resources are extracted – NOTE: In case of theatres or cinemas, the tax
30%; shall first be deducted and withheld by their
c. Barangay where the sand, gravel, proprietors, lessees, or operators and paid to
and other quarry resources are the provincial treasurer before the gross
extracted – 40%. receipts are divided between said proprietors,
lessees, or operators and the distributors of
E. Professional Tax (Sec. 139, LGC) the cinematographic films.
1. Annual professional tax on each person 2. The holding of operas, concerts, dramas,
engaged in the exercise or practice of his recitals, painting, and art exhibitions, flower
profession requiring government examination shows, musical programs, literary and
at such amount and reasonable classification oratorical presentations, except pop, rock, or
as the Sangguniang Panlalawigan may similar concerts shall be exempt from the
determine but in no case shall exceed three payment of the tax.
hundred pesos (P300).
2. In case the person practices his profession in The proceeds from the amusement tax shall
several places, he shall pay professional tax to be shared equally by the province and the
the province where he practices his profession municipality where such amusement places
or where he maintains his principal office. are located.
However, he shall be entitled to practice his
profession in any part of the Philippines Annual Fixed Tax for Every Delivery Truck or Van
without being subjected to other national or of Manufacturers or Producers, Wholesalers of,
local tax, license, or fee for the practice of such Dealers, or Retailers in certain products
profession. 1. Annual fixed tax in the delivery or
3. In Section 139, the tax is imposed by distribution of distilled spirits, fermented
provinces, while in Section 147, it is imposed liquors, softdrinks, cigars and cigarettes, and
by cities and municipalities: other products as may be determined by the
Sangguniang Panlalawigan, to sales outlets,
or consumers, whether directly or indirectly,
a. In the former, those persons subject to within the province in an amount not
tax are those who passed a government exceeding P500.00.
examination, while in the latter, the
persons tax are those who are not NOTE: The tax is imposed if there is a vehicle
required to pass a government used in the delivery. If the deliveries are
examination; made by a person only, the person delivers the
b. In the former, it provides for a maximum goods mentioned, this tax is not applicable
amount to be imposed which is P300.00, but the tax to be applied is the tax under
while the latter does not set a maximum Section 1439 (g) – the tax on peddlers.
amount.
TAXING POWERS OF CITIES
4. It shall be payable annually, on or before (Sec. 151, LGC)
the 31st day of January. Any person first
beginning to practice a profession after the Cities are authorized specifically to impose taxes,
month of January must, however, pay the fees and charges that provinces and
full tax before engaging therein. municipalities may levy, at rates that may be
above the maximum established for provinces and
municipalities but not exceeding 50% of such
maximum rates except the rates of professional 2% of gross sales or receipts for the preceding
and amusement taxes. calendar year.
Cities may levy a community tax. Ceiling on Business Tax in Municipalities within
Metropolitan Manila Area
TAXING POWERS OF MUNICIPALITIES
(Sec. 143, LGC) The municipalities within the Metropolitan
Manila Area may levy taxes at rates which shall
Municipalities may levy taxes, fees, and charges not exceed by 50% the maximum rates prescribed
not otherwise levied by provinces. They may also by municipalities.
levy a community tax.
Tax on Retirement of Business
Tax on Various Types of Business
1. A business shall, upon termination
The municipality may impose taxes on the thereof, submit a sworn statement of its
following businesses: gross sales or receipts for the current
1. On manufacturers, assemblers, repackers, year.
processors, brewers, distillers, rectifiers, and 2. It the tax paid during the year be less
compounders of liquors, distilled spirits, and than the tax due on said gross sales or
wines or manufacturers of any article of receipts of the current year, the
commerce of whatever kind or nature; difference shall be paid before the
2. On wholesalers, distributors, or dealers in business is considered officially
any article of commerce of whatever kind or retired.
nature;
3. On exporters, and on manufacturers, millers, Rules on Payment of Business Tax
producers, wholesalers, distributors, dealers
or retailers of essential commodities 1. The tax imposed by the municipalities is
enumerated hereunder at a rate not payable by every separate and distinct
exceeding ½ of the rates prescribed under establishment or place where such
paragraphs (a), (b) and (d) of Section 142 of business is conducted.
the Local Government Code: 2. In case a person conducts two or more
 Rice and corn; businesses subject to the same tax rate,
 Wheat or cassava flour, meat, dairy the tax shall be computed on the
products, locally manufactured, combined total gross sales or receipts of
processed or preserved food, sugar, salt the two or more businesses.
and other agricultural, marine, and fresh 3. In case the tax rates applicable to the
water products, whether in their original businesses are different, the gross sales
state or not; or receipts of each business shall be
 Cooking oil and cooking gas; separately reported.
 Laundry soap, detergents, and medicine;
Per Annum Rate of Tax
 Agricultural implements, equipment and
(1) P400,000.00 or less 2%
post-harvest facilities, fertilizers, (2) more than P400,000.00 1%
pesticides, insecticides, herbicides and
other farm inputs;
 Poultry feeds and other animal feeds;
 School supplies; and
 Cement Fees and Charges for Regulation and Licensing
4. On retailers, with gross sales or receipts for 1.Fees for Sealing and Licensing of Weights and
the preceding calendar year of: Measures
5. On contractors and other independent a. Levy fees at such reasonable rates as shall be
contractors; prescribed by the sangguniang bayan.
6. On banks and other financial institutions, at b. The sangguniang bayan shall prescribe the
a rate not exceeding 50% of 1% on the gross necessary regulations for the use of such weights
receipts of the preceding calendar year; and measures, subject to the guidelines as shall be
7. On peddlers engaged in the sale of any prescribed by the Department of Science and
merchandise or article of commerce, at a rate Technology.
not exceeding P50.00 per peddler annually;
The sangguniang bayan, pursuant to an
NOTE: On any business, provided, however, appropriate ordinance, may:
that in the case of any business subject to the a. Penalize fraudulent practices and unlawful
excise, value-added or percentage tax under possession or use of instruments or weights
the NIRC, the rate of the tax shall not exceed

143
and measures and prescribe the criminal municipality where the factory, project office,
penalty therefor; plant and plantation are located.
b. Authorize the municipal treasurer to settle
an offense not involving the commission of If the plantation is located in a place different
fraud before a case therefor is filed in court, from where the factory is located, the 70% shall be
upon payment of a compromise penalty of further divided, thus:
not less than P200.00.
60% - taxable by the city or
2.Fishery Rentals, Fees and Charges municipality where the factory is
a. Municipalities shall have exclusive authority to located;
grant fishery privileges in the municipal waters 40% - taxable by the city or
and impose rentals, fees or charges therefor; municipality where the plantation is
b. The sangguniang bayan may: located.
1. Grant fishery privileges to erect fish
corals, oyster, mussels or other aquatic If the factory, project office, plant and plantation
beds or bangus fry areas, within a is located in different localities, the 70% shall be
definite zone of the municipal waters; divided pro rata among the different localities
where such establishments are located. The
NOTE: Duly registered organizations division shall be based on the respective volumes
and cooperatives of marginal fishermen shall of production during the taxable period.
have the preferential right to fishery
privileges. In their absence or failure to Situs According to Jurisprudence:
exercise their preferential right, other parties With respect to excise tax, the tax is upon the
may participate in the public bidding. performance of an act, enjoyment of a privilege or
the engaging in an occupation. The power to levy
2. Grant the privilege to gather, take or such tax is not dependent on the domicile of the
catch bangus fry, prawn fry or kawag- taxpayer, but on the place in which act is
kawag or fry of other species and fish performed or the occupation is engaged in; not
from the municipal waters by nets, traps upon the location of the office, but the place where
or other fishing gears to marginal the sale is perfected. (Allied Thread Co., Inc. vs.
fishermen free of any rental, fee, charge City Mayor of Manila, L-40296)
or any other imposition whatsoever;
With respect to sale, it is the place of the
c. Issue licenses for the operation of fishing consummation of the sale, associated with the
vessels of three (3) tons or less for which delivery of the things which are the subject matter
purpose the sangguniang bayan shall of the contract that determines the situs of the
promulgate rules and regulations regarding contract for purposes of taxation, and not merely
the issuances of such licenses to qualified the place of the perfection of the contract. (Shell
applicants under existing laws. Co., vs. Municipality of Sipocot, Camarines Sur
105 Phil. 1263)
Situs of Tax Collected (Sec. 150, LGC)
Branch or sales office – a fixed placed in the

locality which conducts the operation of the
business as an extension of the principal office.
TAXING POWERS OF BARANGAYS
Principal office – the head or the main office of the
business; the city or the municipality specifically The barangay may levy taxes, fees, and charges,
mentioned in the Articles of Incorporation or which shall exclusively pertain to them:
official registration papers as being the official
address of said principal office shall be considered Taxes – on stores or retailers with fixed
the situs thereof. business establishments with gross sales or
receipts of P50,000 or less; in case of cities,
For businesses, the tax shall be paid to the P30,000 or less; in case of municipalities, at a
municipality where the branch is located. In the rate not exceeding 1% of the gross receipts.
absence thereof, the taxes shall pertain to the city
or municipality where the principal office is Service Fees or Charges – collect reasonable
located. fees or charges for services rendered in
connection with the regulation or the use of
For factories, project offices, plants and barangay-owned properties or service
plantations in the conduct of its business, 30% of facilities such as palay, copra, or tobacco
the sales shall be taxed by the city or municipality dryers.
where the principal office is located; while the
remaining 70% shall be taxed by the city or
Barangay Clearance – it is a condition  owns real property with aggregate

precedent before a business license or permit assessed value of P1,000.00 or more;
may be issued by a city or municipality. It or
must be issued by the barangay where the  is required by law to file an income
business is located. It is for this purpose that tax return.
the sangguniang barangay is authorized by
the LGC to impose reasonable fees. Tax Rate: P5.00 plus an annual community
tax of P1.00 for every P1,000.00 of income
The application for clearance shall be acted regardless of whether from business, exercise
upon seven (7) working days from its filing. In of profession of from property which in no case
case the 7-day period lapsed without the shall exceed P5,000.00.
barangay acting upon the same, the city or
municipality may issue such clearance. Place of Payment: place of residence of the
individual.
Other Fees and Charges – it may levy
reasonable fees and charges on: Juridical Persons Liable to Community Tax
 commercial breeding of fighting cocks, Every corporation no matter how created or
cockfights and cockpits; organized, whether domestic or resident foreign,
 places of recreation which charge engaged in or doing business in the Philippines.
admission fees; and
 billboards, signboards, neon signs, and It must be duly registered with the Securities and
outdoor advertisements. Exchange Commission.
COMMON REVENUE RAISING POWERS Tax Rate: P500.00 plus an annual community
tax, which, in no case, shall exceed P10,000.00
The following fees and charges may be imposed by in accordance with the following schedule:
all LGUs: a) For every P5,000.00 worth of
A. Service Fees and Charges – on services real property in the Philippines owned by
rendered provided such fees or charges are it during the preceding year based on the
reasonable. valuation used for the payment of the real
B. Public Utility Charges – for the operation property tax under existing laws – P2.00.
of public utilities which must be owned, b) For every P5,000.00 of gross
operated and maintained by the LGU receipts or earnings derived by it from its
concerned within their jurisdiction. business in the Philippines during the
C. Toll Fees or Charges – for the use of any preceding year – P2.00.
public road, pier, wharf, waterway, bridge,
ferry or telecommunication system funded Place of Payment: where the principal office
and constructed by the LGU concerned. By of the juridical entity is located.
way of exception, the toll fees imposed under
this section shall not apply: Time of Payment – The community tax shall
 Officers and enlisted men of the AFP; accrue on the 1st day of January of each year which
 Members of the PNP on mission; shall not be paid not later than the last day of
 Post-office personnel delivering mail; February of each year.
 Physically handicapped and disabled
citizens who are 65 years or older; and
 When public safety requires, the said Penalties for Delinquency
facility shall be free and open for public If the tax is not paid within the time prescribed,
use. there shall be added to the unpaid amount an
interest of 24% per annum from the date until it is
paid.
COMMUNITY TAX
Who are exempted from paying tax?
Who are liable to pay? 1. Diplomatic and consular
representatives; and
Individuals Liable to Community Tax 2. Transient visitors when their stay in the
Every inhabitant of the Philippines (regardless of Philippines does not exceed three (3)
the citizenship of the individual) who is: months.
 eighteen (18) years of age or over;
 who has been regularly employed on
a wage or salary basis for at least COMMON LIMITATIONS ON
thirty (30) consecutive working days LOCAL TAXING POWERS
during any calendar year; or
 engaged in business or occupation; or Unless otherwise provided, the exercise of the
taxing powers of provinces, cities, municipalities,

145
and barangays shall not extend to the levy of the kinds of licenses or permits for the driving
following: thereof, except tricycles;
1. Income tax, except when levied on banks
and other financial institutions; 13. Taxes, fees or other charges on Philippine
products actually exported, except as
2. Documentary stamp tax; otherwise provided herein;
3. Taxes on estates, inheritance, gifts, 14. Taxes, fees or charges on Countryside

legacies and other acquisitions mortis causa, and Barangay Business Enterprises and
except as otherwise provided in the LGC; cooperatives duly registered under R.A. No.
6810 and R.A. No. 6938, otherwise known as
4. Customs duties, registration fees of the “Cooperatives Code of the Philippines”
vessel and wharfage on wharves, tonnage respectively; and
dues, and all other kinds of customs fees,
charges and dues except wharfage on wharves 15. Taxes, fees or charges of any kind on the
constructed and maintained by the local National Government, its agencies and
government unit concerned; instrumentalities, and local government
units.
5. Taxes, fees and charges and other
impositions upon goods carried into or out of, COLLECTION OF LOCAL TAXES
or passing through, the territorial jurisdiction
of local government units in the guise of Tax Period and Manner of Payment
charges for wharfage, tolls for bridges or
otherwise, or other taxes, fees or charges in The tax period shall be the calendar year. Such
any form whatsoever upon such goods or taxes, fees and charges may be paid in quarterly
merchandise; instalments.
6. Taxes, fees or charges on agricultural and Accrual of Tax

aquatic products when sold by marginal  They shall accrue on the 1st day of
farmers or fishermen; January of each year.
7. Taxes on business enterprises certified to  New taxes, fees or charges, or changes in

by the Board of Investments as pioneer or the rates therof, shall accrue on the 1st day of
non-pioneer for a period of six (6) and four (4) the quarter next following the effectivity of
years, respectively from the date of the ordinance imposing such new levies or
registration; rates.
8. Excise taxes on articles enumerated Time of Payment

under the National Internal Revenue code, as -Within the first 20 days of January or of each
amended, and taxes, fees or charges on subsequent quarter, as the case may be.
petroleum products; -The period is extendible but not exceeding six
(6) months.
NOTE: A local government unit may impose
a tax on a petroleum business. A tax on
Penalties on Unpaid Taxes, Fees, or Charges
business is distinct from a tax on the article The imposable surcharge shall not exceed 25% of
itself; the amount of taxes, fees or charges not paid on
time and an interest at the rate not exceeding 2%
9. Percentage or value-added tax (VAT) on per month of the unpaid taxes, fees or charges
sales, barters or exchanges or similar including surcharges, until such amount is fully
transactions on goods or services except as paid but in no case shall the total interest on the
otherwise provided in the LGC; unpaid amount or portion thereof exceed 36
months.
10. Taxes on gross receipts of transportation
contractors and persons engaged in the Authority of Treasurer in Collection and
transportation of passengers or freight by hire Inspection of Books
and common carriers by air, land or water,  All local taxes, fees or charges shall be
except as provided in the LGC; collected by the provincial, city, municipal, or
barangay treasurer, or their duly authorized
11. Taxes on premiums paid by way of deputies.
reinsurance or retrocession;  The provincial, city or municipal
treasurer may designate the barangay
12. Taxes, fees or charges for the registration treasurer as his deputy to collect local taxes,
of motor vehicles and or the issuance of all fees or charges.
 The provincial, city, municipal or lapse of the 60-day period

barangay treasurer may, by himself or (Secretary’s inaction upon the
through any of his deputies duly authorized appeal);
in writing , examine the books, accounts, and
other pertinent records of any person, NOTE: The appeal of the taxpayer
partnership, corporation, or association shall not have the effect of
subject to local taxes, fees and charges in suspending the effectivity of the
order to ascertain, assess, and collect the ordinance and the accrual and
correct amount of the tax, fee, or charge. payment of the tax, fee or charge
 Inspection shall be made during regular levied therein.
business hours, only once for every tax period,
and certified to by the examining officer. -Declaratory relief whenever applicable
 In case of examination by duly authorized
deputies of the local treasurer, the written After Assessment
authority of the deputy concerned shall
specifically state: Protest of the Assessment
Protest is filed (Payment under protest is NOT
(1) Name necessary)
(2) Address
(3) Business of the taxpayer File a written protest with the local treasurer
(4) Date and place of examination within 60 days from the receipt of the notice of
(5) Procedure to be followed in assessment;
conducting the examination
Decision: If the local treasurer finds the
REMEDIES OF THE TAXPAYER assessment
(a) meritorious – issue a notice to
Prescriptive Periods for the Assessment and CANCEL wholly or partly the
Collection of Local Taxes assessment;
(b) wholly or partly correct – DENY the
Prescriptive Period for Assessment protest wholly or partly with notice to
 Local taxes, fees, or charges shall be taxpayer.
assessed within 5 years from the date they
become due. Appeal: within 30 days from receipt of the denial
 In case of fraud or intent to evade the of the protest or from the lapse of the 60-day
payment of taxes, fees, or charges, the same period, otherwise the assessment becomes
may be assessed within 10 years from the conclusive and unappealable.
discovery of the fraud or intent to evade the
payment. No protest is filed -Assessment becomes final and
executory.
Prescriptive Period for Collection
Local taxes, fees, or charges may be collected
within 5 years from the date of assessment by
administrative or judicial action. No such action Action for Refund or Tax Credit
shall be instituted after the expiration of said
period. No case or proceeding shall be maintained in any
court for refund or tax credit unless the following
Protest of Assessment (Administrative) is satisfied:
Before Assessment a. File a written claim for refund or credit for

any tax, fee, or charge erroneously or
-Appeal illegally collected;
It is any question on the constitutionality or b. Within 2 years from the date of payment or
legality of tax ordinances or revenue measures from the date the taxpayer is entitled to a
may be raised on appeal; refund or credit.
a. within 30 days from the
effectivity thereof to the Right of Redemption – within 1 year from the date
Secretary of Justice; of sale or from the date of forfeiture.
b. Secretary of Justice shall render
decision within 60 days from the JUDICIAL
date of receipt of the appeal; 1. COURT ACTION
c. Taxpayer may file appropriate a) Within 30 days after receipt of
action within 30 days after the decision or the lapse of the 60-day
receipt of the decision or the

147
period without the secretary of justice b. It may be posted in the office of the chief
acting upon the appeal; executive of the LGU concerned.
b) Within 30 days from the receipt
of denial of the protest or from lapse of 4. Release of distrained property upon
the 60-day period within which to appeal, payment prior to sale – if at any time
otherwise, the assessment becomes prior to the consummation of the sale, the
conclusive and unappealable; taxpayer shall pay all the charges.
c) Local treasurer’s inaction in
refund cases and after the lapse of the 2- 5. Auction Sale
year period; a. Should the property distrained be
d) If the remedies available do not not disposed of within 120 days from
provide plain, speedy and adequate the date of distraint, the same shall
remedy as an exception to the rule of be considered as sold to the LGU
exhaustion of administrative remedies. concerned.
2. DECLARATORY RELIEF 6. Disposition of proceeds

a. The proceeds of the sale shall be applied
3. INJUNCTION to satisfy the tax including all charges
and the expenses of the distraint and
CIVIL REMEDIES BY THE LGU TO sale.
COLLECT REVENUES b. Any excess shall be returned to the owner
of the property sold.
Local Government’s Lien – local taxes, fees, c. If proceeds of the sale are insufficient to
charges and other revenues constitute a lien, satisfy the claim, other property may be
superior to all liens, charges or encumbrances in distrained until fully paid.
favor of any person, enforceable by appropriate
administrative or judicial action. Levy on Real Property – It shall proceed as
follows:
The lien may only be extinguished upon full 1. Preparation of the Certificate
payment of the delinquent local taxes, fees and The certificate shall operate with force of a
charges including related surcharges and interest. legal execution throughout the Philippines.
Civil Remedies
Administrative action 2. Written notice of the levy to the assessor,
1. Distraint of Personal Property Registrar of Deeds and the taxpayer.
2. Levy of Real Property
3. Levy of the real property
Judicial Action Real property may be levied on before,
1. Court Action simultaneously, or after the distraint of
2. Declaratory relief personal property if the latter is insufficient
3. Injunction to satisfy the tax delinquency.
4. Advertisement
a. The auction sale shall be advertised for a
PROCEDURE FOR ADMISTRATION ACTION period of 30 days after the levy;
b. Posting of notice (a) at the main entrance
Distraint of Personal Property – it shall proceed of the municipal building or city hall, and
as follows: (b) in a public and conspicuous place in
1. Seizure the barangay where the real property is
a. Taxpayer failed to pay tax within the located.
time required. c. Publication of notice once a week for
b. Issuance of Certificate of Delinquency three (3) consecutive weeks in a
which shall serve as a sufficient warrant. newspaper of general circulation where
c. Local treasurer or his deputy may, upon the property is located.
written notice, seize or confiscate any
personal property in sufficient quantity 5. Release of levied property upon payment
to satisfy the liability. prior to sale – at any time before the date
of sale, the taxpayer may stay the
2. Accounting of distrained goods proceedings by paying all the proper
charges.
3. Publication
a. Posting of the notice of sale in not less 6. Auction Sale
than three (3) public and conspicuous a. It shall be held either (a) at the main
places in the LGU; entrance of the provincial, city or
municipal building, or (b) on the property
sold, or (c) at any other place as lawful use of which a fisherman earns
determined by the local treasurer; his livelihood; and
b. Within 30 days after the sale, the local h. Any material or article forming part of a
treasurer shall make a report of the sale house or improvement of any real
to the sanggunian concerned; property.
c. Delivery of the certificate of sale to the
purchaser. Penalty for Failure to Issue and Execute Warrant
– without prejudice to criminal prosecution under
7. Disposition of the proceeds of the sale RPC, the local treasurer shall be automatically
a. The proceeds of the sale shall be dismissed from the service after due notice and
applied to satisfy the tax and charges hearing.
including all expenses of the sale.
b. Any excess shall be turned over to the PROCEDURE FOR JUDICIAL ACTION
owner of the property.
The local government unit concerned may enforce
8. Redemption the collection of delinquent taxes, fees, charges or
a. Within one (1) year from the date of other revenues by civil action.
the sale; The civil action shall be filed by the local treasurer
b. Upon payment of the total amount of within a period of five (5) years.
taxes, fees, or charges and other
related charges and expenses. City of Pasig vs. Republic of the Philippines, (G.R.
No. 185023, August 24, 2011)
9. Execution of the final deed to the
purchaser – If the taxpayer fails to redeem the Properties owned by the Republic of the
property or after the lapse of 1 year without Philippines are exempt from real property tax,
redemption. except when their beneficial use has been granted,
Note: In case there is no bidder for the real for consideration or otherwise, to a taxable person.
property advertised for sale, or if the highest The properties are also exempt from execution or
bid is for an amount insufficient to pay the foreclosure sale unless these are considered
taxes, fees, or charges and other related properties of public dominion.
charges and expenses, the local treasurer
shall purchase the property in behalf of the Facts:
LGU. Following the ouster of President
Ferdinand Marcos in 1986, Jose Campos, Jr.
Further Distraint or Levy – The remedies of voluntarily surrendered to the Republic of the
distraint and levy may be repeated if necessary Philippines properties, assets and corporations
until the full amount due, including all expenses, which he had held in trust for the deposed
is collected. president. These included Mid-Pasig Land
Development Corporation (MLDC) which was the
registered owner of two parcels of land located in
Pasig City.
Properties Exempt from Distraint and Levy
a. Tools and the implements necessarily In 2005, the Pasig City Assessor’s Office assessed
used by the delinquent taxpayer in his MLDC delinquency real property taxes (RPT) on
trade or employment; the properties for the period 1987 to 2005, despite
b. One (1) horse, cow, carabao, or other claims that the properties are exempt from RPT
beast of burden, such as the delinquent by virtue of the States’ ownership of the parcels of
taxpayer may select, and necessarily land. While MLDC paid a portion of the tax
used by him in his ordinary occupation; assessed under protest, it received two warrants
c. His necessary clothing, and that of all his of levy on the properties.
family;
d. Household furniture and utensils The Republic filed a case with the Regional Trial
necessary for housekeeping and used for Court (RTC) to question Pasig City’s levy. Pending
that purpose by the delinquent disposition of the case, Pasig City sold the
taxpayer, such as he may select, of a properties at public auction.
value not exceeding P10,000.00;
e. Provisions, including crops, actually Issues:
provided for individual or family use 1. Are the properties exempt from RPT?
sufficient for 4 months; 2. Can the properties be sold at public auction?
f. The professional libraries of doctors,
engineers, lawyers and judges; Ruling:
g. One fishing boat and net, not exceeding
the total value of P10,000.00, by the 1. No. Section 234(a) of RA No. 7160 (the Local
Government Code) states that properties owned

149
by the Republic are exempt from RPT “except

when the beneficial use has been granted, for
consideration or otherwise, to a taxable person.”
Thus, the portions of the properties not leased to
taxable entities are exempt from RPT while those
leased to taxable entities are subject to RPT. The
law imposes the liability to pay RPT on the
Republic.
2. Yes. Properties classified as part of the public

dominion under Article 420 of the Civil Code are
beyond the commerce of man and, consequently,
exempt from sale at public auction. However, the
subject properties are not properties of public
dominion. The parcels of land are neither
“intended for public use, such as roads, canals,
rivers, torrents, ports and bridges constructed by
the State, banks, shores, roadsteads,” nor are
these “intended for some public service or for the
development of the national wealth.”
Although portions of the properties

leased to taxable entities can be sold at public
auction to satisfy the tax delinquency, Pasig City
must first issue to the Republic new RPT
assessments covering the portions of the
properties leased to taxable entities and only for
the period of such leases. Interest and penalties on
such new RPT assessment shall accrue only after
receipt of such new assessment by the Republic. If
the Republic fails to pay the RPT on such portions,
only then may such portions be sold at public
auction to satisfy the tax delinquency.
TARIFF AND CUSTOMS C

(As amended)
TARIFF AND DUTIES
Tariff – custom duties, toll or tribute payable upon

merchandise to the government. It is a schedule of
import and export rates paid to a government.
Customs – are the duties, toll, tribute or tariff

payable upon merchandise exported or imported.
Custom Duties – those which are assessed at the

prescribed tariff rates which are likely imposed for
both revenue raising and for regulatory purposes.
It is the name given to taxes on the importation MEANING AND SCOPE OF THE TARIFF AND
and exportation of commodities, the tariff or tax CUSTOMS LAWS
assessed upon merchandise imported from, or
exported to, a foreign country. [Garcia vs. Include not only the provisions of the Tariff and
Executive Sec., G.R. No. 101273, July 3, 1992] Customs Code (TCC) and regulations pursuant
thereto, but all other laws and regulations that
NOTE: Customs duties and tariffs are are subject to the Bureau of Customs (BOC) or
synonymous with one another. They both refer to otherwise within its jurisdiction.
the taxes imposed on imported or exported wares,
articles, or merchandise. As to its scope, therefore, tariff and customs laws
extend not only to the provisions of the TCC but to
Other Types of Fees Charged by the Bureau of all other laws as well, the enforcement of which is
Customs entrusted to the BOC.
 Arrastre charge
 Wharfage due – counterpart of license, THE BUREAU OF CUSTOMS
charged not for the use of any wharf but for
a special fund known as the Port Works FUNCTIONS OF THE BUREAU OF CUSTOMS
Fund.
 Berthing fee 1. Assessment and collection of revenues from
 Harbor fee imported articles and all other impositions
 Tonnage due under the tariff and customs laws;
2. Control smuggling and related frauds;
3. Supervision and control over the entrance and
GENERAL RULE clearance of vessels and aircraft engaged in
foreign commerce;
All importations and exportations of goods are 4. Enforcement of TCC and related laws;
subject to custom duties. (Sec. 105, TCC) 5. Supervision and control over the handling of
foreign mails arriving in the Philippines;
Exceptions: 6. Supervise and control all import and export
1. Exemption under the TCC cargoes for the protection of government
2. Exemptions granted to government agencies revenue;
or GOCCs with existing contracts, 7. Exclusive original jurisdiction over seizure
commitments, agreements, or obligations and forfeiture cases under the tariff and
with foreign countries. customs laws.
3. International organizations pursuant to
agreement and special law
JURISDICTION OF COLLECTOR OF
CUSTOMS OVER IMPORTATION OF
ARTICLES
1. Cause all articles for importation to be

entered in the customhouse,
2. Cause all such articles to be appraised and
4. Exemption granted by the President of the classified,
Philippines upon recommendation of the 3. Assess and collect the duties, taxes and other
NEDA. charges thereon, and
4. Hold possession of all imported articles until
Government Importations the duties, taxes and other charges are paid
Importations by the government are also taxable. thereon. (Sec. 1206, TCC)
All importations by the government for its own use
or that of its own subordinates branches or TERRITORIAL JURISDICTION OF THE BOC
instrumentalities or corporations, agencies or
instrumentalities owned or controlled by the 1. All seas within the jurisdiction of the
government shall be subject to the duties, taxes , Philippines
fees and charges provided in the Tariff and 2. All coasts, ports, airports, harbors, bays,
Customs Code.(Section 1205, Tariff and Customs rivers and inland waters whether navigable
Code) or not from the sea. (1st par, Sec. 603, TCC)
WHEN TARIFF AND CUSTOMS APPLIED

151
Only after importation has begun but before  all importations by the government, its
importation is terminated. branches, instrumentalities, GOCCs,
agencies or instrumentalities owned or
Importation begins: controlled by government are subject to
1. when the conveying vessel or aircraft similar duties, taxes and fees except for
2. enters the jurisdiction of the Phil. those provided in Sec. 105 (conditionally free
3. with intention to unload therein imports)
Importation is deemed terminated: B. Declaration

1. upon payment of the duties, taxes and other Imported articles must be entered in customhouse
charges due upon the articles and at the port of entry within 30 days from date of
discharge by:
2. legal permit for withdrawal shall have been 1. importer, being holder of B of L
granted. 2. customs broker
3. agent
3. In the case of articles that are free of duties,
taxes and other charges, until they have IMPORT ENTRIES:
legally left the jurisdiction of the customs
(Sec. 1202, TCC) 1. Informal entry
- articles of commercial nature intended for
INTENTION TO UNLOAD sale, barter or hire the DV is P2,000 or less
Even if not yet unloaded, and there is - personal and household effects, not in
unmanifested cargo, forfeiture may take place commercial quantity, for personal use
because importation has already begun.
2. Formal entry
-may be for immediate consumption, or
PURPOSE FOR IMPOSITION under irrevocable domestic letter of credit,
bank guarantee or bond for:
1. Revenue tariffs – those whose rates are a. placing article in customs bonded
relatively low so that goods may be readily warehouse
imported and duties may be easily collected; b. constructive warehousing and
2. Protective tariffs – those whose rates are immediate transportation to other Phil
relatively high to keep certain imports out of ports upon proper examination and
the domestic market or to raise domestic price appraisal
on certain imports so that they may be c. constructive warehousing and
manufactured profitably and domestically; immediate exportation
3. Bargaining tariffs – those whose schedules
include rates designed primarily for Written Declaration of Import Entry must contain
bargaining purposes or which contain some statements that declare:
general provision for the imposition of higher 1. full account of value or price
2. the invoice and entry contains just and
duties upon products of countries whose tariff faithful account of the value or price of
policies are considered unsatisfactory or articles; nothing has been omitted or
unfair. concealed
3. to the best of knowledge of declaring, all
the invoices and B of L are the only ones in
existing in relation to the importation in
IMPOSITION OF DUTIES question
4. the invoices, entries and B of L are
A. Persons liable genuine and true
Deemed Owner of Imported Articles:
1. consignee holder of bill of lading  signed by importer, consignee or holder of
2. if consigned to order, the consignor bill, manager of corporation, firm or
3. underwriters of abandoned articles and association, licensed customs broker
4. salvors of articles saved at a wreck
Form of Import Entry:
 the liability of importer for the duties, taxes,  shall be signed by person making entries
fees and other charges constitute a personal  have required number of copies as
debt due to the government which may be prescribed by RR
discharged only upon full payment. It also
constitutes a lien upon the articles imported Contents:
while articles are in custody or subject to  name of importing vessel or aircraft
control of government  # and marks of packages,
 quantity
 description of article National Economic and Development

 value set in the invoice Authority, is empowered:
1. To increase, reduce, or remove existing
C. Examination, Appraisal and Classification protective rates of import duty, provided
(§1405-08) that the increase should not be higher
that 100% ad valorem;
Procedure: 2. To establish import quota or to ban
1. appraisers shall ascertain, estimate, imports or any commodity; and
determine the value or price of articles 3. To impose additional duty on all imports
 file action within 1 year not exceeding 10% ad valorem
2. examiners shall render a report
3. appraisers shall describe all articles on the NOTE: An order issued by the President
face of entry in tariff pursuant to the flexible tariff clause shall
 15 days take effect thirty (30) days after
promulgation, except in the imposition of
An appraisal, fully passed upon and approved by additional duty not exceeding ten percent
Collector, may not be altered or modified except: (10%) ad valorem which shall take effect at
1. statement of error the discretion of the President.
2. request for reappraisal and/or classification
3. if duty assessed amount is lower than the In the case of imposition of additional duty,
entered value the investigation of the Tariff Commission
and recommendation of NEDA are needed.
D. Assessment of Taxes
LIMITATIONS TO THE FLEXIBLE TARIFF
E. Liquidation (§1601-03) CLAUSE
1. Conduct by the tariff commission of an
Liquidation shall be made on the face of entry investigation in a public hearing.
showing the particulars. The Commission shall also hear the views and
recommendations of any government office,
Daily record of entries liquidated shall be posted agency or instrumentality concerned. The
on the public corridor of customs house. commission shall submit their findings and
recommendations to the NEDA within 30
Tentative Liquidation - if to determine the exact days after the termination of the public
amount due some future action is required, hearing. The NEDA thereafter submits the
liquidation is deemed tentative as to items recommendation to the president.
affected and shall be subject to future and final
adjustment and settlement within 6 months 2. The power of the president to increase or
decrease the rates of import duty within the
Finality of Liquidation: After expiration of 1 year abovementioned limits fixed in the code shall
from date of final payment of duties include the modification in the form of duty.
In the absence of protest, final and conclusive
between the parties unless liquidation was In such case the corresponding ad valorem or
tentative. specific equivalents of the duty with respect
to the imports from the principal competing
foreign country for the most recent
FLEXIBLE TARIFF CLAUSE representative period shall be used as bases
(Sec. 401, TCC).
Flexible Power of the President
 Section 28(2), Article VI, Constitution: The REQUIREMENTS OF IMPORTATION

Congress may, by law, authorize the
Who are authorized to make an import entry?
President to fix within specified limits, and 1. The importer being holder of the bill of
subject to such limitations and restrictions as lading;
it may impose, tariff rates, import and export 2. A customs broker acting under authority of the
quotas, tonnage and wharfage dues, and other holder of the bill; or a person duly empowered
duties or imposts within the framework of the to act as agent or attorney-in-fact
national development program of the
Government. Import entry – a declaration to the BOC showing
the description, value, tariff classification and
 Section 401, Tariff and Customs Code: other particulars of the imported article to enable
In the interest of national economy, general the customs authorities to determine the correct
welfare and/or national security, the customs duties and internal revenue taxes due on
President upon recommendation of the the importation

153
 All importers are required to keep all

OBLIGATIONS OF IMPORTER records of their importations and book of
accounts, business and computer
1. Cargo manifest systems, and all customs commercial
data including payment records at their
2. Import entry principal place of business for a period of
 An importer is required to file an import 3 years from the date of importation.
entry. It must be accomplished from  Brokers are required to make copies of
disembarking of the last cargo from the the abovementioned records at their
vessel. principal place of business and for a
period of 3 years from the date of
3. Declaration of correct weight or value importation.
 After the 3 year period, the liquidation
4. Liability for payment of duties becomes final except in cases of tentative
 It constitutes a personal debt due from liquidation.
the importer to the government which
can be discharged only by payment in full
of all duties, taxes, fees and other charges IMPORTATION IN VIOLATION OF TCC
legally accruing.
 It constitutes a lien upon the articles SMUGGLING OR UNLAWFUL IMPORTATION
imported which may be enforced while Any person who shall fraudulently import or bring
such articles are in custody or subject to into the Philippines, or assist in doing so, any
the control of the government. article, contrary to law, or shall receive, conceal,
 The Code provides that all articles buy, sell, or in any manner facilitate the
imported into the Philippines shall be transportation, concealment, or sale of such
held to be the property of the person to article after importations, knowing the same to
whom the same are consigned: and the have been imported contrary to law, shall be guilty
holder of the bill of lading duly endorse by of smuggling. (Sec. 3601, TCC)
the consignee thereof therein named, or if
consigned to order by the consignor, shall FRAUDULENT PRACTICES (Criminal Offense)
be deemed the consignee thereof. The against Custom Revenues under Sec. 3602
underwriters of abandoned articles and a. Entry of imported articles by means of any
the salvors of articles saved from a wreck false or fraudulent invoice;
at sea, along a coast, or in any area of the b. Entry of goods at less than the true weight or
Philippines, maybe regarded as the measure;
consignees (Section 1203, Tariff and c. Filling of any false or fraudulent entry for the
Custom Code) payment of drawbacks or refund of duties.
5. Liquidation of duties
CLASSIFICATION OF GOODS
 The liquidation shall be made on the face
of the entry showing the particulars Articles Subject to Customs Duties
thereof if the collector shall approve the Articles, when imported from any foreign country
returns of the appraiser and report of the into the Philippines, shall be subject to duty upon
weight, gauge or quantity. each importation, even though previously
 The liquidation shall be initiated by the exported from the Philippines, EXCEPT as
liquidating clerk, approved by the chief otherwise specifically provided for in this Code or
liquidator and recorded in the record of in other laws. [SEC. 100, TCC]
liquidations.
 A daily record of all entries liquidated Merchandise – the Revised Administrative Code
shall be posted in the public corridor of defines merchandise, when used with reference to
the customhouse, stating the name of the importation or exportation, to include goods, wares
vessel or aircraft, the port from which she and in general, anything that may be the subject of
arrived, the date of her arrival, the name exportation. Checks, money orders and dollar bills
of the importer, and the serial number properly within the concept of merchandise as used in
and date of the entry. A daily record Revised Administrative Code, are merchandise.
must also be kept by the collector of all [Bastida vs. CIR]
additional duties, taxes and other
charges found upon liquidation, and KINDS OF GOODS/MERCHANDISE
notice shall promptly be sent to the 1. Articles subject to duty (Dutiable Goods)
interested parties. 2. Prohibited importation
3. Conditionally-free importations
6. Keeping of records
DUTIABLE/TAXABLE GOODS
(AFP-CPP-NPA-VMH-FAT-WE-MAMO) Articles the importation of which is exempt from
payment of import duties only upon compliance
1. Animals and animals product with the formalities prescribed, conditions
2. Animal or vegetable Fats; oil and their imposed and/or with the regulations promulgated
cleavage products under the Tariff and Customs Code of the
3. Prepared foodstuffs; beverages, spirits and Philippines, as amended, issued by the
vinegar; tobacco and manufactured tobacco Commissioner of customs with the approval of the
4. Products of Chemical or allied industries Secretary of Finance.
5. Plastic and rubber articles
6. Pulp or wood; (PSST-BAR-FEW-PERA-SAM-CPP-VICE)
7. Natural or cultural stones 1. Professional instruments and implements
8. Plaster, cements and other related articles 2. Sea store supplies to the vessel or aircraft
9. Arms and ammunitions 3. Salvage articles recovered from an abandoned
10. Vegetable products vessel
11. Mineral products 4. Trailer chassis by a shipping company
12. Hides ( skin, fur, leather) 5. Books
13. Footwear, headgear, etc. 6. Aquatic products
14. Aircraft, vessels, vehicles and all other mode 7. Relief organization and articles used for relief
of transportation operations
15. Textile and textile products 8. Film production by foreign media or movie
16. Wood and related articles outfit
17. Electrical and mechanical machineries 9. Equipment used in salvaging vessels
18. Metals 10. Wearing apparels
19. Artworks, antique 11. Personal and household effects
20. Manufactured/miscellaneous articles 12. Importation for the use of foreign Embassies
21. Optical products, medical and surgical 13. Receptacles, containers holders and other
products [Sec. 104, Title 1, TCC] similar boxes
14. Animals, EXCEPT race horse
PROHIBITED IMPORTATIONS 15. Samples of any kind
(HOT-DOG-TAMAD) 16. Articles for repair, re-conditioning for export
17. Mining equipment and tools
18. Cost of repair made abroad upon a vessel
1. Heroine, marijuana and other dangerous
registered in the Philippines
drugs, narcotics and pharmaceutical products
19. Articles which are previously exported but
EXCEPT when made by the government
returned in the Philippines
designed for medical purpose
20. Prizes, medals, trophies, badges and other
2. Opium pipes and other drugs paraphernalia
thing bestowed as an award
3. Written or printed materials containing any
matter advocating of inciting Treason,
21. Vessels spare part of foreign vessel and
sedition, rebellion materials
aircraft
4. Dynamite, ammunition and other explosive
22. Articles which are Imported subsequently in
weapons EXCEPT when authorized by law
the Philippines
5. Written or printed articles involving Obscene
23. Coffin, caskets
or immoral character
24. Exhibition, competition articles for display
6. Gambling Devices
7. Lottery and sweepstakes Tickets EXCEPT
NOTE: These articles which are exempt from
those authorized by the Philippine
import duties upon compliance with the
Government
formalities prescribed in or with regulations
8. Articles, instruments, drugs and substances
promulgated by the Commissioner of Customs
designed and intended to produce unlawful
with the approval of the Sec. of Finance.
Abortion and printed materials promoting
unlawful abortion
9. Articles made of precious Metal but actual
fineness of quality not indicated CLASSIFICATION OF DUTIES
10. other Articles (P.D. 34)
11. Any Adulterated or misbranded drug in Ordinary or Regular Customs Duties
violation of the Food and Drugs Act.(Sec. Imposed and collected merely as a source of
102,TCC) revenue
a. Ad Valorem - the duty is based on the market
NOTE: All the above merchandise/goods cannot value or price of the imported article.
be brought in or out of the Philippines. 1. transaction value
2. transaction value of identical goods –
CONDITIONALLY-FREE IMPORTATION goods are the same in all respects.

155
3. transaction value of similar goods – not impose special duties in addition to the regular
alike in all respects, but: duties. Dumping duties should be imposed.
- must have like characteristics and
component materials 2. Countervailing Duty – imposed upon foreign
- must perform the same function goods enjoying subsidy thus allowing them to
- interchangeable sell at lower prices to the detriment of local
- similar quantity & reputation products similarly situated.
- trademarks must be considered
4. deductive value Rate: equivalent to the bounty, subsidy or
5. computed value subvention
6. other reasonable means or fallback value
Imposing authority: Secretary of Finance
b. Specific - the duty is based on the weight or
volume of the imported article.  Bounty is the cash award paid to an
exporter or manufacturer while subsidy
Special Customs Duties refers to fiscal incentives, not in the form
Imposed and collected in addition to ordinary of direct cash award, to encourage
customs duties usually to protect local industries manufacturers; or
against foreign competition.  The duty is equal to the ascertained or
estimated amount to the bounty or
1. Dumping Duty – imposed upon foreign subsidy
products with value lower than their fair
market value to the detriment of local Elements of Countervailing:
products. a. product comparability
b. subsidy
Rate: difference between the actual price and c. injury
the normal value of the article. d. causal link
Imposing authority: Special Committee on Illustration: Sometimes imported products

Anti-Dumping composed of the Sec. of enjoy certain subsidy from their government.
Finance as chairman; members: Secretary of So, they have an advantage. Our local
Trade and Industry; and either the Secretary products for example, do not enjoy similar
of Agriculture, if the article in question is subsidy. We should counter that advantage by
agricultural product or the Secretary of imposing countervailing duties. The purpose
Labor, if non-agricultural product. there is to protect our local products against
unfair competition.
This represents the inland excise tax on

locally manufactured articles of the same
Elements of Dumping: kind to off-set this advantage.
a. like product
b. price difference As regards dumping duties, the extent of the
c. injury special duty is the amount that represents
d. causal link under-pricing
NOTES: As regards countervailing duties, the extent is

There must be a deliberate and continuous the excise inland tax or the amount of
sale of imported article in the Philippines as advantage enjoyed by that imported article.
price lower than the prices in the exporting
country. 3. Marking Duty- imposed upon those not
properly marked as to place of origin of the
This must prejudice or cause or likely to cause goods.
injury to our local industry.
Rate: 5% ad valorem of articles
Illustration: There are articles of foreign origin
the prevailing price of which in the US is
equivalent to P100. These articles are sold or
dumped in the Phils. at lower than the prevailing Imposing authority: Commissioner of
price in the US because they are saleable in the Customs
U.S.
 The purpose is to prevent deception of
So, this will prejudice our local industries. In order consumers.
to protect our local product or to discourage people  The articles must be properly marked,
from buying this imported product, we should otherwise a special duty of 5% of the
value shall be imposed. [Sec. 303, Tariff Rate: any amount not exceeding 100% ad
and Customs Code]. valorem of the subject articles
Imposing authority: President of the
4. Retaliatory/Discriminatory Duty- imposed Philippines
upon goods coming from countries that
discriminate against Philippine products.
DISTINCTIONS BETWEEN SPECIAL DUTIES
DRAWBACK
It is a device resorted to for enabling a commodity

affected by taxes to be exported and sold in foreign
markets upon the same terms as if it was not been
taxed at all. It may be full or partial.
 The return of 99% of customs paid on

imported articles when they are re-exported
forming part of domestically produced
articles.
 The refund of 99% duty on imported fund

when used for propulsion vessels engaged in
the foreign or coastwise trade.
DUMPING COUNTERVAILING MARKING DISCRIMINATORY

DUTY DUTY DUTY DUTY
As to Nature
Imposed upon foreign Imposed upon foreign Imposed upon those Imposed upon goods
products with value lower goods enjoying subsidy not properly coming from countries
than their FMV to the thus allowing them to marked as to place that discriminate
detriment of local sell at lower prices to of origin of the against Philippine
products. the detriment of local goods. products.
products similarly
situated.
As to Amount or Rate
Difference between the Equivalent to the 5% ad valorem of Any amount not
actual price and the bounty, subsidy or articles exceeding 100% of the
normal value of the article subvention. subject articles
As to Imposing Authority
Special Committee on Secretary of Finance Commissioner of President of the
Anti-Dumping Customs Philippines
Chairman-Secretary of
Finance
Members:
DTI Secretary, and
either Secretary of
Agriculture or Secretary of
Labor
When Drawbacks Allowed
Drawbacks are allowed on the following

commodities:
1. Fuel used on propulsion vessels;
2. Petroleum oils and oils obtained from
bituminous minerals, etc., eventually used for
generation of electric power and manufacture
of city gas; and

157
3. Articles made of imported materials upon the g) In general, to investigate the operation of
exportation of articles manufactured or customs and tariff laws, including their
produced in the Philippines subject to certain relation to the national revenues, their
conditions. effect upon the industries and labor of the
country and to submit reports of its
CONDITIONS FOR GRANT OF DRAWBACK investigation as provided. (Sec. 506, TCC)
1. Imported material was actually used in the II. Administrative Assistance to the President and
production of article to be exported. Congress (Sec. 506, TCC)
2. Refund or credit shall not exceed 100% of
duties paid on the imported material.
3. No determination by NEDA of the requirement TAX REMEDIES UNDER TARIFF AND
for certification on non-availability of locally CUSTOMS CODE
produced or manufactured competitive
substitutes for the imported material (no local
substitute for the materials). REMEDIES OF THE GOVERNMENT
4. Exportation must be made within 1 year after
importation of material and claim for refund or A. Administrative/ Extrajudicial
credit must be made within 6 months from
exportation. 1. Tax Lien (Sec. 1204, TCC)
5. When 2 or more result from the used of same  Attaches on the goods, regardless of
imported material, apportionment shall be ownership, while still in the custody or
made. control of the Government.
 Every application for drawback must pay  Availed of when the importation is
P500 filing, processing, and supervision neither prohibited nor improperly
fees made.
 Claims shall be paid by BOC within 60  Enforcement of tax lien: (Sec. 1508)
days after receipt of properly
accomplished claims When an importer has an outstanding
and demandable account with the
Bureau of Customs,
Collector shall hold the delivery of the

article and upon notice, he may sell
such importation or a portion of it to
THE TARIFF COMMISSION satisfy the obligation
FUNCTION OF THE TARIFF COMMISSIONS Importer may settle his obligation

anytime before the sale.
I. Investigative Powers
2. Administrative Fines and Forfeitures
a) The administration of and the fiscal and  Applied when the importation is
industrial effects of the tariff and customs unlawful,
laws of this country now in force or which
may hereafter be enacted.  it may be exercised even where the
b) The relations between the rates of duty on articles are not or no longer in custom’s
raw materials and the finished or partly custody. UNLESS the importation is
finished products. merely attempted in which case it may
c) The effects of ad valorem and specific duties be effected only while the goods are still
and of compound specific and ad valorem within the Customs jurisdiction or in
duties. the hands of a person who is aware
d) All questions relative to the arrangement of thereof. (Sec. 2531 and 2530, TCC)
schedules and classification of articles in
the several schedules in the tariff law.  Under Sec. 2530 (a), TCC in order to
e) The tariff relations between the Philippines warrant forfeiture, it is not necessary
and other foreign countries’ commercial that the vessel or aircraft must itself
treaties, preferential provisions, economic carry the contraband. The
alliances, the effect of export bounties and complementary if collateral use of their
preferential transportation rates. Cessna plane for smuggling operation
f) The volume of importations compared with is sufficient for it to be deemed to have
domestic production and consumption; and been used in smuggling. (Llamado vs.
Commissioner of Customs, G.R. No. L- 6. The importer aggrieved by the action or ruling
28809, May 16, 1983) of the Commissioner in any case of seizure may
appeal to the CTA.
3. Reduction of Custom Duties/ 7. The importer may proceed on appeal to the SC
Compromise as the case may be.
Subject to approval of Sec. of Finance
(Sec. 709, 2316, TCC) Q. Under what ground may the Collector of
Customs issue Warrant of Seizure and
4. Seizure, search, and arrest (Sec. 2205, Detention of articles under the TCC?
2210, 2211, TCC) A. Issuance of the Warrant of Seizure and
Detention must be based upon probable
Seizure and Forfeiture Cases cause that the articles in question were
These refer to the matters involving smuggling. It imported or attempted to be exported
is administrative and civil in nature and is contrary to the Tariff and Customs Law.
directed against the res or imported articles and
entails a determination of the legality of Q. What are the requisites for the settlement of
importation. seizure case through the payment of fine?
A.
NOTE: These are actions in rem. 1. The seizure case is pending adjudication
with the Collector of Customs
Seizure and Forfeiture: 2. There is no fraud in the importation or
 Collector issues warrant for the detention of exportation of the article in question.
the goods. Formal hearing is set, and the 3. The owner, exporter, importer or
importer is notified thereof. consignee or his agent shall offer to pay
 Available only when the importation is the fine imposed upon the property, and
unlawful or irregularly made. 4. The fine imposable must be in an amount
 Available even when the goods are no longer not less than 20% or more than 80% of the
in custody of the Bureau. Available even when landed cost of the imported seized article
the goods are already in the hands of an or the FOB value of the seized article for
innocent purchaser who knew nothing of the export
illegality of the importation. Good faith is 5. The property under seizure is not
immaterial as far as the seizure is concerned. absolutely prohibited nor the release
It is however, a valid defense in a criminal thereof is not contrary to law and
prosecution.
 While pending with the collector of customs,

the courts cannot interfere with the seizure 6. The settlement must be subject the
and forfeiture. The CTA must wait for the approval of the Commissioner of
appeal. Customs.
Q. What is the nature and purpose of seizure Q. What are the requisites of forfeiture of goods
proceeding under the TCC? under the Tariff Code?
A. They are actions in rem directed against the A.
property seized, not against the owner 1. Wrongful making by the owner, importer,
thereof. In such action, the property itself is exporter or consignee of any declaration
the defendant. The title of the case is, for or affidavit, or the wrongful making or
instance, Republic of the Philippines vs. Two delivery by the same person of any
(2) Honda Accord Motor Vehicles. There is an invoice, letter or paper-all touching on
actual trial as in the case of Judicial the importation or exportation of
Proceedings. merchandise
2. The falsity of such declaration, affidavit,
Procedure in seizure cases of imported articles: invoice, letter o paper and intention on
1. The Collector issues a warrant for the the part of the imparter or consignee to
detention or forfeiture of the imported articles evade the payment of the duties due.
2. The Collector gives the importer a written 3. The fraud must be proved to justify
notice of the seizure and fixes a hearing date to forfeiture. It must be actual amounting to
give to importer an opportunity to be heard an intention of wrong doing with the clear
3. A formal hearing is conducted purpose of avoiding the tax. (Republic vs.
4. The Collector renders a declaration of CTA, G.R. No. 139050. October 2, 2001)
forfeiture
5. The importer aggrieved by the action of the Q. What is the extent of the jurisdiction of the
Collector in any case of seizure may appeal to Commissioner of Customs in forfeiture
the Commissioner for review within 15 days proceedings?
from written notice of the collector’s decision

159
A. The Commissioner of Customs when sitting in 2. if the owner is not in the business for which
forfeiture proceedings constitutes a tribunal the conveyance is generally used; and
upon which the law confers jurisdiction to 3. if the owner is financially not in a position to
determine all questions touching the own such conveyance.
forfeiture and further disposition of the
illegally imported merchandise. (Auyong Doctrine of Primary Jurisdiction Over Seizure and
Hian vs. CTA, 59 SCRA 110, September 12, Forfeiture Cases
1974)  the exclusive jurisdiction in seizure and
forfeiture cases vested in the collector of
NOTE: In all proceedings taken for the seizure customs precludes a regular court from
and/or forfeiture of any vehicle, vessel, aircraft, assuming cognizance of such matter.
beast or articles under the provisions of the tariff  the BOC acquires exclusive jurisdiction over
and customs laws, the burden of proof lies upon imported goods, for the purpose of
the claimant. It is required that probable cause be enforcement of the customs laws, form the
first shown for the institution of such proceedings moment the goods actually in its possession or
and the seizure and /or forfeiture was made under control, even if no warrant of seizure or
the circumstances and in the manner prescribed detention had previously been issued by the
by the Tariff and Customs Code. Collector of Custom in connection with
seizure and forfeiture proceedings.
Right of Custom Officers to Effect Seizure and  the RTC does not have jurisdiction over
Arrest seizure and forfeiture proceedings conducted
1. May seize any vessel, aircraft, cargo, article, by the BOC. Even if a Custom seizure is
animal or other movable property when the illegal, exclusive jurisdiction still belongs to
same is subject to forfeiture or liable for any the BOC. (Jao vs. CA, G.R. No. 104604,
time as imposed under TCC, rules and October 6, 1995)
regulation
2. May exercise only in conformity with the laws Pertinent Cases on Doctrine on Primary
and the TCC. (Sec. 2205, TCC) Jurisdiction:
Articles subject to Seizures and Forfeitures (FEU-  The Collector of Customs, when sitting in
UE-UM-UP-BIR) forfeiture proceedings, constitutes a tribunal
1. Fraudulent removal of cargoes upon which the law expressly confess
2. Excessive sea store jurisdiction to hear and determine all
3. Undeclared cargoes questions touching on the forfeiture and
further disposition of the illegal imported
4. Unlawful use of aircraft or vessel EXCEPT if mechanics (Government of the P.I. vs. Gale,
there is Certificate of Public Convenience and 24 Phil 95; Auyong Hian vs. CTA, 19 SCRA
Necessity 10).
5. Excessive cargoes  Jurisprudence is replete with cases which
6. Unlawful transfer of cargoes have held that regional trial courts are devoid
7. Money used to bribe of any competence to pass upon the validity of
8. Unauthorized removal of goods seizure and forfeiture proceedings conducted
9. Prohibited articles in the Bureau of Customs and to enjoin, or
10. Beast, actually used for the consequence that otherwise interfere with these proceedings.
is subject of forfeiture The Collector of Customs sitting in the seizure
11. Instruments used in the loading or unloading and forfeiture proceedings has exclusive
of goods subject of forfeiture jurisdiction to hear and determine all
12. Receptacles, boxes used to conceal goods questions touching on the seizure and
subject of forfeiture (Sec. 2530,TCC) forfeiture proceedings of dutiable goods. The
regional trial courts are preclude from
Article not subject to forfeiture or seizure: assuming cognizance over such even though
The forfeiture of vessel or aircraft or seizure of petition for certiorari, prohibition, or
articles shall not be effected if it is established mandamus.
that the owner thereof or his agent in charge of the  Even if a Customs seizure is illegal, exclusive
means of conveyance used as aforesaid has no jurisdiction still belongs to the Bureau of
knowledge of a participation in the unlawful act. Customs (Jao, et. al vs. CA, supra).
In other words, no forfeiture or seizure in the
absence of prima facie evidence. To seize or not to seize is discretionary on
Customs, so mandamus does not lie. However, in
However, a prima facie presumption shall exist case of grave abuse by customs, petitioner can file
against the vessel, vehicle or aircraft under any of certiorari proceedings (Provident Tree Farms, Inc.
the following circumstances: vs. Batario, Jr. etc et. al G.R. No. 92285, March 28,
1. if the conveyance has been used for smuggling 1994).
at least twice before;
Protest vs. Seizure NOTE: In Assali vs. Commissioner, 27 SCRA 312,

the Supreme Court held as valid the interception
PROTEST SEIZURE and seizure of a vessel on the high seas, saying
Issue Validity or Validity or that the authority of a nation within its territory
propriety of legality of is absolute and exclusive. The power to secure
assessment of importation itself from injury may certainly be exercised
goods beyond the limits of its territory.
Proof 1. Collector is No probable
required wrong. cause exists Places Where Searches and Seizures may be
2. Assessment regarding the Conducted
and illegality of 1. Right of police officer to enter enclosure
classification. the WITHOUT a warrant, EXCEPT a dwelling
importation. i. house
Procedure Payment Warrant of 2. Search within a dwelling house must be with
seizure proper warrant
15 days 3. right to search vehicles or aircrafts and person
After hearing or articles conveyed therein
Protest before decision by 4. Right to search vehicles, beast and person
collector the collector 5. Search of person arriving from foreign
countries
15 days 15 days
Settlement of Forfeiture Cases
Commissioner Commissioner
of Customs of Customs General Rule: Settlement of cases by payment of
fine or redemption of forfeited property is
30 days 30 days allowed.
CTA CTA The District Collector subject to the approval of

En En the Commissioner may, while the case is
banc banc pending:
15 days 15 days
SC SC 1. Accept the settlement of any seizure case
provided that the owner, importer, exporter or
consignee or his agent shall offer to pay to
Doctrine of Hot Pursuit
Requisites:
the Collector a fine imposed by him upon the
1. Over Vessels: property
a. an act is done in Philippine waters in
violation of the Tariff and Customs 2. In case of forfeiture, the owner, exporter,
Code. importer or consignee or his agent shall offer
b. a pursuit of such vessel began within the to pay for the domestic market value of the
jurisdictional waters which may seized article.
continue beyond the maritime zone and
the vessel may be seized on the high Exceptions:
seas. 1. the importation is absolutely prohibited or
2. the release of the property to the person
2. Over Imported Articles: offering to redeem would be contrary to law or
a. there is a violation of TCC 3. when there is fraud in. (Sec. 2307,TCC)
b. they may be pursued in the Philippines
by land, water, or air NOTES:
c. such jurisdiction exerted over them at Acquittal in a criminal charge is not res judicata
any place therein necessary for the in seizure or forfeiture proceedings.
enforcement of the law. (2nd par. Sec. 603,
TCC) Since criminal proceeding are actions in personam
while the latter is action in rem.
Jurisdiction of the BOC - The BOC shall have the
right of supervision and police authority over all Burden of proof in seizure or forfeiture case is on
seas within the jurisdiction of the Philippines and the claimant. (sec. 2535, TCC)
over all coasts, ports, airports harbor, bays, rivers
and inland waters whether navigable or not from SURCHARGE - To overcharge or to charge again
the sea. (Sec. 603, TCC) as in an accounting between parties
Articles subject to surcharge (DEMI)

161
1. Failure to pay Duties (Sec. 2501,TCC) Actual seizure of the articles

2. Failure or refusal of a party to submit 
Evidence (Sec. 2504,TCC) Listing of description, appraisal and
3. Misclassification, misdeclaration or under classification of seized property
evaluation of article 
4. Failure to submit or supply Invoice (Sec. Report of seizure to the Comm. of Customs and
2502, TCC) the Chairman, Comm. on Audit

Issuance by the Collector of a warrant of
FINES
detention
Articles subject to fine (BRUCE)

1. Breach or a Notification to owner or importer
2. Failure to supply or manifest requirements 
provided by law (Sec. 2521, TCC) Formal hearing
3. Unlawful loading and unloading of cargoes 
(Sec. 2524, 2517,TCC) District collector renders his decisions
4. Failure to produce all the crew members
5. Failure to exhibit the documents related to  
the vessel (Sec. 2519, 2507, 2508-2514, TCC) If decision is not If decision is not
favorable to the favorable to the
B. Judicial aggrieved owner or government
1. this remedy is normally availed of when importer
the tax lien is lost by the release of the  
goods Appeal by the Automatic Review by
 Civil Action (Sec. 1204, TCC) aggrieved owner or the Commissioner
 Criminal Action importer
When the goods are properly released and thus

beyond the reach of tax lien, the government can
seek payment of tax liability through judicial
action since the tax liability of the importer
constitutes a personal debt to the government,
therefore enforceable by action. In this case,
REMEDIES OF THE TAXPAYER
judicial remedy is normally availed of instead of
A. Administrative
the administrative remedy.
1. Protest
Q. Is Judicial Remedy for tax collection available
under the TCC?
 Any importer or interested party, if
A. Only civil action for collection is available.
dissatisfied with published value
Criminal action is not available. Only in the
within 15 days from date of
NIRC is there recovery of taxes through
publication or within 5 days from the
criminal suit.
date of importer is entitled to refund,
if payment is rendered erroneous or
Rules on Appeal Including Jurisdiction
illegal by events occurring after the
The party aggrieved by a ruling of the
payment.
Commissioner in any matter brought before him
upon protest or by his action or ruling in any case
 Taxpayer within 15 days from
of seizure may appeal to the Court of Tax Appeals,
in the manner and within the period prescribed by assessment (Sec. 2308, 2210, TCC)
law and regulations. Unless an appeal is made to
the Court of Tax Appeals in the manner and NOTE: Payment under protest is
within the period prescribed by laws and necessary.
regulations, the action or ruling of the
Commissioner shall be final and conclusive. 2. Abatement and Refund
 A written claim for refund may be

ADMINISTRATIVE AND JUDICIAL
submitted by the importer in
PROCEDURES RELATIVE TO CUSTOMS
abatement cases on missing packages,
SEIZURES AND FORFEITURES
deficiencies in the contents of
packages or shortages before arrival
Determination of probable cause and issuance of of the goods in the Philippines,
warrant articles, lost or destroyed after such

arrival, dead or injured animals, and

for manifest clerical errors; and  Article shall be delivered by the owner,
importer or consignee at such place which the
 Drawback cases where the goods are Collector designates; failure to comply shall
re-exported (Sec. 1701-1708, TCC) make him liable for expenses that may be
incurred in connection with the disposition
3. Settlement of any seizure by payment of thereof.
fine or redemption
Implied Abandonment
 But this shall not be allowed in any When the owner, importer, consignee or
case where importation is absolutely interested party, after due notice, fails to file an
prohibited or the release would entry within thirty (30) days, which shall not be
contrary to law, or when there is an extendible, from the date of discharge of the last
actual and intentional fraud. (Sec. package from the vessel or aircraft; OR
2307, TCC)
Having filed an entry for his shipment, the owner,
4. Appeal importer or consignee, or other interested party
fails to claim his importation within fifteen (15)
 Within 15 days to the Commissioner days, which shall not be extendible, from the date
after notification by Collector of his of posting of the notice to claim such importation.
decision. (Sec. 2313, TCC)
Effects of Abandonment
B. Judicial 1. Owner, importer, consignee or other
interested party deemed to have renounced
1. Appeal all of his interests and property rights over
the articles.
Within 30 days from receipt of decision 2. Abandoned article shall be ipso facto deemed
of the Commissioner or Secretary of the property of the government and shall be
Finance to the division of the CTA (Sec. disposed of in accordance with the provisions
2403, TCC, Sec. 7, R.A. 1125, as of the Code.
amended by Sec. 9, R.A. 9282)
 The CTA empowers to issue It does not relieve owner or importer from any
injunction, it would appear that an criminal liability which may arise from any
importer may appeal without first violation of law committed in connection with the
paying the duties, such as in seizure, importation of the abandoned article.
but not in protest cases.
2. Action to question the legality of seizure Nature of Customs Protest; Seizures and
Forfeiture cases
3. Abandonment
a. Expressly (Sec. 1801 TCC) There are two kinds of proceedings in the Bureau
b. Impliedly (Sec. 1801 TCC) of Customs, these are:
Failure to file an import entry within 30 days a. Customs protest cases- deal safely with
from the discharge of goods or having filed an liability for customs, duties, fees and
entry fails to claim within 15 days but it shall other charges.
not be so effective until so declared by the
collector. (Sec. 1801, as amended by R.A. b. Seizure and forfeiture cases- refer to
7651) matters involving smuggling or the act of
any person who fraudulently imports or
Abandonment – it is the renunciation by an brings into the Philippines, or assists in
importer of all his interest in the property rights so doing, any article contrary to law, or
in the imported article. It may be express or shall receive, conceal, buy, sell or in any
implied. manner facilitate the importation,
concealment, or sale of such auricles after
Express Abandonment importation, knowing the same to have
When the owner, importer or consignee of the been imported contrary to law smuggling
imported article expressly signifies in writing and includes the exportation act of articles in
under oath to the Collector of Customs his a manner contrary to law. (Sec. 3154,
intention to abandon his shipment in favor of the TCC).
government, within ten days after filing of the
import entry, he shall be relieved from payment of NOTE: Before filing a protest, there must first be
duties, taxes and other charges and expenses. a payment under protest.

163
decision or ruling of the Collector to which

CUSTOMS PROTEST APPLICABLE exception is taken or objection made, and
The customs protest is required to be filed shall indicate with reasonable precision the
only in case the liability of the taxpayer for duties, particular ground or grounds upon which the
taxes, fees and other charges is determined and protesting party bases his claim for relief.
the taxpayer disputes said liability. (Section 2310, Tariff and Customs Code)
WHEN CUSTOMS PROTEST NOT REQUIRED 5. The scope of a protest shall be limited to the
Where there is no dispute, but the claim for refund subject matter of a single adjustment or other
arises by reason of the happening of supervening independent transaction; but any number of
events such as when the raw material imported is issues may be raised in a protest with
utilized in the production of finished products reference to the particular item or items
subsequently exported and a duty drawback is constituting the subject matter of the protest.
claimed. Single adjustment refers to the entire content
of one liquidation including all duties,
Requirement for Making Protest surcharges or fines incident thereto. (Section
1. Must be in writing; 2310, Tariff and Customs Code)
2. Must point out the particular decision or
ruling of the Collector of Customs to which 6. When a protest in proper form is presented,
exception is taken or objection made the Collector shall issue an order for hearing
3. Must state the grounds relied upon for relief within fifteen (15) days from receipt of the
4. Must be limited to the subject matter of a protest and hear the matter thus presented.
single adjustment Upon the termination of the hearing, the
5. Must be filed when the amount claimed is Collector shall render a decision within thirty
paid or within 15 days after the payment (30) days, and if the protest is sustained in
6. Protest must furnish samples of goods under whole or in part, he shall make the
protest when required. appropriate order, the entry re-liquidated if
necessary in seizure cases. (Sec. 2312)
7. The person aggrieved by the decision or action
of the Collector in any matter presented upon
protest may within fifteen (15) days after
Procedure on Customs Protest Cases notification in writing by the Collector of his
action or decision, give written notice to the
1. The Collector shall cause all articles entering Collector and one copy furnished to the
the jurisdiction of his district and destined for Commissioner of his desire to have the matter
importation through his port to be entered at reviewed by the Commissioner. Thereupon,
the customhouse. He shall cause all such the Collector shall forthwith transmit all
articles to be appraised and classified, and records of the proceedings to the
shall assess and collect the duties, taxes, and Commissioner, who shall approve, modify, or
other charges thereon, and shall hold reverse the action or decision of the Collector
possession of all imported articles, upon and take such steps and make such orders as
which duties, taxes, and other charges have may be necessary to give effect to his decision.
not been paid or secured to be paid, disposing (Section 2313, Tariff and Customs Code)
of the same according to law. (Section 1206,
Tariff and Customs Code) 8. If in any case involving the assessment of
duties, the Collector renders a decision
2. The party adversely affected by the ruling or adverse to the Government, such decision
decision of the Collector whereby liability for shall automatically be elevated to, and
duties, taxes, fees or other charges are reviewed by the Commissioner; and if the
determined, may protest such ruling or Collector’s decision would be affirmed by the
decision. (Section 2308, Tariff and Customs Commissioner, such decision shall
Code) automatically be elevated to, and be finally
reviewed by, the Secretary of Finance.
3. The protest, which must be in writing, is filed However, if within thirty (30) days from the
with the Collector within fifteen (15) days. No receipt of the record of the case by the
protest shall be considered unless payment of Commissioner or by the Secretary of Finance,
the amount due after final liquidation (i.e. as the case may be, no decision is rendered by
computation of the liability) has first been either of them, the decision under review
made and the corresponding docket fee shall become final and executory. Any party
actually paid. aggrieved by either the decision of the
Commissioner or the Secretary of Finance
4. Every protest shall be filed in accordance with may appeal to the Court of Tax Appeals
rules and regulations promulgated for the within thirty (30) days from receipt of a copy
purpose, and shall point out the particular
of such decision. (Section 2315, Tariff and

  Except as provided above, the supervisory
authority of the Secretary of Finance over the
If decision is If decision is adverse Bureau of Customs does not extend to the
adverse to the to the government administrative review of the ruling of the
protestant Commissioner in matters appealed to the Court of
  Tax Appeals.
Appeal with the Automatic Review
Commissioner by the  Automatic review is intended to protect the
within 15 days Commissioner interest of the government in the collection of
from notice  taxes and customs duties in seizure and
 Automatic review by protest cases which, without such review,
Appeal with the the Secretary of neither the Commissioner nor the Secretary
Court of Tax Finance of Finance would probably know about.
Appeals Division   Automatic review as a procedural rule applies
within 30 days to both customs cases and seizure and
from notice forfeiture cases incident to smuggling or
unlawful importation or exportation.
 If decision of
 Likewise, supervisory authority is exercised
Appeal with the Commissioner or by the Commissioner on seizure and forfeiture
CTA en banc Secretary of Finance
cases while the case is still pending in the
 is adverse to the
Office of the Collector of Customs and before
Appeal by protestant, he may
the decision of the Collector becomes final.
certiorari with appeal to the CTA
the Supreme and SC under the
Burden of Proof in Protest Cases
Court within 15 same procedure on
days from notice. the left. In protest cases, the protestant has the burden of
proving the correctness of his contention for the
issue is not whether the Collector was wrong but
whether the importer is right.
Customs Code)
Incidentally, in case of appeals to the Court of Tax

Appeals from the decisions of the Secretary of PROCEDURE IN CUSTOMS PROTEST
Finance as a consequence of the automatic review CASES
by the Secretary of Finance of decisions
emanating from Customs, the thirty-day period of
appeal under Republic Act No. 1125 will The Collector acting within his jurisdiction shall
necessarily be counted from the receipt of the cause the imported goods to be entered at the
decision of the Secretary of Finance. customhouse

Automatic review and supervisory authority of The Collector shall assess, liquidate, and collect
Commissioner and Customs and Secretary of the duties thereon, or detain the said goods if the
Finance party liable does not pay the same
 If in any case involving the assessment of 
duties, the Collector renders a decision The party adversely affected (the protestant) may
adverse to the government; such decision file a written protest on his foregoing liability
shall automatically be elevated to, and with the Collector within 15 days after paying
reviewed, by the Commissioner. the liquidated amount (the payment under
 If the Collector’s decision would be affirmed protest rule applies)

by the Commissioner, such decision shall be
Hearing within 15 days from receipt of the duly
automatically elevated to, and finally
presented protest. Upon termination of the
reviewed, by the Secretary of Finance.
hearing, the Collector shall decide on the same
 However, if within thirty (30) days from
within 30 days
receipt of the record of the case by the
Commissioner or the Secretary of Finance, as
the case may be, no decision is rendered by
either of them, the decision under review
shall become final and executory.
REASONS FOR AUTHOMARIC REVIEW OF
DECISIONS ADVERSE TO THE
Any party aggrieved by either the decision of the
GOVERNMENT
Commissioner or the Secretary of Finance may
1. To protect the interest of the Government
appeal to the Court of Tax Appeals within thirty
(30) days from receipt of a copy of such decision.

165
2. A favorable decision will not be appealed paper - all touching on the importation or
by the taxpayer and certainly a Collector exportation of merchandise.; and
will not appeal his own decision.
3. Lifeblood Theory 2. That such declaration, affidavit, invoice,
letter or paper is false. (Farolan, Jr. vs. Court
REGIONAL TRIAL COURTS (RTC) of Tax Appeals, GR No. 42204, January 21,
vs. 1993)
BUREAU OF CUSTOMS (BOC)
 The RTCs do not have jurisdiction over PERTINENT CASES ON FORFEITURES:

seizure and forfeiture proceedings conducted
by the BOC and to interfere with these Acting Commissioner of Customs vs. CTA
proceedings. The Collector of Customs has The dismissal of the criminal charge in the fiscal’s
exclusive jurisdiction over all questions office against respondent Andrulis does not
touching on the seizure and forfeiture of constitute res judicata in the forfeiture
dutiable goods. proceedings. Forfeiture is in rem, whereas a
 No petitions for certiorari, prohibition or criminal action is in personam. Conviction in the
mandamus filed with the RTC will lie because criminal action is not a bar to forfeiture. Results
these are in reality attempts to review the of a criminal proceeding being dependent on the
Commissioner's actuations. Neither replevin evidence therein will not necessarily influence
filed with the RTC will issue. judgment in the forfeiture proceedings.
Rationale: Doctrine of Primary Jurisdiction.
 Even if a Customs seizure is illegal, exclusive
jurisdiction (to the exclusion of regular
courts) still belongs to the Bureau of Customs
(Jao vs. Court of Appeals, GR No. 104604, Llamado vs. Commissioner of Customs,
October 6, 1995). (123 SCRA 118)
A Cessna plane carrying persons engaged in the
GOODS IN CUSTOM’S CUSTODY BEYOND smuggling of untaxed “blue seal” cigarettes,
REACH OF ATTACHMENT landed at an airstrip in Alabat, Quezon Province.
Goods in the custom’s custody pending payment of The plane was also used to bring in “de gaza”
customs duties are beyond the reach of kerosene lanterns and kerosene used to light the
attachment. As long as the importation has not airstrip to facilitate the loading of the cigarettes.
been terminated, the imported goods remain The plane was subject to forfeiture pursuant to
under the jurisdiction of the Bureau of Customs. Sec. 2530 (a) of the Tariff and Customs Code. It is
(Viduya vs. Berdiago, GR No. L-29218, October 29, not necessary that the vessel or aircraft must
1976) carry the contraband. It is not likewise essential
that the vessel or aircraft must come from a
PERSONS HAVING POLICE AUTHORITY TO foreign country.
ENFORCE THE TARIFF & CUSTOMS LAWS
AND EFFECT SEARCHES, SEIZURES AND Commissioner of Customs vs. CTA and Jose
ARRESTS (SEC. 2203, TCC) Pascual, (138 SCRA 581)
1. officials of the BOC, district collectors, police The Supreme Court ruled that the forfeiture of
2. officers, agents, inspectors, and guests of the Pascual’s vessel used in the illegal importation of
BOC; untaxed cigarettes is justified. Forfeiture,
3. officers of the Phil. Navy and other members according to the Citing the case of Vierneya vs.
of the AFP and national law enforcement Commissioner of Customs (July 30, 1968), is in the
agencies when authorized by the nature of proceedings in rem and is directed
Commissioner of Customs against the res. The fact that the owner of the
4. officials of the BIR on all cases falling within vessel had no actual knowledge that the vessel
the regular performances of their duties, was illegally used does not render the vessel
when the payment of internal taxes are immune from forfeiture. This is so because the
involved; forfeiture action is against the vessel itself.
5. officers generally empowered by law to
effect arrests and execute processes of NOTE: The said vessel was duly authorized to
courts, when acting under the direction of engage in coastwise trade but has no certificate of
the Collector. public convenience.
REQUIREMENTS FOR CUSTOMS Transglobe International Inc. vs. CA,

FORFEITURE (G.R. No. 126634,January 25, 1999)
1. The wrongful making by the owner, importer, Forfeiture of seized goods in the Bureau
exporter or consignee of any declaration or of Customs is a proceeding against the goods and
affidavit, or the wrongful making or delivery not against the owner. It is the nature of a
by the same persons of any invoice, letter or proceeding in rem, i.e. directed against the res or
imported article and entails a determination of the the Philippines to another is required when one or
legality of their importation. In this proceeding, it both of such places is a port of entry (Sec. 906,
is in legal contemplation the property itself which TCC). Manifests are also required of vessel from a
commits the violation and is treated as the foreign port (Sec. 1005, TCC).
offender, without reference whatsoever to the
character or conduct of the owner. IS MANIFEST REQUIRED ONLY FOR
IMPORTED GOODS?
PLACES WHERE SEARCHES & SEIZURES NO. Articles subject to seizure do not have to be
MAY BE CONDUCTED imported goods. Manifests are also required for
a. enclosures articles found on vessels or aircraft engaged in
b. dwelling house (there must be search coastwise trade. (Rigor vs. Rosales, GR No. L-
warrant issued by a judge) 33756, October 23, 1982)
c. vessels or aircrafts and persons or articles
conveyed therein UNMANIFESTED CARGO IS SUBJECT TO
d. vehicles, beasts and persons FORFEITURE whether the act of smuggling is
e. persons arriving from foreign countries. established or not under the principle of res ipsa
loquitur. It is enough that the cargo was
NOTE: Burden of proof in seizure or forfeiture is unmanifested and that there was no showing that
on the claimant. (Sec. 2535, TCC) payment of duties thereon had been made for it to
be subject to forfeiture.
PERTINENT CASES ON SEARCHES AND SETTLEMENT OF FORFEITURE CASES

SEIZURES: General Rule: Settlement of cases by payment of
fine or redemption of forfeited property is
1) The legality of a search can be contested only allowed.
by the party whose rights have been impaired
thereby and that the objection to an unlawful Exceptions:
search and seizure is purely personal and 1. the importation is absolutely prohibited
cannot be availed of by third parties. (Nasiad, or
et al. vs. CTA, Nov. 29, 1994) 2. the surrender of the property to the
person offering to redeem would be
2) Warrants of seizure and detention issued by contrary to law, or
the Collector of C covering the seizure of 3. when there is fraud. (Sec. 2307, TCC)
imported goods are not general
warrants issued in violation of Section 3 (now ACQUITTAL IN CRIMINAL CHARGE NOT RES
section 4), rule 126 of the Rules of Court. JUDICATA IN SEIZURE OR FORFEITURE
Upon effecting the seizure of the goods, the PROCEEDINGS
Bureau of Customs acquired exclusive
jurisdiction not only over the case but also Reasons:
over the goods seized for the purpose of 1) Criminal proceedings are actions in personam
enforcing the tariff and Customs laws. (Chia while seizure or forfeiture proceedings are
vs. Acting Collector of Customs, Sept. 26, actions in rem.
1989) 2) Customs compromise does not extinguish
criminal liability. (People vs. Desiderio, GR
3) The proceedings upon search warrants must No. L-208005, November 26, 1965)
be absolutely legal, “for there is not a
description of process known to the law, the NOTE: At any time prior to the sale, the
execution of which is more distressing to the delinquent importer may settle his obligations
citizen. Perhaps there is none which excites with the Bureau of Customs, in which case the
such intense feeling in the consequence of its aforesaid articles may be delivered upon payment
humiliating and degrading effect.” The of the corresponding duties and taxes and
warrants will always be construed strictly compliance with all other legal requirements (Sec.
without however, going the full length of 1508, TCC)
requiring technical accuracy. No
presumptions of regularity are to be invoked ABATEMENT
in aid of process when an officer undertakes The reduction or non-imposition of customs duties
to justify under it. (Uy vs. BIR, Oct. 20, 2000) on certain imported materials as a result of:
1) Damage incurred during voyage;
REQUIREMENTS FOR MANIFEST 2) Deficiency in contents packages
A manifest in coastwise trade for cargo and 3) Loss or destruction of articles after
passengers transported from one place or port in arrival

167
4) Death or injury of animals
FRAUDULENT PRACTICES CONSIDERED AS

CRIMINAL OFFENSES AGAINST CUSTOMS
REVENUE LAWS
1) Unlawful importation;
2) Entry of imported or exported article by
means of any false or fraudulent practices,
invoice, declaration, affidavit, or other
documents;
3) Entry of goods at less than their true weights
or measures or upon a classification as to
quality or value;
4) Payment of less than the amount due;
5) Filing any false or fraudulent claim for the
payment of drawback or refund of duties upon
the exportation of merchandise; or
6) Filing any affidavit, certificate or other
document to secure to himself or others the
payment of any drawback, allowance or
refund of duties on the exportation of
merchandise JUDICIAL REMEDIES

greater than that
legally due (R.A. 1125)
thereon. (Sec. (the act that created the COURT OF TAX APPEALS (CTA),
3602, TCC)
as amended, and THE REVISED RULES OF THE CTA)
JURISDICTION OF THE
COURT OF TAX APPEALS
EXCLUSIVE APPELLATE JURISDICTION

OVER CIVIL TAX CASES
a. Cases within the jurisdiction of the Court En

Banc
Petition for review under Rule 43, RRC before
the CTA En Banc-Involving decisions or
rulings of the CBAA and the RTC in the
exercise of its appellate jurisdiction.
b. Cases within the jurisdiction of the Court in

Divisions
Petition for Review under Rule 42, RRC
before a division of the CTA- Involving
decision, ruling or inaction of the CIR,
Commissioner of Customs, Sec. of Finance,
Sec. of Trade and Industry and Sec. of
Agriculture or the RTC.
CRIMINAL CASES
Under RA 1125, CTA has no criminal jurisdiction-

It may refer the matter to the proper official for
investigation or prosecution. (Ollada vs. CTA, 99 Judicial tax collection arises:

Phil. 604, 1956) a. If the self-assessed tax shown in the
return was not paid within the date
a. Exclusive original jurisdiction prescribed by law.
 Criminal cases arising from violations of b. Final assessment is not protested
the Tax Code and the Tariff Code and administratively within 30 days from
other laws, part of laws, or special laws date of receipt.
administered by the BIR or the Bureau of c. Non-compliance with the condition laid
Customs. down in the approval of the protest.
d. Failure to file a timely appeal to the CTA
 Offenses or felonies where the principal on the final decision of the CIR or his
amount of the taxes and fees, exclusive of authorized representative on the
charges and penalties claimed is Php1M disputed assessment.
and above or where there is no specified Civil action as a means to collect tax
amount claimed shall be tried by the liability
regular courts and the jurisdiction of the  Resorted to when a tax liability
CTA shall be appellate. becomes collectible or
b. Exclusive appellate jurisdiction in criminal

cases  When the tax assessment has
 Over appeals from the judgments, become final
resolutions or orders of the Regional Trial  A civil action shall commence only
Courts in tax cases originally decided by upon the approval of the CIR except
them, in their respected territorial when expressly delegated by the CIR
jurisdiction. to the Regional Directors. The civil
action for the collection of tax
liability shall be filed in the regular
courts. In such case, the taxpayer is
 Over petitions for review of the precluded from raising the following
judgments, resolutions or orders of the defenses: 1) The BIR has no
Regional Trial Courts in the exercise of authority to collect the tax within the
their appellate jurisdiction over tax cases prescriptive period and 2) the
originally decided by the legality or validity of the assessment.
 Metropolitan Trial Courts, Municipal  Once the assessment has become

Trial Courts and Municipal Circuit Trial final, the civil case for collection of
Courts in their respective jurisdiction. such tax liability becomes akin to an
action to enforce a judgment such
that no inquiry can be made thereon
JUDICIAL PROCEDURES as the merits of the original case or
the justness of the final judgment
relied upon. (Mambulao Lumber Co.
JUDICIAL ACTION FOR
vs Republic, GR. No. L-37061
COLLECTION OF TAXES
September 5, 1984)
1. Internal Revenue Taxes Q. How is judicial action for tax collection
Prescriptive periods for collection of taxes commenced?
a. If there is an assessment made, the A. It is begun by (1) filing of a complaint with
period shall be within five (5) years from the proper court, or (2) where the
the finality of the assessment. assessment is on appeal in the CTA, by
b. In the absence of an assessment and a tax filing by the government of the answer to
return was filed as long as it is not false the taxpayer’s petition for review wherein
or fraudulent, the period to collect is payment of the tax is prayed for. (Alhambra
within five (5) years from date the tax is vs. Collector, 105 Phil. 1337, May 29, 1959)
due.
c. If no return was filed where one was Civil action for tax collection can be
required, the period to collect is within resorted to by filing a collection case in the
ten (10) from discovery of the omission regular court where the assessment is
without need of assessment. already final and demandable. It should be
d. If the tax return filed was fraudulent, noted that no civil action for the recovery of
collection may be resorted to without taxes shall begun without the approval of
need of an assessment within ten (10) the CIR.
years from the discovery of fraud.

169
Q. May the BIR demand for the payment of a. Injunction not available to restrain
taxes in the same criminal action filed collection
against a taxpayer? An appeal to the CTA does not by itself
A. Yes. This is authorized under Sec. 205 (b) of suspend the payment, levy, distraint
the Tax Code which provides: “judgment in and/or sale of any property of the
the criminal case shall not only impose the taxpayer for the satisfaction of his tax
penalty but shall also order payment of the liability. So that, notwithstanding the
taxes subject of the criminal case as finally appeal, the CIR may proceed to collect the
decided by the Commissioner.” tax assessed against the taxpayer. The
taxpayer here may petition the CTA for
2. Local Taxes the issuance of a writ of injunction to
The local government unit concerned may stop/defer the collection of subject tax.
enforce the collection of delinquent taxes,
fees, and charges or other revenue by civil
action in any court of competent jurisdiction.
The civil action shall be filed by the local
treasurer within the period prescribed. Requisites:
1. The injunction is an incident of a case
 Under RA 1125, The CTA has no over which the CTA has jurisdiction.
jurisdiction to take cognizance of tax 2. That the collection pending appeal
collection of local taxes and protested might jeopardize the interest of the
local tax cases. However, under RA 9337 government and/or the taxpayer.
expanded jurisdiction of CTA, it has 3. That the taxpayer shows that the
jurisdiction over local taxes and real appeal is not frivolous nor for the
property taxes. purpose of delaying the tax collection.
4. The taxpayer is willing to deposit the
 Civil action would preclude a criminal amount claimed or to file a surety
case as a proper remedy for collection of bond for not more than double the
delinquent local taxes. (Republic vs amount of the tax with the court when
Patanao. L-22356, July 21, 1967) required.
Prescriptive Period Taking of Evidence

Local taxes, fees, or charges may be collected  Trials are generally conducted en banc,
within five (5) years from the date of but the Court may delegate to a member
assessment by administrative or judicial the taking of evidence, after which said
action. No such action shall be instituted after judge submits a report to the Court.
the expiration of such period.
 Reception of evidence may be assigned to
CIVIL CASES one of the judges:
a. In the determination of a question of
Who may appeal mode of appeal, effect of appeal? fact.
Any person, association or corporation adversely b. When the taking of account is
affected by a decision or ruling of the CIR, CC, SF, necessary.
CBAA, RTC involving local taxes in the exercise of c. When the issue of fact requires
their original or appellate jurisdiction , Sec. of examination of long accounts.
Trade and Industry and Sec. of Agriculture on
special duties may file an appeal to the CTA. Thus, Motion for Reconsideration or New Trial
the Government is certainly not one of them. A party adversely affected by a ruling, order,
(Acting Collector of Customs vs. CA, G.R. No. L- or decision of a division of the CTA may file a
8811, October 31, 1957) motion for reconsideration or motion for new
trial before the same division within 15 days
 File a Petition for review under Rule 43, RRC from notice.
before the CTA En Banc-Involving decisions
or rulings of the CBAA and the RTC in the Appeal to the CTA En Banc
exercise of its appellate jurisdiction. A party adversely affected by a resolution of a
division of the CTA on the motion for
 File a Petition for Review under Rule 42, RRC reconsideration or motion for new trial may
before a division of the CTA- Involving file a petition for review with the CTA En
decision, ruling or inaction of the CIR, Banc.
Commissioner of Customs, Sec. of Finance,
Sec. of Trade and Industry and Sec. of Petition for Review on Certiorari to the
Agriculture or the RTC. Supreme Court
A party adversely affected by a decision or
Suspension of Collection of Tax ruling of the CTA En Banc may file with the
SC a verified petition for review on certiorari A party adversely affected by a decision or ruling
under Rule 45, RCC. of the Court en banc may appeal therefrom by
filing with the Supreme Court a verified petition
Note: In cases of inaction of the CIR and an for review on certiorari within 15 days from
appeal has been filed by the taxpayer with the receipt of a copy of the decision or resolution.
CTA, the CIR cannot later decide on the
protest since under Rules 42 and 43,RRC, the Motion for New Trial or Reconsideration
CIR has only residual jurisdiction over the Within 15 days from receipt of a copy of the
case after the appeal has been made. resolution denying the motion for reconsideration
of for new trial
Effect of Appeal
If appeal is made during pendency of the motion
for reconsideration or for new trial, said motion
shall be deemed abandoned.
CRIMINAL CASES TAXPAYER’S SUIT IMPUGNING THE

VALIDITY OF TAX MEASURES OR ACTS
Institution and Prosecution of Criminal Actions OF TAXING AUTHORITIES
Institution on civil action in criminal action Taxpayer’s Suit is a class suit brought by one or
When the government (BIR or BC) files a criminal more taxpayers (natural or juridical) on behalf of
action against a taxpayer, the corresponding civil themselves and as representation of a class of
action for the recovery of the civil liability (taxes, taxpayers situated within a taxing district and for
interests, surcharge, and other penalties) is the purpose of seeking relief from illegal or
deemed to necessarily carry with it the filing of the unauthorized acts of the government or its tax
civil action and it shall at all times be officials which are injurious to their common
simultaneously instituted with, and jointly interest as taxpayers.
determined in the same proceeding by the CTA.
Hence, there is no need to reserve the filing of such  It may include a legislative enactment or
civil action separately from the criminal action. ordinance that is directly involved in the
illegal disbursement of public fund derived
Appeal and Period of Appeal from taxation.
 It is permitted whenever there is a waste or
Solicitor General as counsel for the People and unlawful use of public funds or property.
government officials sued in their capacity  The illegal actions of public officials are in
some way injurious to municipal and public
Q. Who should institute appeal in the tax cases interest and if allowed to continue, it will
for and in behalf of government?(From CTA result in increase burden or disadvantage to
to SC) the taxpayers.
A. The institution or commencement before a  This action is designed to obtain a relief and
proper court of civil or criminal actions and not to stop the imposition of a burden.
proceedings arising under RA 8224 shall be
conducted by legal officers of the BIR. An Taxpayer’s suit vs Citizen’s Suit.
Appeal from such court, however, is not a In a taxpayer’s suit, the complainant or plaintiff is
matter of right. The SC maintains that it is affected by the expenditure of public funds while
the Solicitor General who has the primary in the citizen’s suit, he is but a mere instrument of
responsibility to appear for the government the public concern.
in appellate proceedings. (Commissioner of
Internal Revenue vs. La Suerte Cigar and Requisites of a Taxpayer’s Suit
Cigarette Factory, 433 Phil. 463) 1. Tax money is being exacted and spent in
violation of specific constitutional protections
NOTE: The legal officers of the BIR are against abuse of legislative power.
authorized to commence tax proceedings or 2. Public money is being deflected to any
civil actions before the regular courts and the improper purpose (Pascual vs. Sec of Public
CTA but are not authorized to institute appeal Works, 110 Phil. 22, (1960).
proceedings without the participation of the 3. The petitioners seek to restrain the
Solicitor General. respondents from wasting public funds
through enforcement of an invalid or
Petition for Review on Certiorari to the Supreme unconstitutional law.
Court
NOTE: The SC has discretion as to whether
Appeal or not to entertain a taxpayer’s suit and could

171
brush aside the lack of locus standi where the agency or instrumentality of the
issues are of transcendental importance in government; and
keeping with the court’s duty to determine 3. the lack of any other party with a more
that public offices have not absurd the direct and specific interest in raising the
discretion given to them. [Kilosbayan, questions being raised. [Kilosbayan,
Incorporated vs. Guingona, Jr., 232 SCRA 110 Incorporated vs. Guingona, Jr., 232
(1994)] SCRA 110 (1994)]
A tax payer has the right to file an action Ripeness for Judicial Determination
questioning the validity or constitutionality of An issue is ripe for judicial determination
a statute or law on the theory that the when litigation is inevitable, or when
expenditure of public funds by an officer of the administrative remedies have been
government for the purpose of invalid law exhausted. (Corsiga vs. Defensor, G.R. No.
constitutes a misapplication of such 139302, October 28, 2002).
funds. (Gascon vs. Arroyo, G.R No.78389,

October 16, 1989)
Concept of Locus Standi as Applied in

Taxation
For legislators, there must be a claim that the
official action complained of infringes upon
their prerogatives as legislators.
(David, et al., vs. President Gloria Macapagal-
Arroyo, etc.,et al, G.R No. 171396, May 3,
2006)
Locus standi, being merely a matter of

procedure, have been waived in certain
instances where a party who is not personally
injured may be allowed to bring suit. The
following are examples of instances where
suits have been brought by parties who have
not been personally injured by the operation
of a law or any other government act but by
concerned citizens, taxpayers or voter who
actually sue in public interest.
a. The taxpayer’s suits to question contracts
entered into by the national government
or government-owned or controlled
corporations allegedly in contravention of
law.
b. A taxpayer is allowed to sue where there
is a claim that public funds are illegally
disbursed or that public money is being
deflected to any improper purpose or that
there is wastage of public funds through
the enforcement of an invalid or
unconstitutional law. (Abaya vs. Ebdane,
G.R No. 167919, February 14, 2007)
Doctrine of Transcendental Importance

There being no doctrinal definition of
transcendental importance, the following
determinants formulated by former Supreme
Court Justice Florentino P. Feliciano are
instructive:
1. the character of the funds or other assets
involved in the case;
2. the presence of a clear case of disregard
of a constitutional or statutory
prohibition by the public respondent

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1

GENERAL PRINCIPLES OF TAXATION

Scope of Legislative Power (SM-PARKS)

whatever, except such as rest in the discretion use of

FAR EASTERN UNIVERSITY  CENTRALIZED BAR OPERATIONS 2012

revenues, the modern view is that it cannot be

period to assess is within ten (10) years from

b. Tariff and Customs Code – It does not express

FAR EASTERN UNIVERSITY  CENTRALIZED BAR OPERATIONS 2012

a. It may be based on a contract

FAR EASTERN UNIVERSITY  CENTRALIZED BAR OPERATIONS 2012

Limitations on Revocation: It is a general pardon or intentional overlooking

Tax amnesty is granted to erring taxpayers and

2. Civil in nature. Hence, not subject to ex post

FAR EASTERN UNIVERSITY  CENTRALIZED BAR OPERATIONS 2012

Where a statute is susceptible of the meaning

5. Exemption of the Government b. Promotion of the General Welfare Test -

A. Specific or Direct NOTE: Incidental advantage to the public or

FAR EASTERN UNIVERSITY  CENTRALIZED BAR OPERATIONS 2012

d. Subject matter of the tax (person, property,

Corporate Taxes – is taxed on the country where

FAR EASTERN UNIVERSITY  CENTRALIZED BAR OPERATIONS 2012

1. Properties owned by the Republic of the

All revenues and assets of non-stock, non-profit

exclusively for educational purposes shall be

7. Special Fund Requisites of Due Process:

10. Grant of Power of Taxation to Local

FAR EASTERN UNIVERSITY  CENTRALIZED BAR OPERATIONS 2012

circumstances and conditions, both in the (LAP-R)

Tax refunds are in the nature of tax exemptions.

TAX pertains to an enforced proportionate TAX TOLL

REQUISITES OF A VALID TAX Subject of Businesses, Required for

FAR EASTERN UNIVERSITY  CENTRALIZED BAR OPERATIONS 2012

When Post-activity Pre-activity

AS TO SCOPE OR AUTHORITY TO IMPOSE

- real property tax

FAR EASTERN UNIVERSITY  CENTRALIZED BAR OPERATIONS 2012

taxpayer other than a producing goods or

 A mere increase in the value of property is not

NATIONAL INTERNAL REVENUE CODE OF 1997

NATIONAL INTERNAL REVENUE TAXES is also known as appraisal surplus or

Final Withholding agent (source) -

b. SCHEDULAR TAX SYSTEM. Provides for a a. CITIZENSHIP PRINCIPLE. A citizen of the

FAR EASTERN UNIVERSITY  CENTRALIZED BAR OPERATIONS 2012

Foreign Corporation Within 3. The income, gain or profit is received or

FAR EASTERN UNIVERSITY  CENTRALIZED BAR OPERATIONS 2012

o Corporations falling under MCIT (2% of gross

o For taxpayers (individuals or corporations)

4. Taxable Net Income

GROSS INCOME vs. NET INCOME vs.

3. Net Income Item 1.COMPENSATION INCOME.

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It includes salaries, wages, emoluments 3. Fixed or Variable Allowances. In general, fixed

Personal exemptions is comprised of Basic PE of 4. Commission is usually a percentage of total

1. Basic Salary or Wage 7. Hazard or Emergency Pay is an additional

FAR EASTERN UNIVERSITY  CENTRALIZED BAR OPERATIONS 2012

Tax Effects/Implications/Incidences **Life Insurance Premium

c. The ER condoned the debt of the EE in If EE is rank-and-file-

32(b)(7)(e) of the Tax Code: (Sec 1, Rev Regs. No