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Taxation PDF
Taxation PDF
Q: What is the basis of the inherent nature of taxation? Note: The Congress may, by law, authorize the President to
fix within specified limits, subject to such limitations and
A: The Life-blood Doctrine. “Without taxes, the government restrictions as it may impose, tariff rates, import and export
would be paralyzed for lack of motive power to activate quotas, tonnage and wharfage dues and other duties or
and operate it. Hence, despite the natural reluctance to imposts within the framework of the national development
program of the government. (Sec. 28 [2], Art. VI, 1987
surrender part of one’s earned income to the taxing
Constitution)
authorities, every person who is able must contribute his
share in the running of the government.” (CIR v. Algue, G.R.
3. When the delegation relates merely to administrative
No. L-28896, February 17, 1988)
implementation that may call for some degree of
discretionary powers under a set of sufficient standard
Manifestations:
1. Imposition even in the absence of constitutional grant expressed by law (Cervantes v. Auditor General, G.R.
2. State’s right to select objects and subjects of taxation No. L-4043, May 26, 1952) or implied from the policy
3. No injunction to enjoin collection of taxes except for a period and purpose of the act. (Maceda v. Macaraig, G.R. No.
of 60 days upon application to the CTA as an incident of its 88291, June 8, 1993)
appellate jurisdiction.
4. Taxes could not be the subject of compensation and set-off Note: Technically, this does not amount to a delegation of the
subject to certain exceptions. power to tax because the questions which should be
5. A valid tax may result in destruction of property. determined by Congress are already answered by Congress
before the tax law leaves Congress.
Q: May legislative bodies enact laws to raise revenues in
the absence of constitutional provisions granting said
body the power of tax? Explain. (2005 Bar Question)
Note: This is not exclusive to Congress. A: The power to tax involves the power to destroy since
the power to tax includes the power to regulate even to
e. Apportionment of the tax (whether the tax shall the extent of prohibition or destruction, as when the
be of general application or limited to a particular power to tax is used validly as an implement of police
locality, or partly general and partly local) power in discouraging and prohibiting certain things or
f. Kind of tax to be collected enterprises inimical to the public welfare.
g. Situs of taxation
While the power to tax is so unlimited in force and so
2. The grant tax exemptions and condonations. searching in extent that the courts scarcely venture to
3. The power to specify or provide for administrative as declare that it is subject to any restrictions whatever, it is
well as judicial remedies (Philippines Petroleum subject to the inherent and constitutional limitations which
Corporation v. Municipality of Pililla, G.R. No.85318, are intended to prevent abuse on the exercise of the
June 3, 1991). otherwise plenary and unlimited powers. It is the court’s
role to see to it that the exercise of the power does not
Q: In order to raise revenue for the repair and transgress these limitations.
maintenance of the newly constructed City Hall of Makati,
the City Mayor ordered the collection of P1.00, called The power to tax therefore, must not be exercised in an
“elevator tax”, every time a person rides any of the high- arbitrary manner. It should be exercised with caution to
tech elevators in the City Hall during the hours of 8am to minimize injury to proprietary rights of a taxpayer. It must
10am and 4pm to 6pm. Is the elevator tax a valid be exercised fairly, equally and uniformly, lest the tax
imposition? (2003 Bar Question) collector kill the hen that lays the golden egg. (Roxas et. al
vs. CTA et. al, L-25043, April 26, 1968)
A: No. The imposition of a tax, fee or charge or the
generation of revenue under the Local Government Code, Taxpayers may seek redress before the courts in case of
shall be exercised by the Sanggunian of the local illegal imposition of taxes and irregularities. The
government unit concerned through an appropriate Constitution, as the fundamental law, overrides any
ordinance (Sec. 132, LGC). The city mayor alone could not legislative or executive act that runs counter to it. In any
order the collection of the tax; as such, the “elevator tax” is case, therefore, where it can be demonstrated that the
an invalid imposition. challenged statutory provision fails to abide by its
command, then the court must declare and adjudge it null.
Q: Discuss the Marshall dictum “The power to tax is the (Sison Jr. v. Ancheta, G.R. No. L-59431, July 25, 1984)
power to destroy” in the Philippine setting.
Note: Marshall’s view refers to a valid tax while Holmes’ view
A: Taxation is a destructive power which interferes with refers to an invalid tax.
the personal and property rights of the people and takes
from them a portion of their property for the support of CHARACTERISTICS OF TAXATION
the government. (McCulloch vs. Maryland, 4 Wheat, 316 4
L ed. 579, 607) Q: What are the characteristics of the power to tax?
Note: It is more reasonable to say that the maxim “the power to A: CUPS
tax is the power to destroy” is to describe not the purposes for 1. Comprehensive - It covers persons, businesses,
which the taxing power may be used but the degree of vigor with activities, professions, rights and privileges.
which the taxing power may be employed in order to raise 2. Unlimited - It is so unlimited in force and searching in
revenue. (Cooley). extent that courts scarcely venture to declare that it is
subject to any restrictions, except those that such rests
Q: Justice Holmes once said: “The power to Tax is not the in the discretion of the authority which exercises it.
power to destroy while this court (Supreme Court) sits”. (Tio v. Videogram Regulatory Board, G.R. No. 75697,
Explain. June 18, 1987)
POWER OF TAXATION COMPARED WITH OTHER POWERS A: Yes. Taxation is no longer envisioned as a measeure
OF THE STATE merely to raise revenue to support the existence of the
government. Taxers may be levied with a regulatory
Q: What are the distinctions among the three inherent purpose to provide a means for the rehabilitation and
powers of the State? stabilization of a threatened industry which is acffected
with public interest as to be within the police power of the
A: state. (Caltex Philippines, Inc. v. Commission on Audit, 208
TAXATION POLICE POWER EMINENT DOMAIN SCRA 726) Thus, the power of taxation may be exercised to
Authority who exercises the power implement police power. (Tiu v. Videogram Regulatory
Government or Government or Government or Board, 151 SCRA 208)
its political its political public service
subdivision subdivision companies and Q: Central Luzon Drug (CLD) operated 6 drugstores under
public utilities the name and style “Mercury Drug”. CLD granted 20%
Purpose sales discount to senior citizens pursuant to R.A. 7432 and
To raise revenue Promotion of To facilitate the its Implementing Rules. CLD filed with petitioner a claim
in order to general welfare taking of private for tax refund/credit in the amount allegedly arising from
support of the through property for public the 20% sales discount. CIR was ordered to issue a tax
Government regulations purpose credit certificate in favor of CLD. Can taxation be used as
Persons affected an implement for the exercise of the power of eminent
Upon the Upon On an individual as domain?
community or community or the owner of a
class of class of particular property A: Yes. Tax measures are but “enforced contributions
individuals individuals exacted on pain of penal sanctions” and “clearly imposed
Amount of monetary imposition for a public purpose.” The 20% discount given to senior
No ceiling except Limited to the No imposition, the citizens on pharmacy products was considered a property,
in the form of a supposed profit, taken from the drugstore
inherent cost of owner is paid the
limitations regulation, fair market value of and used for public use, by means of giving it directly to
individual senior citizen. Be it stressed that the privilege
issuance of his property
license or enjoyed by senior citizens does not come directly from the
State, but rather from the private establishments
surveillance
concerned. Accordingly, the tax credit benefit granted to
Benefits received
these establishments can be deemed as their just
Protection of a Maintenance of The person receives
compensation for private property taken by the State for
secured healthy the fair market
public use. (CIR v. Central Luzon Drug, G.R. No. 159647, Apr.
organized society, economic value of the
15, 2005)
benefits received standard of property taken from
from society/ No him/ direct benefit
PURPOSE OF TAXATION
government/ No direct benefit results
direct benefit
Q: What are the purposes of taxation?
Non-Impairment of contracts
Tax laws generally Contracts may Contracts may be A:
do not impair be impaired impaired 1. Revenue – to raise funds or property to enable the
contracts, unless:
State to promote the general welfare and protection
government is of the people.
party to contract
granting 2.
2
Non-revenue [PR EP]
exemption for a
consideration
e. Protectionism – In case of foreign importations, Q: Will violation of these principles invalidate a tax law?
protective tariffs and customs are imposed to
protect local industries. A: It depends. A tax law will retain its validity even if it is
not in consonance with the principles of fiscal adequacy
PRINCIPLES OF SOUND TAX SYSTEM and administrative feasibility because the Constitution does
not expressly require so. These principles are only
Q: What are the basic principles of a sound tax system designated to make our tax system sound. However, if a
(Canons of Taxation)? tax law runs contrary to the principle of theoretical justice,
such violation will render the law unconstitutional
A: FAT considering that under the Constitution, the rule of taxation
1. Fiscal adequacy should be uniform and equitable. (Tax Principles and
a. Revenue raised must be sufficient to meet Remedies 2011, Justice Dimaampao)
government/public expenditures and other public
needs. (Chavez v. Ongpin, G.R. No. 76778, June 6, Q: Frank Chavez, as taxpayer, and Realty Owners
1990) Neither an excess nor a deficiency of Association of the Philippines, Inc. (ROAP), alleged that
revenue vis-à-vis the needs of government would E.O.73 providing for the collection of real property taxes
be in keeping with the principle (Vitug, Acosta, as provided for under Section 21 of P.D.464 (Real Property
Tax Law and Jurisprudence, Second Edition) Tax Code) is unconstitutional because it accelerated the
application of the general revision of assessments to
2. Administrative feasibility January 1, 1987 thereby increasing real property taxes by
a. The tax system should be capable of being 100% to 400% on improvements, and up to 100% on land
effectively administered and enforced with the which would necessarily lead to confiscation of property.
least inconvenience to the taxpayer (Diaz v. Is the contention of the Chavez and ROAP correct?
Secretary of Finance, G.R. No. 193007, July 19,
2011) A: No. To continue collecting real property taxes based on
valuations arrived at several years ago, in disregard of the
Note: Non-observance of this canon, however, will not render increases in the value of real properties that have occurred
a tax imposition invalid “except to the extent that specific
since then, is not in consonance with a sound tax system.
constitutional or statutory limitations are impaired” (Ibid.).
Fiscal adequacy, which is one of the characteristics of a
3. Theoretical justice sound tax system, requires that sources of revenues must
a. Must take into consideration the taxpayer’s be adequate to meet government expenditures and their
ability to pay (Ability to Pay Theory). variations. (Chavez v. Ongpin, G.R. No. 76778, June 6, 1990)
b. Art. VI, Sec. 28(1), 1987 Constitution mandates Q: Is the VAT law violative of the administrative feasibility
that the rule on taxation must be uniform and principle?
equitable and that the State must evolve a
progressive system of taxation. A: No. The VAT law is principally aimed to rationalize the
system of taxes on goods and services. Thus, simplifying tax
Q: What are the distinctions among the basic principles of administration and making the system more equitable to
a sound tax system? enable the country to attain economic recovery (Kapatiran
ng Mga Naglilingkod sa Pamahalaan v. Tan, G.R.No.81311,
A: June 30, 1988).
FISCAL ADMINISTRATIVE THEORETICAL
Note: Even if the imposition of VAT on tollway operations may
ADEQUACY FEASIBILITY JUSTICE seem burdensome to implement, it is not necessarily invalid unless
Meaning some aspect of it is shown to violate any law or the Constitution
Sources of The enforcement Imposition must (Diaz v. Secretary of Finance, G.R. No. 193007, July 19, 2011).
revenues must be should be be based on the
A: The theories underlying the power of taxation are the Q: What is the Doctrine of Prospectivity of tax laws?
following:
1. Lifeblood theory (Necessity theory) A: GR: Taxes must only be imposed prospectively.
2. Benefits-protection theory (Doctrine of Symbiotic
Relationship) XPN: If the law expressly provides for retroactive
3. Necessity Theory imposition. Retroactive application of revenue
4. Jurisdiction over subject and objects laws may be allowed if it will not amount to
denial of due process.
Q: Discuss the meaning and the implications of the
statement: “Taxes are the lifeblood of the government Q: Is the prohibition against ex post facto law applicable in
and their prompt and certain availability is an imperious taxation?
need.” (1991 Bar Question)
A: No. The prohibition against ex post facto laws applies
A: The phrase expresses the underlying basis of taxation only to criminal matters and not to laws which are civil in
which is governmental necessity, for indeed, without nature.
taxation, a government can neither exist nor endure.
Note: When it comes to civil penalties like fines and forfeiture
Taxation is a principal attribute of sovereignty. The exercise (except interest), tax laws may be applied retroactively unless it
of the taxing power derives its source from the very produces harsh and oppressive consequences which violate the
taxpayer’s constitutional rights regarding equity and due process.
existence of the State whose social contract with its citizens
But criminal penalties arising from tax violations may not be given
obliges it to promote public interest and the public good. retroactive effect.
In the case of Valley Trading Co. v. CFI G.R. No. 495529, Q: Due to an uncertainty whether or not a new tax law is
March 31, 1989, the Supreme Court ruled that the damages applicable to printing companies, DEF Printers submitted a
that may be caused a taxpayer by being made to pay the legal query to the BIR on that issue. The BIR issued a ruling
taxes cannot be said to be as irreparable as it would negate that printing companies are not covered by the new law.
the Government ability to collect taxes. Relying on this ruling, DEF Printers did not pay said tax.
Subsequently, however, the BIR reversed the ruling and
Q: What is the Benefits-Protection Theory (Symbiotic issued a new one stating that the tax covers printing
Relationship Doctrine) in taxation? companies. Could the BIR now assess DEF Printers for back
taxes corresponding to the years before the new ruling?
A: It involves the power of the State to demand and receive Reason briefly. (2004 Bar Question)
taxes based on the reciprocal duties of support and
protection between the State and its citizen. A: No. The reversal of the ruling shall not be given a
retroactive application, if said reversal will be prejudicial to
Every person who is able must contribute his share in the the taxpayer. Therefore, the BIR cannot assess DEF Printers
burden of running the government. The government for its for back taxes because it would be violative of the principle
part is expected to respond in the form of tangible and of non-retroactivity of rulings and doing so would result to
intangible benefits intended to improve the lives of the grave injustice to the taxpayer who relied on the first ruling
people and enhance their material and moral values. (CIR v. in good faith (Sec. 246, NIRC; Commissioner v. Burroughs,
Algue, G.R. No. L-28896, February 17, 1988) Ltd., G.R. No. L-66653, June 19, 1986).
Special benefits to taxpayers are not required. A person Note: SEC. 246. Non-Retroactivity of Rulings. – Any revocation,
cannot object to or resist the payment of taxes solely modification, or reversal of any of the rules and regulations
because no personal benefit to him can be pointed out promulgated by the Commissioner or any of the rulings or circulars
arising from the tax. (Lorenzo v. Posadas, 64 Phil. 353) promulgated by him shall not be given retroactive application if
the revocation, modification, or reversal will be prejudicial to the
Q: Discuss the necessity theory. taxpayers, except in the following cases:
Q: What is double taxation in its strict sense? Q: What are the methods to ease the burden of double
taxation?
A: Otherwise described as “direct duplicate taxation”, the
two taxes must be imposed on the same subject matter, for A: Local legislation and tax treaties may provide for:
the same purpose, by the same taxing authority, within the 1. Tax credit – an amount subtracted from taxpayer’s tax
same jurisdiction, during the same taxing period; and the liability in order to arrive at the net tax due.
taxes must be of the same kind or character. (City of Manila 2. Tax deduction – an amount subtracted from the gross
v. Coca Cola Bottlers Philippines, G.R. No. 181845, Aug. 4, amount on which a tax is calculated.
2009) 3. Tax exemption – a grant of immunity to particular
persons or entities from the obligation to pay taxes.
Q: What are the elements of direct double taxation? 4. Imposition of a rate lower than the normal domestic
rate
A: (OAPT)
a. The same object or property is taxed twice Q: SC Johnson and Son, Inc., is a domestic corporation
b. by the same taxing authority entered into an agreement with SC Johnson and Son-USA,
c. for the same taxing purpose a non-resident foreign corporation, pursuant to which SC
d. within the same tax period (Taxation Vol. I, Johnson Philippines was granted the right to use the
Domondon) trademark, patents and technology owned by the SC
Johnson and Son-USA for the use of trademark and
Both Art. 13 of the RP-US Tax Treaty and Art. 12(2) of the Q: What are the basic forms of escape from taxation?
RP-West Germany Tax Treaty speak of tax on royalties for
2
the use of trademark, patents, and technology. The A: SCATE
entitlement of the 10% rate by US firms despite the 1. Shifting
absence of matching credit (20% for royalties) would 2. Capitalization
derogate from the design behind the most favored nation 3. Avoidance
clause to grant equality of international treatment since the 4. Transformation
tax burden laid upon the income of the investor is not the 5. Exemption
same in the two countries. The similarity in the 6. Evasion
circumstances of payment of taxes is a condition for the
enjoyment of the most favored nation treatment precisely Q: What is capitalization?
to underscore the need for equality of treatment.
A: It is the reduction in the price of the taxed object equal
The RP-US Tax Treaty is just one of a number of bilateral to the capitalized value of future taxes which the purchaser
treaties which the Philippines have entered into for the expects to be called upon to pay.
avoidance of double taxation. The purpose of these
international agreements is to reconcile the national fiscal Q: What is transformation?
legislation of the contracting parties in order to help the
taxpayer avoid international juridical double taxation. A: It is the scheme where the manufacturer or producer
(Commissioner v. SC Johnson and Son, Inc., G.R. No. 127105, upon whom the tax has been imposed, fearing the loss of
June 25, 1999) his market if he should add the tax to the price, pays the tax
and endeavors to recoup himself by improving his process
Q: What is the purpose of the most-favored nation clause? of production, thereby turning out his units of products at a
lower cost.
A: The most favored nation clause in a bilateral tax treaty is
meant to ensure that the treaty partner will always enjoy Q: Mr. Pascual’s income from leasing his property reaches
the same privileges as that another party which is granted the maximum rate of tax under the law. He donated ½ of
more favorable treatment. This is an important clause in his said property to a non-stock, non-profit educational
treaties, especially with the passage of time. It is to grant institution whose income and assets are actually, directly,
to the contracting parties treatment not less favorable than and exclusively used for educational purposes, and
that which has been or may be granted to the “most therefore qualified for tax exemption under Art.XIV, Sec.
favored” among other countries. It is intended to establish 4 (3) of the Constitution and Sec. 3 (h) of the Tax Code.
the principle of equality of international treatment by Having thus transferred a portion of his said asset, Mr.
providing that the citizens or subjects of the contracting Pascual succeeded in paying a lesser tax on the rental
nations to enjoy the privileges accorded by either party to income derived from his property. Is there tax avoidance
those of the most favored nation. The essence of the or tax evasion? Explain. (2000 Bar Question)
principle is to allow the taxpayer in one State to avail of
more liberal provisions granted in another tax treaty to A: Yes. Mr. Pascual has exploited a legally permissive
which the country of residence of such taxpayer is also a alternative method to reduce his income by transferring
party provided that the subject matter of taxation is the part of his rental income to a tax exempt entity through a
same as that in the tax treaty under which the taxpayer is donation of ½ of the income producing property. The
liable. donation is likewise exempt from donor’s tax. The donation
is the legal means employed to transfer the incidence of
Q: Upon the passage of the Local Autonomy Act (RA 2264), income tax on the rental income.
the City of Iloilo Board passed an ordinance imposing
municipal license tax on persons engaged in the business
of operating tenement houses. Is the ordinance
unconstitutional on the ground of double taxation since
UNIVERSITY OF SANTO TOMAS
7 FACULTY OF CIVIL LAW
Law on Taxation
SHIFTING OF TAX BURDEN TAX EVASION
A: The transfer of the burden of tax by the original payer or A: It is the scheme where the taxpayer uses illegal or
the one on whom the tax was assessed or imposed to fraudulent means to defeat or lessen payment of a tax.
another or someone else without violating the law.
Note: Tax evasion is a scheme used outside of those lawful means
Q: What are the kinds of shifting? and when availed of, it usually subjects the taxpayer to further or
additional civil or criminal liabilities (Commissioner v. Estate of
Benigno Toda Jr. G.R. No. 30554, Feb. 28, 1983). Tax evasion is
A:
sometimes referred to as Tax Dodging.
1. Forward shifting – When the burden of tax is
transferred from a factor of production through the
Q: What are the elements to be considered in
factors of distribution until it finally settles on the
determining that there is tax evasion?
ultimate purchaser or consumer.
2. Backward shifting – When the burden is transferred
A: ESC
from the consumer through the factors of distribution
1. End to be achieved, i.e., payment of less than that
to the factors of production.
known by the taxpayer to be legally due, or non-
3. Onward shifting – When the tax is shifted two or more
payment of tax when it is shown that the tax is due;
times either forward or backward.
2. Accompanying State of mind which is described as
being evil, in bad faith, willful or deliberate and not
Q: In what kind of taxes does it apply?
accidental; and
3. Course of action which is unlawful.
A: It applies to indirect taxes since the law allows the
burden of the tax to be transferred. In case of direct tax,
Q: Distinguish tax avoidance from tax evasion
the shifting of burden can only be via a contractual
provision.
A:
TAX AVOIDANCE TAX EVASION
Note: Examples of taxes when shifting may apply are VAT,
percentage tax, excise tax on excisable articles, ad valorem tax Validity
that oil companies pays to BIR upon removal of petroleum Legal and not subject to Illegal and subject to
products from its refinery. criminal penalty criminal penalty
Effect
Q: What is impact of taxation? Almost always results in
Minimization of taxes
absence of tax payment.
A: Otherwise known as the burden of taxation, it is the
economic cost of the tax. The impact of taxation may fall Q: What may be used as evidence to prove tax evasion?
on another person not statutorily liable to pay the tax.
A:
Q: What is incidence of taxation? 1. Failure of taxpayer to declare for taxation purposes
his true and actual income derived from business for
A: The incidence of taxation is upon the person statutorily two (2) consecutive years; (Republic v. Gonzales, G.R.
liable to pay the tax. No. L-17744, April 30, 1965)
2. Substantial under declaration of income in the income
Note: Where the burden of the tax is shifted to the purchaser, the tax return for four (4) consecutive years coupled by
amount passed on to it is no longer a tax but becomes an added intentional overstatement of deductions. (Perez v.
cost on the goods purchased, which constitutes a part of the
CTA, G.R. No. L-10507, May 30, 1958)
purchase price.
Note: Deductions for income tax purposes partake of the A: Art. VI, Section 28(4) of the Constitution provides that:
nature of tax exemptions, hence, they are also be strictly “No law granting any tax exemption shall be passed
construed against the taxpayer. without the concurrence of a majority of all the members
of Congress.”
6. Tax exemption is generally revocable.
7. In order to be irrevocable, the tax exemption must be Note: Tax amnesties, tax condonations, and tax refunds are in the
founded on a contract or granted by the Constitution. nature of tax exemptions. Such being the case, a law granting tax
8. The congressional power to grant an exemption amnesties, tax condonations, and tax refunds requires the vote of
necessarily carries with it the consequent power to an absolute majority of the Members of Congress.
revoke the same.
Note: The prevalent rule in our jurisdiction disfavors set-off or legal A: It is a contract whereby the parties, by reciprocal
compensation of tax obligations for the following reasons: (1) taxes
concessions avoid litigation or put an end to one already
3. Customs Commissioner, subject to the approval of the Q: What is the nature of tax laws?
Secretary of Finance, in cases involving the imposition
of fines, surcharges, and forfeitures. (Sec.2316, TCC) A: Tax laws are:
1. Not political
TAX AMNESTY 2. Civil in nature
3. Not penal in character
Q: Define tax amnesty?
Q: How are tax laws construed?
A: A tax amnesty, being a general pardon or intentional
overlooking by the State of its authority to impose A:
penalties on persons otherwise guilty of evasion or 1. Generally, no person or property is subject to tax
violation of a revenue or tax law, partakes of an absolute unless within the terms or plain import of a taxing
forgiveness or waiver by the government of its right to statute.
collect what otherwise would be due to it, and in this 2. Tax laws are generally prospective in nature.
sense, prejudicial thereto, particularly to give tax evaders, 3. Where the language is clear and categorical, the
who wish to relent or are willing to reform a chance to do words employed are to be given their ordinary
so and become a part of the new society with a clean meaning.
slate. (Republic v. IAC, 1991) 4. When there is doubt, tax laws are strictly construed
against the Government and liberally in favor of the
taxpayer.
TAX AMNESTY TAX EXEMPTION
Scope of immunity Note: Taxes, being burdens, are not to be presumed beyond
Immunity from all criminal, Immunity from civil liability what the statute expressly and clearly provides.
civil and administrative only
obligations arising from 5. Provisions of the taxing act are not to be extended by
non-payment of taxes implication.
Grantee 6. Tax laws are special laws and prevail over general
laws.
General pardon given to all A freedom from a charge or
erring taxpayers burden to which others are
Q: What is meant by the strict construction rule?
subjected
How applied
A: When it is said that exemptions must be strictly
Applied retroactively Applied prospectively construed in favor of the taxing power, this does not mean
3. Delegation to administrative agencies – When the Congress did not abdicate its functions or unduly delegate
delegation relates merely to administrative power when it describes what job must be done, who must
implementation that calls for some degree of do it, and what is the scope of his authority. The Secretary
discretionary powers under sufficient standards of Finance, in this case, becomes merely the agent of the
expressed by law or implied from the policy and legislative department, to determine and declare the even
purposes of the Act. upon which its expressed will takes place. The President
a. Authority of the Secretary of Finance to cannot set aside the findings of the Secretary of Finance,
promulgate the necessary rules and regulations who is not under the conditions acting as her alter ego or
for the effective enforcement of the provisions of subordinate. (Abakada Guro Party List v. Ermita, etc., et al.,
the law. (Sec. 244, R.A.8424) G. R. No. 168056, September 1, 2005)
b. The Secretary of Finance may, upon the
recommendation of the Commissioner, require
the withholding of a tax on the items of income
payable. (Sec. 57, R.A. 8424)
A:
GR: The taxing power of a country is limited to persons and
property within and subject to its jurisdiction.
Reasons:
1. Taxation is an act of sovereignty which could only be
exercised within a country’s territorial limits.
2. This is based on the theory that taxes are paid for the
protection and services provided by the taxing authority
which could not be provided outside the territorial
boundaries of the taxing State.
XPNs:
1. Where tax laws operate outside territorial
jurisdiction – i.e. Taxation of resident citizens on
their incomes derived abroad.
2. Where tax laws do not operate within the
territorial jurisdiction of the State.
a. When exempted by treaty obligations; or
b. When exempted by international comity.
SITUS OF TAXATION
OBJECT SITUS
INCOME TAX
Nationality – applied to RC, DC Upon sources of income derived within and without the Philippines
Place – applied to NRC, NRA, NRFC Upon sources of income derived within the Philippines
Residence – applied to RA, RFC Upon sources of income derived within the Philippines
PROPERTY TAX
Real Property Location of the property (lex rei sitae / lex situs)
Rationale:
1. The taxing authority has control because of the stationary and fixed
character of the property.
2. The place where the real property is situated gives protection to the
real property; hence the property or its owner should support the
government of that place.
Personal Property
Domicile of the owner (mobilia sequuntur personam)
Tangible personal property
Rationale: The place where the tangible personal property is found gives its
protection.
Intangible personal property GR: Situs of intangible personal property is the domicile of the
owner pursuant to the principle of the mobilia sequntur personam.
XPN:
1. When the property has acquired a business situs in another
jurisdiction;
2. When an express provision of the statute provide for another
rule, i.e. Sec. 104 of the NIRC in case of donor’s and estate tax
EXCISE TAX / DONOR’S TAX / ESTATE TAX
Nationality– applied to RC, NRC Taxed upon their properties wherever situated
Sale of personal property 1. Personal property produced within the Philippines and sold
without, or produced without and sold within – any gain or
profit or income shall be treated as derived partly from sources
within and partly from sources without.
2. Purchase of personal property within and its sale without, or
purchase of personal property without and its sale within – any
gain or profit or income shall be treated as derived entirely
from sources within the country in which it is sold.
3. Shares of stock in a domestic corporation – Gain, profit or
income is treated as derived entirely from sources within the
Philippines, regardless of where the said shares are sold
A: The Philippine Constitution expressly adopted the Q: Will the mere fact that an entity is an agency or
generally accepted principles of international law as part of instrumentality of the national government make it
the law of the land. (Sec. 2, Art. II, 1987 Constitution) exempt from local or national tax?
PROHIBITION AGAINST IMPRISONMENT FOR NON- Q: Explain the requirement of uniformity as a limitation in
PAYMENT OF POLL TAX the imposition and/or collection of taxes (1998 Bar
Question).
Basis: “No person shall be imprisoned for debt or non-payment of
a poll tax.” (Sec.20, Art.III, 1987 Constitution) A: The criterion is met when the tax laws operate equally
and uniformly on all persons under similar circumstances.
Q: What is a poll tax? All persons are treated in the same manner, the conditions
not being different, both in privileges conferred and
A: It is a fixed amount upon all persons, or upon all persons liabilities imposed. Uniformity in taxation also refers to
of a certain class, residents within a specified territory, geographical uniformity. Favoritism and preference is not
without regard to their property or occupation. It is a tax allowed.
imposed on a per head basis. The present poll tax is the
community tax. Note: Singling out one particular class for taxation purposes does
not infringe the requirements of uniformity.
Q: May a person be imprisoned for non-payment of TAX?
Q: When is taxation progressive?
A: GR: A person may be imprisoned for non-payment of
internal revenue taxes, such as income tax as well as other A: Taxation is progressive when tax rate increases as the
taxes that are not poll taxes if expressly provided by law. income of the taxpayer increases.
A: Yes. The principle of progressive taxation has no relation PROHIBITION AGAINST TAXATION OF RELIGIOUS,
with the VAT system inasmuch as the VAT paid by the CHARITABLE ENTITIES AND EDUCATIONAL PURPOSES
consumer or business for every goods bought or services
enjoyed is the same regardless of income. In other words, Q: To what exemption does the constitutional exemption
the VAT paid eats the same portion of an income, whether of all lands, buildings and improvements actually, directly
big or small. The disparity lies in the income earned by a and exclusively used for religious, charitable and
person or profit margin marked by a business, such that educational purposes refer to?
the higher the income or profit margin, the smaller the
portion of the income or profit that is eaten by VAT. A A: It pertains to exemption from real property taxes only.
converso, the lower the income or profit margin, the bigger
the part that the VAT eats away. At the end of the day, it is Q: What are the properties exempt under the
really the lower income group or businesses with low- Constitution from the payment of property taxes?
profit margins that is always hardest hit. (ABAKADA Guro
v. Ermita, G.R. No. 168056, September1, 2005) A:
1. Charitable institutions
Note: Not regressive as defined in such a manner that the tax rate 2. Churches and parsonages or convents appurtenant
decreases as the amount subject to taxation increases. thereto,
3. Mosques
Q: Does the Constitution prohibit regressive taxes? 4. Non-profit cemeteries and
5. All lands, buildings and improvements actually,
A: No, what the Constitution simply provides is that directly and exclusively used for religious, charitable
Congress shall evolve a progressive system of taxation. or educational purposes shall be exempt from
taxation. (Sec. 28(3), Art. VI, 1987 Constitution)
Q: What does the Constitution mean when it used the
term “evolve”? Q: What is meant by the term “exclusive”?
A: The constitutional provision has been interpreted to A: It is defined as possessed and enjoyed to the exclusion of
mean simply that "direct taxes are to be preferred and as others; debarred from participation or enjoyment; and
much as possible, indirect taxes should be minimized. The “exclusively” is defined, "in a manner to exclude; as
mandate of Congress is not to prescribe but to evolve a enjoying a privilege exclusively.”
progressive tax system. This is a mere directive upon
Congress, not a justiciable right or a legally enforceable Note: If real property is used for one or more commercial
one. We cannot avoid regressive taxes but only minimize purposes, it is not exclusively used for the exempted purposes but
them. (Tolentino et.al. v. Secretary of Finance, G.R. No. is subject to taxation.
115455, Oct. 30, 1995).
Q: Is exclusivity synonymous with dominant use?
GRANT BY CONGRESS OF AUTHORITY TO THE PRESIDENT
TO IMPOSE TARIFF RATES A: No. The words "dominant use" or "principal use" cannot
be substituted by the words "used exclusively" without
Q: What is the authority of the President in imposing tax? doing violence to the Constitution and the law. Solely is
synonymous with exclusively.
A: The Congress may, by law, authorize the President to fix
within specified limits and subject to such limitations and Q: What is meant by “actual, direct and exclusive use of
restrictions at it may impose, (1) tariff rates, (2) import and the property for religious, charitable and educational
export quotas, (3) tonnage and wharfage dues and (4) purposes”?
other duties or imposts within the framework of the
national development program of the Government. (Sec. 28 A: It is the direct and immediate and actual application of
[2], Art. VI, 1987 Constitution) the property itself to the purposes for which the charitable
institution is organized. It is not the use of the income from
the real property that is determinative of whether the
property is used for tax-exempt purposes.
The tax exemption under this constitutional provision 2. For purposes of donor’s and estate taxation -
covers property taxes only. As Chief Justice Hilario G. Davide, Jr., donations in favor of religious and charitable
then a member of the 1986 Constitutional Commission, explained: institutions are generally not subject to tax provided,
". . . what is exempted is not the institution itself . . .; those however, that not more than 30% of the said bequest,
exempted from real estate taxes are lands, buildings and devise, or legacy or transfer shall be used for
improvements actually, directly and exclusively used for religious,
administration purposes (Secs. 87[D] and 101, NIRC).
charitable or educational purposes."
Under the 1935 Constitution, "all lands, buildings, and Q: In 1991, Imelda gave her parents a Christmas gift of
improvements used “exclusively” for religious and charitable P100, 000.00 and a donation of P80,000 to the parish
purposes shall be exempt from taxation." However, under the 1973 church. She also donated a parcel of land for the
and the 1987 Constitutions, for "lands, buildings, and construction of a building to the PUP Alumni Association a
improvements" of the charitable institution to be considered non-stock, non-profit organization. Portions of the
exempt, the same should not only be "exclusively" used for Building shall be leased to generate income for the
charitable purposes; it is required that such property be used
association.
"actually" and "directly" for such purposes.
1. Is the Christmas gift of P100, 000.00 to Imelda’s
Under the 1973 and 1987 Constitutions and Rep. Act No. 7160 in Parents subject to tax?
order to be entitled to the exemption, the petitioner is burdened 2. How about the donation to the parish church?
to prove, by clear and unequivocal proof, that (a) it is a charitable 3. How about the donation to the PUP alumni
institution; and (b) its real properties association? (1994 Bar Question)
are ACTUALLY, DIRECTLY and EXCLUSIVELY used for charitable
purposes. "Exclusive" is defined as possessed and enjoyed to the A:
exclusion of others; debarred from participation or enjoyment; and
1. The Christmas gift of P100,000 given by Imelda to her
"exclusively" is defined, "in a manner to exclude; as enjoying a
privilege exclusively." If real property is used for one or more parents is not taxable because under the law (Section
commercial purposes, it is not exclusively used for the exempted 99[A], NIRC), net gifts not exceeding P100,000 are
purposes but is subject to taxation. The words "dominant use" or exempt.
"principal use" cannot be substituted for the words "used
exclusively" without doing violence to the Constitutions and the 2. The donation of P80,000.00 to the parish church
law. Moreover, it is not the use of the income from the real
even is tax exempt provided that not more than
property that is determinative of whether the property is used for
tax-exempt purposes but the use of the property itself. 30% of the said bequest shall be used by such
institutions for administration purposes. (Section
Q: Give the rules on taxation of non-stock corporations for 101[A][3], NIRC)
charitable and religious purposes
3. The donation to the PUP alumni association does not
A: also qualify for exemption both under the
1. For purposes of income taxation Constitution and the aforecited law because it is not
a. The income of non-stock corporations operating an educational or research organization, corporation,
exclusively for charitable and religious purposes, institution, foundation or trust.
no part of which inures to the benefit of any
member, organizer or officer or any specific Q: The Constitution exempts from taxation charitable
person, shall be exempt from tax. institutions, churches, parsonages, or convents
appurtenant thereto, mosques, and non-profit cemeteries
However, the income of whatever kind and and lands, buildings and improvements actually, directly,
nature from any of their properties, real or and exclusively used for religious, charitable or
personal or from any of their activities for profit educational purposes.
regardless of the disposition made of such
income shall be subject to tax.(Sec. 30 [E] and Mercy hospital is a 100 bed hospital organized for charity
last par., NIRC). patients. Can said hospital claim exemption from taxation
under the provision? (1996 Bar Question)
b. Donations received by religious, charitable, and
educational institutions are considered as income A: Yes. Mercy hospital can claim exemption from taxation
but not taxable income as they are items of under the provision of the Constitution, but only with
exclusion. respect to real property taxes provided that such real
properties are used actually, directly, and exclusively for
On the part of the donor, such donations are charitable purposes.
deductible expense provided that no part of the
income of which inures to the benefit of any
Note: Under the present Constitution, the doctirine of exemption Q: How are exemptions granted?
by incidental purpose is no longer applicable. Such doctrine is only
applicable to cases where the cause of action arose under the
A: Exemptions may be created:
1935 Constitution. Under the present Constitution, it must be
prove that the properties are ACTUALLY, DIRECTLY and 1. By the Constitution or
EXCLUSIVELY used for the purpose of institution for the exemption 2. By statute, subject to limitations as the
to be granted (Taxation Law Review, Sababan 2008). Constitution may provide.
PROHIBITION ON USE OF TAX LEVIED FOR SPECIAL GR: The courts cannot inquire into the wisdom of a taxing
PURPOSE act.
Q: How does the constitution treat all money collected on XPN: There is an allegation of violation of constitutional
any tax levied for a special purpose? limitations or restrictions.
A: It is treated as a special fund and paid out for such GRANT OF POWER TO THE LOCAL GOVERNMENT UNITS
purpose only. If the purpose for which a special fund was TO CREATE ITS OWN SOURCES OF REVENUE
created has been fulfilled or abandoned, the balance, if
any, shall be transferred to the general funds of the Q: What justifies the delegation of legislative taxing
government. (Sec. 29[3], Art. VI, 1987 Constitution) power to local governments?
Note: In Gaston v. Republic Planters Bank, 158 SCRA 626, the A: Each local government unit shall have the power to
Court ruled that the “stabilization fees” collected by the State create its own sources of revenues and to levy taxes, fees
(PHILSUCOM) for the promotion of the sugar industry were in the and charges subject to such guidelines and limitations as
nature of taxes and no implied trust was created for the benefit of the Congress may provide, consistent with the basic policy
sugar industries. Thus, the revenues derived therefrom are to be
of local autonomy. Such taxes, fees, and charges shall
treated as a special fund to be administered for the purpose
intended. No part thereof may be used for the exclusive benefit of accrue exclusively to the local governments. (Article X,
any private person or entitiy but fot the benefit of the entire sugar Section 5, 1987 Constitution)
industry. Once the purpose is achieved, the balance, if any
remaining, is to be transferred to the general funds of the FLEXIBLE TARIFF CLAUSE
government (Tax Law and Jurisprudence p.20, Vitug and Acosta,
2000). Q: What is the “Flexible Tariff Clause”?
PRESIDENT’S VETO POWER ON APPROPRIATION, REVENUE A: This clause provides the authority given to the President
AND TARIFF BILLS to adjust tariff rates under Section 401 of the Tariff and
Customs Code. (Garcia v. Executive Secretary, G.R. No.
GR: The President may not veto a bill in part and approve it 101273, July 3, 1992)
in part.
Note: This authority, however, is subject to limitations and
XPN: The President shall have the power to veto any restrictions indicated within the law itself.
particular item or items (item veto) in an (1) The Congress may, by law, authorize the President to fix within
Appropriation, (2) Revenue or (3) Tariff bill but the veto specified limits and subject to such limitations and restrictions at it
shall not affect the item or items which he does not may impose, (1) tariff rates, (2) import and export quotas, (3)
object. (Sec. 27(2), Art. VI, 1987 Constitution) tonnage and wharfage dues and (4) other duties or imposts within
the framework of the national development program of the
Government. (Sec. 28 [2], Art. VI, 1987 Constitution)
Q: The City Council of Ormoc enacted Ordinance No. 4, A: When the State grants an exemption on the basis of a
Series of 1964 taxing the production and exportation of contract, consideration is presumed to be paid to the State
only centrifugal sugar. At the time of the enactment, and the public is supposed to receive the whole equivalent
plaintiff Ormoc Sugar Co., was the only sugar central in therefore.
Ormoc. Petitioner alleged that said Ordinance is
unconstitutional for being violative of the equal Note: This applies only where one party is the government and the
protection clause. Is the Ordinance valid? other party, a private person.
A: No, equal protection clause applies only to persons or Q: What are the rules regarding non-impairment of
things identically situated and does not bar a reasonable obligation and contract with respect to the grant of tax
classification of the subject of legislation. The classification, exemptions?
to be reasonable, should be in terms applicable to future
conditions as well. The taxing ordinance should not be A:
singular and exclusive as to exclude any substantially 1. If the grant of the exemption is merely a spontaneous
established sugar central, of the same class as Ormoc Sugar concession by the legislature, such exemption may be
Co., from the coverage of the tax (Ormoc Sugar Industry v. revoked. (unilaterally granted by law)
City Treasurer of Ormoc City, G.R. No. L-23794, Feb. 17, 2. If it is without payment of any consideration or the
1968). assumption of any new burden by the grantee, it is a
mere gratuity. (franchise)
RELIGIOUS FREEDOM 3. However, if the tax exemption constitutes a binding
contract and for valuable consideration, the
Q: Is the real property tax exemption of religious government cannot unilaterally revoke the tax
organizations violative of the non-establishment clause? exemption. (bilaterally agreed upon)
A: No. Neither the purpose nor the effect of the exemption Q: Does RA 7716 (E-VAT Law) violate the non-impairment
is the advancement or the inhibition of religion; and it clause?
constitutes neither personal sponsorship of, nor hostility to
religion. (Walz v. Tax Commission, 397 US 664) A: No. Even if such taxation may affect particular contracts,
as it may increase the debt of one person and lessen the
Note: Public money or property cannot be used for a religious security of another, or may impose additional burdens
purpose (Sec. 28[3], Art VI, 1987 Constitution). Except, if a priest is upon one class and release the burdens of another, still the
assigned to the armed forces, penal institutions, government tax must be paid unless prohibited by the Constitution, nor
orphanages or leprosarium. (Sec.29[2], Art.VI, 1987 Constitution) can it be said that it impairs the obligations of any existing
contract in its true and legal sense.
Q: Is the imposition of fixed license fee a prior restraint
on the freedom of the press and religious freedom? Contracts must be understood as having been made in
reference to the possible exercise of the rightful authority
A: Yes. As a license fee is fixed in the amount and unrelated of the government and no obligation of contract can extend
to the receipts of the taxpayer, the license fee, when to defeat the authority. (Tolentino v. Secretary of Finance,
applied to a religious sect, is actually being imposed as a ibid.)
condition for the exercise of the sect’s right under the
Constitution. (Tolentino v. Secretary of Finance, G.R. No. Q: X Corporation was the recipient in 1990 of two tax
115873, Aug. 25, 1994) exemptions both from Congress, one law exempting the
company’s bond issues from taxes and the other
Q: Is VAT registration restrictive of religious and press exempting the company from taxes in the operation of its
freedom? public utilities. The two laws extending the tax
A: No. The VAT registration fee although fixed in amount is exemptions were revoked by Congress before their expiry
not imposed for the exercise of a privilege but only for the dates. Were the revocations Constitutional? (1997 Bar
purpose of defraying part of the cost of registration (Ibid.). Question)
A: (4) Taxes are levied by the executive branch of Note: If any installment is not paid on or before the date fixed for
government. This statement is erroneous because levy its payment, the whole amount of the tax unpaid becomes due and
refers to the act of imposition by the legislature which is payable, together with delinquency penalties.
done through the enactment of a tax law. Levy is an
exercise of the power to tax which is exclusively legislative REFUND
in nature and character. Clearly, taxes are not levied by the
executive branch of government. (NPC v. Albay, G.R. No. A claim for tax refund may be based on the following:
87479, June 4, 1990) 1. erroneously or illegally assessed or collected
internal revenue taxes
ASSESSMENT AND COLLECTION 2. penalties imposed without authority
3. any sum alleged to have been excessive or in any
Q: What is tax administration? manner wrongfully collected.
Note: Assessment and collection may be delegated but not levy Q: When should the claim for refund for unutilized input
since it is exclusively conferred with the Congress.
VAT payments be made?
Q: Is the approval of the court, sitting as probate or estate
A: Unutilized input VAT payments not otherwise used for
settlement court, required in the enforcement of the
any internal revenue tax due the taxpayer must be claimed
estate tax? (2005 Bar Question)
within two years reckoned from the close of the taxable
quarter when the relevant sales were made pertaining to
A: No. The approval of the court, sitting in probate, is not a
the input VAT regardless of whether said tax was paid or
mandatory requirement in the collection of estate tax. On
not.
the contrary, under Section 94 of the NIRC, it is the probate
or settlement court which is forbidden to authorize the Note: Thus, when a zero-rated VAT taxpayer pays input VAT a year
executor or judicial administrator of the decedent’s estate, after the pertinent transaction, said taxpayer only has a year to file
to deliver any distributive share to any party interested in a claim for refund or tax credit of the unutilized creditable input
the estate, unless a certification from the Commissioner of VAT. (Tax Principles and Remedies, Justice Dimaampao 2011)
the Internal Revenue that the estate tax has been paid is
shown. (Marcos II v. Court of Appeals, G.R. No.120880, June DEFINITION, NATURE AND CHARACTERISTICS OF TAXES
5, 1997)
Q: Define taxes
*See page 176 on Remedies for discussion on Assessment
and Collection A: These are enforced proportional contributions from
persons and properties, levied by the State by virtue of its
PAYMENT sovereignty for the support of the government and for all
its public needs (1Cooley 62).
This is the act of compliance by the taxpayer including such
options, schemes or remedies as may be legally available to Q: What are the characteristics of taxes?
him.
4
A: SLEP
GR: Tax shall be paid by the person subject thereto at the 1. It is levied by the State which has jurisdiction over
time the return is filed (Sec. 56[A][1], NIRC). the person or property
2. It is levied by the State through its Law-making
XPN: When the tax due is in excess of P2,000, the body
taxpayer other than a corporation may elect to 3. It is an Enforced contribution not dependent on
pay the tax in 2 equal installments in which case, the will of the person taxed
the first installment shall be paid at the time the 4. It is generally Payable in money
return is filed and the second installment, on or 5. It is Proportionate in character
public purpose/s. acts deemed injurious; economic ends E.g. Tariff and certain duties on
violation of tax laws may imports
give rise to imposition of
penalty. AS TO SCOPE/ OR AUTHORITY TO IMPOSE
Purpose
To raise revenue To regulate conduct 1. National tax – Tax levied by the National Government.
Authority E.g. Income tax, Estate tax, Donor’s tax, Value added
Maybe imposed by the Maybe imposed by tax, Other Percentage taxes and Documentary Stamp
State only private entities taxes
2. Local or Municipal – A tax levied by a local
KINDS OF TAXES government. E.g. Real Estate tax and Community tax
AS TO OBJECT AS TO GRADUATION
1. Personal/Poll or Capitation tax – A fixed amount 1. Progressive – A tax rate which increases as the tax
imposed upon all persons, or upon all persons of a base or bracket increases. E.g. Income tax, Estate tax
certain class, residents within a specified territory, and Donor’s tax
without regard to their property or occupation. E.g. 2. Regressive – The tax rate decreases as the tax base or
Community tax bracket increases.
2. Property tax – Tax imposed on property, whether real 3. Proportionate – A tax of a fixed percentage of amounts
or personal, in proportion either to its value, or in of the base (value of the property, or amount of gross
accordance with some other reasonable method of receipts etc.) E.g. VAT and Other Percentage taxes
apportionment. E.g. Real Property tax
3. Privilege/Excise tax – a charge upon the performance
of an act, the enjoyment of a privilege, or the engaging
in an occupation. An excise tax is a tax that does not
fall as personal or property. E.g. Income tax, Estate
tax, Donor’s tax, VAT
Note: This is different from the excise tax under the NIRC which is
a business tax imposed on items such as cigars, cigarettes, wines,
liquors, frameworks, mineral products, etc.
AS TO BURDEN OR INCIDENCE
AS TO TAX RATES
AS TO PURPOSES
Q: What are the three (3) Income Tax Systems? 3. Comprehensive - it adopted the citizenship principle,
the residence principle and the source principle.
A:
1. Global Tax System- system employed where the tax 4. Semi-schedular or semi- global tax system (Philippine
system views indifferently the tax base and generally Income Tax, Mamalateo, 2010 ed.)
treats in common all categories of taxable income of
the individual. (Tan v. Del Rosario, Jr. 237 SCRA 324, CRITERIA IN IMPOSING PHILIPPINE INCOME TAX
331)
Q: What are the criteria in imposing Philippine Income
2. Schedular Tax System- system employed where the Tax?
income tax treatment varies and is made to depend on
the kind or category of taxable income of the taxpayer. A:
(Tan v. Del Rosario, Jr. 237 SCRA 324, 331) 1. Citizenship or nationality principle - a citizen of the
Philippines is subject to Philippine income tax
3. Semi- schedular or semi- global tax system- all a. on his worldwide income, if he resides in the
compensation income, business or professional Philippines,
income, capital gain, passive income, and other b. only on his Philippine source income, if he
income not subject to final tax are added together to qualifies as a non-resident citizen.
arrive at the gross income. After deducting the
allowable deductions and exemptions from the gross 2. Residence or domicile principle - a resident alien is
income, the taxable income is subjected to one set of liable to pay Philippine income tax only on his income
graduated tax rate (individual) or normal corporate from sources within the Philippines but is exempt from
income tax rate (corporation). (Philippine Income Tax, tax on his income from sources outside the
Mamalateo, 2010 ed.) Philippines.
Q: Distinguish between “schedular treatment” from 3. Source principle - an alien is subject to Philippine
“global treatment” as used income taxation (1994 Bar income tax because he derives income from sources
Question). within the Philippines. A non-resident alien or non-
resident foreign corporation is liable to pay Philippine
A: Income tax on income from sources within the
SCHEDULAR TREATMENT GLOBAL TREATMENT Philippines, despite the fact that he has not set foot in
Different tax rates Unitary or single tax rate the Philippines. (Philippine Income Tax, Mamalateo,
Different categories of No need for classification as 2010 ed.)
taxable income all taxpayers are subjected
to a single rate TYPES OF PHILIPPINE INCOME TAX
Usually used in the income Applied to corporations
taxation of individuals Q: What are the types of Philippine Income Tax?
(Business income, (Business income, 2 3
professional income, professional income, A: Under Title II of Tax Code, namely: (MC F - BINGS)
passive income, illegal passive income, illegal 1. Minimum corporate income tax on corporations;
income) income) 2. Capital gains tax on sale or exchange of unlisted shares
You cannot add all of them All of them will be added of stock of a domestic corporation classified as a
together. together subject it to one capital asset;
tax rate. 3. Capital gains tax on sale or exchange of real property
located in the Philippines classified as capital asset;
FEATURES OF PHILIPPINE INCOME TAX LAW 4. Final Withholding tax on certain passive investment
incomes;
Q: What are the basic features of the Philippine income 5. Final Withholding tax on income payments made to
tax law? non-residents (individual or corporation);
6. Fringe benefit tax;
A: 7. Branch profit remittance tax;
1. Direct tax - tax burden is borne by the income 8. Tax on Improperly accumulated earnings;
recipient upon whom the tax is imposed. It is a tax 9. Normal corporate income tax on corporations;
demanded from the very person who, it is intended or 10. Graduated income tax on individuals; and
desired, should pay it, while indirect tax is a tax 11. Special income tax on certain corporations.
demanded in the first instance from one person in the
expectation and intention that he can shift the burden
to someone else.
abroad most of the time pleasure has the intention to return, he can be considered a
during the taxable year. resident citizen.
A: Results of operation of a partnership shall be treated in Q: What are the classifications of trust for tax purposes?
any way as a corporation. In case of loss, it will be divided
as agreed upon by the partners and shall be taken by the A: TIP
individual partners in their respective returns. 1. Taxable and tax-exempt trust
2. Irrevocable trust and revocable trust
ESTATES AND TRUSTS 3. Trust administered in the Philippines and trust
administered in a foreign country.
Q: Define estate
Q: Explain how trusts are taxed
A: Estate refers to the mass of properties left by a deceased
person. A: GR: Subject to income tax in the same manner as
individuals. (Sec. 60 [A], NIRC)
Note: The income that is subject to income taxation is the,
“Income received by estates of the deceased persons during the XPNs:
period of administration or settlement of the estate.” [Sec.
1. Personal exemption is limited to only P20,000.
60(A)(3), NIRC of 1997]
(Sec. 62, NIRC)
Q: How is the income of estates taxed? 2. No additional exemption is allowed.
3. Distribution to the beneficiaries during the
A: The same income taxes imposed upon individuals. The taxable year of trust income is deductible from
tax imposed by Title II, Tax on Income, of the NIRC of 1997, the taxable income of the trust. Deduction is
upon individuals shall apply to income of the estates. allowed only when the distribution is made
during the taxable year when the income is
Q: When a person who owns property dies, what are the earned (Sec. 61 [A], NIRC).
taxes payable under the income tax law? Note: However, such deduction shall be included in
computing the taxable income of the beneficiaries, whether
A: distributed to them or not.
1. Income Tax for individuals from January to the time of
death. (Secs. 24, and 25, NIRC) Q: Who shall file and pay the income tax?
2. Income Tax of the estate, if the estate is under
administration or judicial settlement. (Sec. 60, NIRC) A: GR: If the income:
1. Is distributed to beneficiaries, the beneficiaries shall
file and pay the tax.
Q: How is income tax applied to estates?
2. Is to be accumulated or held for future distribution,
A: GR: Subject to income tax in the same manner as the trustee or beneficiary shall file and pay the tax.
individuals.
XPN:
XPN: 1. In a revocable trust, the income of the trust will
1. Personal exemption is limited only to P20,000. be returned to the grantor. (Sec. 63, NIRC)
2. No additional exemption is allowed.
UNIVERSITY OF SANTO TOMAS
35 FACULTY OF CIVIL LAW
Law on Taxation
2. In a trust where the income is held for the benefit CO-OWNERSHIPS
of the grantor, the income of the trust becomes
income of the grantor. (Sec. 64, NIRC) Q: What are the examples of co-ownership?
3. In a trust administered in a foreign country, the
A:
income of the trust, administered by any amount
1. A joint purchase of land, by two, does not constitute a
distributed to the beneficiaries shall be taxed to
co-partnership in respect thereto, nor does an
the trustee. (Sec. 61 [C], NIRC)
agreement to share the profits and losses on the sale
Q: Is an “employee’s trust” tax-exempt? of land create a partnership; the parties are only
tenants in common ( Clark v. Sideway, 142 U.S. 682, 12
A: Yes, provided: S. Ct. 327, 35 L. Ed., 1157 cited in Pascual v.
1. Employee’s trust must be part of a pension, stock Commissioner of Internal Revenue, 166 SCRA 560).
bonus or profit sharing plan of the employer for
2. Where plaintiff, his brother, and another agreed to
the benefit of some or all of his employees;
become owners of a single tract of realty holding as
2. Contributions are made to the trust by such
tenants in common, and to divide the profits of
employer, or such employees or both;
disposing it, the brother and the other not being
3. Such contributions are made for the purpose of
entitled to share in plaintiff’s commissions, no
distributing to such employees both the earnings
partnership existed as between the three parties,
and principal of the fund accumulated by the
whatever relation they may have been to third parties
trust; and
(Magee v. Magee, 123 N.E. 673,233 Mass. 341, Ibid.)
4. The trust instrument makes it impossible of any
part of the trust corpus or income to be used for 3. Co-heirs who own inherited properties which produce
or diverted to, purposes other than the exclusive income should not automatically be considered as
benefit of such employees. (See 60[B], NIRC) partners of an unregistered partnership or corporation
subject to income tax. REASONS: Sharing of gross
Q: Is “pension trust” taxable? returns does not by itself establish a partnership; there
must be an unmistakable intention to form a
A: No, tax exemption is likewise to be enjoyed by the partnership or joint venture. There is no contribution
income of the pension trust; otherwise, taxation of those or investment of additional capital to increase or
earnings would result in a diminution of accumulated expand the inherited properties, merely continuing the
income and reduce whatever the trust beneficiaries would dedication of the property to the use to which it had
receive out of the trust fund. (CIR v. CA, GR 95022, Mar. 23, not been put by their forbears. ( Obillo, Jr., v.
1992) Commissioner of Internal Revenue, 139 SCRA 436)
Q: Is co-ownership subject to income tax?
Any amount received by an employee as retirement
benefits shall be excluded from gross income subject to
A: No, if the activities of the co-owners are limited to the
conditions setforth under Sec. 32 [B] of the NIRC.
preservation of the property and the collection of income.
In such case, the co-owners shall be taxed individually on
Q: What is the tax treatment in case of consolidation of
their distributive share in the income of the co-ownership.
income of two or more trusts?
Q: What if the co-owners invest the income in a business
A: The tax computed on consolidated income, and such
for profit, would your answer be the same that it is not
proportion of said tax shall be assessed and collected from
subject to tax?
each trustee which the taxable income of the trust
administered by him bears to the consolidated income of
A: No, if the co-owners invest the income in a business for
the several trusts.
profit they would constitute themselves into a partnership
and such shall be taxable as a corporation.
Q: What is the income of trust not subject to tax but
considered as income of grantor subject to tax?
Q: Brothers A, B, and C borrowed a sum of money from
their father which amount together with their personal
A: Any part of the income of a trust which in the discretion
monies was used by them for the purpose of buying real
of the grantor or of any person not having a substantial
properties. The real properties they bought were leased to
adverse interest in the disposition of such part of the
various tenants. The BIR demanded the payment of
income may be:
income tax on corporations, real estate dealer’s tax, and
1. Held or accumulated for future distribution to the
corporation residence tax. However, A, B. and C seek to
grantor
reverse the letter of demand and be absolved from the
2. Distributed to the grantor
payment of taxes in question. Are they subject to tax on
3. Applied to the payment of premium upon policies
corporations?
of insurance on the life of the grantor
A: Yes. “Corporations” as strictly speaking are distinct and
different from “partnership”. When our Internal Revenue
Code includes “partnership” among the entities subject to
A: No. The Obillos children are co-owners. It is an isolated Q: What is the State Partnership Theory?
act which shows no intention to form a partnership. To
regard them as having formed a taxable unregistered A: It is the basis of the government in taxing income. It
partnership would result in oppressive taxation and confirm emanates from its partnership in the production of income
the dictum that the power to tax involves the power to by providing the protection, resources, incentive and
destroy. It appears that they decided to sell it after they proper climate for such production. (CIR v. Lednicky, G.R.
found it expensive to build houses. The division of profits Nos. L-18169, L-18262 & L-21434, July 31, 1964)
was merely incidental to the dissolution of the co-
ownership which was in the nature of things a temporary Q: Distinguish income tax from property tax
state (Obillos, Jr. v. Commissioner, G.R. No. L-68118,
October 29, 1985). A:
INCOME TAX PROPERTY TAX
Incidence
The incidence of an income The incidence of a property
tax falls on the earner. tax is on the property itself.
Who pays the tax
Income tax is paid by the Property tax is paid by the
earner. owner of the property.
A: It refers to all wealth which flows into the taxpayer other A: No, because income is other than a mere return of
than as mere return of capital. It includes the forms of capital.
income specifically described as gains and profits, including
gains derived from the sale or other disposition of capital Q: Is payment by mistake considered income for tax
assets (Sec. 36, RR No.2). purposes?
An income is an amount of money coming to a person or A: As a general rule, payment by mistake is not taxable
corporation within a specified time, whether as payment except if the recipient received material benefit out of the
for services, interest or profit from investment. Unless erroneous payment (CIR v. Javier, GR 78953, July 31, 1991).
otherwise specified, income means cash or its equivalent
Note: In CIR v. Javier the issue raised was the imposition of the 50%
(Conwi v. CIR, GR 48532, Aug. 31, 1992).
fraud penalty and not the income taxation of money received
through mistake.
Income is a flow of service rendered by capital by payment
of money from it or any benefit rendered by a fund of Q: Is income held in trust for another taxable?
capital in relation to such fund through a period of time
(Madrigal v. Rafferty, GR 12287, Aug. 8, 1918). A: GR: It is not taxable since the trustee has no free disposal
of the amount thereof
Q: How does “income” differ from “capital”? (1995 Bar
Question) XPN: If the income under trust may be disposed of by
the trustee without limitation or restriction such
A: amount is taxable (North American Consolidated v.
CAPITAL INCOME Burnet, 286 U.S. 417, 1932).
Constitutes the Any wealth which flows
investment which is the into the taxpayer other WHEN INCOME IS TAXABLE
source of income than a mere return of
capital Q: What are the requisites for income to be taxable?
Is the wealth Is the service of wealth
Is the tree Is the fruit A: REG
Fund Flow 1. The gain must be Realized or received;
(Madrigal v. Rafferty, 38 Phil. 414) 2. The gain must not be Excluded by law or treaty
from taxation; and
Q: What is being taxed in income taxation? 3. There must be Gain or profit, whether in cash or
its equivalent. (CIR v. Manning, GR L-28398, Aug.
A: 6, 1975)
1. Fruit of Capital
2. Fruit of Labor EXISTENCE OF INCOME
3. Fruit of Labor and Capital combined
Q: Mr. X borrowed P10,000 from his friend Mr. Y payable
Q: What are the types of taxable income? in one year without interest. When the loan became due,
Mr. X told Mr. Y that he (Mr.X) was unable to pay because
A: of business reverses. Mr. Y took pity on Mr. X and
1. Compensation Income – income derived from condoned the loan. Mr. X was solvent at the time he
rendering of services under an employer-employee borrowed the P10,000 and at the time the loan was
relationship condoned. Did Mr. X derive any income from the
cancellation or condonation of his indebtedness? Explain
2. Professional Income – fees derived from engaging in an (Bar Question 1995).
endeavor requiring special training as professional as a
means of livelihood, which includes, but not limited to, A: No, Mr. X did not derive any income from the
the fees of CPAs, lawyers, engineers and the like. cancellation or condonation of his indebtedness. Since it is
Q: Suppose the gain or profit is in the nature of property ACTUAL VIS A VIS CONSTRUCTIVE RECEIPT
or in kind, can we not consider it as taxable gain?
Q: Distinguish Actual from Constructive Receipt
A: Under Sec. 32 A [1] compensation for services can be in
whatever form paid. Therefore whether paid in cash, kind, A:
property, stock and other form, such is taxable. 1. Actual receipt – income may be actual receipt or
physical receipt.
Q: What then is the tax basis?
2. Constructive receipt – occurs when money
A: It is the value of the property in cash under the doctrine consideration or its equivalent is placed at the control
of cash equivalent in taxation. of the person who rendered the service without
restriction by the payor (Sec. 4.108-A, RR 16-2005).
REALIZATION OF INCOME
Examples of income constructively received:
a. Deposit in banks which are made available to the seller
Q: What are the conditions in the realization of income? of services without restrictions
b. Issuance by the debtor of a notice to offset any debt or
A: Under the realization principle, revenue is generally obligation and acceptance thereof by the seller as
recognized when both of the following conditions are met: payment for services rendered
1. The earning process is complete or virtually c. Transfer of the amounts retained by the payor to the
complete account of the contractor
2. An exchange has taken place (Manila Mandarin d. Interest coupons that have matured and are payable
but have not been encashed
Hotels, Inc. v. CIR)
e. Undistributed share of a partner in the profits of a
general partnership
Q: Is the mere increase in the value of property considered .
income? Q: What is the principle of constructive receipt?
A: No, since it is an unrealized increase in capital. A: Income which is credited to the account of or set apart
for a taxpayer and which may be drawn upon by him at any
Q: In 2000, ABC Corporation had a capital stock of 1,000 time is subject to tax for the year during which so credited
shares without par value. At the time of its incorporation, or set apart, although not then actually reduced to
the value of each no-par value share was P10. In 2011, due possession.
to its profitable operations, the corporation earned a
surplus of P200,000. The Corporation’s board of directors RECOGNITION OF INCOME
increased the stated value of each share by P190 making
each share worth P200. The BIR, for income tax purposes Recognition of Income is dependent upon the Accounting
assessed each stockholder for the P190 increase. Is the Method used by the taxpayer.
BIR correct? Explain. (1989 Bar Question)
METHODS OF ACCOUNTING
A: No. The stockholders have not physically or
constructively received any income subject to tax. There Q: What are the methods of accounting in computing net
was no change in the proportion of their ownership in the income?
corporation considering that the shares of stock are
without par value. Furthermore, there was no realization of A:
the income through the chage in the stated value. When 1. Cash Method – recognition of income and expense
the stockholder disposes of the shares, then the same dependent on inflow or outflow of cash.
would be subject to capital gains taxes.
2. Accrual Method – gains and profits are included in
gross income when earned whether received or not,
INSTALLMENT PAYMENT VIS A VIS DEFERRED PAYMENT 3. Economic-benefit test, doctrine of proprietary interest
VIS A VIS PERCENTAGE COMPLETION – Taking into consideration the pertinent provisions of
(IN LONG TERM CONTRACTS) law, income realized is taxable only to the extent that
the taxpayer is economically benefited.
Q: When is installment payment used?
4. Severance Test – Income is recognized when there is
A: Installment method is appropriate when collections separation of something which is of exchangeable
extend over relatively long periods of time and there is a value (Eisner v. Macomber, 252 US 189, 1920)
strong possibility that full collection will not be made.
5. All events Test – This test requires fixing of a right to
Q: What is Deferred Payment? income or liability to pay and the availability of the
reasonable accurate determination of such income or
A: Initial payments exceed 25% of the gross selling price liability.
and such transaction shall be treated as cash sale which
makes the entire selling price taxable in the month of sale. The all-events test is satisfied where computation
remains uncertain, if its basis is unchangeable; the
Q: What are long-term contracts? test is satisfied where a computation may be
unknown, but is not as much as unknowable, within
A: Long-term contract means building, installation or the taxable year. The amount of liability does not have
construction contracts covering a period in excess of one to be determined exactly; it must be determined with
year. ‘reasonable accuracy’. The term ‘reasonable accuracy’
implies something less than an exact or completely
Q: What is percentage of completion? accurate amount. (Commissioner of Internal Revenue
v. Isabela Cultural Corporation, G.R. No. 172231,
A: In case of long-term contracts, persons whose gross February 12, 2007)
income is derived from such contracts shall report such
income upon the basis of percentage of completion.
A:
Q: What is the definition of “gross income” under the Q: What is income from whatever source?
NIRC?
A: All income not expressly excluded or exempted from the
A: Except when otherwise provided, gross income means all class of taxable income, irrespective of the voluntary or
income derived from whatever source, including but not involuntary action of the taxpayer in producing the income
2 2 3
limited to the following items: [CG I- R DAP ] (Gutierrez v. CIR, CTA case).
1. Compensation for services in whatever form paid,
including, but not limited to fees, salaries, wages, Q: What comprises cost of goods sold?
commissions and similar items
2. Gross income derived from the conduct of trade or A: It includes all business expenses directly incurred to
business or the exercise of a profession produce the merchandise and bring them to their present
3. Gains derived from dealings in property location such as direct labor, materials and overhead
4. Interests expenses. (Sec. 27 [A], NIRC)
5. Rents
6. Royalties Q: What comprises cost of services?
7. Dividends
8. Annuities A: All direct costs and expenses necessarily incurred to
9. Prizes and winnings provide the service required by the customers and clients
10. Pensions and including:
11. Partner’s distributive share from the net income of the 1. Salaries and employee benefits of personnel,
general professional partnership (Sec. 32 [A], NIRC). consultants, and specialists directly rendering the
service
Note: Gross income under Sec. 32 is different from the limited 2. Cost of facilities directly utilized in providing the
meaning of Gross Income for purpose of Minimum Corporate service (Sec. 27 E [4], NIRC)
Income Tax (MCIT), which means Gross Sales less Sales Returns,
Discounts, and Allowances and Cost of Goods Sold.
Q: Is money received under payment by mistake, income
subject to income tax?
The above enumeration can be simplified into 5 categories:
1. Compensation Income - income derived from rendering
of services under an employer-employee relationship. A: Income paid or received through mistake may be
2. Professional Income - fees derived from engaging in an considered as “income from whatever source derived”
endeavor requiring special training as professional as a irrespective of the voluntary or involuntary action of the
means of livelihood, which includes, but not limited to, taxpayer in producing income. Moreover, under the “claim
the fees of CPAs, lawyers, engineers and the like. of right doctrine,” the recipient even if he has the
3. Business Income - gains or profits derived from obligation to return the same has a voidable title to the
rendering services, selling merchandise, manufacturing
money received through mistake. (Guttierez v. CIR, CTA
products, farming and long-term contracts.
4. Passive Income - income in which the taxpayer merely Case No. 65, Aug. 31, 1965)
waits for the amount to come in, which includes, but
not limited to interest income, royalty income, dividend Q: Congress enacted a law imposing a 5% tax on the gross
income, prizes and winnings. receipts of common carriers. The law does not define the
5. Gains from Dealings in Property – It includes all income term “gross receipts.” Express Transport a bus company
derived from the disposition of property whether real, has time deposits with ABC Bank. In 2007, Express
personal or mixed. Transport earned P1 Million interest, after deducting the
20% final withholding tax from its time deposits with the
Q: Is the enumeration exclusive? bank. The BIR wants to collect a 5% gross receipts tax on
the interest income of Express Transport without
A: No, under Sec. 32 (A) of the NIRC, gross income means deducting the 20% final withholding tax. Is the BIR
all income derived from whatever source. correct? (2006 Bar Question)
Therefore the source is immaterial – whether derived from A: Yes. The term “gross receipts” is broad enough to include
illegal, legal, or immoral sources, it is taxable. As such, income not physically rendered but constructively received
income includes the following among others: by the taxpayer. After all, the amount withheld is paid to
1. Treasure fund; the government on its behalf, in satisfaction of its
2. Punitive damages representing profit lost; withholding taxes. The fact that it did not actually receive
3. Amount received by mistake; the amount does not alter the fact that it is remitted for its
4. Cancellation of the taxpayer’s indebtedness; benefit in satisfaction of its tax obligations. Since the
5. Receipt of usurious interest; income is withheld is an income owned by Express
6. Illegal gains; Transport, the same forms part of its gross receipts (CIR v.
7. Taxes paid and claimed as deduction Bank of Commerce, GR 149636, June 8, 2005).
subsequently refunded;
8. Bad debt recovery.
A: No. Post dated checks are not taxable except when it is Q: What is compensation income?
subject to discounting.
A: It includes all remuneration for services rendered by an
Q: What is the tax implication when there is exchange of employee for his employer unless specifically excluded
services without compensation? under the NIRC (Sec. 2.78.1, RR 2-98)
A: Both parties are taxable as if both each sold their The name by which the remuneration for services is
services. designated is immaterial. Thus, salaries, wages,
emoluments, honoraria, allowances, commissions (i.e.
Q: What is self-help income? Is that taxable? transportation, representation, entertainment and the
like); fees including director’s fees, if the director is, at the
A: Self-help income is the amount saved for doing a work same time, an employee of the employer/ corporation;
by himself instead of hiring someone to do the work. Self- taxable bonuses and fringe benefits except those which are
help income is exempt from tax. E.g. A person wants to subject to the fringe benefits tax; taxable pensions and
repaint his house. Instead of hiring a painter, that person retirement pay; and other income of a similar nature
did the painting job himself to save money. constitute compensation income. (Sec. 2.78.1, RR 2-98)
Q: What are the types of properties from which income ORDINARY ASSETS
may be derived?
Ordinary assets are property held by the taxpayer used in
A: Ordinary assets and capital assets connection with his trade or business which includes the
following: [SOUR]
Q: Distinguish "capital asset" from "ordinary asset" (2003 1. Stock in trade of the taxpayer or other property of a
Bar Question) kind which would properly be included in the
inventory of the taxpayer if on hand at the close of the
A: The term capital asset is defined by an exclusion of all taxable year
ordinary assets. Thus, those properties not specifically 2. Property held by the taxpayer primarily for sale to
included in the statutory definition constitutes capital customers in the Ordinary course of trade or business
assets, the profits or losses on the sale or the exchange of 3. Property Used in the trade or business of a character
which are treated as capital gains or capital losses. which is subject to the allowance for depreciation
Conversely, all those properties specifically included are provided in the NIRC
considered as ordinary assets and the profits or losses 4. Real property used in trade or business of the taxpayer
realized must have to be treated as ordinary gains or
ordinary losses.
traded in the stock exchange NET CAPITAL GAIN AND NET CAPITAL LOSS
or thru initial public offering
As to holding period Q: What is net capital loss and net capital gain?
GR: Holding period is Holding period is
immaterial considered. A: Net capital loss is the excess of capital losses from
capital gains. Net capital gain is the excess of capital gain
XPN: Disposition of shares not over the capital loss.
traded in the stock exchange
or thru initial public offering Q: When is the rule “gain recognized, loss not recognized”
As to Net Loss Carry Over made applicable?
Not allowed. Could be availed.
A:
Q: What is the holding period rule? 1. When the transaction is not solely in kind that if aside
from the property, cash is also given in the transfer.
A: Where the capital asset sold has been held by the 2. Illegal transactions – illegal gain is taxable but illegal
taxpayer for more than 12 months, the gain derived loss is not deductible.
therefrom is taxable only to the extent of 50%. 3. Transactions between related taxpayer – if there is a
Consequently, if the taxpayer held the capital asset sold for gain such is taxable while the loss is not deductible.
a year or less, the whole gain shall be taxable. It is a form 4. Wash sale - one of the illegal trading services.
of tax avoidance since the taxpayer can exploit it in order
to reduce his tax due (Sec. 39 [B], NIRC). Q: What is wash sale?
Note: Holding period does not find application in the case of A: It is a sale or other disposition of stock or securities
disposition of: where substantially identical securities are acquired or
1. shares of stock traded through the stock market by one who purchased within 61-day period, beginning 30 days before
is not a dealer in securities; and the sale and ending 30 days after the sale.
2. real property considered as capital asset, whether the seller is
an individual, trust, estate or a private corporation.
Q: What may be the subject of wash sale?
Q: Who can avail the holding period rule?
A: It may be shares of stocks, securities, including stock
options.
A: Only individual taxpayers can avail. It is not allowed to
corporations.
Q: What is the significance in determining whether a
transaction is a wash sale or not?
Q: Manalo, Filipino citizen residing in Makati City, owns a
vacation house and lot in California, which he acquired in
A: If the transaction is a wash sale, the gain is taxable and
2000 for P15 million. On Jan. 10, 2006, he sold said real
the loss is not deductible.
property to Mayaman, another Filipino residing in Quezon
City for P20 million. On Feb. 9, 2006, Manalo filed the Note: Loss from wash sales is merely an artificial loss and not
capital gains return and paid P1.2 million representing 6% actually sustained. The seller can recover this loss through the
capital gains tax. Since Manalo did not derive any subsequent sale of the same. In effect, the loss can be recovered.
ordinary income, no income tax return was filed by him So there is really no loss incurred or sustained as it is a mere
for 2006. After the tax audit conducted in 2007, the BIR artificial loss.
officer assessed Manalo for deficiency income tax
computed as follows: P5 million (P20million less P15 Q: How are losses from wash sales treated?
million) x 35%= P1.75 million, without the capital gains
tax paid being allowed as tax credit. Manalo consulted a A: GR: Losses from wash sales are not deductible.
real estate broker who said that the P1.2 million capital
gains tax should be credited from the P1.75 million XPN: When the sale was made by a dealer in stock or
deficiency income tax. Is the BIR officer’s tax assessment securities and with respect to a transaction made in
correct? the ordinary course of the business of such dealer,
losses from such sale is deductible. (Sec. 38, NIRC)
A: No, first, the rate of income tax used is the corporate
income tax although the taxpayer is an individual. Second, Q: What is the rule on the recognition of gain or loss in
the computation of the gain recognized from the sale did exchange of property?
not consider the holding period of the asset. The capital
asset having been held for more than 12 months, only 50% A: Upon the sale or exchange of property, the entire
of the gain is recognized. (Sec. 39 [b], NIRC) amount of the gain or loss shall be recognized.
debenture, note or Q: What are the notable distinctions between NELCO and
certificate or other evidence NOLCO?
of indebtedness issued by
any corporation (including A:
one issued by a government NET CAPITAL LOSS NET OPERATING LOSS
or political subdivision) CARRY OVER CARRY OVER
Availability of NELCO (NELCO) (NOLCO)
NELCO allowed NELCO Not allowed As to source
Arises from capital Arises from ordinary
CAPITAL LOSS LIMITATION RULE transactions meaning transactions meaning
(Applicable to both Corporations and Individuals) involving capital asset involving ordinary asset
As to who can avail
Q: What is the Capital Loss Limitation Rule? Can be availed of by Can be availed of by
individual taxpayer only individual and corporate
A: Under this rule, capital loss is deductible only to the taxpayer
extent of capital gain. As to period of carry-over
May be carried over only Allows carry over of
Q: Capital loss is deductible to the extent of capital gain, in the next succeeding operating loss in 3
what does this mean? taxable year succeeding taxable years
A: This means that you can only deduct capital loss from or in case of mining
capital gain. If there’s no capital gain, no deduction is companies 5 years
allowed because you cannot deduct capital loss from
ordinary gain. DEALINGS IN PROPERTY SITUATED IN THE PHILIPPINES
Q: Can you deduct ordinary loss from ordinary gain and Q: Explain the tax treatment of sale or disposition of real
from capital gain? property treated as capital asset
A: Yes for both cases. A: A final tax of 6% shall be imposed based on the higher
amount between:
Q: What is the Rule on Matching Cost? 1. The gross selling price; or
2. Whichever is higher between the current fair
A: Under this rule only ordinary and necessary expense are market value as determined by:
deductible from gross income or ordinary Income. Capital a. Zonal Value – prescribed zonal value of real
loss is a non-business connected expense as it can be properties as determined by the CIR; or
sustained only from capital transactions. To allow that b. Assessed Value – the fair market value as
capital loss as a deduction from ordinary income would run shown in the schedule of values of the
counter to the rule on matching cost against revenue. Provincial and City assessors (Sec. 24 D [1],
NIRC)
NET LOSS CARRY OVER RULE
Note: Actual gain or loss is immaterial since there is a conclusive
Q: What is the treatment of net capital loss carry-over presumption of gain.
(NELCO)?
Note: This rule shall not apply to a real estate dealer, developer or
A: If any taxpayer, other than a corporation, sustains in any lessor, or one engaged in the real estate business. In such cases,
real properties are considered as ordinary assets.
taxable year a net capital loss, such loss (in an amount not
in excess of the net income for such year) shall be treated
Q: What is the coverage of capital gains and losses in real
in the succeeding taxable year as a loss from the sale or
estate property?
exchange of a capital asset held for not more than 12
months. (Sec. 39 (D), NIRC)
A: It involves the sale or other disposition of real property
Note: Rules with regard to NELCO. classified as capital asset located in the Philippines by a
1. NELCO is allowed only to individuals, including estates and non-dealer in real estate.
trusts.
2. The net loss carry-over shall not exceed the net income for the Q: How is the tax treatment of disposition of real
year sustained and is deductible only for the succeeding year. property deemed capital asset as to taxpayers liable
3. The capital assets must not be real property or stocks listed and therefrom?
traded in the stock exchange.
4. Capital asset must be held for not more than 12 months.
A: As regards transactions affected by the 6% capital gain
tax, the NIRC speaks of real property with respect to
individual taxpayers, estate and trust but only speaks of
land and building with respect to domestic and resident
foreign corporation.
A: Yes, the buyer is subject to capital gains tax on the Note: The applicable tax rate to the case at bar is still 35%
exchange of lots on the basis of prevailing fair market value since it was taxed on 2007. Effective Januray 1, 2009, the
of the property transferred at the time of the exchange or corporate income tax rate is 30%.
the fair market value of the property received, whichever is
higher (Sec. 21 [e], NIRC). Real property transactions Q: What is the treatment of gains from sale to the
subject to capital gains tax are not limited to sales but also government of real property classified as capital asset?
exchanges of property unless exempted by a specific
provision of law. A: The taxpayer has the option to either:
1. Include as part of gross income subject allowable
Q: A, a doctor by profession, sold in the year 2000 a parcel deductions and personal exemptions, then
of land which he bought as a form of investment in 1990 subject to the schedular tax; or
for P1 million. The land was sold to B, his colleague and at
a time when the real estate prices had gone down, for Note: This is not available for a corporate taxpayer.
only P800,000 which was then the fair market value of
2. Subject to final tax of 6% on capital gains. (Sec.
the land. He used the proceeds to finance his trip to the
24 [D], NIRC)
United States. He claims that he should not be made to
pay the 6% final tax because he did not have any actual
gain on the sale. Is his contention correct? (2001 Bar
Question)
A: The holding period notwithstanding, a final tax at the A: A person shall be deemed the owner of a security if he:
rates prescribed below is hereby imposed upon the net 1. Or his agent has title to it
capital gains realized during the taxable year from the sale, 2. Has purchased or entered into an unconditional
barter or exchange or other disposition of shares of stock contract binding on both parties thereto, to purchase
in a domestic corporation which are not traded in the stock it and has not yet received it
exchange. (Sec. 24 [C], NIRC) 3. Owns a security convertible into or exchangeable for it
and has tendered such security for conversion or
Not over P100,000 …………………………………….5% exchange
On any amount in excess of P100,000 ………10% 4. Has an option to purchase or acquire it and has
exercised such option
Q: How is selling price determined? 5. Has rights or warrant to subscribe to it and has
exercised such rights or warrants provided however,
A: The following rules shall apply in determining the selling that a person shall be deemed to own securities only
price: to the extent he has a net long position in such
1. In the case of cash sale - the selling price shall be the securities.
total consideration per deed of sale.
2. If the total consideration is partly in money and in kind Q: John, US citizen residing in Makati City, bought shares
- the selling price shall be the sum of money and the of stock in a domestic corporation whose shares are listed
fair market value of the property received. and traded in the Philippine Stock Exchange at the price
of P2 Million. A day after, he sold the shares of stock
SALE OF PRINCIPAL RESIDENCE Q: What is the tax treatment of sale or exchange of other
capital assets?
Q: What is a principal residence?
A: The gains or losses shall be subject to the holding
A: It refers to the dwelling house, including the land on period, after which the net capital gain is determined. The
which it is situated, where the individual and members of net capital gain (excess of the gains from sales or
his family reside, and whenever absent, the said individual exchanges of capital assets over the loss from such
intends to return. Actual occupancy is not considered sales/exchanges) are included in the gross income of the
interrupted or abandoned by reason of temporary absence taxpayer subject to the graduated rates of 5 - 32% for
due to travel or studies or work abroad or such other individuals and the normal corporate income tax of 30% for
similar circumstances. (RR No. 14-00) corporations. (Sec. 24 [D], NIRC)
Note: The address shown in the ITR is conclusively presumed as PASSIVE INVESTMENT INCOME
the principal residence. If the taxpayer is not required to file a
return, certification from Barangay Chairman or Building Q: Define “passive income.”
Administrator (for Condominium units) shall suffice.
A: Passive income refers to income derived from any
Q: Is the sale of principal residence by an individual activity on which the taxpayer has no active participation or
subject to capital gain tax? involvement.
A: No, sale of principal residence by an individual is exempt Q: What are the classifications of passive income?
provided the following requisites are present:
1. Sale or disposition of the old actual principal A: Passive income may either be:
residence; 1. Subject to scheduler rates, or
2. By a citizen or resident alien; 2. Subject to final tax.
3. Proceeds from which is utilized in acquiring or
constructing a new principal residence within 18 Q: What is meant by “income subject to final tax?” Give at
calendar months from the date of sale or disposition; least two examples of income of resident individuals that
4. Notify the CIR within 30 days from the date of sale or is subject to the final tax. (2001 Bar Question)
disposition through a prescribed return of his
intention to avail the tax exemption; A: Income subject to final tax refers to an income wherein
5. Can be availed of once every 10 years; the tax due is fully collected through the withholding tax
6. The historical cost or adjusted basis of his old principal system. Under this procedure, the payor of the income
residence shall be carried over to the cost basis of his withholds the tax and remits it to the government as a final
new principal residence; settlement of the income tax due on said income. The
recipient is no longer required to include the item of
A:
Certain passive income:
1. Interests, royalties, prizes and other winnings
2. Cash and/or property dividends
3. Capital gains from sale of shares of stock not traded in
the stock exchange
4. Capital gains from sales of real property (Sec. 24, NIRC)
Q: Give the summary rules on the tax treatment of certain passive income as applied to individuals.
A:
NRA- NRA –
RC NRC RA
ETB NETB
Within
Sources Of Income and Within Within Within Within
without
NATURE OF INCOME TAX RATE
INTEREST
On interest on currency bank deposits, yield or other monetary benefits
from deposit substitutes, trust funds & similar arrangements. 20% 20% 20% 20% 25%
XPN:
If the depositor has an employee trust fund or accredited retirement
plan, such interest income, yield or other monetary benefit is exempt
from final withholding tax.
Interest income under the Expanded Foreign Currency Deposit System. 7.5% Exempt 7.5% Exempt Exempt
Note: For corporations, the tax rate is also 20% without any distinction as to royalties. Thus, even books and other literary works and musical
compositions shall be subject to 20% tax.
Moreover, prizes and other winnings (except Philippine Charity Sweepstakes and Lotto winnings) of corporations are not subject to final tax but
included as part of their gross income.
Q: Maribel, a retired public school teacher, relies on her Q: How is the Interest Income under the Foreign Currency
pension from the GSIS and the Interest Income from a Deposit System tax?
time deposit of P500,000 with ABC Bank. Is Maribel liable
to pay any tax on her income? A: If the interest is received by an individual taxpayer
(except nonresident individual) from a depository bank
A: Maribel is exempt from tax on the pension from the GSIS under the expanded foreign currency deposit sytem shall
(Sec. 28 b [7] F, NRC). However, with her time deposit, the be subject to a final tax at the rate of 7½% of such income.
interest she receives thereon is subject to 20% final (Sec. 24 [B][1], NIRC)
withholding tax.
Nonresident citizen and Nonresident alien are exempt from
Q: As a rule, interest income is taxable. What are the payment of the 7½% final tax on interest income under the
exceptions? expanded foreign currency deposit system.
2
A: Interest Income: [FIL D] Q: What is the tax treatment of the following interest on
deposits with:
1. From bank Deposits. The recipient must be any 1. BPI Family Bank?
following tax exempts recipients: 2. A local offshore banking unit of a foreign bank? (2005
a. Foreign government; Bar Question)
b. Financing institutions owned, controlled or
financed by foreign government; or A:
c. Regional or international financing institutions 1. It is a passive income subject to a withholding tax rate
established by foreign government. (Sec. 25 A [2], of 20%.
NIRC) 2. It is a passive income subject to final withholding tax
2. On Loans extended by any of the above mentioned rate of 7.5%. (Sec. 24 B [1], NIRC) Both interests are
entities. not to be decalred as part of gross income in the
3. On bonds, debentures, and other certificate of income tax return.
Indebtedness received by any of the above mentioned
entities. Q: Distinguish the 20% final withholding tax on interest
4. On bank deposit maintained under the expanded income from the 5% gross receipts tax on banks.
Foreign currency deposit.
5. From Long term investment or deposit with a A:
maturity period of 5 years or more. 20% FWT ON 5% GROSS RECEIPTS
INTEREST INCOME TAX ON BANKS
Note: In order to avail exemption under item no. 4, the recipient It is an income tax It is a percentage tax under
must be a non-resident alien or non-resident foreign corporation. under Title II of the Title V (Other Percentage
Otherwise, it is subject to final tax of 7 ½ %.
NIRC (Tax on Income) Taxes)
Item no. 5 applies only to individual taxpayers. FWT is imposed on the GRT is measured by a certain
net income or gross percentage of the gross
Q: What are the long-term deposits or investments income realized in a selling price or gross value of
referred above? taxable year money of goods sold,
bartered or imported; or the
A: Certificate of time deposit or investment in the form of gross receipts or earnings
savings, common or individual trust funds, deposit derived by any person
substitutes, investment management accounts or other engaged in the sale of
investments, with maturity of not less than 5 years, the services
form of which shall be prescribed by the Bangko Sentral ng FWT is subject to GRT is not subject to
Pilipinas (BSP) and issued by banks(not by nonbank withholding withholding
financial intermediaries and finance companies) to
individuals in denominations of Php10,000 and other
LEASE OF PERSONAL PROPERTY A: Where the lease contract provides that the lessee will
erect a permanent improvement on the rented property
Rental income on the lease of personal property located in and after the term of the lease, the improvement shall
the Philippines and paid to a non-resident taxpayer shall be become the property of the lessor, the lessor may, at his
taxed as follows: option, report the income therefrom upon either of the
following methods:
NON- 1. Outright Method - the fair market value of the building
NON-RESIDENT
RESIDENT or improvement shall be reported as additional rent
CORPORATION
ALIEN income at the time when such building or
Vessel 4.5% 25% improvements are completed;
Aircraft, machineries 7.5% 25% 2. Spread Out Method – allocate over the life of the lease
and other equipment the estimated book value of such buildings or
Other assets 32% 25% improvements at the termination of the lease and
report as additional rent for each year of the lease an
LEASE OF REAL PROPERTY aliquot part thereof in addition to the regular rent
income.
APPLICABLE
LESSORS BASIS Note: With the outright method it would only be counted for 1
TAX RATES rental payment unlike with the spread out method it would be
Citizen, resident alien or Graduated Net taxable distributed to the remaining term of the lease contract.
Q: X leased his vacant lot in Binondo to Y for a term of 10 Q: What is the tax treatment of VAT added to rental/paid
years at an annual rental of P600,000. The contract by the lessee?
provides that Y will put up a building on the lot and after
10 years, the building will belong to X. The building was A: Taxes paid by a tenant (lessee) to or for a landlord
erected at a cost of P6,000,000 and has an estimated (lessor) for a business property are additional rent and
useful life of 30 years. Assuming the fair value of the constitute income taxable to lessor. Since the lessors are
completed building is the same as the construction cost, generally the ones responsible for VAT, any payments made
what is the total income of X if he opts to report his in their behalf by the lessees on leased property shall form
income on the leasehold improvements using: part of the rental income of the former.
a. Outright method
b. Spread out method TAX TREATMENT OF ADVANCE
RENTAL/LONG TERM LEASE
A:
a. If X reports his income on the improvements in the Q: Are advance rentals taxable?
year it was completed, his total rental income shall be:
FMV of the building in the year of completion P6,000,000 A: If the advance payment by the lessee is really a loan to
Add: Annual rental 600,000
Total rental income P6,000,000
the lessor, or an option money for the property or a
security deposit for the faithful performance of certain
b. If X reports his income on the imporvements using the obligations of the lessee, the lessor realizes no taxable
spread out method, his total rental income shall be: income in the year the advance payment is received. If the
Cost of the building P6,000,000 advance payment is, in fact, a prepaid rental, there is
Less: Accumulated depreciation at the end taxable income to the lessor whether the latter is using the
of lease term (₱6,000,000/30 years x 10 years) 2,000,000
Book value of the building at the expiration of lease P4,000,000 cash or accrual method of accounting.
Divide by: Lease term 10
Annual income of X on the improvement P400,000
Regular rental income 600,000
Total annual rental income P1,000,000
FORMS OF
WHEN
ADVANCE TAX TREATMENT
TAXABLE
TAX TREATMENT OF VAT ADDED TO PAYMENT
RENTAL/PAID BY THE LESSEE A loan to the G.R. Non-taxable
lessor from the
Q: Are leases of property subject to VAT? lessee XPN: If the lessee
violates the terms
A: Yes, all forms of property for lease, whether real or of the contract
personal, are liable to VAT. Leases or property shall be An option money G.R. Non-taxable
subject to VAT regardless of the place where the contract of for the property
lease or licensing agreement was executed if the property XPN: If the lessee
leased or used is located in the Philippines. violates the terms
of the contract
XPNs: A security deposit G.R. Non-taxable
a. Lease of a residential unit with a monthly rental to insure the
not exceeding twelve thousand eight hundred faithful XPN: If the lessee
pesos (P12,800); performance of violates the terms
b. Lease of passenger or cargo vessels and aircraft, the lease of the contract
including engine, equipment and spare parts A security deposit G.R. Non-taxable
thereof for domestic or international transport which restricts
operations (Sec. 109[S], NIRC); the lessor as to its XPN: Security
c. Lease of goods or properties or the performance use deposit applied to Taxable at the
of services other than the transactions mentioned rental shall be time it is
in the preceding paragraphs, the gross annual subject tom VAT at applied
sales and/or receipts do not exceed the amount the time of its
of One million five hundred thousand pesos application
(P1,919,500). Prepaid rental Taxable In the year it
without is received
Q: In leases of property, who are liable for VAT? restriction as to irrespective
its use of the
A: Generally, lessors of property, whether real or personal, accounting
are liable to VAT. method
employed by
XPN: Where the lessors are non-resident foreign the lessor
corporations or owners, the licensee shall be
responsible for the payment of VAT on rentals in
behalf of the former. (RR 16-2005, Sec 4.108-3)
UNIVERSITY OF SANTO TOMAS
2013 GOLDEN NOTES 58
NATIONAL INTERNAL REVENUE CODE
ANNUITIES, PROCEEDS FROM LIFE INSURANCE AND Any policy loans or borrowings made on the policy shall be
OTHER TYPES OF INSURANCE deducted as advances from the life insurance proceeds received
upon death.
Q: What is an annuity?
Q: Who may be the recipients of non-taxable life
A: It refers to the periodic installment payments of income insurance proceeds?
or pension by insurance companies during the life of a
person or for a guaranteed fixed period of time, whichever A: Proceeds of life insurance policies paid to individual
is longer, in consideration of capital paid by him. beneficiaries upon the death of the insured are exempt.
Also, it has also been held that proceeds of life insurance
The portion representing return of premium is not taxable policies taken by a corporation on the life of an executive to
while that portion that represents interest is taxable. indemnify it against loss in case of his death do no
constitute taxabe income. (El Oriente Fabrica de Tabacos
Note: The portion of annuity net of premiums is taxable being vs. Posadas, G.R. No. 34774, Sept. 21, 1931, 56 Phil. 147)
interest or earnings of the premium and not return of capital.
Q: Differentiate the tax treatment of life insurance
Q: Why are returns of premiums not taxable? proceeds under income and estate taxation.
A: The premiums returned are not income but return of A: In estate taxation, the concept of revocability or
capital. They represent earnings which were previously irrevocability in the designation of the beneficiary is
taxed. necessary to determine whether the life insurance
proceeds are included in the gross estate or not. However,
Q: X purchased a life annuity for P100,000 which will pay if the appointed beneficiary is the estate, executor or
him P10,000 a year. The life expectancy of X is 12 years. administrator, the proceeds shall be excluded from the
How much is excluded from the gross income of X? gross estate.
A: The P100,000 is excluded from the gross income of X On the other hand, in income taxation, there is no need for
since it represents a return of premiums which is not the determination of revocability or irrevocability of the
income but a return of capital. beneficiary for purposes of exclusion of the such proceeds
from the gross income. They are non-taxable regardless of
Q: Are proceeds of life insurance taxable? who the recipient is.
A: Generally, amounts received under a life insurance, Q: ABC Corp. took two insurances covering the life of its
endowment, or annuity contact, whether in a single sum or employee, Y. The first insurance designated W, wife of Y
in installments, paid to the beneficiaries upon the death of as the beneficiary; while in the second insurance, it was
the insured are excluded from the gross income of the ABC Corp. which was the designated as the irrevocable
beneficiary. beneficiary. In both insurances, it was ABC Corp. paying
the premiums. Y died.
XPNs: a. Do the proceeds form part of the taxable income of
a. If such amounts, when added to amounts the recipients?
already received before the taxable year under b. Are the proceeds forming part of the taxable estate
such contract, exceed the aggregate premiums of the deceased?
or considerations paid, the excess shall be
A:
inculed in the gross income.
a. The proceeds are not part of the taxable income of the
recipients. Section 32(B)(1) expressly excludes from
Note: However, in the case of a transfer for a valuable
consideration by assignment or otherwise, of a life
income taxation proceeds of life insurance. This is
insurance, endowment or annuity contract or any based on the theory that such proceeds, for income tax
interest therein, only the actual value of such purposes, are considered as forms of indemnity. Thus,
consideration and the amount of the premiums and they are non-taxable regardless of who the recipient is.
other sums subsequently paid by the transferee are
exempt from taxation. b. The proceeds of the first insurance form part of the
gross estate; while the proceeds of the second
b. Interest payments thereon if such amounts are insurance will not. This is because for estate tax
held by the insurer under an agreement to pay purposes, the determining factor of whether the
interest shall be taxable. If paid to a transferee proceeds of insurance shall be excluded is when the
for a valuable consideration, the proceeds are designation of the beneficiary is irrevocable.
not exempt.
Notes: The life insurance proceeds must be paid by reason of the
death of the insured. Payments for reasons other than death are
subject to tax up to the excess of the premiums paid.
A: It refers to amount of money in cash or in kind received Note: The national sports association referred to by law that
by chance or through luck and are generally taxable except should sanction said sport activity is the Philippine Olympic
if specifically mentioned under the exclusion from Committee.
computation of gross income under Sec. 32[B] of NIRC.
c. Prizes that winning inventors receive from the
Q: How are prizes and winnings treated for income tax nationwide contest for the most innovative New and
purposes? Renewable Energy Systems jointly sponsored by the
PNOC and other organizations for during the first ten
A: Generally, prizes exceeding ₱10,000 and other winnings years reckoned from the date of the first sale of the
from sources within the Philippines shall be subject to 20% invented products, provided that such sale does not
final withholding tax, if received by a citizen, resident alien exceed P200,000 during any twelve-month period.
or non-resident engaged in trade or business in the (Secs. 5 and 6, R.A. No. 7459; BIR Ruling 069-2000)
Philippines. If the recipient is a non-resident alien not
engaged in trade or business in the Philippines, the prizes PENSIONS, RETIREMENT BENEFIT OR SEPARATION PAY
and other winnings shall be subject to 25% final
withholding tax. If the recipient is a corporation (domestic Q: What is pension?
or foreign), the prizes and other winnings are added to the
corporation’s operating income and the net income is A: It refers to amount of money received in lump sum or
subject to 30% corporate income tax. on staggered basis in consideration of services rendered
given after an individual reaches the age of retirement.
RECIPIENTS TAX RATES
Citizen, resident alien or Subject to 20% final Q: When is pension taxable?
non-resident engaged in withholding tax
trade or business in the A: Pension being part of gross income is taxable to the
Philippines. extent of the amount received except if there is a BIR
Non-resident alien not Subject to 25% final approved pension plan. (Sec. 32 B [6], NIRC)
engaged in trade or withholding tax
business in the Philippines INCOME FROM ANY SOURCE WHATEVER
Corporation (domestic or Subject to 30% corporate
foreign income tax. Q: What are examples of income from any source
whatever?
A:
Q: What prizes and winning are subject to Philippine 1. Forgiveness of indebtedness
income tax? 2. Recovery of accounts previously written off
3. Receipt of tax refunds or credit
A:
1. Prizes derived from sources within the Philippines not Q: What is the general rule on taxation of debts?
exceeding P10,000 is included in the gross income;
2. Winning derived from sources within the Philippines is A: Borrowed money is not part of taxable income because
subject to final tax on passive income except PCSO and it has to be repaid by the debtor. On the other hand, the
lotto winnings which are tax exempt; creditor does not receive any income upon payment
3. Prizes and winnings from sources outside the because it is merely a return of the investment.
Philippines.
FORGIVENESS OF INDEBTEDNESS
Q: What are the prizes and awards exempt from income
tax? Q: What is the tax treatment of forgiveness of
indebtedness?
A:
a. Prizes and awards made primarily in recognition of A:
religious, charitable , scientific, educational, artistic, 1. When cancellation of debt is income. If an individual
literary, or civic achievement provided, the following performs services for a creditor, who in consideration
conditions are met: thereof, cancels the debt, it is income to the extent of
i. The recipient was selected without any action on the amount realized by the debtor as compensation for
his part to enter the contest or proceeding; and his services.
ii. The recipient is not required to render substantial
future services as a condition to receiving the 2. When cancellation of debt is a gift. If a creditor merely
prize or award. desires to benefit a debtor and without any
consideration therefore cancels the amount of the
UNIVERSITY OF SANTO TOMAS
2013 GOLDEN NOTES 60
NATIONAL INTERNAL REVENUE CODE
debt, it is a gift from the creditor to the debtor and INCOME FROM ANY SOURCE WHATEVER
need not be included in the latter’s income.
3. When cancellation of debt is a capital transaction. If a Q: What does the phrase “income from whatever source
corporation to which a stockholder is indebted forgives derived” imply?
the debt, the transaction has the effect of payment of a
dividend. (Sec. 50, RR No. 2) A: This phrase implies that all income not expressly
exempted from the class of taxable income under our laws
4. An insolvent debtor does not realize taxable income form part of the taxable income, irrespective of the
from the cancellation or forgiveness. (CIR v. Gin Co.) voluntary or involuntary action of the taxpayer in
5. The insolvent debtor realizes income resulting from the producing the income. The source of the income may be
cancellation or forgiveness of indebtedness when he legal or illegal.
becomes solvent. (Lakeland Grocery Co. v. CIR 36 BTA
289 [1937]) Q: Give examples of “income from whatever source
derived” which form part of the taxable income of the
taxpayer.
RECOVERY OF ACCOUNTS PREVIOUSLY WRITTEN OFF-
WHEN TAXABLE/WHEN NOT TAXABLE
A:
1. Gains arising from expropriation of property which
Q: Explain the Tax Benefit Rule or Equitable Doctrine of
would be considered as income from dealings in
Tax Benefit.
property;
2. Gains from gambling;
A: This rule states that the recovery of bad debts
3. Gains from embezzlement or stealing money;
previously allowed as deduction in the preceding year or
4. Gains, money or otherwise derived from extortion,
years shall be included as part of the taxpayer’s gross
illegal gambling, bribery, graft and corruption,
income in the year of such recovery to the extent of the
kidnapping, racketeering, etc.
income tax benefit of said deduction.
Rationale: These are taxable because title is merely
The recovery of amounts deducted in previous years from
voidable.
gross income become taxable income unless to the extent
thereof, the deduction did not result in any tax benefit to
5. In stock options, the difference between the fair
the taxpayer or in a reduction of income tax liability.
market value of the shares at the time the option is
exercised and the option price constitutes additional
Q: When is the recovery of bad debts not taxable?
compensation income to the employee. (
Commissioner vs Smith, 324 U.S. 177)
A: If the taxpayer did not benefit from deduction of the
bad debt written-off because it did not result in any 6. Money received under solution indebiti
reduction of his income tax in the year of such deduction
as in the case where the result of the taxpayer’s business Rationale: Under the claim of right doctrine, the
operation was a net loss even without deduction of the recipient, even if he has the obligation to return the
bad debts written-off, his subsequent recovery thereof same, has a voidable title to the money received
shall be treated as a mere recovery or a return of capital, through mistake.
hence, not treated as receipt of realized taxable income.
7. Condonation of indebtedness for a consideration.
RECEIPT OF TAX REFUNDS OR CREDIT
Rationale: This is because when a creditor cancels a
Q: How are tax cedits or refunds treated for income tax debt as part of a business transaction, the debtor is
purposes? enriched or receives financial advantages thereby
increasing its net assets, and thus realizes taxable
A: If a taxpayer receives tax credit certificate or refund for
income.
erroneously paid tax which was claimed as a deduction
from his gross income that resulted in a lower net taxable
Q: Explain the James doctrine.
income or a higher net operating loss that was carried over
to the succeeding taxable year, he realizes taxable income
A: This doctrine provides that even though the law
that must be included in his income tax return in the year
imposes a legal obligation upon an embezzler or thief to
of receipt.
repay the funds, the embezzled or stolen money still forms
XPN: The foregoing principle does not apply to tax
part of the gross income since the embezzler or thief has
credits or refunds of the following taxes since these
no intention of repaying the money.
are not deductible from gross income:
a. Income tax;
Q: Why are proceeds of stolen or embezzled property
b. Estate tax;
taxable?
c. Donor’s tax; and
d. Special assessments
A: The money or other proceeds of the sale or other
disposition of stolen property is subject to income tax
Income from Sources Within the Philippines RATIONALE FOR THE EXCLUSIONS
1. Interests derived from sources within the Philippines There are exclusions from the gross income either because
2. Dividends from domestic and foreign corporations, if they:
more than 50% of its gross income for the three-year 1. Represent return of capital;
period ending with the close of the taxable year prior 2. Are not income, gain or profit;
3. Are subject to another kind of internal revenue tax;
to the declaration of dividends was derived from
4. Are income, gain or profit that are expressly exempt
sources within the Philippines from income tax under the Constitution, Tax treaty,
3. Compensation for services performed within the Tax Code, or general or a special law.
Philippines
4. Rentals and royalties from properties located in the TAXPAYERS WHO MAY AVAIL OF EXCLUSIONS
Philippines or any interest in such property including
rentals or royalties for the use of or for the privilege of All kinds of taxpayers – individuals, estates, trusts and
using within the Philippines intellectual property corporations, whether citizens, aliens, whether residents or
rights such as trademarks, copyrights, patents, etc. non-residents may avail of the exclusions.
5. Gains on sale of real property located in the
Philippines Rationale: the excluded receipts are not considered as income for
6. Gains on sale of personal property other than shares tax purposes.
of stock within the Philippines
7. Gains on sale of shares of stock in a domestic
corporation
Q: Is the rule that the amount of the proceeds of life 2. It depends. If the heirs, estate, administrator or
insurance excluded from the gross income absolute? executor is designated as beneficiary, the proceeds
form part of the estate whether the designation is
A: No. The exceptions are: [ASV-PPC] revocable or irrevocable.
1. If there is an Agreement between the insured and the
rd
insurer to the effect that the amount shall be withheld If the person designated is a 3 person (which includes
by the insurer under an agreement to pay interest the employer,) the proceeds form part of the estate if
thereon, the interest held by the insurer pursuant to the designation is revocable. If the designation is
that agreement is the one taxable but not the principal irrevocable, the proceeds will not be included in the
amount (Sec. 32 B [1], NIRC) gross estate.
2. Where the life insurance policy is used to Secure a
money obligation 3. It shall be considered as revocably designated. Under
3. Where the life insurance policy was transferred for a Sec. 11 of the Insurance Code of the Philippines, the
Valuable consideration insured has the right to change the beneficiary he
4. The recipient of the insurance proceeds is a business designated in the policy, unless he has expressly
Partner of the deceased and the insurance was taken waived this right in said policy. If the policy is silent,
to compensate the partner-beneficiary for any loss in the general rule that the designation is revocable shall
income that may result as the death of the insured apply. There is only irrevocable designation if the
partner policy expressly provides.
5. The recipient of the insurance proceeds is a
Partnership in which the insured is a partner and the Q: Noel is a bright computer science graduate. He was
insurance was taken to compensate the partnership hired by HP. To entice him to accept the job, he was
for any loss in income that may result from the offered the arrangement that part of his compensation
dissolution of the partnership caused by the death of package would be an insurance policy with a face value of
the insured partner P20 million. The parents of Noel are made the
6. The recipient of the life insurance proceeds is a beneficiaries of the insurance policy. Will the proceeds of
Corporation in which the insured was an employee or the insurance form part of the income of the parents of
officer. (Sec. 62, RR No. 2) Noel and be subject to income tax? (2007 Bar Question)
Q: Will interest earned on the proceeds from life A: No, the proceeds of life insurance policies are paid to the
insurance be excluded from gross income? heirs or beneficiaries upon the death of the insured are not
included as part of the gross income of the recipient. There
A: If such amounts of the life insurance proceeds are held is no income realized because nothing flows to Noel’s
by the insurer under an agreement to pay interest thereon, parents other than a mere return of capital, the capital
the interest payments shall be included in the gross being the life of the insured.
income. (Sec.32 [B][1], NIRC of 1997).
Q: What is the tax treatment of proceeds received under Q: If Mr. Generous gave a gift to Ms. Gorgeous what are
endowment policies? the tax implications?
A: If the insured dies, and the beneficiary receives the life A: Mr. Generous, the donor is subject to donor’s tax while
insurance proceeds, these are not taxable income because Ms. Gorgeous the donee is not subject to donee’s tax.
they are excluded from gross income as proceeds from life Donee’s tax has been abolished by PD 69. The value of the
insurance. gift received by Ms. Gorgeous is not included in the
computation of gross income pursuant to Sec. 32 B (3),
If the insured does not die and survives the designated NIRC, gifts, bequest and devises are excluded from gross
period, the amount pertaining to the premiums he paid are income.
excluded from gross income, but the excess shall be
considered part of his gross income. Q: What is a Bequest and a Devise?
Q: Suppose A obtained an endowment policy valued at P1 A: Bequest is a gift of personal property and devise is a gift
million. He paid premiums amounting to P800,000. Upon of real property. Both are donations mortis causa. The giver
maturity, he received P1 million, what amount is taxable? is either known as the testator or decedent while the
recipient may be the heirs or beneficiaries.
A: The amount of P200,000 is taxable. The difference
between the value of the insurance and the actual Q: What are the tax implications of a Bequest and Device?
premiums paid forms part of A’s gross income.
A: The estate of the testator or the decedent is subject to
Q: Mario worked his way through college. After working estate tax, while the heirs or beneficiaries are not required
for more than 2 years in X Corporation, Mario decided to to pay donee’s tax as the same was already abolished. The
retire and avail of the benefits under the very reasonable value of the bequest and/or the devise received by the
Q: What is the “Gift Tax Test”? A: The wife and daughter should pay income tax because it
is fruit of labor. They should also pay donor’s tax because
A: When a person gives a thing or right to another and it is they gave D P250,000.00. For C, since he pays the salary of
not a “legally demandable obligation” then it is treated as a D, it is not subject to tax; it is a deductable item. It is a
gift and excluded from gross income. However, if there is a business expense and therefore it is an allowable
legally demandable obligation to give such as for services deduction. For D, there is no tax because payment of
rendered by one to the donor or due to his merits, the obligation is not taxable.
amount received is taxable income to the recipient.
AMOUNT RECEIVED THROUGH
Q: Quiroz worked as chief accountant of a hospital for 45 ACCIDENT OR HEALTH INSURANCE
years. When he retired at 65 he received retirement pay
equivalent to 2 months' salary for every year of service as Q: What are the kinds of compensation for injuries or
provided in the hospital BIR approved retirement plan. sickness that may be excluded from gross income?
The Board of Directors of the hospital felt that the hospital
should give Quiroz more than what was provided for in A:
the hospital's retirement plan in view of his loyalty and 1. Amounts received through Accident or Health
invaluable services for 45 years. Hence, it resolved to pay Insurance or Workmen’s Compensation Act as
him a gratuity of P1 million over and above his retirement compensation for personal injuries or sickness
pay. The CIR taxed the P1 million as part of the gross 2. Amounts of any damages received whether by suit or
compensation income of Quiroz who protested that it was agreement on account of such injuries or sickness.
excluded from income because (a) it was a retirement pay, (Sec. 32 B [4], NIRC)
and (b) it was a gift.
Note: They are mere compensation for injuries or sickness suffered
Is Quiroz correct in claiming that the additional P1 Million and not income. It is intended to make the injured party whole as
was gift and therefore excluded from income? before the injury.
A: No, the amount received was in consideration of his Q: JR was a passenger of an airline that crashed. He
loyalty and invaluable services to the company which is survived the accident but sustained serious physical
clearly a compensation income received on account of injuries which required hospitalization for 3 months.
employment. Under the employer's 'motivation test,' Following negotiations with the airline and its insurer, an
emphasis should be placed on the value of Quiroz services agreement was reached under the terms of which JR was
to the company as the compelling reason for giving him the paid the following amounts: P500,000 for his
gratuity; hence it should constitute a taxable income. The hospitalization; P250,000 as moral damages; P300,000 for
payment would only qualify as a gift if there is nothing but loss of income during the period of his treatment and
'good will, esteem and kindness' which motivated the recuperation. In addition, JR received from his employer
employer to give the gratuity. (Stonton v. U.S., 186 F. Supp. the amount of P200,000 representing the cash equivalent
393) of his earned vacation and sick leaves. Which if any, of the
amounts are subject to income tax? (2005 Bar Question)
Q: C is a creditor of D. The debt is condoned by C. What is
the tax implication of the condonaton of debt? A: The amount of P200,000 that JR received from his
employer is subject to income tax, except the money
A: For D, that amount is a Remuneratory Donation and equivalent of 10 days unutilized vacation leave credits
subject to income tax. It is not a gift because it started from which is not taxable. Amounts of vacation allowances or
an obligation and not from pure liberality of the donor. C sick leave credits which are paid to an employee constitute
should pay donor’s tax if the amount condoned is more compensation. (Sec. 2.78 A [7], RR 2-98, as amended by RR
than PHP 100,000.00. 10-2000)
Q: C lends D PHP 150,000.00 but D failed to pay the debt. The amounts that JR received from the airline are excluded
C told D that D should work in C’s Restaurant and part of from gross income and not subject to income tax because
D’s salary will be applied to the obligation. What is the tax they are compensation for personal injuries suffered from
implication there?
UNIVERSITY OF SANTO TOMAS
2013 GOLDEN NOTES 66
NATIONAL INTERNAL REVENUE CODE
an accident as well as damages received as a result of an 5. RP-Netherlands Tax Treaty
agreement on account of such injuries. (Sec. 32 B [4], NIRC)
Q: What is the “Most Favored Nation Clause”?
Q: A was hospitalized for two months because of car
accident. B, the person who hit him gave P22,000.00, A’s A: This grants to the contracting party treatment not less
two months salary. Is that P22,000.00 taxable? favorable than which has been or may be granted to the
most favored among other countries. It allows the taxpayer
A: No. It is not part of gross income. It is salary actualized in one state to avail of more liberal provisions granted in
given not by the employer and it is Compensation for another tax treaty to which the country of residence of
injuries sustained. such taxpayer is also a party; provided that the subject
matter of taxation is the same as that in the tax treaty
Q: In the problem above, If the salary actualized is given under which the taxpayer is liable. (CIR v. SC Johnson and
by the employer, is it taxable? Son Inc., GR 127105, June 25, 1999)
A: If it is given by the employer as backwages, it is taxable. Q: What are the statutory income tax exemptions?
A:
1. RP-Japan Tax Treaty
2. RP-US Tax Treaty
3. RP-France Tax Treaty
4. RP-Switzerland Tax Treaty
A: No, it is not included. It is subject to a final tax of 20% for Q: Onyoc, an amateur boxer, won in a boxing competition
the amount is in excess of P10,000, otherwise it would be sponsored by the Gold Cup Boxing Council, a sports
included in his gross income and subjected to a scheduler association duly accredited by the Philippine Boxing
rate (Sec. 24 B [1], NIRC) Association. Onyoc received the amount of P500,000 as
UNIVERSITY OF SANTO TOMAS
2013 GOLDEN NOTES 70
NATIONAL INTERNAL REVENUE CODE
his prize which was donated by Ayala Land Corporation. GAINS FROM REDEMPTION OF SHARES IN A
The BIR tried to collect income tax on the amount received MUTUAL FUND COMPANY
by Onyoc who refuses to pay. Decide. (1996 Bar Question)
Q: What is a mutual fund company?
A: The prize will not constitute a taxable income to Onyoc,
hence the BIR is not correct in imposing the income tax. RA A: The term “mutual fund company” shall mean an open-
7549 explicitly provides that “All prizes and awards granted end and close-end investment company as defined under
to athletes in local and international sports tournaments the Investment Company Act. (Sec.22 [BB], NIRC)
and competitions in the Philippines or abroad and
sanctioned by their respective national sports association UNDER SPECIAL LAWS
shall be exempt from income tax.”
PERSONAL EQUITY AND RETIREMENT ACCOUNT
Neither is the BIR correct in collecting the donor’s tax from
Ayala Land corporation. The law is clear when it Q: What is Personal Equity and Retirement Account
categorically stated “That the donors of said prizes and (PERA)?
awards shall be exempt from the payment of the donor’s
tax.” A: It refers to the voluntary retirement account established
by and for the exclusive use and benefit of the Contributor
INCOME DERIVED BY FOREIGN GOVERNMENT for the purpose of being invested solely in PERA investment
products in the Philippines. (Sec. 3, RA 9505 otherwise
Q: What are the conditions in order for the income known as the Personal Equity and Retirement Account
derived by foreign government from investments in the (PERA) Act of 2008)
Philippines be exempted from tax?
Q: Who may be a contributor?
A:
2. It must be an income derived from investments in the A: A contributor may be any person with the capacity to
Philippines; contract and who possesses a tax identification number.
3. It must be derived from BOnds, Loans or other The Contributor establishes and makes contributions to a
Domestic securities, Stocks or Interests on deposits in PERA.
banks; [BOLDSI] and
4. The recipient of such income from investment in the Q: What are the different PERA Investment Products?
Philippines must be a:
a. foreign government; A: It may be a unit investment bust fund, mutual fund,
b. financing institutions owned, controlled or annuity contract, insurance pension products, pre-need
financed by foreign government; or pension plan, shares of stock and other securities listed and
c. regional or international financing institutions traded in a local exchange, exchange-traded bonds or any
established by foreign government. (Sec. 32 B [7], other investment product or outlet which the concerned
NIRC) Regulatory Authority may allow for PERA purposes.
Note: The exclusion may be premised either on the principle of Q: How is “Regulatory Authority” defined under the Act?
comity or upon the principle of reciprocity.
TH
A: It refers to the Bangko Sentral ng Pilipinas (BSP) as
13 MONTH PAY AND OTHER BENEFITS regards banks, other supervised financial institutions and
th
trust entities, the Securities and Exchange Commission
Q: How much is the maximum amount allowed for 13 (SEC) for investment companies, investment houses
month pay and other benefits to be excluded from gross stockbrokerages and pre-need plan companies, and the
income? Office of the Insurance Commission (OIC) for insurance
companies.
A: Gross benefits received by officials and employees of
public and private entities may be excluded from gross Q: What is the requirement in order to qualify as PERA
income provided that the total exclusion shall not exceed investment product?
P30,000. The excess would be considered as part of the
compensation income of the employee where it is subject A: To qualify as a PERA investment product, the product
on a scheduler rate. (Sec. 32 B [7] e, NIRC) must be non-speculative, readily marketable, and with a
track record of regular income payments to investors.
GAINS FROM THE SALE OF BONDS, DEBENTURES OR
OTHER CERTIFICATE OF INDEBTEDNESS. Q: What is required for tax-exemption?
Note: The bonds, debentures or other certificate of indebtedness A: The concerned Regulatory Authority must first approve
sold, exchanged or retired must be with a maturity of more than
the product before being granted tax-exempt privileges by
five years.
the BIR.
A: No, all income earned from the investments and Q: Distinguish exclusion from gross income from allowable
reinvestments of the maximum amount allowed herein is deductions from gross income.
tax exempt.
A:
Q: What is the maximum annual PERA contribution ALLOWABLE
EXCLUSION
allowed by this Act? DEDUCTIONS
Refers to a flow of wealth which Refer to amounts
A: does not form part of the gross which the law
MAXIMUM ANNUAL PERA income because: allows as
CONTRIBUTORS
CONTRIBUTIONS 1. it is exempted by the deductions from
If the contributor P100,000 or its equivalent in any fundamental law; gross income order
is single convertible foreign currency at the 2. it is exempted by the to arrive at net
prevailing rate at the time of the statute; income or taxable
actual contribution 3. it does not come within income
If the contributor Each of the spouses shall be the definition of income
is married entitled to make a maximum Material to arrive at gross Necessary to arrive
contribution of One hundred income at net or taxable
thousand pesos (P l00,000.00) or its income
equivalent in any convertible Something earned or received Something paid or
foreign currency which do not form part of the incurred in earning
OFW Double the allowable maximum gross income gross income
amount.
Q: Distinguish exemption from allowable deduction
DEDUCTIONS FROM GROSS INCOME
A:
Q: Define deductions from gross income ALLOWABLE
EXEMPTION
DEDUCTION
A: Deductions from gross income refer to items or amounts An immunity or privilege, A subtraction from gross
authorized by law to be subtracted from pertinent items of a freedom from a charge income
gross income to arrive at the taxable income. or burden to which others
are subjected.
Q: What is the nature of deductions? Generally receipts which Not receipts, but are,
are excluded from taxable expenditures which are
A: The items of amounts allowed as deductions represent income. permitted to be subtracted
the expenses (reduction of wealth) of the taxpayer (other from income to determine
personal expenses and capital expenditures) in earning the the amount subject to tax.
income (increase of wealth) subject to tax as well as The theoretical personal, Reduction of wealth
reasonable living expenses. family and living which helped earn the
expenses of an individual. income subject to tax.
Deduction partakes the nature of exemption, then it must
also be strictly be construed against the taxpayer. (CIR v. Q: Distinguish allowable deductions from gross income
Isabela Cultural Corporation, G.R. 172231). from personal exemptions.
Q: What are the deductions that can be claimed by a Q: What is the limitation on such deduction?
corporation?
A: In the case of non-resident alien individual engaged in
Domestic Corporations and Resident Foreign Corporation trade or business in the Philippines and a resident foreign
may opt between the OSD or the Itemized Deductions, corporation, the deductions for taxes shall be allowed only
except Non-Resident Foreign Corporation which is subject if and to the extent that they are connected with income
to final tax on its gross income from sources within the from sources within the Philippines. (Sec. 34 C [2], NIRC)
Philippines.
Q: Discuss the matching concept of deductibility Q: What are the itemized deductions allowed by the NIRC?
A: Under this principle, taxpayers may use estimates when Another reason for its non-deductibility is the fact that it
they can show that there is some factual foundation on can be considered as an illegal compensation made to a
which to base a reasonable approximation of the expense, government employee. This is so because if the insured, his
they can prove that they had made a deductible estate or heirs were made as the beneficiary (because of
expenditure but just cannot prove how much that the requirement of insurable interest), the payment of
expenditure was. (Cohan v. Commissioner, 39 F (2d) 540) premium will constitute bribes which are not allowed as
deduction from gross income. (Sec. 34 A [l] c, NIRC)
It is the use of estimates or approximations of the amount
of cash and other assets where the taxpayer lacks adequate On the other hand, if the company was made the
records. beneficiary, whether directly or indirectly, the premium is
not allowed as a deduction from gross income
Note: If there is showing that expenses have been incurred but the
exact amount thereof cannot be ascertained due to the absence of Q: How can the taxpayer prove that the expense has
receipts and vouchers of the expenditures involved, the BIR will been paid or incurred during the taxable year?
make an estimate of deduction that may be allowable in
computing the taxpayer's taxable income bearing heavily against
the taxpayer whose inexactitude is of his own making. That A: It is a basic requirement that all expenses must be
disallowance of 50% of the taxpayer’s claimed deduction is valid substantiated by original copy of receipts or in the absence
(RMC 23-2000). thereof, a taxpayer can still prove that the claimed
deduction was really paid or incurred by providing other
Q: What are included as ordinary and necessary expenses? evidence such as certified true copies of the official receipts
in case of loss, payment vouchers and checks.
A:
1. Salaries, wages and other forms of compensation for Q: If a businessman hired a lawyer but the lawyer did not
personal services actually rendered bill the services and did not give receipts, can the
2. Travelling expenses businessman claim it as an allowable deduction on that
3. Rental expenses year?
UNIVERSITY OF SANTO TOMAS
75 FACULTY OF CIVIL LAW
Law on Taxation
Q: What are the requisites for deductibility of bonus?
A: Yes. All-events test will apply. (2006 Bar Question)
Note: If the lawyer billed the services and issued the receipt on the A:
succeeding year and the businessman failed to claim the a. The payment of the bonus is made in good faith for
deduction on the year the service was rendered, the businessman
additional compensation.
is not allowed to claim the allowable deduction anymore.
b. It must be for personal services actually rendered; and
c. The bonus when added to salaries is “reasonable when
Q: What is the all-events tests?
measured by the amount and quality of the services
performed with relation to the business of the particular
A:
taxpayer.
1. Fixing of a right to income or liability to pay
2. The availability of the reasonable accurate
The following conditions may be taken into consideration:
determination of such income or liability.
1. The payment made in good faith
Note: The all-events test requires the right to income or liability be 2. The character of the taxpayer’s business; e.g. the
fixed, and the amount of such income or liability be determined volume and amount of its net earnings; its
with reasonable accuracy. However, the test does not demand locality; the type and extent of the services
that the amount of income or liability be known absolutely, only rendered; the salary policy of the corporation
that a taxpayer has at his disposal the information necessary to 3. The size of the particular business
compute the amount with reasonable accuracy. The all-events test 4. The employees’ qualification and contributions to
is satisfied where computation remains uncertain, if its basis is the business venture
unchangeable; the test is satisfied where a computation may be
5. General economic conditions (C.M. Hoskins &
unknown, but is not as much as unknowable, within the taxable
year. The amount of liability does not have to be determined Co., Inc. v. CIR, GR L-24059, Nov. 28, 1969)
exactly; it must be determined with "reasonable accuracy." th
Accordingly, the term "reasonable accuracy" implies something Q: Gold and Silver Corporation gave extra 14 month
less than an exact or completely accurate amount (CIR vs. Isabela bonus to all its officials and employees in the total
Cultural Corporation GR No. 172231, February 12, 2007). amount of P75 million. When it filed its corporate income
tax return the following year, the corporation declared a
SALARIES, WAGES AND OTHER FORMS OF net operating loss. When the income tax return of the
COMPENSATION FOR PERSONAL SERVICES ACTUALLY corporation was reviewed by the BIR the following year, it
RENDERED, INCLUDING THE GROSSED-UP MONETARY disallowed as item of deduction the P75 million bonus the
VALUE OF THE FRINGE BENEFIT corporation gave its officials and employees on the
SUBJECTED TO FRINGE BENEFIT TAX WHICH TAX SHOULD ground of unreasonableness. The corporation claimed
HAVE BEEN PAID that the bonus is an ordinary and necessary expense that
should be allowed. If you were the CIR, how will you
Q: What are requisites before an employer can deduct resolve the issue? (2006 Bar Question)
compensation payments to employees?
A: I will rule against the deductibility of the bonus. The
A: extra bonus is not normal to the business and
1. The payments must be reasonable; unreasonable. Giving an extra bonus at a time that the
2. They are, in fact, payments for personal services company suffers operating losses is not a payment done in
rendered. (Sec. 70, Rev. Regs. 2) good faith and is not normal to the business, hence
unreasonable and would not qualify as ordinary and
Note: Reasonable and true compensation is only such amount as necessary expense.
would ordinarily be paid for services like enterprises in like
circumstances.
Q: Noel is a bright computer science graduate. He was
hired by Hewlett Packard. To entice him to accept the job,
Q: What are included in compensation for services which
he was offered the arrangement that part of is
are allowed as deductions from gross income?
compensation would be an insurance policy with a face
value of P20 million. The parents of Noel are made the
A:
beneficiaries of the insurance policy. Can the company
1. Wages, salaries, commissions, professional fees,
deduct from its gross income the amount of the premium?
vacation-leave pay, retirement pay, and other
compensation
A: Yes, the premiums paid are ordinary and necessary
2. Bonuses in good faith
business expenses of the company. They are allowed as a
3. Pensions and compensation for injuries if not
deduction from gross income so long as the employer is
compensated for by insurance or otherwise
not a direct or indirect beneficiary under the policy of
4. Grossed-up monetary value of fringe benefit provided
insurance. Since the parents of the employee were made
for, as long as the final tax imposed has been paid.
the beneficiaries, the prohibition for their deduction does
The fringe benefit must have been granted to
not exist. (Sec. 36 A [4], NIRC)
managerial and supervisory employees, otherwise it
cannot be availed as deduction.
Note: Travelling expense includes transportation, meals and Q: What are the requisites for its deductibility?
lodging. (RR No. 2)
A:
Q: What does the term “away from home” mean? 1. Payment was made as a condition to the continuous
use of or possession of the property;
A: The term “away from home” means away from the 2. Taxpayer has not taken or is not taking title to the
location of the employee’s principal place of employment property or has no equity other than that of a lessee,
regardless of where the family residence is maintained. user or possessor;
3. Property must be used in the trade or business; and
Q: What are the rules in deducting travel expenses? 4. Subject to withholding tax.
3. Reimbursement for travel taxes, airport fees and REPAIRS AND MAINTENANCE
other charges, if duly receipted or substantiated, may
be deducted by the employer as business expenses. Q: When is repair expense allowed as a deduction from
gross income?
4. Subject to the above rules, expenses incurred in
attending two foreign professional conventions a year A: Repairs are allowed as deduction when it is minor and
shall constitute a deductible expense. ordinary, and keeps the asset in its ordinary working
condition. Major and extraordinary repairs are capitalized
Note: These maybe considered as fringe benefit subject to fringe and included in determining depreciation expense because
benefits tax. In such cases, it is deductible from the employer’s they tend to prolong the life of the asset.
gross income (Domondon, Income Taxation Vol. 2, 2009).
EXPENSES UNDER LEASE AGREEMENTS
COSTS OF MATERIALS
Q: What are the expenses under the lease agreement
Q: Are all materials and supplies deductible whether or which may be allowed as deductions by the lessor?
not they are used?
A: Since the rentals are considered as income of the lessor
A: No, materials and supplies are deductible only to the (owner of the property), such lessor may deduct all
amount actually consumed or used in the operation during ordinary and necessary expenses paid or incurred during
the taxable year. the taxable year to the earning of the income (Sec. 2.01, RR
No. 19-86).
Q: What are the methods utilized to determine materials
used? Among such deductions may be cost of repairs and
maintenance, salaries and wages of employees attendant
A: to such lease, interest payment, property taxes, etc.
1. Actual consumption method or inventory method
2. Direct purchase method
Q: Cite examples of expenses for professionals? Net sales/net revenue x Actual Expense
Total Net sales and revenue
A:
Q: What are included as entertainment, amusement and
1. Supplies expense;
recreation expenses?
2. Expenses paid in the operation and repair of
transportation equipment used in making professional
A: They include representation expenses and/or
calls;
depreciation or rental or public order; expense relating to
3. Membership dues to professional associations or
entertainment facilities.
societies and subscriptions to journals;
4. Office rentals
Note: “Representation expenses” shall refer to expenses incurred
5. Utilities expense for water and electricity consumed by a taxpayer in connection with the conduct of his trade, business
in connection with the exercise of the profession or exercise of profession, in entertaining, providing amusement
6. Communication expense and recreation to, or meeting with, a guest or guests at a dining
7. Expenses for hiring employees or office assistants place, place of amusement, country club, theater, concert, play,
8. Expenses incurred for books, furniture and sporting event and similar events or places.
professional instruments and equipment with short
useful life Note: “Entertainment facilities” shall refer to a yacht, vacation
home or condominium; and any other similar item of real or
Note: Those of a permanent character are not allowable as personal property used by the taxpayer primarily for the
deductions. entertainment, amusement, or recreation of guests or employees.
(Sec. 2, RR 10-2002)
ENTERTAINMENT/REPRESENTATION EXPENSES
Q: What expenses are not considered entertainment,
Q: What are the requisites to avail of this deduction? amusement and recreation expenses?
A. A:
1. Paid or incurred during the taxable year 1. Expenses which are treated as compensation or fringe
2. Directly connected to the development, management, benefits for services rendered under an employer-
and operation of the business, trade or profession of employee relationship
the taxpayer; or directly related to or in furtherance of 2. Expenses for charitable or fund-raising events
the conduct of its trade, business or exercise of a 3. Expenses for bona fide business meeting of
profession. stockholders, partners or directors
3. Not contrary to law, morals, good customs, public 4. Expenses for attending or sponsoring an employee to
policy or public order. a business league or professional organization
4. Must not constitute as a bribe, kickback, or other meeting
similar payment; 5. Expenses for events organized for promotion,
5. Duly substantiated by adequate proof or receipt. marketing and advertising including concerts,
6. Withholding tax, if any, should have withheld conferences, seminars, workshops, conventions, and
therefrom and paid. other similar events
6. Other expenses of similar nature. (Sec. 3, RR 10-2002)
Q: What are the ceiling on the amount allowed as
entertainment, amusement and recreation expense? ADVERTISING AND PROMOTIONAL EXPENSES
A: Entertainment, amusement and recreation expense Q: What are the requisites for the deductibility of
shall be allowed as a deduction from gross income but in advertising and promotional expenses?
no case shall exceed:
1. For taxpayers engaged in sale of goods or properties – A: Sub-pro-ser
0.50% of net sales (i.e., gross sales less sales returns or 1. Substantiated with sufficient evidence;
allowances and sales discounts) 2. All payments for the purchase of promotional give-
2. For taxpayers engaged in sale of services, including aways, contest prizes or similar material must be
exercise of profession and use or lease of properties – properly receipted; and
1.00% of net revenue (i.e., gross revenue less 3. All payments for services such as radio and TV time,
discounts) print ads, talent fees, advertising expense or know-
3. For taxpayers deriving income from both sale of goods how must be subjected to withholding tax.
and services – the allowable deduction shall in all
cases be determined based on an apportionment Q: What are the (3) kinds of advertising and their
formula taking into consideration the percentage of deductibility?
the net sales/net revenue to the total net sales/net
revenue, but which in no case shall exceed the A:
maximum percentage ceiling provided (Sec. 5, RR 10- 1. Advertising to stimulate the CURRENT sale of
2002) merchandise or use of services are deductible as
3. Advertising to promote the sales of SHARES OF STOCK Q: How is interest as a deduction from gross income
or to create a corporate image IS not deductible as an defined? (1992 Bar Question)
advertisement (Domondon, Income Taxation Vol. 2,
2009) A: Interest shall refer to the payment for the use or
forbearance or detention of money, regardless of the name
Q: Algue, Inc. is a domestic corporation engaged in it is called or denominated. It includes the amount paid for
engineering, construction and other allied activities. the borrower’s use of money during the term of the loan,
Philippine Sugar Estate Development Company (PSEDC) as well as for his detention of money after the due date for
appointed Algue as its agent, authorizing it to sell its land, its repayment (Sec. 2 [a], RR 13-2000).
factories and oil manufacturing processes. Pursuant to
said authority and through the joint efforts of the officers REQUISITES FOR DEDUCTIBILITY
of Algue, they formed the Vegetable Oil Investment
Corporation, inducing other persons to invest in it. This Q: What are the requirements under the NIRC for interest
new corporation later purchased the PSEDC properties. to be deductible?
For this sale, Algue received as an agent a commission of
P125,000 and from this commission the P75,000 A: The following requirements must be met for interest to
promotional fees were paid to the officers of Algue. Is the be deductible:
promotional expense deductible? 1. There must be an indebtedness;
2. The indebtedness must be that of the taxpayer;
A: Yes, the promotional expense paid by PSEDC to Algue 3. The interest must be legally due and stipulated in
amounting to P75,000 is deductible for it was reasonable writing;
and not excessive. Algue proved that the payment of the 4. The interest must be paid or incurred during the
fees was necessary and reasonable in the light of the efforts taxable year;
exerted by the payees in inducing investors and prominent 5. The indebtedness must be connected with the
businessmen to venture in an experimental enterprise taxpayer’s trade, business, or exercise of profession;
(Vegetable Oil Investment Corporation) and involve 6. The interest arrangement must not be between
themselves in a new business requiring millions of pesos. related taxpayers.
(CIR v. Algue, GR L-28896 Feb. 17, 1988) 7. The allowable deduction have been reduced by an
amount equal to 33% of the interest income subject
POLITICAL CAMPAIGN EXPENSES to tax. (Sec. 34[B][1], NIRC as amended by Rep. 6337)
Q: What is the rule on deduction and withholding of Q: What are the deductible interest expenses?
campaign expenditures?
A: Interest:
A: All individuals, juridical persons and political parties, 1. On taxes, such as those paid for deficiency or
with respect to their income payments made as campaign delinquency, since taxes are considered indebtedness
expenditures and/or purchase of goods and services (provided that the tax is a deductible tax.) However,
intended as campaign contributions are constituted as fines, penalties, and surcharges on account of taxes
withholding agents for purposes of the creditable tax are not deductible. The interest on unpaid business
withheld on income payments (R.R. No. 8-2009). tax shall not be subjected to the limitation on
deduction
Note: A creditable income tax at the rate of 5% shall be withheld 2. Paid by a corporation on scrip dividends
on income payments made by political parties and candidates of
3. On deposits paid by authorized banks of the BSP to
local and national elections of all their campaign expenditures, and
income payments made by individuals or juridical persons for their
depositors, if shown that the tax on such interest was
purchases of goods and services intended to be given as campaign withheld
contribution to political parties and candidates (R.R. No. 8-2009). 4. Paid by a corporate taxpayer, liable on a mortgage
upon real property of which the said corporation is
TRAINING EXPENSES the legal or equitable owner, even though it is not
directly liable for the indebtedness
Grants for manpower training and special studies given to
rank-and-file employees pursuant to a program prepared
by the labor-management committee for development
skills identified as necessary by the appropriate
government agencies shall entitle the business enterprise
to a special deduction from gross income equivalent to fifty
UNIVERSITY OF SANTO TOMAS
79 FACULTY OF CIVIL LAW
Law on Taxation
NON-DEDUCTIBLE INTEREST EXPENSE INTEREST SUBJECT TO SPECIAL RULES
Q: What are considered “losses” for purposes of Q: X, a travelling salesman in Sulu. In the course of his
deductions from gross income? travel, a band of MNLF seized his car by force and used it
to kidnap a foreign missionary. The next day, the military
A: Losses actually sustained during the taxable year and not and the MNLF band had a chance encounter which caused
compensated for by insurance or other forms of indemnity. X’s car to be a total wreck. Can X deduct the value of his
(Sec. 34 D [1], NIRC)\ car from his income as casualty loss? (1993 Bar Question)
A: Absence of Creditor is not Bad Debt. Q: What factors will determine whether or not the debts
are bad debts? (2004 Bar Question)
REQUISITES FOR DEDUCTIBILITY
A: The factors to be considered include, but are not limited
Q: What are the general requisites for deductibility of bad to, the following:
debts? 1. The debtor has no property or visible income;
2. The debtor has been adjudged bankrupt or
A: UST-CAR insolvent;
1. The debts are Uncollectible despite diligent effort 3. There are numerous debtors with small amounts
exerted by the taxpayer; of debts and further action on the accounts
would entail expenses exceeding the amounts
Note: To prove that the taxpayer exerted diligent efforts to sought to be collected;
collect the debts:
4. The debt can no longer be collected even in the
1. Sending of statement of accounts;
2. Sending of collection letters; future; and
3. Giving the account to a lawyer for collection; and 5. Collateral shares have become worthless.
4. Filing a collection case in court.
Note: "Worthless" is not determined by an inflexible formula or
2. Existing indebtedness Subsisting due to the taxpayer slide rule calculation, but upon the exercise of sound business
judgment. In order that debts be considered as bad debts because
which must be valid and legally demandable;
they have become worthless, the taxpayer should:
3. Connected with the taxpayer’s Trade, business or i. Ascertain the debt to be worthless in the year for which
practice of profession; the deduction is sought.
4. Actually Charged off in the books of accounts of the ii. Act in good faith in ascertaining the debt to be worthless
taxpayer as of the end of the taxable year; (CIR v. Goodrich International Rubber Co., GR L-22265,
5. Actually Ascertained to be worthless and uncollectible Dec. 22, 1967).
as of the end of the taxable year; and
Q: Is the testimony of a CPA sufficient as substantial
Note: In lieu of requisite No. 5, the BSP, thru its evidence for the deductibility of a claimed worthless
Monetary Board, shall approve the writing off of said debt?
indebtedness from the banks’ books of accounts at the
end of the taxable year. A: No, mere testimony of a CPA explaining the
worthlessness of said debts is seen as nothing more than as
In no case may a receivable from an insurance or surety
a self-serving exercise which lacks probative value. Mere
company be written off from the taxpayer’s books and
claimed as bad debts deduction unless such company has allegations cannot prove the worthlessness of such debts.
been declared closed due to insolvency or for any such (Philippine Refining Co. v. CA, GR 118794, May 8, 1996)
similar reason by the Insurance Commissioner.
Q: Are “reserves for bad debts” deductible from gross
6. Must not be sustained in a transaction entered into income for income tax purposes?
between Related parties.
A: No, bad debts must be charged off during the taxable
Q: Who are related parties? year to be allowed as deduction from gross income. The
mere setting up of reserves will not give rise to any
A: deduction. (Sec. 34 [E], NIRC)
1. Members of the same family. (brothers and
sisters, whether whole or half-blood; spouse, EFFECT OF RECOVERY OF BAD DEBTS
ancestors, and lineal descendants)
2. An individual and a corporation more than fifty Q: What is the effect of recovery of bad debts?
percent (50%) in value of the outstanding stock of
which is owned, directly or indirectly, by or for A: The taxpayer is obliged to declare as taxable income
such individual subsequent recovery of bad debts in the year they were
3. Two corporations more than fifty percent (50%) collected to the extent of the tax benefit enjoyed by the
in value of the outstanding stock of each of which taxpayer when the bad debts were written off and claimed
is owned, directly or indirectly, by or for the same as deduction from gross income. This is the tax benefit rule
individual as applied to recovery of bad debts. It is also called the
4. The grantor and a fiduciary of any trust “Recapture Rule”.
Q: Who is entitled to claim depreciation expense? A: The annual depreciation is P4,500 computed as follows:
Acquisition cost less salvage value, then divide the
A: The person who sustains an economic loss from the difference by its useful life. [100,000 – 10,000 = 90,000]
decrease in property value due to depreciation which is then [90,000 / 20 = 4,500]
usually the owner. Non-resident aliens and foreign
corporations are allowed to deduct only when the property Q: What method shall be used in depreciation of
is located within the Philippines. (Sec. 34 [F], NIRC) properties used in petroleum operations?
Q: What are depreciable assets and non-depreciable A: It may either be straight line or declining balance
assets for tax purposes? method with a useful life of 10 years or shorter, as allowed
by the CIR.
A:
1. Depreciable Assets: Note: If the property is not directly related to production,
a. Tangible property used in trade or business depreciation is for 5 years using straight line method (Sec. 34 F
b. Intangible property like patent copyrights and [4], NIRC).
franchises
2. Non-depreciable Assets: Q: What method shall be used in depreciation of
a. Inventories or stock properties used in mining operations other than
b. Land petroleum operations?
c. Bodies of minerals subject to depletion
d. Personal effects and clothing A:
1. At the normal rate of depreciation if the expected life
METHODS FOR COMPUTING DEPRECIATION ALLOWANCE is less 10 years or less; or
2. Depreciated over any number of years between 5
Q: What are the methods of depreciation under the NIRC? years and the expected life if the latter is more than
10 years and the depreciation thereon is allowed as
A: deduction from taxable income.
1. Straight line method – The annual depreciation charge
is calculated by allocating the amount to be Provided, that the contractor notifies the CIR at the
depreciated equally over the number of years of the beginning of the depreciation period which depreciation
estimated useful life of the tangible. It results in a rate allowed will be used.
constant charge over the useful life.
Q: Z purchased fully depreciated machineries and entered
2. Declining balance method – accelerated method of the machineries in his books at P120,000. Based on the
depreciation which writes off a relatively larger independent appraisal and engineering report, Z assigned
amount of the asset’s cost nearer the start of its to the machineries an economic life of 5 years. Adopting
useful life than that of the straight line. the straight-line method, Z claimed a depreciation
deduction of P24,000 in his income tax return. Is the
A: Yes, the starting point for the computation of the A: These are: [GAFA]
deductions for depreciation is the reasonable cost of 1. Donations to the Government of the Philippines, or
acquiring the asset and its economic life. The fact that the political subdivisions including fully-owned
machineries were already depreciated by its original owner government corporation to be used exclusively in
does not matter. Z is allowed a depreciation allowance for undertaking priority activities in: [CHEESHY]
the exhaustion, wear and tear (including reasonable a. Culture
allowance for obsolescence) of the machineries which he is b. Health
using in his trade or business. (Sec. 34 [F], NIRC) c. Economic Development
d. Education
Q: Is depreciation of goodwill deductible from gross e. Science
income? (1999 Bar Question) f. Human Settlement
g. Youth and Sports development
A: GR: No, while intangibles may be allowed to be
depreciated or amortized, it is only allowed to those 2. Donations to Foreign institutions and international
intangibles whose use in the business or trade is definitely organizations in compliance with treaties and
limited in duration. Such is not the case in goodwill. agreements with the Government.
Q: What is optional standard deduction (OSD)? Q: Who may not avail of the OSD?
A:
Q: What are the rules in case of change of status during A: The events in the life of spouses, Mar and Joy, which
the taxable year? have income tax incidence are:
1. Their marriage in 1990 had no effect on their
A: If the taxpayer marries or should have additional entitlement to the basic personal exemption of
dependent during the the taxable year, he may claim the P50,000 which may be enjoyed irrespective of the
corresponding additional exemptions, as the case may be, individual taxpayer’s status;
in full for such year. 2. Their employment in 1991 by the same company will
make them liable to the income tax imposed on gross
If the spouse or any of the dependents dies of if any of compensation income;
such dependents marries, becomes 21 years old, or 3. Birth of their first child in 1992 would give rise to an
becomes gainfully employed during the taxable year, the additional exemption of P25,000 for taxable year
taxpayer may still claim the same exemptions as if the 1992;
dependend died, married, became 21 years old or became 4. Birth of their second child in 1993 would likewise
gainfully employed at the clos of such year. entitle them to claim additional exemption of P25,000
for 1993.
If the taxpayer dies during the taxable year, his estate may
claim the personal and additional exemptions for himself Note: If the spouses are qualified under “substituted filing,” they
and his dependents, as if he died at the close of such year. need not file Income Tax Returns.
3. Any amount expended in restoring property or in Q: Distinguish the tax treatment between a proprietary
making good the exhaustion thereof for which an educational institution and a non-stock non-profit
allowance is or has been made (Major Repairs) educational institution.
4. Premiums paid on any life insurance policy covering A: A non-stock non-profit educational institution is exempt
the life of any officer or employee, or of any person from tax on its revenues and assets actually, directly and
financially interested in any trade or business carried exclusively used for educational purposes (Sec. 30, NIRC).
on by the taxpayer, individual or corporate, when the
taxpayer is directly or indirectly a beneficiary under
such policy (Sec. 36 [A], NIRC)
5. Interest expense, bad debts, and losses from sales of
property between related parties
6. Losses from sales or exchanges of property (Sec. 36
[B], NIRC)
7. Non-deductible interest
XPNs:
a. Government Service Insurance System (GSIS);
b. Social Security System (SSS);
c. Philippine Health Insurance Corporation (PHIC);
d. Philippine Charity Sweepstakes Office (PCSO)
A: These are facilities or privileges furnished or offered by Note: All other benefits given by employers, which are not included
an employer to his employees that are of relatively small in the above enumeration shall NOT be considered as de minimis
value and are offered or furnished by the employer merely benefits, and hence, shall be subject to Income Tax as well as to
withholding tax on compensation income. The benefits provided in
as a means of promoting the health, goodwill, contentment
the Regulations shall apply to income earned starting the year
and efficiency of his employees. 2011 (R.R. No. 5-2011 issued March 16, 2011).
Q: What are included as de minimis fringe benefits and Q: What is the treatment in case of excess of the de
give their respective ceiling amounts? minimis benefits over their respective ceilings prescribed
by the revenue regulation?
A: As per RR 5-2011, de minimis benefits include:
Monetized unused Qualify: A: It shall be considered as part of “other benefits” under
vacation leave 1. Private employees: Sec. 32 B [7] e of the NIRC.
credits of employees a. Vacation leave - exempt
up to 10 days Note: Under Sec. 32 B [7] e of the NIRC, 13th month pay and other
b. Sick leave – always benefits are excluded from gross income provided that they do not
taxable exceed P30,000. Any excess thereof is considered part of the
2. Government employees: compensation income of an individual.
Vacation and sick leave
are always tax exempt Q: How de minimis benefits are taxed?
regardless of the number
of days. A: GR: De minimis benefits are not taxable.
Q: What are the housing privileges not treated as taxable Note: The same shall be considered as taxable
fringe benefit? compensation income subject to the tax imposed under
Sec. 24 of the NIRC.
A:
1. Housing privilege of military officials of the Armed Q: What are the situations whereby motor vehicle of any
Forces of the Philippines consisting of officials of the kind or the use thereof may be subject to FBT?
Philippine Army, Philippine Navy, and Philippine Air
Force. (Sec. 2.33 D [1] f, NIRC) A: Employer:
1. Purchases vehicle in employee’s name
Note: Benefit to said officials shall not be treated as taxable 2. Provides employee cash for vehicle purchase
fringe benefit in accordance with the existing doctrine that 3. Purchases car on installment in name of employee
the State shall provide its soldier with necessary quarters 4. Shoulders a portion of purchase price
which are within or accessible from the military camp so that
5. Owns and maintains a fleet of motor vehicle for use of
they can readily be on call to meet the exigencies of their
military service. business and employees
6. Leases and maintains a fleet of motor vehicles for the
2. A housing unit which is situated inside or adjacent to use of the business and employees
the premises of a business or factory.
Q: When is the use of motor vehicle not subject to taxable
Note: A housing unit is considered adjacent to the premises fringe benefits?
if it is located within the maximum 50 meters from the
perimeter of the business premises. A: The use of aircraft (including helicopters) owned and
maintained by the employer shall be treated as business
3. Temporary housing for an employee who stays in a use and not be subject to the fringe benefits tax.
housing unit for three (3) months or less. (Sec. 2.33 D
[1] g, RR 3-98) Q: What are the household expenses subject to FBT?
Q: What are the expenses treated as taxable fringe A: Expenses of the employee which are borne by the
benefits? employer for household personnel, such as salaries of
household help, personal driver of the employee, or other
1. Expenses incurred by the employee but which are similar personal expenses (like payment for homeowners
paid by his employer; association dues, garbage dues, etc.) shall be treated as
2. Expenses paid for by the employee but reimbursed by taxable fringe benefits. (Sec. 2.33 D [4], RR 3-98)
his employer
3. Personal expenses of the employee (like purchases of Q: Give the rules on “interest on loan at less than market
groceries for the personal consumption of the rate” as taxable fringe benefit.
employee and his family members) paid for or
reimbursed by the employer to the employee, A: If the employer lends money to his employees free of
whether or not the same are duly receipted for in the interest or at a rate lower than 12%, such interest foregone
name of the employer. by the employer or the difference of the interest assumed
4. Membership fees, dues, and other expenses borne by by the employee and the rate of 12% shall be treated as
the employer for his employee, in social and athletic fringe benefit.
clubs or other similar organizations shall be treated as
taxable fringe benefits of the employee in full. The rule shall apply to installment payments or loans with
interest rate lower than 12%. (Sec. 2.33 D [5], RR 3-98)
Q: Give the rules on “educational assistance to the 5. Reasonable business expenses which are paid for by
employee or dependents” treated as taxable fringe the employer for the foreign travel of his employee
benefit. for the purpose of attending business or conventions.
A: GR: The cost of the educational assistance to the 6. A scholarship grant to the employee by the employer
employee which is borne by the employer shall be treated if the education or study involved is directly
as taxable fringe benefit. connected with the employer’s trade, business or
profession, and there is a written contract between
XPN: A scholarship grant shall not be treated as them that the employee is under obligation to remain
taxable fringe benefit if: in the employ of the employer for period of time that
1. Education/study is directly connected with they have mutually agreed upon.
employer’s trade, business or profession; and
2. There is written contract that the employee 7. Cost of premiums borne by the employer for the
shall remain employed with the employer for a group insurance of his employees.
period of time mutually agreed upon by the
parties. (Sec. 2.33 D [9] b, RR 3-98) 8. Expenses of the employee which are reimbursed if
they are supported by receipts in the name of the
Q: Give the rules on “life or health insurance” treated as employer and do not partake the nature of a personal
taxable fringe benefit. expense of the employee
A: GR: The cost of life or health Insurance and other non- 9. Motor vehicles used for sales, freight, delivery service
life insurance premiums borne by the employer are taxable and other non-personal uses. (RR 3-98)
fringe benefits.
Q: What is the nature of a fringe benefit tax (FBT)?
XPNs:
1. Contributions of the employer for the benefit of A: It is a final withholding tax imposed on the grossed-up
employee to the SSS, GSIS, or similar monetary value (GMV) of fringe benefit furnished, granted
contributions arising from provisions of any or paid by the employer to the employee, except rank and
existing law. file employees. (Sec. 2.33 [A], RR 3-98)
2. The cost of premiums borne by the employer for
the group of insurance of employees. (Sec 2.33 It is a tax imposed on fringe benefits which are granted or
[D] 10, RR 3-98) are paid by an employer to an employee occupying a
managerial or supervisory position. (Dimaampao, Basic
Q: Are Stock Options subject to FBT? Approach to Income Taxation)
A: Yes, the basis is the difference between the fair market Q: What does the GMV represent?
value and the exercise price at the time of exercise.
A: It represents the whole amount of income realized by
Note: Employees receive stock options as part of their payment
the employee which includes the net amount of money or
for the services they rendered to their employer, which entitles
them to buy their employer’s shares of stock at an agreed price. net monetary value of property which has been received
plus the amount of fringe benefit tax thereon otherwise
Q: What are those benefits which are considered due from the employee but paid by the employer for and
necessary to the business of the employer or are granted in behalf of his employee. (Sec. 2.33, RR 3-98)
for the convenience of the employer?
Q: What are the specific guidelines for valuation of fringe benefits and the determination of the monetary value of the fringe
benefits?
A:
FRINGE BENEFITS VALUE OF THE BENEFIT MONETARY VALUE OF THE FRINGE BENEFIT
HOUSING PRIVILEGE
If the employer leases a residential The amount of rental paid thereon Fifty per cent (50%) of the value of the benefit.
property for the use of his employee by the employer, as evidenced by
and the said property is the usual the lease contract.
place of residence of the employee
If the employer owns a residential Five per cent (5%) of the market Fifty per cent (50%) of the value of the benefit.
property and the same is assigned for value of the land and
the use of his employee as his usual improvement, as declared in the The monetary value of the housing fringe
place of residence Real Property Tax Declaration benefit is equivalent to the following:
Form, or zonal value, whichever is
higher. MV = [5%(FMV or ZONAL VALUE] X 50%
Where:
MV = Monetary Value
FMV = Fair Market Value
If the employer purchases a Five per cent (5%) of the Fifty per cent (50%) of the value of the benefit.
If the employer purchases a The employer's acquisition cost or The entire value of the benefit.
residential property and transfers zonal value, whichever is higher.
ownership thereof in the name of the
employee
If the employer purchases a The difference between the fair The entire value of the benefit.
residential property and transfers market value, as declared in the
ownership thereof to his employee Real Property Tax Declaration
for the latter's residential use, at a Form, or zonal value, whichever is
price less than the employer's higher, and the cost to the
acquisition cost employee.
If the employer purchases the motor The acquisition cost thereof The entire value of the benefit, regardless of
vehicle in the name of the employee whether the motor vehicle is used by the
employee partly for his personal purpose and
partly for the benefit of his employer.
If the employer provides the The acquisition cost thereof The entire value of the benefit regardless of
employee with cash for the purchase whether the motor vehicle is used by the
of a motor vehicle, the ownership of employee partly for his personal purpose and
which is placed in the name of the partly for the benefit of his employer, unless the
employee same was subjected to a withholding tax as
compensation income under Revenue
Regulations No. 2-98.
If the employer purchases the car on The acquisition cost exclusive of The entire value of the benefit regardless of
installment basis, the ownership of interest, divided by five (5) years whether the motor vehicle is used by the
which is placed in the name of the employee partly for his personal purpose and
employee partly for the benefit of his employer.
If the employer shoulders a portion The value of the benefit shall be The entire value of the benefit regardless of
of the amount of the purchase price the amount shouldered by the whether the motor vehicle is used by the
of a motor vehicle the ownership of employer. employee partly for his personal purpose and
which is placed in the name of the partly for the benefit of his employer
employee
If the employer owns and maintains a The value of the benefit shall be The monetary value of the fringe benefit shall
fleet of motor vehicles for the use of the acquisition cost of all the be fifty per cent (50%) of the value of the
the business and the employees motor vehicles not normally used benefit.
for sales, freight, delivery service
and other non-personal used
divided by five (5) years.
If the employer leases and maintains The amount of rental payments The monetary value of the motor vehicle fringe
a fleet of motor vehicles for the use for motor vehicles not normally benefit is equivalent to the following:
of the business and the employees used for sales, freight, delivery,
service and other non-personal MV = [(A)/5] X 50%
use
Where:
MV = Monetary value
A = acquisition cost
The use of yacht whether owned and The value of the benefit shall be The monetary value of the fringe benefit shall
maintained or leased by the measured based on the be fifty per cent (50%) of the value of the
employer depreciation of a yacht at an benefit.
estimated useful life of 20 years.
A:
SALARY Fixed salary – Taxable
th
Other Benefits (ECOLA, 13 month pay, Christmas Bonus, Transportation/Representation
st
allowances, tips, etc) – the 1 PHP 30,000.00 is exempted from income tax, any excess is
taxable.
Transportation/Representation allowances
if there is liquidation, not taxable
if there is no liquidation, taxable.
SICK LEAVE/ VACATION If paid or availed of as salary of an employee who is on vacation or on sick leave
LEAVE/SERVICE notwithstanding his absence from work, it constitutes taxable compensation. (Rev. Reg. 6-82)
INCENTIVE LEAVE (SIL)
Monetized value of unutilized vacation leave credits of private employees (Rev. Reg. 2-98)
10 days or below – not taxable
Any excess over 10 days is taxable
Note: It does not include pre-terminated annuity and gratuity programs (they are taxable except if the
employee is more than 60 years old).
TERMINAL LEAVE They are not taxable regardless of whether the recipient is a government or private employee.
PAYMENTS
A: Under the Tax Code, as amended by RA 9504, there shall A: The term ‘statutory minimum wage’ shall refer to the
be allowed a basic personal exemption amounting to rate fixed by the Regional Tripartite Wage and Productivity
₱50,000 for each individual taxpayer regardless of whether Board, as defined by the Bureau of Labor and Employment
he is single, head of the family or married. Statistics (BLES) of the Department of Labor and
Employment (DOLE). (Sec. 22 (GG), NIRC, as amended by
Q: How much is the additional exemption for taxpayers? RA 9504)
In the case of married taxpayers, only the spouse claiming II 247 - 255 235 – 243 235 – 243
the additional exemption for dependents shall be entitled III 285 – 336 270 - 306 258 - 290
to this deduction. (Sec. 34 [M], NIRC) IV-A 255 - 349.50 251 - 324.50 231 - 304.50
Q: How much is the amount allowed? IV-B 205 – 275 215 – 225 215 - 225
V 228 – 252 228 228
A: The amount of premiums not to exceed P2,400 per
VI 235 - 277 245 235
family or P200 a month paid during the taxable year for
health and/or hospitalization insurance taken by the VII 282 – 327 262 – 309 262 – 309
taxpayer for himself, including his family, shall be allowed VIII 260 235 – 241 220.50
as deduction from gross income. (Sec. 34 [M], NIRC)
IX 267 242 222
Q: What are the conditions in order to avail said X 271 - 286 259 – 274 259 - 274
deduction? XI 301 291 291
A: XII 270 252 249
1. The health and/or hospitalization was taken by the XIII 258 248 228
taxpayer for himself, including his family; and
ARMM 232 232 232
2. That said family has a gross income of not more than
P250,000 for the taxable year. Source: National Wages and Productivity Commission
Note: Minimum wage earners shall be exempt from the c. If the Senior Citizen will pre-terminate his 5-year
payment of income tax on their taxable income Provided, long-term deposit or investment in the form of
further, That the holiday pay, overtime pay, night shift
savings, common or individual trust funds,
differential pay and hazard pay received by such minimum
wage earners shall likewise be exempt from income tax. deposit substitutes, investment management
(Sec24(A)(2), NIRC as amended by R.A. 9504) accounts and other investments evidenced by
certificates in such form prescribed by the Bangko
2. Senior Citizens – provided he/she is considered to be Sentral ng Pilipinas before the fifth year, he shall
minimum wage earner in accordance with Republic Act be subject to the final withholding tax imposed on
No. 9504. the entire income depending on the holding
3. Exemptions granted under international agreements period of the deposit or investment. If held for a
period of:
Q: Who is a senior citizen or an elderly? Four years to less than five years — 5%
Three years to less than four years — 12%;
A: A senior citizen is any Filipino citizen who is a resident of and
the Philippines, and who is sixty (60) years old or above. It Less than three years — 20%
may apply to senior citizens with “dual citizenship” status
provided they prove their Filipino citizenship and have at d. The 10% final withholding tax –
least six (6) months residency in the Philippines. (Sec 2, RR i. On cash and/or property dividends
7-2010) actually or constructively received from a
domestic corporation or from a joint stock
Q: What are the privileges granted to senior citizens for company, insurance or mutual fund
income tax purposes? company and a regional operating
headquarters of a multinational company;
A: G.R. Qualified Senior Citizens deriving returnable income or
during the taxable year, whether from compensation or ii. On the share of an individual in the
otherwise, are subject to income tax, and are required to distributable net income after tax of a
file their income tax returns and pay the tax as they file the partnership (except a general professional
return. partnership) of which he is a partner; or
iii. On the share of an individual in the net
XPNs: income after tax of an association, a joint
1. If the returnable income of a Senior Citizen is in account, or a joint venture or consortium
the nature of compensation income but he taxable as a corporation of which he is a
qualifies as a minimum wage earner under RA No.
9504;
UNIVERSITY OF SANTO TOMAS
105 FACULTY OF CIVIL LAW
Law on Taxation
member or a co-venturer (Sec. 24(B)(2), d. Aliens, whether resident or not, receiving income from
Tax Code). sources within the Philippines.
e. Capital gains tax from sales of shares of stock not Q: Who are the individuals not required to file an ITR?
traded in the stock exchange (Sec. 24(C), Tax
Code); and A:
1. An individual whose gross income does not exceed the
f. The 6% final withholding tax on presumed capital total personal and additional exemptions;
gains from sale of real property, classified as 2. An individual with respect to pure compensation
capital asset, except capital gains presumed to derived from sources within the Philippines, the
have been realized from the sale or disposition of income tax on which has been correctly withheld;
principal residence (Sec. 24(D), Tax Code). 3. An individual whose sole income has been subjected
to final withholding tax;
Q: How may a senior citizen avail tax exemption? 4. A minimum wage earner or who are exempt from
income tax. (Sec.51, NIRC)
A:
1. He must be qualified as such by the CIR or RDO of the Note: Individuals not required to file an income tax return may
place of his residence; nevertheless be required to file an information return. Under R.A.
9504, minimum wage earners are granted full tax exemption from
2. He must file a Sworn Statement on or before January
paying income tax.
31 of every year that his annual taxable income for the
previous year does not exceed the poverty level as
Q: What is the rule on married individuals’ tax return?
determined by the National Economic and
Development Authority (NEDA) thru the National
A: Married individuals, whether citizens, resident, or non-
Statistical Coordinating Board (NSCB);
resident aliens, who do not derive income purely from
3. If qualified, his name shall be recorded by the RDO in
compensation, shall file a return for the taxable year to
the Master List of Tax-Exempt Senior Citizens for that
include the income of both spouses. If it is impracticable to
particular year, which the RDO is mandatorily required
file one return, each spouse may file a separate return of
to keep.
income but the returns so filed shall be consolidated by the
Bureau for purposes of verification for the taxable year.
INDIVIDUAL TAX RETURN
(Sec. 51 [D], NIRC)
Q: Who are required to file an Income Tax Return (ITR)?
Q: What is the rule on income of unmarried minors /
children?
A: The following individuals are required to file an income
tax return:
A: GR: The income of unmarried minors derived from
a. Resident citizens receiving income from sources within
property received from a living parent shall be included in
or outside the Philippines
the return of the parent.
i. Individuals deriving compensation income from 2
or more employers, concurrently or successively
XPNs:
at anytime during the taxable year;
1. when the donor’s tax has been paid on such
ii. Employees deriving compensation income
property or
regardless of the amount, whether from a single
2. when the transfer of such property is exempt
or several employers during the calendar year,
from donor’s tax. (Sec. 51 [E], NIRC)
the income tax of which has not been withheld
correctly resulting to collectible or refundable
Q: Who may file a return for the disabled taxpayer?
return;
iii. Employees whose monthly gross compensation
A: If the taxpayer is unable to make his own return, the
income does not exceed 5,000 or the statutory
return may be made by his duly authorized agent or
minimum wage, whichever is higher, and opted
representative or by the guardian or other person charged
for non-withholding of tax on said income;
with the care of his person or property, the principal and
iv. Individuals deriving non-business, non-
the representative or guardian assuming the responsibility
professional related income in addition to
of making the return and incurring penalties provided for
compensation income not otherwise subject to a
erroneous, false or fraudulent returns. (Sec. 51[F], NIRC)
final tax;
v. Individuals receiving purely compensation income
Q: Where to file the ITR?
from a single employer, although the income of
which has been correctly withheld, but whose
A: Except in cases where the Commissioner otherwise
spouse is not entitled to substituted filing.
permits, the return shall be filed with any authorized agent
b. Non-resident citizens receiving income from sources
bank, Revenue District Officer, Collection agent or duly
within the Philippines.
authorized Treasurer of the municipality or city where such
c. Citizens working abroad receiving income from
person has his legal residence or principal place of business
sources within the Philippines.
or if there be no legal residence or principal place of
Q: When do individuals subject to capital gains tax file a TAXATION OF DOMESTIC CORPORATIONS
tax return?
Q: What are the elements of a corporate income tax?
A:
1. From the sale or exchange of shares of stock not A:
traded thru a local stock exchange as prescribed under 1. Two or more owners;
Section 24 (C) shall file a return within 30 days after 2. The owners must contribute money to a common
each transaction and a final consolidated return on or fund;
before April 15 of each year covering all stock 3. There is habituality, continuity in the conduct of
transactions of the preceding taxable year; and business.
2. From the sale or disposition of real property under
Section 24 (D) shall file a return, within 30 days Note: If one or more elements of corporate income tax are
following each sale or other disposition. (Sec. 51 not present, the co-owner shall be taxed separately,
[C][2], NIRC) independently, individually based on their distributive share.
A:
TAXABILITY OF INCOME
DERIVED FROM SOURCES
CORPORATE TAXPAYER IS A:
Within the Outside the TAX BASE RATE
Philippines Philippines
Domestic Corporation √ √ Net taxable income 30%
Resident Corporation (Foreign Corporation √
Engaged in Business and Trade) X Net taxable income 30%
Non-resident Foreign Corporation √ X Gross income 30%
Special Domestic Corporations √ √ Net taxable income
1. Proprietary educational 10%
institutions
XPN: Those whose gross income
from unrelated sources exceeds
50% of their total gross income
2. Non-profit hospitals 10%
3. Government-owned or 30%
controlled corporations
4. Exempt government institutions Tax-exempt
Q: To what corporations is the minimum corporate Q: Is MCIT an additional tax to the regular or normal
income tax (MCIT) applicable? income tax?
A: It is applicable to domestic and resident foreign A: No, it is not an additional tax. At the end of the taxable
corporations which are subject to regular (normal) income quarter, the MCIT is compared with the regular income tax
tax. which is due from a corporation. If the regular income is
higher than the MCIT, then the corporation does not pay
Note: Under its charter, Philippine Airlines is exempt from the the MCIT. Newly established firms, or those which are on
MCIT. (CIR v. Philippine Airlines, Inc., GR 180066, July 7, 2009) their first three years of operations are not covered by the
MCIT.
IMPOSITION OF MCIT
Q: What are the instances when the MCIT is imposed?
Q: Explain the concept and rationale of the MCIT
A: The MCIT shall be imposed:
A: The MCIT came about as a result of the perceived 1. When there is zero or negative taxable income; or
inadequacy of the self-assessment system in capturing the 2. Whenever the amount of the minimum corporate
true income of corporations. It was devised as a relatively income tax is greater than the normal tax of 30%
simple and effective revenue-raising instrument compared due on the taxable income of the corporation.
to the normal income tax which is more difficult to control
and enforce. It is a means to ensure that everyone will
UNIVERSITY OF SANTO TOMAS
109 FACULTY OF CIVIL LAW
Law on Taxation
Q: When does MCIT commence? (CREBA, Inc. v. Romulo, et al., GR 160756, Mar. 9,
2010)
A: The MCIT is imposed beginning on the fourth taxable
year immediately following the year in which the CARRY FORWARD OF EXCESS MINIMUM TAX
corporation commenced its business operations. The
period of reckoning the start of its business operations is Q: What is the carry-forward provision under the MCIT?
the year when the corporation was registered with the BIR
regardless of whether the corporation is using the calendar A: Any excess of MCIT over the NCIT may be carried
or fiscal year as its taxable year. (Sec. 27 E [1], NIRC) forward on an annual basis and credited against the NCIT
for the three (3) immediately succeeding taxable years (Sec.
Q: Why is MCIT imposed only on the fourth taxable year 27 E [2], NIRC)
following the commencement of its operations?
Q: Illustrate the carry-forward provision under the MCIT
A: Recognizing the birth pangs of businesses and the reality
of the need to recoup initial major capital expenditures, the A:
imposition of the MCIT commences only on the fourth EXCESS
taxable year immediately following the year in which the Normal TAX
of MCIT
Corporate PAYABLE
corporation commenced its operations. This grace period YR MCIT over the
allows a new business to stabilize first and make its Income (whichever
Normal
Tax is higher)
ventures viable before it is subjected to the MCIT. Tax
07 85,000 100,000 100,000 15,000
Q: When is MCIT reported and paid? 08 80,000 120,000 120,000 40,000
09 100,000 50,000 100,000
A: The MCIT shall be paid in the same manner prescribed
for the payment of the normal corporate income tax which
is on a quarterly and on a yearly basis.The taxpayer shall Computation of the net tax due and payable for the year
pay the MCIT whenever it is greater than the regular or 2009:
normal corporate income tax.
Tax Payable 100,000
The MCIT shall likewise apply to the quarterly corporate Less: 2007 excess MCIT: 15,000
income tax but the final comparison between the NCIT 2008 excess MCIT: 40,000
payable by the corporation and the MCIT shall be made at 55,000
the end of the taxable year and the payable or excess Net tax due and payable: 45,000
payment in the Annual Income Tax Return shall be
Note: A corporation shall pay the NCIT or MCIT whichever is
computed taking into consideration corporate income tax
higher.
payment made at the time of filing of quarterly corporate
income tax return whether this be MCIT or normal income In 2007 and 2008, the corporation is liable to pay the MCIT since it
tax. (RR 12-2007) is greater than the normal income tax. The excess of MCIT over
the NCIT shall be carried over and shall be credited against the
Q: Can the company claim the MCIT it paid as a deduction normal tax for the three (3) immediately succeeding taxable years.
from gross income?
In 2009, the corporation shall pay the normal income tax of
P100,000. However, the corporation can credit the MCIT carry-
A: No. Since MCIT is an estimate of the normal income tax,
forward of P15,000 and P40,000 for the years 2007 and 2008
it cannot be claimed as a deduction. respectively, for a total of P55,000. Thus, the amount of net
income tax payable for the year 2009 is P45,000, i.e., P100,000
Q: CREBA assails the constitutionality of MCIT on the less P55,000.
contention that it violates due process. Is the imposition
of MCIT unconstitutional? Q: What are the rules on carry-forward of the excess
MCIT?
A: No, the imposition of MCIT is not violative of due process
for the following reasons: A:
1. MCIT is imposed on gross income and not on capital. 1. The excess of MCIT over the NCIT can be carried
Thus, it is not arbitrary or confiscatory. forward on an annual or quarterly basis.
2. It is not an additional tax imposition but is imposed in 2. The excess can be credited against the NCIT due for
lieu of normal net income tax and only if said tax is the three (3) immediately succeeding taxable years.
suspiciously low. 3. Any excess not credited in the next three years shall
3. There is no legal objection to a broader tax base or be forfeited.
taxable income resulting from the elimination of all 4. Carry forward (annually or quarterly) is possible only if
deductible items and, at the same time, reduction of MCIT is greater than NCIT.
the applicable tax rate. In as much as deductions are a The maximum amount that can be credited is only up to the
matter of legislative grace, Congress has the power to amount of the NCIT, there can be no negative NCIT.
condition, limit or deny deductions from gross income
in order to arrive at the net that it chooses to tax.
3. Legitimate Business Reverses – include substantial A: The President, upon recommendation by the Secretary
losses due to fire, theft or embezzlement or for other of Finance may, effective Jan. 1, 2000, allow domestic
economic reason as determined by the Secretary of corporations the option to be taxed at 15% of gross income
Finance. (Sec. 27 E [3], NIRC) subject to the following conditions:
1. A tax effort ratio of 20% of GNP;
CORPORATIONS EXEMPT FROM THE MCIT 2. A ratio of 40% of income tax to total tax revenue;
3. A VAT tax effort of 4% of GNP;
Q: What are those corporations which do not fall within 4. A 0.9% ratio of Consolidated Public Sector Finance
the coverage of MCIT? Position to GNP. (Sec. 27 [A], NIRC)
Note: The MCIT does not apply to the foregoing since they are A: In the case of a domestic corporation whose operations
subject to different preferential tax rates and not to the regular or activities are partly covered by the regular income tax
income tax rates under the Tax Code. system and partly covered under a special income tax
system, the MCIT will apply on operations covered by the
Q: What are the limitations on the applicability of MCIT? regular income tax system. For example, if a BOI-registered
enterprise has a "registered" and an "unregistered"
A: activity, the MCIT shall apply to the unregistered activity.
1. MCIT does not apply if the domestic or resident (RR 9-98)
corporation is not subject to NCIT.
2. In the case of a domestic corporation whose ALLOWABLE DEDUCTIONS
operations or activities are partly covered by the
regular income tax system and partly covered under a *See page 72 for the discussion on allowable deductions.
special income tax system, the MCIT shall apply only
Q: What are the special domestic corporations under the A: Special deductions are allowed to insurance companies
NIRC? under Sec. 37 of the NIRC.
A: These are the domestic corporations that are subject to The net additions, if any, required by law to be made
concessionary tax rates that are lower than those imposed within the year to reserve funds and the sums other than
upon ordinary domestic corporations. Among such special dividends paid within the year on policy and annuity
domestic corporations are: contracts may be deducted from their gross income.
1. Proprietary educational institutions
2. Non-profit hospitals Q: How are depositary banks under the expanded foreign
3. Insurance companies currency deposit system taxed?
4. Depositary banks
5. GOCCs, government instrumentalities or agencies A: GR: They are exempt from all taxes.
6. Franchise holders
XPNs:
Q: What is the Predominance Rule? 1. Final tax of 10% on interest income from
foreign currency loans granted by such
A: When the income realized from tuition or hospital depositary banks under the expanded
services is higher than the income from unrelated trade, foreign currency deposit system, to
business, or other activity, special domestic corporations residents other than offshore units in the
shall be taxed at 10%. Otherwise, those corporations shall Philippines or other depositary banks under
be taxed at the regular rate of 30%. the expanded system.
Note: Those corporations should segregate their income realized 1. Net income from such transactions as may
from tuition/hospital services and their income realized from allied be specified by the Monetary Board to be
services (dormitory, canteen, gymnasium, pharmacy, small grocery subject to the regular income tax payable by
store). banks.
Q: How are proprietary educational institutions and non- TAX ON GOVERNMENT-OWNED OR CONTROLLED
profit hospitals treated? CORPORATIONS (GOCC), AGENCIES OR
INSTRUMENTALITIES
A: GR: They shall pay a tax of 10% on their taxable income
except those passive income covered by Sec. 27 [D] of the GR: The rules governing domestic corporations engaged in
NIRC. (Sec. 27 [B], NIRC) a similar business, industry or activity shall apply.
Note: The basis of the 100% threshold of retention Q: If the profit which has been subjected to IAET is not
(considered within the reasonable needs of the declared as dividend in later years, can it be subjected
business) shall be the paid up capital or the amount again to IAET?
contributed to the corporation representing the par
value of the shares of stock. Any excess capital over A: No, once the profit has been subjected to IAET, the
and above the par (APIC/Premium) shall be excluded. same shall no longer be subjected to IAET in later years
(RMC No. 35-2011) even if not declared as dividend. Notwithstanding the
imposition of the IAET, profits which have been subjected
2. Earnings reserved for definite corporate expansion to IAET, when finally declared as dividends shall
approved by the Board of Directors or equivalent nevertheless be subject to tax on dividends imposed under
body. the NIRC except in those instances where the recipient is
3. Reserved for building, plants or equipment acquisition not subject thereto. (Sec. 5, RR 2-2001)
as approved by the Board of Directors or equivalent
body. Q: To whom is IAET imposed?
4. Reserved for compliance with any loan covenant or
pre-existing obligation. A: Upon a domestic corporation and closely-held
5. Earnings required by law or applicable regulations to corporations which is formed or availed of for the purpose
be retained. of avoiding the income tax with respect to its shareholders
6. In case of subsidiaries of foreign corporations in the or the shareholders of any other corporation by permitting
Philippines, all undistributed earnings intended or earnings and profits to accumulate instead of dividing or
reserved for investments within the Philippines. distributing it.
Q: What are the prima facie instances of accumulation of Note: IAET does not apply to the following:
profits beyond the reasonable needs of a business? 1. Publicly-held corporations (Sec. 29 B [2], NIRC)
2. Banks, other non-bank financial intermediaries
A: 3. Insurance companies
1. Investment of substantial earnings and profits of the 4. Publicly-held corporations
5. Taxable partnerships
corporation in unrelated business or in stock or
6. General professional partnerships
securities unrelated business. 7. Non- taxable joint ventures
2. Investment in bonds and other long term securities. 8. Enterprises duly registered with the Philippine Economic
Zone Authority under R.A. 7916, and enterprises
CORPORATE RETURNS Q: What are the options of the corporation if the sum of
the quarterly tax payments made during the taxable year
Q: Who are required to file a Corporate Tax Return? is not equal to the total tax due on the entire taxable
year?
A: GR: Every corporation subject to tax under the NIRC shall
file a corporate tax return. A:
1. Pay the balance of tax still due; or
XPN: Foreign corporations not engaged in trade or 2. Carry-over the excess credit;
business in the Philippines (Sec. 52, NIRC) 3. Be credited or refunded with the excess amount paid,
as the case may be. (Sec. 76, NIRC)
Q: What are the requirements for corporations in filing
their returns? Note: In case the corporation is entitled to a tax credit or refund of
the excess estimated quarterly income taxes paid, the excess
amount shown on its final adjustment return may be carried over
A: Every corporation subject to the tax under the code, and credited against the estimated quarterly income tax liabilities
except foreign corporation not engaged in trade or for the taxable quarters of the succeeding taxable years. (Sec. 76,
business, shall render, induplicate, a true and accurate NIRC)
quarterly income tax return and final or adjustment return.
The returns shall be filed by the president, vice-president or Q: Is the option of carry- over exclusive?
other principal officer, and shall be sworn to by such officer
and by the treasurer or assistant treasurer. (Sec. 52, NIRC) A: Yes. Once the option to carry-over and apply the excess
quarterly income tax against income tax due for the taxable
Q: What shall be the accounting period that a corporation quarters of the succeeding taxable quarters has been made,
may employ as its basis for filing its annual income tax such option shall be considered irrevocable for the taxable
return? period and no application for cash refund or issuance of tax
credit certificate shall be allowed. (Sec. 76, NIRC)
A: A corporation may employ either a calendar year or
fiscal year, provided, that the corporation may not change Q: What is the importance of the Final Adjustment Return
the accounting period employed without prior approval to the refund of erroneously paid taxes?
from the Commissioner in accordance with the provisions
os Section 47 of the NIRC. (Sec. 52 [B]) A: The two year period shall be computed from the time of
filing the adjustment return or annual income tax return
and final payment of income tax. (Atlas Consolidated v. CIR,
June 8, 2007)
Q: Where does a corporation file the tax returns? Note: A GPP is not subject to income tax, but it is required to file a
return of its income for the purpose of furnishing information as to
the share in the gains or profits which each partner shall include in
A: The quarterly income tax return and final adjustment
his individual return. The individual partner is taxable on his
return shall be filed with the authorized agent banks or distributive share of the net income of the partnership, whether
Revenue District Officer or Collection agent or duly distributed or not, and are required to include such distributive
authorized treasurer of the city or municipality having shares in their individual returns (Sec. 22, Regs. No. 2 as amended).
jurisdiction over the location of the principal office of the
corporation filing the return or place where its main books Q: What are the rules governing Fiduciary Returns?
of accounts and other data from which the return is
prepared are kept. (Sec. 77[A], NIRC) A: Guardians, trustees, executors, administrators, receivers,
conservators and all persons or corporations, acting in any
Q: Is an extension of time allowed in the filing of return? fiduciary capacity, shall render, in duplicate, a return of the
income of the person, trust or estate for whom or which
A: Yes. The Commissioner, may, in meritorious cases, grant they act, in case such person, trust, estate has a gross
a reasonable extension of time for filing returns of income income of 20,000 pesos or over during the taxable year.
(or final and adjustment returns in case of corporations),
subject to the provisions of Section 56 of the NIRC. (Sec.53, Such fiduciary or person filing the return for him or it, shall
NIRC) take oath that he has sufficient knowledge of the affairs of
such person, trust or estate to enable him to make such
Q: What is required from a Corporation Contemplating return and that the same is, to the best of his knowledge
Dissolution or Reorganization as regards the filing of and belief, true and correct, and subject to the provisions
return? applicable to individual taxpayers under Title II of the NIRC.
A: Every corporation shall, within 30 days after the Note: The return made by or for one or two or more joint
adoption by the corporation of a resolution or plan for its fiduciaries filed in the province where such fiduciaries reside, shall
dissolution; or for the liquidation of the whole or any part be a sufficient compliance with the requirements of Sec. 65, NIRC.
of its capital stock, including a corporation which has been
Furthermore, trustees, executors, administrators and other
notified of possible involuntary dissolution by the SEC; or
fiduciaries are indemnified against the claims or demands of every
for its reorganization, shall render a correct return to the beneficiary for all payments of taxes which they shall be required
Commissioner, verified under oath, setting forth the terms to pay, and they shall have credit for the amount of such payments
of such resolution or plan and such other information as against the beneficiary or principal in any accounting which they
the Secretary of Finance, upon recommendation of the make as such trustees or other fiduciaries. (Sec. 66, NIRC)
Commissioner, shall by rules and regulations, prescribe.
(Sec. 52[C], NIRC) In the Philippines any share, obligation, bond or right by way of gift
inter vivos or mortis causa, legacy or inheritance, unless a
Note: The dissolving or reorganizing corporation, shall prior to the certification from the Commissioner that the taxes fixed in this
issuance by the SEC of the certificate of dissolution or Title and due thereon have been paid is shown. (Sec. 97, NIRC)
Reorganization, secure a certificate of tax clearance from the BIR
which shall be submitted to the SEC. (Sec. 52[C], NIRC)
Q: What other corporations are exempted from income A: It is equal to each partner’s distributive share of the net
tax under special laws? income declared by the partnership for a taxable year after
deducting the corresponding corporate income tax.
A:
1. Cooperatives under R.A. 6938, the Cooperative Code Note: In a business partnership, there is no constructive receipt of
of the Philippines distributive share in the net income.
2. Foundations created for scientific purposes under Sec.
24 of R.A. 2067, an Act to Integrate, Coordinate, and WITHHOLDING TAX
Intensify Scientific and Technological Research and
Development and to Foster Invention Q: What is the “withholding tax system?”
c. Withholding of Business Tax (VAT and The finality of the withholding tax is limited only to the
Percentage) payee's income tax liability on the particular income. It
does not extend to the payee's other tax liability on said
d. Withholding Tax on Government Money income, such as when the said income is further subject to
Payments a percentage tax. For example, if a bank receives income
It is the withholding tax withheld by subject to final withholding tax, the same shall be subject
government offices and instrumentalities, to a percentage tax. (Sec. 2.57 (A), R.R. 2-98)
including government-owned or –controlled
corporations and local government units, Q: Distinguish creditable withholding tax from final
before making any payments to private withholding tax.
individuals, corporations, partnerships
and/or associations. A:
CREDITABLE WITHHOLDING FINAL WITHHOLDING
i. Percentage Taxes – is the tax withheld TAX TAX
by National Government Agencies As to income subject of the system
(NGAs) and instrumentalities, including Compensation Income Passive incomes
government-owned and controlled Professional/talent fees Fringe benefits
corporations (GOCCs) and local Rentals
government units (LGUs), before Cinematographic film rentals
making any payments to non-VAT and other payments
registered taxpayers/suppliers/payees Income payments to certain
contractors
ii. Value Added Taxes (VAT) – is the tax As to whether or not income should be reported as part
withheld by National Government of the gross income
Agencies (NGAs) and instrumentalities, The employee is required to The recipient may not
including government-owned and include the income in his report the said income
controlled corporations (GOCCs) and gross income in his gross income
local government units (LGUs), before because the tax
making any payments to VAT registered withheld constitutes
taxpayers/suppliers/payees on account final and full settlement
of their purchases of goods and of the tax liability
services. As to the effect of the tax withheld
The tax withheld can be The tax withheld cannot
2. Final Withholding Tax claimed as a tax credit or may be claimed as tax credit
be deducted from the tax due
Q: Explain the creditable withholding tax system. or payable
As to filing of ITR
A: Under the creditable withholding tax system, taxes The earner is required to file If the only source of
withheld on certain income payments are intended to an ITR. income is subject to
equal or at least approximate the tax due of the payee on final tax, no need to file
said income. The income recipient is still required to file an an ITR on the part of the
income tax return, as prescribed in Sec. 51 and Sec. 52 of earner
the NIRC, as amended, to report the income and/or pay
the difference between the tax withheld and the tax due
on the income. Taxes withheld on income payments
covered by the expanded withholding tax and
compensation income are creditable in nature. (Sec. 2.57
(B), R.R. 2-98)
Q: What is the consequence if the actual input VAT A: A withholding agent is a separate entity acting no more
exceeds 7%? than an agent of the government for the collection of tax in
order to ensure its payments.
A: Should actual input VAT attributable to sale to
government exceeds seven percent (7%) of gross payments, Note: A withholding agent is explicitly made personally liable
the excess may form part of the sellers’ expense or cost. On under Sec. 251, NIRC for the payment of the tax required to be
the other hand, if actual input VAT attributable to sale to withheld, in order to compel the withholding agent to withhold
government is less than seven percent (7%) of gross the tax under any and all circumstances. In effect, the
payment, the difference must be closed to expense or cost. responsibility for the collection of the tax as well as the payment
thereof is concentrated upon the person over whom the
Government has jurisdiction. (Filipinas Synthetic Fiber Corporation
Q: What is the effect of withholding by a resident VAT- v. CA, et al., GR 118498 & 124377, Oct. 12, 1999)
registered withholding agent?
Q: May a withholding agent bring a claim for refund or tax
A: VAT withheld and paid for the non resident recipient credit of erroneously withheld tax?
which VAT is passed on to the resident withholding agent
by the non-resident recipient of the income, may be A: Yes, in applications for refund, the withholding agent is
claimed as input tax by said VAT-registered withholding considered a taxpayer because if he does not pay, the tax
agent upon filing his own VAT Return, subject to the rule on shall be collected from him. (CIR v. Procter & Gamble
allocation of input tax among taxable sales, zero-rated sales Philippine Manufacturing Corporation, GR L-66838, Dec. 2,
and exempt sales. 1991)
XPN: In the case of a minimum wage earner. (Sec. 79 [A], TIMING OF WITHOLDING
NIRC)
Q: When does the obligation to deduct and withhold
Q: What are the elements of withholding on arise?
compensation?
A: At the time the income is paid or payable or accrued or
A: There must be: recorded as an expense or asset whichever is applicable in
1. An employer-employee relationship; the payor’s books, whichever comes first. (Sec. 2.57.4 of RR
2. Payment of compensation or wages for services 2-98 as amended by Sec. 4 of RR 12-2001)
rendered; and It is payable when the obligation becomes due,
3. A payroll period. demandable or legally enforceable.
Q: What are exempted from Withholding Tax on Q: How are withholding taxes withheld and remitted?
Compensation?
A: Taxes deducted and withheld by withholding agents
A: shall be covered by a return and paid to, except in cases
1. Remuneration as an incident of employment where the CIR otherwise permits, an authorized Treasurer
2. Retirement benefits received under RA 7641 of the municipality or city where the withholding agent has
3. Any amount received by an official or employee or by his legal residence or principal place of business, or where
his heirs from the employer due to death, sickness or the withholding agent is a corporation, where the principal
other physical disability or for any cause beyond the office is located. The taxes deducted and withheld by the
control of the said official or employee such as withholding agent shall be held as a special fund in trust for
retrenchment, redundancy or cessation of business the government until paid to the collecting officers. (Sec.
4. Social security benefits, retirement gratuities, 58{A], NIRC)
pensions and other similar benefits
5. Payment of benefits due or to become due to any Q: What are the violations resulting from non-compliance
person residing in the Philippines under the law of the of obligations under the withholding tax system?
US administered US Veterans Administration
6. Payment of benefits made under the SSS Act of 1954, A: Non-compliance with these obligations would result in
as amended the following violations:
7. Benefits received from the GSIS Act of 1937, as 1. Non-withholding – when there is failure to withhold
amended, and the retirement gratuity received by the tax on the taxable income of the employee.
government employee
8. Remuneration paid for agricultural labor
Depending on the violation, the penalties may vary from A: The employer’s:
collection of surcharge, interest and in certain cases, 1. Failure or refusal to file the withholding exemption
compromise penalty in lieu of criminal liability. (RMC 21- certificate
2010) 2. False and inaccurate information
BASIC PRINCIPLES
A:
TRANSFER TAX INCOME TAX
Upon What Imposed
Tax on transfer of property Tax on income
Rates Applicable
Rates are lower Rates of individual income
1. Estate tax - 5% to 20% taxes are higher - 5% to 32%
2. Donor’s Tax - 2% to 15%
or 30%
Exemptions
Lesser exemptions More exemptions
A:
1. Estate tax
2. Donor’s tax
A:
DONOR’S TAX ESTATE TAX
Nature of transfer
During the lifetime of the donor. After death of decedent
May take place between natural and juridical persons
Transfer takes place only between natural persons
Amount exempt
P100,000 P200,000
Rate of tax
2-15% 5-20%
Grant of exemption
Sec. 101, NIRC Yes. Sec .87, NIRC
Grant of deductions
GR: None Yes. Sec 86, NIRC
A: The manner by which a person takes step to conserve 6. Progressive – the rate increases as the tax base
the property to be transmitted to his heirs by decreasing increases. (Sec. 84, NIRC)
the amount of estate taxes to be paid upon his death.
It is considered as lawful because, “the legal right of a Q: What are the theories for the imposition of estate tax?
taxpayer to decrease the amount of what otherwise would
be his taxes or altogether avoid them by means which the A:
law permits, cannot be doubted.”(Delpher Trades 1. Benefits-protection theory – based on the power of the
Corporation v. IAC, et al. G.R. No. 73584, Jan. 28, 1988) State to demand and receive taxes on the reciprocal
duties of support and protection i.e. distribution of the
Q: A law was passed by Congress abolishing estate tax. Is estate of the decedent;
the law valid?
2. Privilege theory/State-partnership theory – the State,
A: Yes, it is in the nature of a tax exemption. Settled is the as a passive and silent partner in the privilege of
rule that the power to tax includes the power to grant an accumulating property, has the right to collect the share
exemption. which is properly due it;
A: They are excise taxes; not property taxes. 4. Redistribution of wealth – receipt of inheritance
contributes to the widening inequalities in wealth. By
Note: They are not property taxes because their imposition does imposing estate tax, the value received by the successor is
not rest upon general ownership but rather they are privilege tax thereby reduced and brings said value into the coffers of
since they are imposed on the act of passing ownership of the government
property.
Q: What are the requisites for the imposition of Estate
Q: What are the characteristics of estate tax? Tax?
A: A: DSD
1. Excise tax – it is a tax imposed upon the privilege of 1. Death of decedent;
transferring property or shifting of economic benefits and 2. Successor is alive at the time of decedent’s death; and
enjoyment of the property from the dead to the living; 3. Successor is not Disqualified to inherit.
Note: The estate tax accrues as of the death of the decedent. The DETERMINATION OF GROSS AND NET ESTATE
accrual of the tax is distinct from the obligation to pay the same
which is 6 months after the death of the decedent. Q: How is the gross estate determined?
CLASSIFICATION OF DECEDENT A:
1. If the decedent is a resident or non-resident citizen,
Q: Who are the taxpayers liable to pay estate tax? or a resident alien – All properties, real or personal,
tangible or intangible, wherever situated.
A: Only individuals - 2. If the decedent is a non-resident alien – Only
1. Resident decedent properties situated in the Philippines provided that,
a. Resident citizen intangible personal property is subject to the rule of
b. Non-resident citizen reciprocity provided for under Section 104 of the
c. Resident alien NIRC. (Section 85, NIRC)
2. Non-resident decedent
a. Non-resident alien Q: How is the net estate determined?
Note: Domestic and foreign corporations are subject only to A: The same rule as the gross estate and afterwards
donor’s tax and not to estate tax because it is not capable of death
subtracting the allowable deductions from the gross estate.
but may enter into a contract of donation.
GROSS ESTATE vis-a-vis NET ESTATE Q: Tong Siok, a Chinese billionaire and a Canadian
resident, died and left assets in China valued at P80 billion
Q: What is the estate tax formula? and in the Philippines assets valued at P20 billion. For
Philippine estate tax purposes the allowable deductions
A: for expenses, losses, indebtedness, and taxes, property
Gross estate( Sec. 85) previously taxed, transfers for public use, and the share of
Less: (1) Deductions (Sec 86) his surviving spouse in their conjugal partnership
____ (2) Net share of the surviving spouse amounted to P15 billion. Tong's gross estate for Philippine
Net Estate estate tax purposes is? (2011 Bar Question)
x Tax rate(Sec. 84)__________________
Estate tax due A: P20 billion. Being a non-resident alien, the estate tax to
Less: Tax credit (if any) (Sec. 86(E) or 110(B)) be paid will be based on his properties situated in the
Estate Tax Due, if any Philippines. The deductions are not included since the
question pertains to gross estate, not the net estate.
Q: What are the instances where amount of the gross
estate is significant? Note: Gross estate tax is arrived at after adding all those included
and deducting the exclusions while net estate is arrived at after
subtracting the allowable deductions from the gross estate.
A:
1. Where the value of the gross estate exceeds P20,000,
Q: What is the basis for the valuation of gross estate?
the executor, administrator or any legal heirs, as the
case may be, within two (2) months after the
A:
decedent’s death, or within like period after qualifying
as such executor or administrator, shall give a written PROPERTY VALUATION
notice thereof to the Commissioner (Sec. 89, NIRC). As to real Whichever is higher between the fair
property market value:
2. In all cases of transfers subject to the tax imposed 1. as determined by the Commissioner
herein, or where, though exempt from tax, the gross (zonal value) or
value of the estate exceeds Two hundred thousand 2. as shown in the schedule of values
pesos (P200,000), or regardless of the gross value of fixed by the provincial and city
the estate, where the said estate consists of registered assessors
or registrable property such as real property, motor * if there is no zonal value, use the
vehicle, shares of stock or other similar property for FMV in the latest tax declaration.
As to Whether tangible or intangible, appraised 3. Shares, obligations or bonds by any foreign corporation
personal at FMV. “Sentimental value” is practically 85% of its business is located in the Philippines;
property disregarded.
As to shares Unlisted 4. Shares, obligations or bonds issued by any Foreign
of stock 1. unlisted common - book value corporation if such shares, obligations or bonds have
2. unlisted preferred - par value acquired a business situs in the Philippines;
Listed - Arithmetic mean between the 5. Shares or rights in any partnership, business or industry
highest and lowest quotation at a date Established in the Philippines (Sec. 104, NIRC)
nearest the date of death, if none is
available on the date of death itself. Note: This enumeration of intangible properties are significant only
for non-resident alien and for foreign corporation because they are
As to right to Shall be taken into account the probable the only set of taxpayers where the situs of the property is
usufruct, use life of the beneficiary in accordance with considered in determining whether their property shall form part
or the latest basic standard mortality table, of the gross estate or not. Remember that in case of Filipino
habitation, to be approved by the Secretary of citizens (whether resident or non-resident) and resident aliens all
as well as Finance, upon recommendation of the of their properties whether real or personal wherever situated
that of Insurance Commissioner. shall form part of the gross estate.
annuity
Q: Is there an exception to the above exceptions?
Note: In determining the book value of common shares, the
following shall not be considered: A: Yes, on the basis of reciprocity. No donor’s or estate tax
1. Appraisal surplus shall be collected in respect of intangible personal property:
2. The value assigned to preferred shares, if there are any. 1. Total exemption - If the decedent at the time of
his death or the donor at the time of the donation
If there is an improvement, the value of improvement is the
was a citizen and resident of a foreign country
construction cost per building pernit or the fair market value per
latest tax declaration. which at the time of his death or donation did not
impose a transfer tax of any character, in respect
Q: What is the meaning of fair market value? of intangible personal property of citizens of the
Philippines not residing in that foreign country, or
A: The price at which any seller will sell and any buyer will 2. Partial exemption - If the laws of the foreign
buy both willingly without any force or intimidation. country of which the decedent or donor was a
citizen and resident at the time of his death or
COMPOSITION OF GROSS ESTATE donation allows a similar exemption from transfer
or death taxes of every character or description in
Q: What does gross estate include? respect of intangible personal property owned by
citizens of the Philippines not residing in that
A: foreign country. (Sec. 104, NIRC)
RESIDENT DECEDENT NON-RESIDENT DECEDENT
Value at the time of death of all Q: Will shares of stock issued by a foreign corporation in
a. Real property wherever a. Real Property situated in favor of a non-resident form part of the gross estate?
situated, to the extent of the Philippines
the interest therein of b. Tangible personal A: Yes, if 85% of the business of the foreign corporation
the decedent at the time property situated in the who issued the stocks is located in the Philippines. It is
of his death. Philippines considered to have obtained business situs in the
b. Personal property, c. Intangible personal Philippines, thus the issued shares of stock shall form part
tangible or intangible, property with situs in the of the gross estate of the nonresident. (Section 104, NIRC)
wherever situated to the Philippines unless
extent of the interest exempted on the basis of Q: Is there a need to disclose properties outside the
therein of the reciprocity Philippines?
decedent at the time of
his death. A: Yes, whether resident or non-resident. A resident
decedent is taxed on properties within or without. On the
Q: What are the intangible properties of a non-resident other hand, a non-resident decedent is required to disclose
alien decedent which are considered as situated in the the value of his gross estate outside the Philippines in order
Philippines, hence treated as part of the gross estate? to avail of the allowable deductions (Sec. 86 (D), NIRC).
A: All of the properties enumerated except (h), the Q: Is 13th month pay included in the gross estate?
proceeds from life insurance, are included in the taxable
gross estate in the Philippines. Ralph Donald is considered a A: Yes. Because there is a law mandating employers to
resident alien for tax purposes since he is an American grant 13th month pay.
citizen and was a permanent resident of the Philippines at
the time of his death. The value of the gross estate of a Note: In contrast, Christmas bonus is not included because there is
no law requiring it.
resident alien decedent shall be determined by including
the value at the time of his death of all property, real or
Q: Define transfer in contemplation of death
personal, tangible or intangible, wherever situated. (Sec.
85, NIRC) The other item, (h) proceeds from a life insurance
A: This is a transfer motivated by the thought of impending
policy, may be included in his gross estate only when it was
death although death may not be imminent:
Ralph Donald who took out the insurance upon his own life,
payable upon his death to his estate, or when the
1. When the decedent has, at any time, made a transfer
beneficiary is a third person other than his estate who is
in contemplation of or intended to take effect in
not designated as an irrevocable beneficiary (Sec. 85[E],
possession or enjoyment at or after death;or
NIRC).
2. When decedent has, at any time, made a transfer
under which he has retained for his life or for a period not
ascertainable without reference to his death or any period
which does not in fact end before his death:
a. Possession, enjoyment or right to income
from the property; or
Illustration: A: Yes. When the donor makes his will within a short time
A creates a trust to pay the income to himself for of, or simultaneously with, the making of gifts, the gifts are
life, remainder to B or his estate. considered as having been made in contemplation of death.
(Roces v. Posadas, 58 Phil. 108). Obviously, the intention of
Since enjoyment of the property remains, in A, the the donor in making the inter-vivos gifts is to avoid the
transferor, throughout his lifetime, the value of the imposition of the estate tax and since the donees are
entire property is included in A’s estate at death. likewise his forced heirs who are called upon to inherit, it
will create a presumption juris tantum that said donations
2. Interests Analogous to Life Estates – where the were made mortis causa, hence, the properties donated
decedent had transferred certain shares of stock to his shall be included as part of A's gross estate.
daughter “subject to your giving me the first dividends
on these P15,000,” and part of the P15,000 was still Q: What are the other descriptions for transfer in
unpaid when the decedent died, it was held that the contemplation of death?
entire value of the securities was properly included in
the decedent’s gross estate since he had retained the A:
income for a period which did not in fact end before 1. Transfer equivalent to testamentary disposition
his death. 2. Inter vivos in form, Mortis Causa in substance
Q: On June 30, 2000, X took out a life insurance policy on A: Only the excess of the fair market value of the property
his own life in the amount of P2,000,000. He designated at the time of the decedent’s death over the consideration
his wife, Y, as irrevocable beneficiary to P1,000,000 and received shall be included in the gross estate.
his son Z, to the balance of P1,000,000, but in the latter
designation, reserving his right to substitute him for Q: When is this applicable?
another. On September 1, 2003 X died and his wife and
son went to the insurer to collect the proceeds of X’s life A: This is applicable to:
insurance policy. 1. Transfers in contemplation of death
1. Are the proceeds of the insurance subject to income 2. Revocable transfers
tax on the part of Y and Z for their respective shares? 3. Transfers under general power of appointment which
Explain. are not bona fide sale for an adequate and full
2. Are the proceeds of the insurance to form part of the consideration in money and money’s worth.
gross estate of X? Explain.
(2003 Bar Question) Q: Can this transfer be subjected to donor’s tax?
Q: What may be deducted from the gross estate? A: In the case of a nonresident not a citizen of the
Philippines, ELIT is allowed such proportion of the
A: deduction allowed to resident decedents which the value of
RESIDENT CITIZEN, such part bears to the value of his entire gross estate
NON-RESIDENT CITIZEN, OR NON-RESIDENT ALIEN wherever situated.
RESIDENT ALIEN (EPTraN)
(EPTran-FS-MAN) Q: What is the formula for computing ELIT deductible from
the gross estate of a nonresident alien decedent?
1. Expenses, losses, 1. Expenses, losses,
indebtedness, and taxes indebtedness, and taxes
A:
(ELIT): (ELIT):
Philippine Allowable
1. Funeral expenses 1. Funeral expenses Expenses, Deductions
2. Judicial expenses for 2. Judicial expenses Gross
Estate Losses, from Gross
testamentary or for testamentary or x Indebtedness = Income
intestate proceedings intestate World and Taxes
Gross
3. Claims against the proceeding (ELIT)
Estate
estate 3. Claims against the
4. Claims against estate
insolvent persons 4. Claims against ACTUAL FUNERAL EXPENSES
included in the gross insolvent persons (whether paid or unpaid).
estate included in the
5. Unpaid mortgages or gross estate Q: What is the amount of funeral expenses deductible
indebtedness upon 5. Unpaid mortgages from the gross estate of a Filipino decedent (whether
the property or indebtedness resident or non-resident) or of a resident alien decedent?
6. Unpaid taxes upon the property
7. Losses incurred 6. Unpaid taxes A: The amount deductible is the lower between:
during the settlement 7. Losses incurred 1. actual funeral expenses or
of the estate during the 2. 5% of the gross estate
2. Property previously taxed settlement of the
3. Transfers for public use estate But not exceeding P200,000.
4. The Family home 2. Property Previously
5. Standard deduction Taxed Q: What is the amount of funeral expenses deductible
6. Medical expenses 3. Transfers for Public Use from the gross estate of a non- resident alien decedent?
7. Amount received by heirs 4. Net share of the
under R.A. No. 4917 surviving spouse in the A: The proportion which actual funeral expenses or amount
(Retirement Benefits of conjugal or community equal to 5% of the gross income whichever is lower but not
Employees of Private property to exceed P20,0000, bears to the value of the entire gross
Firms) estate whichever situated.
8. Net share of the surviving
spouse in the conjugal or Q: What are included as funeral expense?
community property.
A: The term is not confined to its ordinary or usual
Note: The following expenses are not allowed as deductions to meaning. It includes:
non-resident aliens:
Note: The purpose of vanishing deduction is to lessen the harsh First basis
effects of double taxation. LESS: Second deduction
-------------------------------------
Q: What is the rate of deduction? Second basis
Multiplied by 100%, 80%, etc. (as the case may be)
-------------------------------------------------
A: The rate of deduction depends on the period from the
Vanishing deduction
date of transfer to the death of the decedent, as follows:
Q: Differentiate Sec. 86(A)(3) from Sec. 87(D) of the NIRC STANDARD DEDUCTION
Q: What are the requisites for deductibility? Q: Up to what amount is excluded from the gross estate?
EXEMPTION OF CERTAIN ACQUISITIONS AND Q: Who must file the notice of death?
TRANSMISSIONS
A: The executor, administrator, or any legal heir.
Q: What are transmissions exempted from the payment of
estate tax? Q: To whom must notice of death be filed?
E.g. Y died leaving a condominium unit, the naked title ESTATE TAX RETURN
belongs to W and usufruct to F for a period of 5 years,
then F died after two years. Upon the death of F, the Q: When is estate tax return required?
usufruct will merge into the owner of the naked title
W who shall become the absolute owner of the said A: In cases of:
condominium unit. The transfer from F to W is exempt 1. Transfers subject to tax
from estate tax. 2. Where gross value of estate exceeds P200,000
3. Where estate consists of registered or registrable
2. The transmission or delivery of the inheritance or property, regardless of amount (Sec. 90[A], NIRC)
legacy by the fiduciary heir or legatee to the
fideicommissary, Provided that: Q: Within what period must the estate tax return be filed?
i. the substitution must not go beyond one degree
from the heir originally instituted A: Within 6 months from the decedent’s death. (Sec. 90[B],
ii. the fiduciary or the first heir must be both living NIRC)
at the time of death of the testator.
Q: Is an extension to file an estate tax return allowed?
E.g. X dies and leaves in his will a lot to his brother, Y,
who is entrusted with the obligation to transfer the lot A: In meritorious cases but not to exceed 30 days. (Sec.
to Z, a son of X, when Z reaches legal age. Y is the 90[C], NIRC)
fiduciary heir and Z is the fideicommissary. The
transfer from X to Y is subject to estate tax. But the Q: Who shall file the estate tax return?
transmission or delivery to Z upon reaching legal age
shall be exempt from estate tax. A:
1. Executor
3. The transmission from the first heir, legatee or donee 2. Administrator
in favor of another beneficiary, in accordance with the 3. Any legal heir
desire of the predecessor
Q: Before whom must the estate tax return be filed?
4. All bequests, devises, legacies or transfers to social
welfare, cultural and charitable institutions. Provided: A:
i. no part of the net income of which inures to the 1. If it is a resident decedent - To an authorized agent
benefit of any individual; and bank, RDO, Collection Officer, or duly authorized
ii. Not more than thirty percent (30%) of the said Treasurer in the city or municipality where the
bequests, devises, legacies or transfers shall be decedent was domiciled at the time of his death, or to
used by such institutions for administration the Office of the CIR.
purposes. (Sec. 87, NIRC) 2. If it is a non-resident decedent - To the RDO or to the
Office of the CIR. (Sec. 90[D], NIRC)
Q: Distinguish “notice of death” from “estate tax return” Q: When must the taxpayer pay the estate tax?
Q: Who shall pay the estate tax? Q: When can the estate be distributed?
A:
1. A return was filed but paid less than the amount of tax
due;
2. A return was filed but did not pay any tax;
3. No return was filed, therefore, no tax was paid.
A: Yes. This is considered as an indirect donation in favor of Q. What is the subject of donor’s tax?
B.
A. The subject of donor’s tax is the gift or donation. Article
725 of the Civil Code defines a gift or donation as “an act of
liberality whereby a person disposes gratuitously of a thing
or right in favor of another who accepts it.”
UNIVERSITY OF SANTO TOMAS
2013 GOLDEN NOTES 146
NATIONAL INTERNAL REVENUE CODE
Q: What law governs the imposition of donor’s tax? Note: Donative intent is necessary only in cases of direct gift.
If the gift is indirectly taking place by way of sale, exchange or
A: The law in force at the time of the perfection/completion other transfer of property as contemplated in cases of
transfers for less than adequate and full consideration (Sec.
of the donation. (Sec. 11, R.R. 2-2003)
100, NIRC), not always essential to constitute a gift.
Q: What are the requisites for a gift to be taxable? Note: Donations made by a corporation to its deceased officer out
of gratitude for past services are subject to donor’s tax. Past
A: CaDonAcAct services rendered without relying on a promise express or implied
1. Capacity of donor to donate that such services would be paid for in the future do not constitute
a demandable debt. Thus, the amount given by the corporation to
Note: The donor’s capacity shall be determined as of the time the heirs of the deceased officer of the corporation as gratitude for
of the making of the donation (Art. 737, NCC) past services rendered by the officer is subject to donor’s tax.
2. Donative intent
4. If the commercial lot was received by inheritance, the Q: What are the limitations to the tax credit?
gain from the sale for P20 million is P5 million because
the basis is the fair market value as of the date of A: The following are the limitations to the tax credit:
acquisition. The stepped-up basis of P15 million which 1. The amount of credit shall not exceed the same
is the value for estate tax purposes is the basis for proportion of the tax against such credit is taken,
determining the gain. (Sec. 34(b)(2), NIRC) which the net gifts situated within such country
taxable under donor’s tax bears to the entire net gifts
COMPOSITION OF GROSS GIFT (Per country basis)
2. The amount of the tax credit shall not exceed the same
Q: What are included in the gross gifts? proportion of the tax against such credit is taken,
which the donor’s net gifts situated outside the
A: Philippines taxable under donor’s tax bears to his
1. For resident citizen, non-resident citizen, and resident entire net gifts (Overall basis)
alien(wherever situated);
a. Real property wherever situated (within &
without the Philippines);
b. Personal property wherever situated, tangible or
intangible.
2. For non-resident alien (only within);
a. Real property situated within the Philippines;
UNIVERSITY OF SANTO TOMAS
149 FACULTY OF CIVIL LAW
Law on Taxation
Q: What is the formula in computing the donor’s tax non-profit corporation/NGO institution for administration
credit? purposes (Domondon, Taxation Reviewer - Volume 1, 2008 ed.).
A: Limitation A (per country): Q: What are the requisites for exemption of dowries?
will not amount to double Further, in indirect taxation, there is a need to distinguish
taxation because the tax paid between the liability for the tax and the burden of the tax.
for the previous methods will As earlier pointed out, the amount of tax paid may be
be considered as tax credit for shifted or passed on by the seller to the buyer. What is
succeeding donations. transferred in such instances is not the liability for the tax,
but the tax burden. In adding or including the VAT due to
Q: What is the significance of the two methods the selling price, the seller remains the person primarily
mentioned? and legally liable for the payment of the tax. What is
shifted only to the intermediate buyer and ultimately to the
A: The significance is in relation to donees. For relatives, final purchaser is the burden of the tax. Stated differently, a
the graduated tax rates are applicable over a period of one seller who is directly and legally liable for payment of an
year. Hence, by splitting the donation into different indirect tax, such as the VAT on goods or services is not
calendar year, the tax base will be lowered, and hence, the necessarily the person who ultimately bears the burden of
donor’s tax will also be lower. the same tax. It is the final purchaser or consumer of such
goods or services who, although not directly and legally
XPN: When the amount of donation is liable for the payment thereof, ultimately bears the burden
P10,000,000 or above, the cumulative method is of the tax. (Contex v. CIR, GR No. 151135, July 2, 2004)
no longer relevant since in that case, the rate
applicable is 15%, hence, it is as if the rate is Q: What is the effect of VAT being an indirect tax on
fixed. exemptions?
For strangers, whether the method to be used is cumulative A: If a special law merely exempts a party as a seller from
or splitting, it is immaterial since any donation made to its direct liability for payment of the VAT, but does not
them is subject to a fixed rate of 30%. relieve the same party as a purchaser from its indirect
burden of the VAT shifted to it by its VAT-registered
VALUE-ADDED TAX suppliers, the purchase transaction is not exempt. It is
because VAT is a tax on consumption, the amount of which
CONCEPTS may be shifted or passed on by the seller to the purchaser
of the goods, properties or services. (CIR v. Seagate
Q: What is value-added tax (VAT)? Technology, G.R. No. 153866, Feb. 11, 2005)
A: Value Added Tax is a business tax imposed and collected Q: Mr. A, a VAT-exempt retailer sells to Mr. O, a non-VAT
from the seller in the course of trade or business on every exempt purchaser. Is Mr. O liable to pay VAT on the
sale of properties (real or personal) lease of goods or transaction?
properties (real or personal) or vendors of services. It is an
indirect tax, thus, it can be passed on to the buyer. A: Yes. The purchaser is subject to VAT because it is merely
added as part of the purchase price and not as a tax
Q: What is the nature and characteristics of VAT? because the burden is merely shifted. The seller is still
exempt because it could pass on the burden of paying the
A: VAT is a tax on consumption levied on the sale, barter, tax to the purchaser.
exchange or lease of goods or properties and services in the
Philippines and on importation of goods into the Q: Lily’s Fashion Inc is a garment manufacturer located
Philippines. The seller is the one statutorily liable for the and registered as a Subic Bay Freeport Enterprise under
payment of the tax but the amount of the tax may be R.A. 7227 and a non-VAT taxpayer. And as such, it is
shifted or passed on to the buyer, transferee or lessee of exempt from payment of all local and national internal
the goods, properties or services. However, in the case of revenue taxes. During its operations, it purchased various
importation, the importer is the one liable for the VAT. (Sec supplies and materials necessary in the conduct of its
4.105-2 RR 16-2005) manufacturing business. The supplier of these goods
shifted to Lily’s Fashion, Inc. the 10% VAT on the
Q: Explain VAT as an indirect tax purchased items amounting to P500,000. Lily’s Fashion
Inc. filed with the BIR a claim for refund for the input tax
A: The amount of tax paid on the goods, properties or shifted to it by the suppliers. If you were the CIR will you
services bought, transferred, or leased may be shifted or allow the refund? (2006 Bar Question)
passed on by the seller, transferor, or lessor to the buyer,
transferee or lessee. Unlike a direct tax, such as the income A: No. The exemption of Lily’s Fashion Inc. is only for taxes
tax, which primarily taxes an individual’s ability to pay for which it is directly liable, hence, it cannot claim
based on his income or net wealth, an indirect tax, such as exemption for tax shifted to it, which is not at all
the VAT, is a tax on consumption of goods, services, or considered a tax to the buyer but part of the purchase
certain transactions involving the same. The VAT, thus, price. Lily’s Fashion Inc. is not a taxpayer in so far as the
forms a substantial portion of consumer expenditures as passed-on tax is concerned and therefore, it cannot claim
part of the goods or services’ purchase price. for a refund of a tax merely shifted to it. Only taxpayers are
allowed to file a claim for refund.
Q: Is the VAT law violative of the administrative feasibility Q: What is Tax Cascading?
principle?
A: An item is taxed more than once as it makes its way from
A: No. The VAT law is principally aimed to rationalize the production to final retail sale.
system of taxes on goods and services. Thus, simplifying tax
administration and making the system more equitable to Q: Explain how VAT is not a cascading tax?
enable the country to attain economic recovery. (Kapatiran
ng Mga Naglilingkod sa Pamahalaan v. Tan, G.R.No.81311, A: VAT is merely added as part of the purchase price and
June 30, 1988) not as a tax because the burden is merely shifted. Thus,
there can be no tax on the tax itself.
Q: Is VAT regressive?
Q: What are the elements of a VAT taxable transaction?
A: Yes. The principle of progressive taxation has no relation
with the VAT system inasmuch as the VAT paid by the A: A transaction could either be:
consumer or business for every goods bought or services a. a sale, barter or exchange of goods or properties in the
enjoyed is the same regardless of income. In other words, ordinary course of business;
the VAT paid eats the same portion of an income, whether b. a sale of service in the ordinary course of trade or
big or small. The disparity lies in the income earned by a business; or
person or profit margin marked by a business, such that c. an importation of goods, whether or not made in the
the higher the income or profit margin, the smaller the ordinary course of trade or business. (Sec. 105, NIRC)
portion of the income or profit that is eaten by VAT. A
converso, the lower the income or profit margin, the bigger Taxable transactions are those transactions which are
the part that the VAT eats away. At the end of the day, it is subject to VAT either at the rate of 12% (effective January
really the lower income group or businesses with low- 1, 2006, VAT rate was increase from 10 to 12%) or 0%, and
profit margins that is always hardest hit (ABAKADA Guro v. the seller shall be entitled to tax credit for the VAT paid on
Ermita, G.R. No. 168056, September 1, 2005). purchases and leases of goods, properties or services
(Commissioner v. Cebu Toyo Corporation, G.R. No. 149073,
Q: How is the regressive effect of VAT minimized? February 16, 2005)
A: The law minimizes the regressive effects of this Q: How are transactions classified under the VAT system?
imposition by providing for zero rating of certain
transactions while granting exemptions to other A:
transactions. The transactions which are subject to VAT are 1. VAT taxable transactions
those which involve goods and services which are used or a. Subject to 12% VAT rate
availed of mainly by higher income groups. b. Zero-rated transactions
2. Exempt transactions
CHARACTERISTICS/ELEMENTS OF A VAT-TAXABLE
TRANSACTION Q: Define “in the course of trade or business” (Rule of
Regularity) as used under the VAT law.
Q: What are the characteristics of VAT? (1996 Bar
Question) A: It means the regular conduct or pursuit of a commercial
or an economic activity, including transactions incidental
A: thereto, by any person regardless of whether or not the
1. It is a tax on value added of a taxpayer. person engaged therein is a non-stock, non-profit private
2. It is an excise tax based on consumption. organization (irrespective of the disposition of its net
3. It is a percentage tax. income and whether or not it sells exclusively to members
4. It is an ad valorem tax, imposed on the value added in or their guests), or government entity.
each stage of distribution.
5. It is a national tax, imposed by the national GR: If the disposition of goods or services is not in the
government. course of trade or business then it is not subject to VAT
6. It is collected through the tax credit method.
7. It is an indirect tax where tax shifting is always XPN: Importation is subject to VAT regardless of
presumed. whether or not it is in the course of trade or
8. It is a revenue or general tax. business.
9. It is not a cascading tax.
UNIVERSITY OF SANTO TOMAS
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Reason: This is to protect our local or domestic goods or articles TAX CREDIT METHOD
and to regulate the entry or introduction of foreign articles to our
local market. Q: Explain the Tax Credit Method (also called invoice
method) of collecting VAT?
Note: Non-resident persons who perform services in the
Philippines are deemed to be making sales in the course of trade or
business, even if the performance of services is not regular. (Sec. A: The input tax shifted by the seller to the buyer is
4.105-3, RR 16-2005) credited against the buyer’s output taxes when he in turn
sells the taxable goods, properties or services. The formula
Q: Pursuant to the privatization program of the in arriving at the VAT is therefore output tax less the input
government, National Development Company (NDC) sold tax.
five of its vessels to Magsaysay Lines Inc. (Magsaysay). In
the sales contract it provides that VAT shall be paid by the Note: “output tax” – the value added tax due on the sale or lease
purchaser Magsaysay Lines. Magsaysay asked BIR for a of taxable goods, properties or services by any person registered or
required to register under Sec. 236 of the Tax Code.
formal request for a ruling whether said purchaser should
pay VAT on account of such sale. BIR held that it is liable “input tax” – the value added tax due from or paid by a VAT-
to pay VAT. The CTA reversed the same on the ground that registered person in the course of his trade or business on
it was not done in the ordinary course of business of NDC. importation of goods or local purchase of goods, properties or
Is Magsaysay lines liable to pay VAT on such sale? services, including lease or use of property, from a VAT registered
person. (Sec. 110 [A], NIRC).
A: No. VAT is a tax levied only on the sale, barter or
exchange of goods or services by persons who engage in DESTINATION PRINCIPLE
such activities, in the course of trade or business. The
"carrying on business" does not mean the performance of a Q: What is the “Destination Principle” or the “Cross
single disconnected act, but means conducting, prosecuting Border Doctrine” as used in VAT?
and continuing business by performing progressively all the
acts normally incident thereof; while "doing business" A: The destination of the goods determines taxation or
conveys the idea of business being done, not from time to exemption from tax. Under this doctrine, goods and
time, but all the time. "Course of business" is what is services are taxed only in the country where they are
usually done in the management of trade or business. consumed. No VAT shall be imposed to form part of the
cost of goods destined outside the territorial border of the
The act of NDC in selling the vessels was not done in the taxing authority. Thus, exports are either exempt or zero
regular manner, not in the ordinary course of trade or rated, while imports are taxed.
business. In fact the sale was effected only because of the
privatization program of the government thus the sale was Q: Is there any exception to the destination principle?
not subject to VAT (CIR v. Magsaysay Lines Inc., G.R. No.
146984, July 28, 2006) A: Yes. The law clearly provides for an exception to the
destination principle; that is, for a zero percent VAT rate for
Q: What are the exceptions to the rule of regularity? services that are performed in the Philippines, "paid for in
acceptable foreign currency and accounted for in
A: accordance with the rules and regulations of the BSP."
1. Any business where the gross sales or receipts or do Hence, actual or constructive export of goods and services
not exceed P100,000 during the 12-month period shall from the Philippines to a foreign country must be zero-
be considered principally for subsistence or livelihood rated for VAT; while, those destined for use or consumption
and not in the course of trade or business. within the Philippines shall be imposed the twelve percent
2. Services rendered in the Philippines by non-resident (12%) VAT.
foreign persons shall be considered as being rendered
in the course of trade or business. (Section 105,NIRC) PERSONS LIABLE
Q: Who bears the impact (levy or imposition) of tax (VAT)? A: Any person who:
1. in the course of trade or business,
A: It is on the seller upon whom the tax has been imposed. a. sells, barters, exchanges, leases goods or
He is considered as the statutory taxpayer who can avail of properties;
a tax refund. b. renders services; and
2. Imports goods, whether made in the course of trade or
INCIDENCE OF TAX business, shall be subject to VAT imposed in Sections
106 to 108 of the NIRC. (Sec. 4.105-1, RR 16-2005)
Q: Who bears the incidence (payment) of tax (VAT)?
Consequently, any sale, barter or exchange of goods or
A: It is on the final consumer, the place at which the tax services not in the course of trade or business is not subject
comes to rest. The tax is shifted to the buyer of the goods, to VAT. (Commissioner v. Magsaysay Lines Inc., G.R. No.
properties, or services as part of the purchase price. 146984, July 28, 2006)
UNIVERSITY OF SANTO TOMAS
155 FACULTY OF CIVIL LAW
Law on Taxation
2. There are reasonable grounds to believe that his gross
Q: Who is a taxable person? receipts or gross sales in the next 12 months shall
exceed P1,919,500, other than those that are exempt
A: “Taxable person” refers to any person liable for the under Sec. 109 (A) to (U),; (Section 236(G), NIRC)
payment of VAT, whether registered or registrable in
accordance with Sec. 236 of the Tax Code (Sec. 4. 105.1, RR Q: What is the penalty for failure to register as VAT
16-2005) taxpayer?
A person may be characterized as a taxable person, if (a) he A: He shall be held liable to pay the tax as if he is a VAT
undertakes taxable transactions in goods, properties or registered person but he cannot avail of the input tax credit
services consumed or destined for consumption within the for the period that he has not properly registered. (Section
Philippines, (b) such transactions are entered into the 236(G), NIRC)
course of his trade or business, and (c) the amount of his
gross sales or receipts is over the threshold fixed by law or Q: Who is a VAT-exempt person?
regulations. An importer of taxable goods, whether made in
the ordinary course of trade or business, is a taxable A: A person who is not liable to pay VAT. He either:
person. (Mamalateo, Reviewer on Income Taxation, 2008) 1. Engages only on VAT-exempt transactions under
Section 109(1) (A to U) of NIRC, regardless of their
Note: annual gross sales (but in sale of residential real
Person refers to any individual, trust, estate, partnership, property or lease of residential property, the specific
corporation, joint venture, cooperative or association. threshold set by law should not be exceeded). He is
exempted from VAT and Percentage tax under Section
Importer - it shall be the importer who shall pay VAT upon release
of the goods from the customs territory. This is an exception to the 116 of NIRC.
general rule requiring a sale before VAT shall be incurred.
Note: Real estate seller of residential house and lot valued at
Note: Special considerations to the following persons: P3,199,200 or less shall NOT pay VAT neither percentage tax
(Sec. 109(1)(P), NIRC)
Husband and wife. – For VAT purposes, shall be treated as
separate taxpayers. A residential unit lessor with a monthly rental exceeding
P12,800 (specific threshold) but whose annual gross rentals
Joint ventures – Although exempt from income tax, is liable to do not exceed P1,919,500 (general threshold) shall NOT pay
value added tax. VAT but shall pay percentage tax (Sec 109(1)(Q) and Sec.116,
NIRC).
Government – subject to VAT if they sell goods, properties or
services in the course of trade or business or when they perform 2. Engages in transactions liable to VAT but becomes
proprietary functions. In case of transactions essential for exempted from VAT because his annual gross sales do
governmental functions, such are exempt from VAT. not exceed P1,919,500 (Sec 109(1)(V), NIRC). Though
VAT exempt, he shall pay percentage tax under Section
Non-stock, non profit association. – generally, receipts from 116.
association dues or special assessments from members is not
subject to VAT.
He should register as a VAT-exempt person unless he opts
However, the moment the non-stock, non-profit association to become VAT registered under Section 109(2) of NIRC.
engages in any taxable sale of goods or services, it is liable to VAT
where the amount of its gross sales and/or gross receipts exceeds VAT ON SALE OF GOODS OR PROPERTIES
P1,919,500, or subject to the 3% percentage tax, if gross sales
and/or gross receipts is P1,919,500 or less. REQUISITES OF TAXABILITY OF SALE OF GOODS OR
PROPERTIES
Q: Who is a VAT-registered person?
Q: What are the requisites for taxability of sale of goods
A: A VAT-registered person refers to any person who is and personal properties?
registered as a VAT taxpayer under Sec. 236 of the Tax code
or a person who opted to be registered as VAT taxpayer. A:
His status as a VAT registered person shall continue until 1. There is an actual or deemed sale, barter or exchange
the cancellation of the registration. of goods or personal properties for valuable
consideration;
Q: Who are the persons required to register for VAT? 2. Undertaken in the course of trade or business;
3. for use or consumption in the Philippines; and
A: Any person who, in the course of trade or business, sells, 4. not exempt from VAT under Section 109 of Tax Code,
barters, or exchanges goods or properties, or engages in special law or international agreement binding upon
the sale or exchange of services are subject to VAT if: the government of the Philippines.
1. The gross sale or gross receipts have exceeded
P1,919,500, other than those that are exempt under Note: Absence of any of the above requisites exempts the
Sec. 109 (A) to (U),; or transaction from VAT. However, percentage taxes may apply
(Section 116, NIRC).
A: The term goods or properties shall mean all tangible and Q: What are the requisites for taxability of sale or
intangible objects which are capable of pecuniary exchange of real property?
estimation and shall include:
1. Real properties held primarily for sale to customers or A:
held for lease in the ordinary course of trade or 1. The seller executes a deed of sale, including dacion en
business. pago, barter or exchange, assignment, transfer, or
2. The right or the privilege to use patent, copyright, conveyance, or merely contracts to sell involving real
design or model, plan secret formula or process, property;
goodwill, trademark, trade brand or other like 2. The real property is located within the Philippines;
property or right. 3. The seller or transferor is engaged in real estate
3. The right or the privilege to use in the Philippines of business either as a real estate dealer, developer, or
any industrial, commercial or scientific equipment. lessor;
4. The right or the privilege to use motion picture films, 4. The real property is an ordinary asset held primarily
films, tapes and discs. for sale or for lease in the ordinary course of business;
5. Radio, television, satellite transmission and cable 5. The sale is not exempt from VAT under Section 109 of
television time. NIRC, special law, or international agreement binding
(Sec. 106[A][1], NIRC) upon the government of the Philippines;
6. The threshold amount set by law should be met.
Q: Are all intangible properties subject to VAT?
Note: Absence of any of the above requisites exempts the
A: No, only those capable of pecuniary estimation. (Sec. transaction from VAT. However, percentage taxes may apply under
4.106-2, RR 16-2005) Section 116 of NIRC.
Q: What are taxable sales? Q: What is the threshold amount in determining whether
the sale of real property is subject to VAT?
A: Taxable sales refers to the sale, barter, exchange and/or
lease of goods or properties, including transactions deemed A:
sale and the performance of service for consideration, 1. Residential lot with gross selling price exceeding
whether in cash or in kind. P1,919,500.00
2. Residential house and lot or other residential dwellings
Q: Are gross receipts derived from sales of admission with gross selling price exceeding P3,199,200.00. (Sec.
tickets in showing motion pictures subject to VAT? 2, RR 16-2011).
Q: How do we tax a sale of a real property on the Q: What is the meaning of zero-rated transaction?
installment plan?
A: Zero-rated sale of goods or properties by a VAT-
A: The real estate dealer shall be subject to VAT on the registered person is a taxable transaction for VAT purposes
installment payments, including interest and penalties, but the sale does not result in any output tax. However, the
actually and/or constructively received by the seller. input tax on the purchases of goods, properties or services
related to such zero-rated sale shall be available as tax
Note: “Sale of real property on installment plan” means sale of credit or refund.
real property by a real estate dealer, the initial payments of which
in the year of sale do not exceed twenty-five percent (25%) of the Note: The gross selling price of goods or properties is multiplied by
gross selling price. 0% VAT rate.
However, in the case of sale of real properties on the deferred- Q: What is the difference between “zero-rated” and “VAT-
payment basis, not on the installment plan, the transaction shall be exempt” transactions?
treated as cash sale which makes the entire selling price taxable in
month of sale.
A. A zero-rated sale of goods, properties and/or services (by
“Sale of real property by a real estate dealer on a deferred
a VAT registered person) is a taxable transaction for VAT
payment basis, not on the installment plan” means sale of real purposes, but shall not result in any output tax. However,
property, the initial payments of which in the year of sale exceed the input tax on purchases of goods, properties or services,
twenty-five percent (25%) of the gross selling price. (Sec. 4.106-3, related to such zero-rated sale, shall be available as tax
RR 16-2005) credit or refund in accordance with existing regulations.
Under this type of sale, no VAT shall be shifted or passed-
Q: Define initial payments on by VAT-registered sellers/suppliers from the Customs
Territory on their sale, barter or exchange of goods,
A: Payment/s which the seller receives before or upon properties or services to the subject registered Freeport
execution of the instrument of sale and payments which he Zone enterprises.
expects or is scheduled to receive in cash or property (other
than evidence of indebtedness of the purchaser) during the A VAT-exempt transaction, on the other hand, refers to the
year when the sale or disposition of real property was sale of goods, properties or services or the use or lease of
made. properties that is not subject to VAT (output tax) under
Section 109 of the Tax Code of 1997, and the
Q: What are the distinctions between sale on installment seller/supplier is not allowed any tax credit of VAT (input
plan and sale on a deferred payment basis? tax) on purchases related to such exempt transaction. (Rev.
Memorandum 50-2007)
A:
INSTALLMENT PLAN DEFERRED PLAN Note: Simply put, the difference lies in the input tax. In VAT-
Initial payments do not Initial payments exceed exempt transactions there is no input tax credit allowed. In the
exceed 25% of the gross 25% of the gross selling case of 0% rated transaction of a VAT registered person, the sale of
selling price price goods or properties is multiplied by 0% thus his output tax is P
0.00. If the person is VAT registered, he may claim such input tax as
Seller shall be subject to Transaction shall be tax credit or refund.
output VAT on the treated as cash sale which
installment payments makes the entire selling E.g.: Output tax -------------------- P 0.00
received, including the price taxable in the month Less: Input tax ------------------- 5,000.00
VAT Creditable P 5, 000.00
Requisites of Foreign Currency Denominated Sale Q: Cebu Toyo Corp., an export enterprise, is a subsidiary of
1. The buyer must be a non-resident; a foreign corporation duly registered with the Philippine
2. The goods sold must be assembled or manufactured in Economic Zone Authority pursuant to PD 66 and is also
the Philippines; registered with the BIR as a VAT taxpayer. It sells 80% of
3. Goods sold are to be delivered to a resident; and its products to its mother corporation, and the rest are
4. Paid for in acceptable foreign currency and accounted sold to various enterprises doing business in the Mactan
for in accordance with the rules and regulations of the Export Processing Zone. Inasmuch as both sales are
BSP.
considered export sales subject to VAT at 0% rate under
Q: What is effectively zero-rated transaction? the National Internal Revenue Code, as amended, it filed
an application for tax credit/refund of VAT paid for the
A: The term “effectively zero-rated sale of goods and said period representing excess VAT input payments. The
properties” shall refer to the local sale of goods and CIR belies the claim for refund. Is the grant of a refund
properties by a VAT-registered person to a person or entity representing unutilized input VAT to Cebu Toyo proper?
who was granted indirect tax exemption under special laws
or international agreement. A: Yes. Cebu Toyo is engaged in taxable rather than exempt
transactions. Taxable transactions are those transactions
Note: Since the buyer is exempt from indirect tax, the seller cannot which are subject to value-added tax either at the rate of
pass on the VAT and therefore, the exemption enjoyed by the twelve percent (12%) or zero percent (0%). In taxable
buyer shall extend to the seller, making the sale effectively zero- transactions, the seller shall be entitled to tax credit for the
rated. (Rev. Memo. 50-2007) value-added tax paid on purchases and leases of goods,
properties or services. An exemption means that the sale of
Q: Differentiate effectively zero-rated transaction from goods, properties or services and the use or lease of
automatic zero-rated transaction. properties is not subject to VAT (output tax) and the seller
is not allowed any tax credit on VAT (input tax) previously
A: paid. A VAT-registered purchaser of goods, properties or
EFFECTIVELY services that are VAT exempt, is not entitled to any input
AUTOMATIC
ZERO-RATED tax on such purchases despite the issuance of a VAT invoice
ZERO-RATED TRANSACTION
TRANSACTION or receipt. Under the system, a zero rated sale by a VAT-
Nature registered person, which is a taxable transaction for VAT
Refers to the sale of Refers to taxable purposes, shall not result in any output tax, but the input
goods, properties or transaction for VAT
UNIVERSITY OF SANTO TOMAS
2013 GOLDEN NOTES 160
NATIONAL INTERNAL REVENUE CODE
tax on his purchase of goods, properties or services related TRANSACTIONS DEEMED SALE
to such zero-rated sale shall be available as tax credit or
refund (CIR v. Cebu Toyo Corporation, G.R. No. 149073, Feb. Q: What are the transactions deemed sale and therefore
16, 2005). subject to VAT?
Q: What is the tax base of transactions deemed sale? VAT ON IMPORTATION OF GOODS
A: The output tax shall be based on the market value of the Q: Is importation subject to VAT?
goods deemed sold as of the time of the occurrence of the
transactions enumerated above in numbers 1, 2 and 3. A: Yes. VAT shall be assessed and collected upon goods
brought into the Philippines whether for use in business or
However, in the case of retirement or cessation of business, not.
the tax base shall be the acquisition cost or the current
market price of the goods or properties, whichever is lower. Q: What is the tax base of importation?
In the case of a sale where the gross selling price is A: GR: The tax base shall be based on the total value used
unreasonably lower than the fair market value, the actual by the BOC in determining tariff and customs duties plus
market value shall be the tax base. (Sec. 4 106-7, RR 16- customs duties, excise taxes, if any, and other charges to be
2005) paid by the importer prior to the release of such goods
from customs custody. (Sec.107[A])
CHANGE OR CESSATION OF STATUS AS
VAT-REGISTERED PERSON XPN: Where the customs duties are determined
on the basis of quantity or volume of the goods,
Q: When is change in or cessation of status of a VAT the VAT shall be based on the landed cost plus
registered person subject to VAT? excise taxes, if any.
A: The following are subject to 12% output VAT: Q: Who pays for the tax on imported goods?
1. Change of business activity from VAT taxable status to
VAT-exempt status A: The importer shall pay the tax prior to the release of the
2. Approval of a request for cancellation of registration imported goods.
due to reversion to exempt status
3. Approval of a request for cancellation of registration Q: Who is an importer?
due to a desire to revert to exempt status after the
lapse of 3 consecutive years from the time of A: An importer is a person who brings goods into the
registration by a person who voluntarily registered Philippines, whether or not made in the course of trade or
despite being exempt under Sec 109 (2) of the Tax business. It includes non-exempt persons or entities who
Code acquire tax free imported goods from exempt persons,
4. Approval of a request for cancellation of registration of entities or agencies.
one who commenced business with the expectation of
gross sales or receipt exceeding P1,919,500 but who Q: When does importation begin and end?
failed to exceed this amount during the first 12
months of operations. A: Importation begins when a vessel or aircraft enters the
Philippine jurisdiction with the intention to unload
Q: When is a change in or cessation of status of a VAT goods/cargo. Importation ends upon the payment of duties,
registered person not subject to VAT? taxes, and other charges due upon the article, or to be paid
at the port of entry and legal permit for withdrawal shall
A: The following are NOT subject to 12% output VAT: have been granted.
1. Change of control in the corporation of as corporation
by the acquisition of controlling interest of the Q: What is “technical importation”?
corporation by another stockholder or group of
stockholders . A: Sale of goods by a PEZA registered enterprise to a buyer
from the customs territory shall be treated as a technical
The goods or properties used in the business or those importation. Such buyer shall be treated as an importer
comprising the stock-in-trade of the corporation will thereof and shall be imposed with the corresponding
not be considered sold, bartered or exchanged despite import taxes.
the change in the ownership interest. However,
exchange of property by corporation acquiring control TRANSFER OF GOODS BY TAX EXEMPT PERSONS
for the shares of stocks of the target corporation is
subject to VAT. Q: What is the consequence if a tax exempt person would
transfer imported goods to a non-exempt person?
2. Change in the trade or corporate name of the
business. A: The purchaser or transferee shall be considered as an
3. Merger or consolidation of corporations. The unused importer and shall be held liable for VAT and other internal
input tax of the dissolved corporation, as of the date of revenue tax due on such importation. (Sec. 107[B])
Q: Anshari, an alien employee of Asian Development Bank *This enumeration is not exclusive.
(ADB) who is retiring soon has offered to sell his car to
you, which he imported tax-free for his personal use. The Q: What does the phrase “sale or exchange of services”
privilege of exemption from tax is recognized by tax likewise include?
authorities. If you decide to purchase the car, is the sale
subject to tax? Explain. (2005 Bar Question) A:
1. The lease or the use of or the right or privilege to use
A: Yes. The sale is subject to tax. Sec. 107 (B) of the Tax any copyright, patent, design or model plan, secret
Code provides that “In case of tax-free importation of formula or process, goodwill, trademark, trade brand
goods into the Philippines by persons, entities or agencies or other like property or right
exempt from tax, where the goods are subsequently, sold, 2. The lease or the use of, or the right to use of any
transferred or exchanged in the Philippines to non-exempt industrial, commercial or, scientific equipment
persons or entities, the purchasers, transferees or 3. The supply of scientific, technical, industrial or
recipients shall be considered a the importer thereof, who commercial knowledge or information
shall be liable for any internal revenue tax on such 4. The supply of any assistance that is ancillary and
importation. subsidiary to and is furnished as a means of enabling
the application or enjoyment of any such property, or
VAT ON SALE OF SERVICE AND USE OR LEASE OF right as is mentioned in subparagraph (2) or any such
PROPERTIES knowledge or information as is mentioned in
subparagraph (3)
Q: What is meant by “sale or exchange of services” subject 5. The supply of services by a non-resident person or his
to VAT? employee in connection with the use of property or
rights belonging to, or the installation or operation of
A: It means the performance of all kinds of services in the any brand, machinery or other apparatus purchased
Philippines for others for a fee, remuneration or from such nonresident person
consideration. 6. The supply of technical advice, assistance or services
rendered in connection with technical management or
Note: It includes services performed by the following: administration of any scientific, industrial or
1. construction and service contractors; commercial undertaking, venture, project or scheme
2. stock, real estate, commercial, customs and immigration 7. The lease of motion picture films, films, tapes and
brokers; discs
3. lessors of property, whether personal or real; 8. The lease or the use of or the right to use radio,
4. persons engaged in warehousing services;
television, satellite transmission and cable television
5. lessors or distributors of cinematographic films;
6. persons engaged in milling, processing, manufacturing or time.
repacking goods for others;
7. proprietors, operators, or keepers of hotels, motels, rest Note: Lease of properties shall be subject to the tax herein
houses, pension houses, inns, resorts, theaters, and movie imposed irrespective of the place where the contract of lease or
houses; licensing agreement was executed if the property is leased or used
8. proprietors or operators of restaurants, refreshment parlors, in the Philippines.
cafes and other eating places, including clubs and caterers;
9. dealers in securities; Q: What is meant by “service”?
10. lending investors;
11. transportation contractors on their transport of goods or A: Service has been defined as “the art of doing something
cargoes, including persons who transport goods or cargoes useful for a person or company for a fee” or “useful labor
for hire and other domestic common carriers by land relative
or work rendered or to be rendered another for a fee. (CIR
to their transport of goods or cargoes;
12. common carriers by air and sea relative to their transport of v. American Express International, Inc., G. R. No. 152609,
passengers, goods or cargoes from one place in the June 29, 2005)
Philippines to another place in the Philippines;
13. sales of electricity by generation, transmission, and/or Q: Are non-stock, non-profit entities liable to pay VAT for
distribution companies; sale of goods and services?
14. franchise grantees of electric utilities, telephone and
telegraph, radio and/or television broadcasting and all other A: Yes. As long as the entity provides service for a fee,
franchise grantees, except franchise grantees of radio and/or
remuneration or consideration, then the service rendered is
television broadcasting whose annual gross receipts of the
preceding year do not exceed Ten Million Pesos subject to VAT. (Commissioner v. CA, G.R. No. 125355, Mar.
(P10,000,000.00), and franchise grantees of gas and water 30, 2000)
utilities;
15. non-life insurance companies (except their crop insurances),
including surety, fidelity, indemnity and bonding companies;
and
A: Constructive receipt occurs when the money Q: What are the services subject to zero percent VAT rate?
consideration or its equivalent is placed at the control of
the person who rendered the service without restrictions A:
by the payor. 1. Processing, manufacturing or repacking goods for
other persons doing business outside the Philippines
Note: The following are examples of constructive receipts under RR which goods are subsequently exported, where the
16- 2005: services are paid for in acceptable foreign currency
1. Deposit in banks which are made available to the seller and accounted for in accordance with the rules and
without restrictions. regulations of the Bangko Sentral ng Pilipinas (BSP);
2. Issuance by the debtor of a notice to offset any debt or
obligation and acceptance thereof by the seller as payment 2. Services other than those mentioned in the preceding
for services rendered.
paragraph rendered to a person engaged in business
3. Transfer of the amounts retained by the payor to the account
of the contractor. conducted outside the Philippines or to a nonresident
person not engaged in business who is outside the
Q: Is a lease of property subject to VAT? Philippines when the services are performed, the
consideration for which is paid for in acceptable
A: All forms of property for lease, whether real or personal, foreign currency and accounted for in accordance with
are liable to VAT. the rules and regulations of the BSP i.e. recruitment
Q: Are advance payments made by lessee for lease of 3. Services rendered to persons or entities whose
property subject to VAT? exemption under special laws or international
agreements to which the Philippines is a signatory
A: If the advance payment is for the faithful performance of effectively subjects the supply of such services to zero
certain obligations of the lessee, it is not subject to VAT. A percent (0%) rate
security deposit that is applied to rental shall be subject to
VAT at the time of its application. If the advance payment 4. Services rendered to persons engaged in international
constitutes a pre-paid rental, then such payment is taxable shipping or international air transport operations,
to the lessor in the month when received, irrespective of including leases of property for use thereof;
the accounting method employed by the lessor.
5. Services performed by subcontractors and/or
REQUISITES FOR TAXABILITY contractors in processing, converting, or
manufacturing goods for an enterprise whose export
Q: What are the requisites for the taxability of sale or sales exceed seventy percent (70%) of total annual
exchange of services or lease or use of property? production;
A: It refers to the sale of goods or properties and/or Q: When is fuel exempt from tax, and when is it zero-
services and the use or lease of properties that is not rated?
subject to VAT (output tax) and the seller is not allowed any
tax credit of VAT (input tax) on purchases. A: Fuel is exempt if imported by persons engaged in
international shipping or air transport operations (Sec. 109
Q: Who is a VAT-exempt party? [T], NIRC). On the other hand, fuel is zero-rated when sold
to persons engaged in international shipping or
A: It is a person or entity granted VAT exemption under the international air transport operations without docking or
Tax Code, a special law or an international agreement to stopping at any other port in the Philippines. (Sec 4.106-
which the Philippines is a signatory, and by virtue of which 5[A][6], RR 16-2005]
its taxable transactions become exempt from VAT.
Q: State whether the following transactions are: a) VAT
Note: The basis for the grant of VAT exemptions is equity Exempt, b) subject to VAT at 12%; or c) subject to VAT at
0%.
Q: What are the distinctions between exempt transaction 1. Sale of fresh vegetables by Aling Ining at the
and exempt party? Pamilihang Bayan ng Trece Martirez.
A: 2. Services rendered by Jake's Construction Company, a
EXEMPT PARTY EXEMPT TRANSACTION contractor to the World Health Organization in the
A person or entity granted Involves goods or services renovation of its offices in Manila.
VAT exemption under the which, by their nature are 3. Sale of tractors and other agricultural implements by
Tax Code, special law or specifically listed in and Bungkal Incorporated to local farmers. [1%]
international agreement to expressly exempted from 4. Sale of RTW by Cely's Boutique, a Filipino dress
which RP is a signatory, and the VAT under the Tax designer, in her dress shop and other outlets.
by virtue of which its Code, without regard to the 5. Fees for lodging paid by students to Bahay-Bahayan
taxable transactions tax status of the parties in Dormitory, a private entity operating a student
become exempt from the the transactions. dormitory (monthly fee P1,500). (1998 Bar Question)
VAT.
Such party is not subject to Transaction is not subject A:
the VAT, but may be to VAT, but the seller is not 1. VAT exempt. Sale of agricultural products, such as
allowed a tax refund or allowed any tax refund or fresh vegetables, in their original state, of a kind
credit of input tax paid, credit for any input taxes generally used as, or producing foods for human
depending on its paid. consumption is exempt from VAT. (Sec. 109[A], NIRC)
registration as a VAT or 2. VAT at 0%. Since Jake's Construction Company has
non-VAT taxpayer. rendered services to the World Health Organization,
which is an entity exempted from taxation under
international agreements to which the Philippines is a
Q: Does a VAT-registered individual have the option to be
signatory, the supply of services is subject to zero
subject to VAT rather than to avail of the above-
percent (0%) rate. (Sec. 108[B][3], NIRC)
mentioned exemptions?
3. VAT at 12%. Tractors and other agricultural
implements fall under the definition of goods which
A: Yes. Under Sec. 109(2) of the Tax Code, the taxpayer has
include all tangible objects which are capable of
the option to be:
pecuniary estimation. (Sec. 106[A][1], NIRC)
1. VAT exempt under Sec. 109(1) of the NIRC; or
4. This is subject to VAT at 12%. This transaction also falls
2. Be subject to VAT.
under the definition of goods which include all tangible
Note: The choice of the taxpayer is irrevocable for a period of 3 objects which are capable of pecuniary estimation
years from the quarter the election was made. (Sec. 106[A][1], NIRC)
5. VAT Exempt. The monthly fee paid by each student
Q: Why would a VAT-exempt person choose to be subject falls under the lease of residential units with a monthly
to VAT than to be VAT exempt? rental per unit not exceeding P12,800 (RR 16-2011),
which is exempt from VAT regardless of the amount of
A: A VAT-registered person who opted to be subject to VAT aggregate rentals received by the lessor during the
may avail of the input tax credit. The input tax is deducted year. (Sec. 109[Q], NIRC, as amended by RR 16-2011).
from the output tax thereby reducing his tax liabilities but a The term unit shall mean per person in the case of
VAT-registered person who opted to be exempt therefrom dormitories, boarding houses and bed spaces (Sec.
cannot avail of the input tax credit. Thus a VAT-registered 4.103-1, RR No. 7-95).
person may choose to be subjected to rather than exempt
from payment of VAT.
A: Persons who are exempt under Section 109(v) of the Q: What are the VAT exempt transactions?
NIRC from the payment of VAT and who is not a VAT-
registered person shall pay a tax equivalent to three A:
percent (3%) of his gross quarterly sales or receipts, except 1. Sale Of Goods And Property
cooperatives shall not be held liable to pay for three
percent (3%) gross receipts tax. (Sec. 116, NIRC) a. Sale of agricultural and marine food products in
their original state, livestock and poultry of a
Q: PHILHEALTH, a corporation that establishes, maintains, kind generally used as, or yielding or producing
conducts and operates a prepaid group practice health foods for human consumption; and breeding
care delivery system or a health maintenance organization stock and genetic materials therefor.
to take care of the sick and disabled persons enrolled in
the health care plan, inquired before the Commissioner of Note: Meat, fruit, fish, vegetables and other agricultural
Internal Revenue (Commissioner) whether the services it and marine food products classified under this
provided to the participants in its health care program paragraph shall be considered in their original date even
if they have undergone the simple processes of
were exempt from the payment of VAT. The
preparation or preservation for the market, such as
Commissioner issued VAT Ruling 231-88 stating that freezing, drying, salting, broiling, roasting, smoking or
PHILHEALTH, as a provider of medical services, was stripping, including those using advanced technological
exempt from the VAT coverage. means of packaging, such as shrink wrapping in plastics,
vacuum packing, tetra-pack, and other similar packaging
Meanwhile, Republic Act 7716 (E-VAT Law) took methods.
effect, amending further the NIRC of 1977.
Subsequently, R.A. 8424 (NIRC of 1997) took effect, Polished and/or husked rice, corn grits, raw cane sugar
and molasses, ordinary salt and copra shall be
substantially adopting and reproducing the provisions of
considered as agricultural food products in their
E.O. 273 on VAT and the E-VAT law. With the passage of original state.
these laws, the BIR sent PHILHEALTH a Preliminary
Assessment Notice for deficiency in its payment of the Sugar whose content of sucrose by weight, in the dry
VAT and documentary stamp taxes (DST) for taxable years state, has a polarimeter reading of 99.5 o and above are
1996 and 1997 and a letter demanding payment of presumed to be refined sugar.
“deficiency VAT” and DST for taxable years 1996 to 1997.
Cane sugar produced from the following shall be
presumed, for internal revenue purposes, to be refined
PHILHEALTH filed a protest with the Commissioner but the
sugar:
latter did not take action on its protest. Consequently, 1. product of a refining process,
PHILHEALTH brought the matter to the CTA. The CTA 2. products of a sugar refinery, or
declared that VAT Ruling 231-88 is void and without force 3. product of a production line of a sugar mill
and effect and ordered it to pay the VAT deficiency, accredited by the BIR to be producing and/or
but canceling the payment of DST. After a Motion for capable of producing sugar with polarimeter
Partial Reconsideration, CTA overruled its decision with reading of 99.5 and above, and for which the
respect to the payment of deficiency VAT and held that quedan issued therefor, and verified by the
Sugar Regulatory Administration, identifies
PHILHEALTH was entitled to the benefit of non-
the same to be of a polarimeter reading of
retroactivity of rulings guaranteed under Section 246 of 99.5 and above.
the Tax Code, in the absence of showing of bad faith on its
part. Are the services of PHILHEALTH subject to VAT? Bagasse is not included in the exemption provided for
under this section.
A: Yes. PHILHEALTH’s services are not VAT-exempt. Those
exempted from VAT are those engaged in the performance b. Sale of fertilizers; seeds, seedlings and
of medical, dental, hospital and veterinary services except fingerlings; fish, prawn, livestock and poultry
those rendered by professionals. PHILHEALTH is not feeds, including ingredients, whether locally
actually rendering medical service but merely acting as a produced or imported, used in the manufacture
conduit between the members and their accredited and of finished feeds.
recognized hospitals and clinics. It merely provides and
arranges for the provision of pre-need health care services Except specialty feeds for race horses, fighting cocks,
to its members for a fixed prepaid fee for a specified period aquarium fish, zoo animals and other animals generally
of time; that it then contracts the services of physicians, considered as pets (Sec. 109[B], NIRC]);
medical and dental practitioners, clinics and hospitals to
perform such services to its enrolled members; and that it c. Transactions which are exempt under
enters into contract with clinics, hospitals, medical international agreements to which the
professionals and then negotiates with them regarding Philippines is a signatory or under special laws,
payment schemes, financing and other procedures in except those under P.D. No. 529 (Sec. 109[K],
the delivery of health services. (CIR v. Philippine Health NIRC]);
Care Providers Inc., G.R. No. 168129, Apr. 24, 2007)
e. Sales by non-agricultural, non-electric and non- j. Sale of goods or properties other than the
credit cooperatives duly registered with the transactions mentioned in the preceding
Cooperative Development Authority: Provided paragraphs, the gross annual sales do not exceed
that the share capital contribution of each the amount of P1,919,500;
member does not exceed Fifteen thousand pesos
(P15, 000.00) and regardless of the aggregate Note: For purposes of the threshold of P1,919,500, the
capital and net surplus ratably distributed among husband and the wife shall be considered separate
the members (Sec. 109[N], NIRC]); taxpayers. However, the aggregation rule for each
taxpayer shall apply. For instance, if a professional, aside
from the practice of his profession, also derives revenue
f. Export sales by persons who are not VAT- from other lines of business which are otherwise subject to
registered (Sec. 109[O], NIRC]); VAT, the same shall be combined for purposes of
determining whether the threshold has been exceeded.
g. Sale of the following real properties. Thus, the VAT-exempt sales shall not be included in
i. Sale of real properties not primarily held for determining the threshold (Sec. 3 (V) [RR 16-2011]).
sale to customers or in the ordinary course
of trade or business 2. Sale of Services
ii. Sale of real properties utilized for low-cost
housing a. Services subject to percentage tax under Title V
iii. Sale of real properties utilized for socialized (Sec. 109[E], NIRC);
housing
iv. residential lot valued at P1,919,500 and Note: Subject to percentage tax under Title V:
i. Sale or lease of goods or properties or the
below, or house & lot and other residential
performance of services of non-VAT registered
dwellings valued at P3,199,200 and below. persons, other than the transactions mentioned in
paragraphs (A) to (U) of Sec. 109(1) of the Tax Code,
the gross annual sales and/or receipts of which
Note: If two or more adjacent residential lots, house and does not exceed the amount of P1,919,500 (Sec.
lot or other residential dwellings are sold or disposed in 116);
favor of one buyer from same seller, for the purpose of ii. Services rendered by domestic common carriers by
utilizing the lots, house and lot or other residential land, for the transport of passengers and keepers of
dwellings as one residential area, the sale shall be exempt garages (Sec. 117);
from VAT only if the aggregate value of the said properties iii. Services rendered by international air/ shipping
do not exceed P1,919,500 for residential lots, and carriers (Sec. 118);
P3,199,200 for residential house and lots or other iv. Services rendered by franchise grantees of radio
residential dwellings although covered by separate titles and/or television broadcasting whose annual gross
and/or separate tax declarations, when sold or disposed to receipts of the preceding year do not exceed Ten
one and the same buyer, whether covered by one or Million Pesos (P10,000,000.00), and by franchise
separate Deed of Conveyance, shall be presumed as a sale grantees of gas and water utilities (Sec. 119);
of one residential lot, house and lot or residential v. Service rendered for overseas dispatch, message or
dwellings. (Sec. 3 (P)(4) [RR 13-2012]) conversation originating from the Philippines (Sec.
120);
h. Sale of books and any newspaper, magazine, vi. Services rendered by any person, company or
review or bulletin which appears at regular intervals corporation (except purely cooperative companies
with fixed prices for subscription and sale and which or associations) doing life insurance business of any
is not devoted principally to the publication of paid sort in the Philippines (Sec. 123);
advertisements (Sec. 109[R], NIRC); vii. Services rendered by fire, marine or miscellaneous
insurance agents of foreign insurance companies
(Sec. 124);
i. Sale of passenger or cargo vessels and aircraft,
viii. Services of proprietors, lessees or operators of
including engine, equipment and spare parts cockpits, cabarets, night or day clubs, boxing
thereof for domestic or international transport exhibitions, professional basketball games, Jai-Alai
operations and provided that (Sec. 109[S], NIRC); and race tracks (Sec. 125); and
c. Medical, dental, hospital and veterinary services Note: For purposes of the threshold of P1,919,500, the
except those rendered by professionals (Sec. husband and the wife shall be considered separate
109[G], NIRC); taxpayers. However, the aggregation rule for each
taxpayer shall apply. For instance, if a professional, aside
from the practice of his profession, also derives revenue
Note: Laboratory services are exempted. The sale of
from other lines of business which are otherwise subject to
medicines by the pharmacy of a hospital or a clinic to its
VAT, the same shall be combined for purposes of
in-patients is considered hospital service hence, VAT
determining whether the threshold has been exceeded.
exempt. If the sale of medicine is made to an out-
Thus, the VAT-exempt sales shall not be included in
patient, such sale is subject to VAT (Mamalateo, Value
determining the threshold. (Sec. 3 (V) [RR 16-2011])
Added Tax, 2007 ed., pp. 163 and 274)
Note: Exemption from VAT on the importation and local b. Lease of passenger or cargo vessels and aircraft,
purchase of passenger and/or cargo vessel shall be including engine, equipment and spare parts thereof
limited to those of one hundred fifty tons (150) and for domestic or international transport operations
above, including engine and spare parts of the said (Sec. 109[S], NIRC);
vessels
c. Lease of goods or properties other than the
h. Importation of fuel, goods and supplies by
transactions mentioned in the preceding
persons engaged in international shipping or air
paragraphs, the gross annual sales and/or receipts
transport operations (Sec. 109[T], NIRC).
do not exceed the amount P1,919,500; (Sec. 3 (V)
[RR 16-2011])
4. Lease Of Property
Note: The foregoing enumerations are taken from Sec. 109 of
a. Lease of residential units with a monthly rental per theNIRC as amended by RA 9337. There are 22 exemptions under
unit not exceeding P12,800, regardless of the the law but in this enumeration the said exemptions are classified
amount of aggregate rentals received by the lessor into sale of goods, sale of services, importation and lease of
during the year;
Q: Define Input Tax Q: How do you claim input tax for Depreciable Goods/
Capital Goods?
A: It means the value-added tax due on or paid by a VAT-
registered person on importation of goods or local A: Where a VAT registered person purchases or imports
purchase of goods, properties or services, including lease or capital goods, which are depreciable assets for income tax
use of properties, in the course of his trade or business. It purposes, the aggregate acquisition cost of which (exclusive
shall also include the transitional input tax and the of VAT) in a calendar month exceeds P1,000,000, regardless
presumptive input tax determined in accordance with of the acquisition cost of each capital good, shall be claimed
Section 111 of the NIRC. (RR 16-2005) as credit against output tax in the following manner:
Q: How do we account VAT exempt purchases? (a) If the estimated useful life of a capital good is five (5)
years or more – Input tax shall be spread evenly over a
A: VAT exempt transactions cannot be credited for input period of sixty (60) months and the claim for input tax
tax, however a transaction which cannot be directly credit will commence in the calendar month when the
attributed in either the taxable or exempt activity, a ratable capital good is acquired.
portion of the input tax may be credited.
(b) If the estimated useful life of a capital good is less than
Q: Is input tax a property right within the Constitutional five (5) years – Input tax shall be spread evenly on a
purview of the due process clause? monthly basis by dividing the input tax by the actual
number of months comprising the estimated useful life of
A: No. A VAT-registered person’s entitlement to the the capital good. Such claim for input tax credit shall
creditable input tax is a mere statutory privilege which may commence in the calendar month that the capital goods
be limited or removed by law. were acquired.
Q: Define Output Tax Where the aggregate acquisition cost (exclusive of VAT) of
the existing or finished depreciable capital goods purchased
A: It means the value-added tax due on the sale or lease of or imported during any calendar month does not exceed P
taxable goods or properties or services by any person 1,000,000.00, the total input taxes will be allowable as
registered or required to register under Sec. 236 of the credit against output tax in the month of acquisition;
NIRC. (Sec. 110[A][3], NIRC) Provided, however, that the total amount of input taxes
(input tax on depreciable capital goods plus other allowable
SOURCES OF INPUT TAX input taxes) allowed to be claimed against the output tax in
the quarterly VAT Returns
Q: What are creditable input taxes?
Q: What is presumptive input tax credit?
A: The input tax evidenced by a VAT invoice or official
receipt issued in accordance with Section 113 of the NIRC A: It is an input tax credit allowed to persons or firms
on the following transactions shall be creditable against the engaged in the: (SMM-RCN)
output tax: 1. processing of:
a. sardines
1. Purchase or importation of goods: b. mackerel
a. For sale; or c. milk
b. For conversion into or intended to form part of a 2. manufacturing of:
finished product for sale including packaging a. refined sugar
materials; or b. cooking oil
c. For use as supplies in the course of business; or c. packed noodle based instant meals
d. For use as materials supplied in the sale of
service; or The allowed input tax shall be equivalent to four percent
e. For use in trade or business for which deduction (4%) of the gross value in money of their purchases of
for depreciation or amortization is allowed under primary agricultural products which are used as inputs to
this Code, except automobiles, aircraft and their production. (Sec. 111 [B], NIRC)
yachts.
Note: The term 'processing' shall mean pasteurization, canning and
2. Purchases of real properties for which a VAT has activities which through physical or chemical process alter the
actually been paid; exterior texture or form or inner substance of a product in such
3. Purchases of services in which a VAT has actually been manner as to prepare it for special use to which it could not have
been put in its original form or condition.
paid;
4. Transactions “deemed sales”;
A: It is an input tax credit allowed to person who becomes Q: To whom shall the input tax be creditable?
liable to value-added tax or any person who elects to be a
VAT-registered person. A:
1. To the importer upon payment of the VAT prior to the
Note: Taxpayers who became VAT registered persons upon release of the goods from the customs custody;
exceeding the minimum turnover of P1,919,500 in any 12-month 2. To the purchaser of the domestic goods or properties
period, or who voluntarily register even if their turnover does not
upon consummation of the sale; or
exceed P1,919,500 (except franchise grantees of radio and
television broadcasting whose threshold is P10,000,000) shall be 3. To the purchaser of the services or the lessee or the
entitled to transitional input tax on the inventory on hand as of the licenses upon payment of the compensation, rental,
effectivity of their VAT registration on the following: royalty or fee. [Sec. 4. 110-2, (RR 16-2005)]
1. Goods purchased for resale in their present condition;
2. Materials purchased for further processing, but which have DETERMINATION OF OUTPUT/INPUT TAX; VAT PAYABLE;
not yet undergone processing; EXCESS INPUT TAX CREDITS
3. Goods which have been manufactured by the taxpayer;
4. Good in process for sale; or
DETERMINATION OF OUTPUT TAX
5. Goods and supplies for the use in the course of the taxpayer’s
trade or business as a VAT-registered person. [Sec. 4. 110-
1(a.), (RR 16-2005)] Q: How is output tax determined?
The allowed input tax shall be whichever is higher between: A: Sellers of goods or properties:
1. 2% of the value of the taxpayer’s beginning inventory Gross selling price/Value appearing on sales
of goods, materials and supplies; or invoices and receipts
2. The actual value-added tax paid on such goods. LESS: Allowable Deductions (sales allowances
(Sec.111[A], NIRC) and discounts if any)
= Tax base
Q: What is the purpose of transitional input tax credit? MULTIPLY BY: VAT rate
= Output Tax
A: It operates to benefit newly VAT-registered persons,
whether or not they previously paid taxes in the acquisition Sellers of service:
of their beginning inventory of goods, materials, and Gross receipts
supplies. During that period of transition from non-VAT to MULTIPLY BY: VAT rate
VAT status, the transitional input tax credit serves to = Output Tax
alleviate the impact of the VAT on the taxpayer. At the very
beginning, the VAT-registered taxpayer is obliged to remit a DETERMINATION OF INPUT TAX CREDITABLE
significant portion of the income it derived from its sales as
output VAT. The transitional input tax credit mitigates this Q: How is creditable input tax determined during a month
initial diminution of the taxpayer’s income by affording the or quarter?
opportunity to offset the losses incurred through the
remittance of the output VAT at a stage when the person is A: By adding all creditable input taxes arising from
yet unable to credit input VAT payments. (Fort Bonifacio transactions allowed input tax credit during the month or
Development Corporation v. CIR, G.R. No. 158885; G.R. No. quarter plus any amount of input tax carried-over from the
170680, Apr. 2, 2009) preceding month or quarter, reduced amount of claim for
VAT-refund or tax credit certificates and other adjustments,
Q: Is the allowance for transitional input tax credit such as (a.) purchase returns and allowances, (b.) input tax
applicable to real property? attributable to exempt sales and (c.) input tax attributable
to sales subject to final VAT withholding.
A: Yes. Under Sec. 105 of the old NIRC (now Sec. 111[A]),
the beginning inventory of “goods” forms part of the **The claim for tax credit referred to in the foregoing
valuation of the transitional input tax credit. Goods, as paragraph shall include not only those filed with the BIR but
commonly understood in the business sense, refer to the also those filed with other government agencies, such as
product which the VAT-registered person offers for sale to the Board of Investments or the Bureau of Customs [Sec.
the public. With respect to real estate dealers, it is the real 110 [C], NIRC]
properties themselves which constitute their “goods”. Such
real properties are the operating assets of the real estate ALLOCATION OF INPUT TAX ON MIXED TRANSACTIONS
dealer. (Ibid.)
Q: How is input tax allocated on mixed transactions?
WHO MAY CLAIM FOR REFUND/APPLY FOR ISSUANCE OF Q: When must the options be availed of?
TAX CREDIT CERTIFICATE (TCC)
A: The claim, which must be in writing, for both cases, must
Q: Who can avail of refund or tax credit? be filed within 2 years after the close of the taxable quarter
when the sales were made apply for:
A: 1. The issuance of a tax credit certificate;
1. A VAT-registered person, whose sales are zero-rated 2. Refund of creditable input tax due or paid
or effectively zero-rated (Sec. 112 [A]) attributable to such sales. (Ibid.)
Note: Where the taxpayer is engaged in both zero-rated or Note: The creditable input tax allowed to be refunded does not
effectively zero-rated sales and in taxable (including sales include transitional input tax.
subject to withholding VAT) or exempt sales of goods,
properties or services, and the amount of creditable input tax In case the taxpayer is engaged in zero-rated and also in taxable or
due or paid cannot be directly and entirely attributed to any exempt sale, and the amount of creditable input tax due or paid
one of the transactions, only the proportionate share of the cannot be directly and entirely attributed to any one of the
input taxes allocated to zero-rated or effectively zero-rated transactions, it shall be allocated proportionately on the basis of
sales can be claimed for refund or issuance of a tax credit the volume of sales.
certificate.
Q: When may the Commissioner grant Tax Credit
In case of a person engaged in the transport of passenger and
Certificates/refund for creditable input taxes?
cargo by air or sea vessels from the Philippines to a foreign
country, the input taxes shall be allocated ratably between
his zero-rated sales and non-zero-rated sales(subject to A: In proper cases, the Commissioner may grant TCC/
regular rate, subject to final VAT withholding and VAT- refund for creditable input taxes within 120 days from the
exempt sales. day of submission of the complete documents in support of
the application filed.
2. A VAT-registered person may apply for the issuance of
a tax credit certificate or refund of input taxes paid on Q: May the taxpayer appeal a full or partial denial of such
capital goods imported or locally purchased, to the claim for tax credit?
extent that such input taxes have not been applied
against output taxes (Sec. 112 [B]). A: Yes. The taxpayer may appeal the full or partial denial
of the claim to the Court of Tax Appeal (CTA) within 30 days
Note: "Capital goods or properties" refer to goods or from the receipt of said denial, otherwise the decision shall
properties with estimated useful life greater that one year
become final. The taxpayer may also appeal to the CTA
and which are treated as depreciable assets under Section 34
(f), used directly or indirectly in the production or sale of
within 30 days after the lapsed of 120 days from the
taxable goods or services (Section 4.106-1 (b) of RR No. 7-95). submission of the complete documents if no action has
been taken by the Commissioner.
Q: For a claim for tax refund to prosper, what must the
VAT-registered entity prove? MANNER OF GIVING REFUND
A: The taxpayer must prove the following: Q: What is the manner of giving refund?
1. That it is a VAT-registered entity;
2. It must substantiate the input VAT paid by purchase A: Refund shall be made upon warrants drawn by the
invoices or official receipts (Commissioner v. Manila Commissioner or by his duly authorized representative
Mining Corporation, G.R. No. 153204, Aug. 31, 2005). without the necessity of being countersigned by the
Chairman of Commission on Audit (COA). Refund shall be
Q: May a taxpayer who has pending claims for VAT input subject to post audit by COA. (Sec 112( D) NIRC)
credit or refund, set off said claims against his other tax
liabilities? Explain your answer. (2001 Bar Question) Q: What is the difference between Sec. 112 on refund for
VAT and Sec. 229 on refund of other taxes?
A: No. Set-off is available only if both obligations are
liquidated and demandable. Liquidated debts are those A:
where the exact amounts have already been determined. In SEC. 112 (VAT) SEC. 229 (OTHER TAXES)
the instant case, a claim of the taxpayer for VAT refund is Period is 2 years after the Period is 2 years from
still pending and the amount has still to be determined. A close of the taxable quarter the date of payment of
fortiori, the liquidated obligation of the taxpayer to the when the sales were made the tax
government cannot, therefore, be set-off against the The 30-day period of appeal Period to file an
unliquidated claim which the Taxpayer conceived to exist in to the CTA need not administrative claim
his favor (Philex Mining Corp. v. CIR, G.R. No. 125704, Aug. necessarily fall within the before the CIR and
29, 1998). two-year prescriptive period, judicial claim with the
as long as the administrative CTA must fall within the
claim before the CIR is filed 2 year prescriptive
within the two-year period e. If the sale involves goods, properties or services
prescriptive period. This is some of which are subject to and some of which
because Sec. 112 (D) of the are VAT zero-rated or VAT-exempt, the invoice or
1997 Tax Code mandates that receipt shall clearly indicate the breakdown of the
a taxpayer can file the judicial sale price between its taxable, exempt and zero-
claim: (1) only within thirty rated components, and the calculation of the
days after the Commissioner value-added tax on each portion of the sale shall
partially or fully denies the be shown on the invoice or receipt: "Provided,
claim within the 120-day That the seller may issue separate invoices or
period, or (2) only within receipts for the taxable, exempt, and zero-rated
thirty days from the components of the sale.
expiration of the 120-day 3. The date of transaction, quantity, unit cost and
period if the Commissioner description of the goods or properties or nature of the
does not act within the 120- service; and
day period (CIR v. San Roque 4. In the case of sales in the amount of one thousand
Power Corporation, G.R. Nos. pesos (P1, 000) or more where the sale or transfer is
187485, 196113, 197156, made to a VAT-registered person, the name, business
February 12, 2013) style, if any, address and taxpayer identification
number (TIN) of the purchaser, customer or client.
DESTINATION PRINCIPLE OR CROSS BORDER DOCTRINE (Sec. 113[B], NIRC)
The Philippine VAT system adheres to the Cross Border Sample Receipt
Doctrine, according to which, no VAT shall be imposed to ABC CORPORATION
form part of the cost of goods destined for consumption 40 Katipunan Ave. Quezon City
outside of the territorial border of the taxing authority. VAT Reg. TIN:456-378-112-037-000
Hence, actual export of goods and services from the
Philippines to a foreign country must be free of VAT; while, April 20, 2009
those destined for use or consumption within the Sold To: Tommy Corporation
Philippines shall be imposed with 12% VAT. Address: 44 Torro St. Project 8, Quezon City
TIN:478-808-000VAT
INVOICING REQUIREMENTS
Unit Transaction
Description Qty. Total
Cost Type
INVOICING REQUIREMENTS IN GENERAL Pad Paper
40 2, 500 100,000 VATable
100pcs/box
Q: What must a VAT-registered person issue in case of Poultry
sale of VATable goods or services? Product VAT exempt
120 30 3, 600
Eggs per Sale
A: A VAT-registered person shall issue: dozen
1. A VAT invoice for every sale, barter or exchange of Native
goods or properties; and products for 56 8, 000 448, 000 Zero-rated
export
2. A VAT official receipt for every lease of goods or
properties, and for every sale, barter or exchange of Vatable sales--------------------------------------- 100,000
services. (Sec. 113[A], NIRC) Vat exempt sale------------------------------------ 3, 600
Zero-rated sale------------------------------------- 448,000
Q: What are the information contained in the VAT invoice Total Sales------------------------------------------ 551,600
or VAT official receipts? 12% Vat--------------------------------------------- 12,000
Total TAXPAYER Payable ----------------------- 563,600
A:
1. A statement that the seller is a VAT-registered person, Q: What are the accounting requirements for VAT
and the taxpayer's identification number (TIN); registered persons?
2. The total amount which the purchaser pays or is
obligated to pay to the seller with the indication that A: All persons subject to the VAT under Sec. 106 and 108
such amount includes the value-added tax: Provided shall, in addition to the regular accounting records
that: required, maintain a subsidiary sales journal and subsidiary
b. The amount of the tax shall be shown as a purchase journal on which the daily sales and purchases are
separate item in the invoice or receipt; recorded. (Sec. 113[C], NIRC)
c. If the sale is exempt from value-added tax, the
term "VAT-exempt sale" shall be written or
printed prominently on the invoice or receipt;
d. If the sale is subject to zero percent (0%) value-
added tax, the term "zero-rated sale" shall be
written or printed prominently on the invoice or
receipt;
UNIVERSITY OF SANTO TOMAS
2013 GOLDEN NOTES 174
NATIONAL INTERNAL REVENUE CODE
INVOICING AND RECORDING DEEMED SALE
TRANSACTIONS Q: State the rules regarding filing of return.
Q: How to invoice and record deemed sales transactions? A: GR: Every person liable to pay the VAT shall file a
quarterly return of the amount of his gross sales or receipts
A: In the case of Sec. 106, (B)(1) [transfer, use or within 25 days following the close of each taxable quarter
consumption not in the ordinary course of business of prescribed for each taxpayer.
goods or properties originally intended for sale or for use in
the ordinary course of business], a memorandum entry in XPN: Any person, whose registration has been
the subsidiary sales journal to record withdrawal of goods cancelled in accordance with Section 236, shall file a
for personal use is required. return:
1. Within 25 days from the date of cancellation of
In the case of Sec. 106 (B)(2), [distribution or transfer to registration;
shareholders or creditors] and Sec. 106 (B)(3) [consignment 2. Provided, that only one consolidated return shall
of goods if actual sale is made within 60 days after the date be filed by the taxpayer for his principal place of
of such consignment], an invoice shall be prepared at the business or head office and all branches. (Sec.
time of the occurrence of the transaction, which should 114[A], NIRC)
include, all the information prescribed in Sec. 113-1. The
data appearing in the invoice shall be duly recorded in the Q: When should VAT be paid?
subsidiary sales journal. The total amount of “deemed sale”
shall be included in the return to be filed for the month or A: GR: VAT-registered persons shall pay the VAT on a
quarter. monthly basis and shall be made not later than 20 days
following the end of each month.
In the case of Sec. 106(B)(4), [retirement or cessation of
business], an inventory shall be prepared and submitted to XPN: Persons whose registration has been
the RDO who has jurisdiction over the taxpayer’s principal cancelled in accordance with Section 236 who
place of business not later than 30 days after retirement or shall pay the tax due thereon within 25 days from
cessation from business. the date of cancellation of registration.
CONSEQUENCES OF ISSUING ERRONEOUS VAT INVOICE OR Note: Under Section 236 of NIRC, a VAT –registered person may
VAT OFFICIAL RECEIPT cancel his registration for VAT if:
a. He makes written application and can demonstrate to
the commissioner’s satisfaction that his gross sales or
Q: What are the consequences of issuing an erroneous receipts for the following twelve (12) months, other
VAT invoice/VAT official receipt? than those that are exempt under Section 109(A) to (U),
will not exceed P1,919,500 or
A: b. He has ceased to carry on his trade or business, and
1. In case of non-VAT registered person who issues a VAT does not expect to recommence any trade or business
invoice/receipt shall be held liable to: within the next twelve (12) months.
a. payment of percentage tax if applicable;
The cancellation of registration will be effective from the first day
b. payment of VAT without input tax;
of the following month.
c. 50% surcharge on tax due; and
d. the purchaser shall be allowed to recognize an
WITHHOLDING OF FINAL VAT ON SALES TO GOVERNMENT
input tax credit provided that the invoice/official
receipt contains the required information.
Q: State the rule regarding the withholding of Final VAT on
2. In case of VAT-registered who issues a VAT
sales to government
invoice/official receipt for a VAT-exempt sale without
the words “VAT Exempt Sale” shall be held liable to
A: The Government or any of its political subdivisions,
pay 12% VAT. (Sec. 113[D], NIRC)
instrumentalities or agencies, including government owned
or controlled corporations (GOCCs) shall, before making
FILING OF RETURN AND PAYMENT
payment on account of its purchase of goods and/or
services taxed at 12% shall deduct and withhold a final VAT
Q: Who are required to file a VAT return?
of 5% of the gross payment. (Section 114(C), NIRC)
A: Note: The five percent (5%) final VAT withholding rate shall
1. Every person or entity who in the course of trade or represent the net VAT payable to the seller
business, sells or leases goods, properties, and services
subject to VAT, if the aggregate amount of actual gross The remaining seven percent (7%) effectively accounts for the
sales or receipts exceed P1,919,500 for any twelve standard input VAT for sales of goods or services to government or
month period any of its political subdivisions, instrumentalities or agencies
2. A person required to register as VAT taxpayer but including GOCCs, in lieu of the actual Input VAT directly
attributable or ratably apportioned to such sales.
failed to register
3. Any person who imports goods
4. Professional practitioners
UNIVERSITY OF SANTO TOMAS
175 FACULTY OF CIVIL LAW
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Should actual input VAT attributable to sale to government exceed ASSESSMENT
seven percent (7%) of gross payments, the excess may form part of
the seller’s expense or cost. Q: What is the rule in the assessment of taxes?
If actual input VAT attributable to sale to government is less than
7% of gross payment, the difference must be closed to expense or A: GR: Taxes are generally self-assessing. They do not
cost. require the issuance of an assessment notice in order to
establish the tax liability of a taxpayer.
Note: It was held in the case of Abakada Guro Partylist v. Ermita,
G.R. No. 168056 September 1, 2005, that the since it has not been XPNs:
shown that the class subject to the 5% final withholding tax has 1. Improperly Accumulated Earnings Tax (Sec. 29,
been unreasonably narrowed, there is no reason to invalidate the NIRC)
provision. It applies to all those who deal with the government.
2. When the taxable period of a taxpayer is
terminated (Sec. 6 [D], NIRC)
TAX REMEDIES UNDER THE NIRC
3. In case of deficiency tax liability arising from a tax
audit conducted by the BIR (Sec. 56 [B], NIRC)
1. Taxpayer’s Remedies
4. Tax lien (Sec. 219, NIRC)
2. Government Remedies
5. Dissolving corporation (Sec. 52 [c], NIRC)
TAXPAYER’S REMEDIES
Q: What is a notice of assessment?
Q: What are the remedies available to the taxpayer?
A: It is a written notice to a taxpayer to the effect that the
amount stated therein is due as tax and containing a
A:
demand for the payment. It is a finding by the taxing agency
1. Administrative
that the taxpayer has not paid his correct taxes.
a. Before payment of taxes:
a. Dispute Assessment (Protest) Note: A notice of assessment contains not only a computation of
i. Request for reconsideration tax liabilities but also a demand for the payment within a
ii. Request for reinvestigation prescribed period. It also signals the time when penalties and
b. Entering a compromise agreement interests begin to accrue.
b. After payment of taxes:
a. Claim for Tax Refund Q: What is the importance of a tax assessment?
b. Claim for Tax Credit
2. Judicial A:
a. Civil TO THE GOVERNMENT TO THE TAXPAYER
b. Criminal 1. In the proper pursuit of 1. To inform the
3. Substantive judicial and extrajudicial taxpayer of his
a. Question validity of tax statute/ regulation remedies to enforce liabilities;
taxpayer liabilities and 2. To determine the
Q: What is the importance of tax remedies? certain matters that relate period within
to it, such as the imposition which to protest.
A: of surcharges and interests; 3. To determine
1. To the government - For the regular collection of 2. In the application of the prescription of
revenue necessary for the existence of the Statute of Limitations; government
government. 3. In the establishment of tax claim.
2. To the taxpayer - They are safeguards of the taxpayer’s liens; and
rights against arbitrary action. 4. In estimating the revenues
that may be collected by the
Q: What are the subjects of tax remedies in internal government.
revenue taxation?
Q: What is the nature of an assessment?
A: They include the action of the BIR where there may be
controversy between the taxpayer and the State such as: A: It is merely a notice to the effect that the amount stated
1. Assessment of internal revenue taxes therein is due as tax and containing a demand for the
2. Collection of internal revenue taxes payment. (Alhambra Cigar Mfg. Co. v. CIR, GR L-23226, Nov.
3. Refund of internal revenue taxes 28, 1967)
4. Imposition of administrative or civil fines, Q: Who has the burden of proof in pre-assessment
penalties, interests or surcharges; promulgation proceedings?
and/or enforcement of administrative rules and
regulations for the effective and efficient A: The burden of proof is on the taxpayer for there is a
enforcement of internal revenue laws presumption of correctness on the part of the CIR.
5. Prosecution of criminal violations of internal Otherwise, the finding of the CIR will be conclusive and the
revenue laws. CIR will assess the taxpayer. If the taxpayer does not
Note: An assessment is deemed made only when the Collector of INVENTORY METHOD FOR INCOME DETERMINATION
Internal Revenue releases, mails or sends such notice to the
taxpayer (CIR v. PASCOR, 309 SCRA 402)
Q: What are the Inventory methods for income
determination?
Q: Enron, a duly registered Subic Bay Freeport Zone
enterprise received a FAN from the CIR despite filing its
A: The International Accounting Standard enumerated the
protest letter to the preliminary five-day letter. Enron
following:
filed a Petition for Review with the CTA since the CIR
1. Last In – First Out (LIFO)
failed to resolve its protest against the FAN within the
2. First In – First Out (FIFO)
mandated 180-day period. Enron alleged that the BIR
3. Weighted Average
failed to provide the legal and factual basis of the
4. Specific identification
assessment in violation of Sec. 3.1.4, RR 12-99. Finding for
Enron, the CTA held that the FAN sent to the Company
Q: What is LIFO and FIFO?
failed to comply with the requirements of a written notice
set by the law as there was no mention of the applicable
A: A method of assigning costs to both inventory and cost
law and facts. The CIR then elevated the case to the SC
of goods sold. With regard to LIFO the assumption is that
claiming that Enron was informed of the legal and factual
the most recent inventory is the one sold first as compared
bases of the deficiency assessment against it.
to FIFO wherein the inventory items are sold in the order
1. Was there a valid assessment?
they are acquired.
2. Is the notice requirement satisfied when the BIR
advised the taxpayer’s representative of the tax
Q: What is Weighted Average?
deficiency during the pre-assessment stage, and
furnished the taxpayer of a copy of the audit working
A: A method of assigning cost which requires that we
papers?
compute the weighted average cost per unit at the time of
each sale equals the cost of goods available for sale divided
UNIVERSITY OF SANTO TOMAS
177 FACULTY OF CIVIL LAW
Law on Taxation
by the units available. Thus, the cost of goods sold would be a. Self-assessed tax per return filed by the taxpayer
dependent on the average acquisition cost of the inventory on the prescribed date was not paid at all or only
currently available when a sale is done. partially paid; or
b. Deficiency tax assessed by the BIR becomes final
Q: What is Specific Identification? and executory.
2. Deficiency Tax –
A: A meticulous method wherein each item in inventory can a. The amount by which the tax imposed by law as
be identified with a specific purchase and invoice, when determined by the CIR or his authorized
each item is sold the sales record should also contain the representative exceeds the amount shown as tax
same. Thus the cost of goods sold would depend on which by the taxpayer upon his return; or
item was sold for that particular sale. b. If no amount is shown as tax by the taxpayer
upon his return is made by the taxpayer, then the
JEOPARDY ASSESSMENT amount by which the tax as determined by the
CIR or his authorized representative exceeds the
Q: What are the different kinds of assessments and what amounts previously assessed or collected without
is jeopardy assessment? assessment as deficiency.
TAX DELINQUENCY AND TAX DEFICIENCY Q: What are the powers of the Commissioner in the
assessment of taxes?
Q: What is Delinquency Tax and Deficiency Tax?
A: The CIR or his duly authorized representative is
A: authorized to use the following powers: (Sec. 6, NIRC)
1. Delinquency Tax – a taxpayer is considered delinquent 1. Examination of return and determination of tax due
in the payment of taxes when: 2. Use of the best evidence available
3. Authority to conduct inventory taking, surveillance and
prescribe gross sales and receipts if there is reason to
A: To secure the taxpayers against unreasonable A: When the return is valid and appropriate.
investigation after the lapse of the period prescribed. They 1. Valid – When it has complied substantially with the
are beneficial to the government because tax officers will requirements of law.
be obliged to act promptly in the assessment and collection 2. Appropriate – When it is a return for the particular tax
of the taxes, for when such period have lapsed their right to required by law.
assess and collect would be barred by the statute of
limitations. Q: What are the prescriptive periods for the assessment of
taxes?
Q: State the basic rules on prescription
A:
A: 1. Where a return was filed:
1. When the tax law itself is silent on prescription, the tax
is imprescriptible; GR: Assessment shall be made within 3 years after:
2. When no return is required, tax is imprescriptible and 1.) The last day prescribed by law for the filing of the
tax may be assessed at any time as the prescriptive return, even if the return was filed before the last
periods provided in Sec. 203 and 222, NIRC are not day prescribed by law.; or
applicable. Remedy of the taxpayer is to file a return 2.) The day the return was filed if filed beyond the
for the prescriptive period to commence. period prescribed by law.
A: It is computed based on the Administrative Code. Sec. 31 c. Where the CIR and taxpayer, before the
of the Administrative Code of 1987 provides that a “year” expiration of the 3-year period have agreed
shall be understood to be 12 calendar months. Both Article
UNIVERSITY OF SANTO TOMAS
181 FACULTY OF CIVIL LAW
Law on Taxation
in writing to the extension of the period, the After an audit of the return, the BIR issued on Apr. 20,
period so agreed upon may thereafter be 2001 a deficiency income tax assessment for the sum of
extended by subsequent agreements in P250,000 inclusive of interest and penalty. For failure of
writing made before the expiration of the Mr. and Mrs. Sebastian to pay the tax within the period
period previously agreed upon. stated in the notice of assessment, the BIR issued on Aug.
19, 2001 warrants of distraint and levy to enforce
d. Where there is a written waiver or collection of the tax.
renunciation of the original 3-year limitation
signed by the taxpayer. If you are the lawyer of Mr. and Mrs. Sebastian, what
possible defenses will you raise in behalf of your clients
Note: Requests for reconsideration of tax against the action of the BIR in enforcing collection of the
assessments, as required by the BIR, must be tax? (2002 Bar Question)
accompanied by a waiver of statute of limitations
accomplished by the taxpayer. (Revenue
A: I will raise the defense of prescription. The right of the
Delegation Authority Order No. 05-01)
BIR to assess prescribes after three years counted from the
last day prescribed by law for the filing of the income tax
2. The return was amended substantially – The
returns when the said return is filed on time. (Sec. 203,
prescriptive period shall be counted from the filing of
NIRC) The last day for filing the 1997 income tax return is
the amended return.
Apr. 15, 1998. Since the assessment was issued only on Apr.
20, 2001, the BIR's right to assess has already prescribed.
Q: When is an amendment considered substantial?
FALSE, FRAUDULENT AND NON-FILING OF RETURNS
A:
1. There is under declaration (exceeding 30% of that
Q: Is a false or fraudulent return presumed?
declared) of taxable sales, receipts or income; or
2. There is overstatement (exceeding 30% of deductions)
A: No, false and fraudulent return is not presumed. The
(Sec. 248, NIRC)
burden of proof to prove that the return was false and
fraudulent lies against the government through the BIR.
Q: What is the effect of filing a defective return?
Q: What is the prescriptive period where the return was
A: If the return was defective, it is as if no return was filed.
false, fraudulent or there was no return filed?
The corollary prescription will be 10 years from and after
the discovery of the failure or omission and not the 3 year
A: The prescription period is 10 years from the discovery of
prescriptive period. There is an omission when the
the falsity, fraud or from the omission to file the return.
taxpayer failed to file a return for the particular tax
(Sec. 222, NIRC)
required by law. (Butuan Sawmill v. CTA, GR L-20601, Feb.
28, 1966)
Q: When is a return considered fraudulent?
Q: Mr. Reyes, a Filipino citizen engaged in the real estate
A:
business, filed his 2004 ITR on Mar. 30, 2005. On Dec. 30,
1. Intentional and substantial declaration (exceeding 30%
2005, he left the Phil. as an immigrant to join his family in
of that declared) of taxable sales, receipts or income;
Canada. After investigation of said return, the BIR issued a
or
notice of deficiency income tax assessment on Apr. 15,
2. Intentional and substantial overstatement of
2008. Mr. Reyes returned to the Phil. as a balikbayan on
deductions of exemptions exceeding 30% of
Dec. 8, 2008. Finding his name to be in the list of
deductions (Sec. 248, NIRC)
delinquent taxpayers, he filed a protest against the
3. Recurrence of the above circumstances
assessment on the ground that he did not receive a notice
of assessment and the assessment had prescribed. Will
Note: Fraud is never presumed and the circumstances constituting
the protest prosper? (2000 Bar Question) it must be alleged and proved to exist by clear and convincing
evidence. It may be established.
A: No, the assessment has not yet prescribed since the BIR
has a period of 3 years from the last day prescribed by law Q: When is a return considered false?
for the filing of the return. The return was filed on Mar. 30,
2005, that is, before the last day prescribed by law for its A: When there is a deviation from the truth due to mistake,
filing, hence the law considers it as being filed on the last carelessness or ignorance.
day prescribed by law for the filing of the same, which is
Apr. 15, 2005. The assessment issued on Apr. 15, 2008 is
therefore within the 3 year prescriptive period.
Q: What is a waiver of statute of limitations? A: Failure to report sales, receipts or income in an amount
exceeding thirty percent (30%) of that declared per return,
A: It is an agreement between the taxpayer and the BIR and a claim of deductions in an amount exceeding (30%) of
that a period to issue an assessment and collect taxes due is actual deductions, shall render the taxpayer liable for
extended to a date certain. (Philippine Journalists, Inc. v. substantial underdeclaration of sales, receipts or income or
CIR, GR 162852, Dec. 16, 2004) for overstatement of deductions, as mentioned herein.
(Sec. 248, 1997 NIRC)
Q: What is the nature of such waiver?
INTEREST
A: It is to a certain extent a derogation of the taxpayer’s
right to security against prolonged and unscrupulous Q: Are there interests to be paid in addition to the tax?
investigations and must be carefully and strictly construed.
A: Yes, there shall be assessed and collected on any unpaid
Q: What are the requisites of an agreement waiving the amount of tax, interest at the rate of 20% per annum, or
statute of limitations? such higher rate as may be prescribed by rules and
regulations, from the date prescribed for payment until the
A: amount is fully paid. (Sec. 249, NIRC)
1. Entered before the expiration of the 3 year period for
assessment of the tax; Q: When does the period of interest commence to run?
2. In writing;
3. Signed by the taxpayer; A: Interest shall be assessed and collected from the date
4. Must specify a definite date agreed upon between the prescribed for payment until the amount is fully paid (Sec.
parties within which to assess and collect taxes; 249, NIRC)
5. Signed and accepted by the CIR or his duly authorized
representative; and Q: What is Deficiency Interest?
6. Date of acceptance must be indicated. (RMC 06-05)
A: Any deficiency in the tax due, as the term is defined in
GENERAL PROVISIONS ON ADDITIONS TO THE TAX the NIRC, shall be subject to the interest prescribed in Sec
249, NIRC
CIVIL PENALTIES
Q: What is Delinquency Interest?
Q: What is the nature of civil penalties?
A: In case of failure to pay:
A: They are imposed in addition to the tax required to be 1. The amount of the tax due on any return required to
paid. It is a penalty equivalent to twenty-five percent (25%) be filed; or
of the amount due, in the following cases: 2. The amount of the tax due for which no return is
a) Failure to file any return and pay the tax due thereon; required; or
b) Unless otherwise authorized by the Commissioner, 3. A deficiency tax, or any surcharge or interest thereon
filing a return with an internal revenue officer other on the due date appearing in the notice and demand
than those with whom the return is required to be of the CIR,
filed;
c) Failure to pay the deficiency tax within the time There shall be assessed and collected on the unpaid
prescribed for its payment in the notice of assessment; amount, interest at the rate prescribed in subsec. A hereof
d) Failure to pay the full or part of the amount of tax until the amount is fully paid, which interest shall form part
shown on any return required to be filed under the of the tax. (Sec. 249, NIRC)
provisions of this Code or rules and regulations, or the
full amount of tax due for which no return is required Q: What is interest on extended payment?
to be filed, on or before the date prescribed for its
payment. (Sec. 248, 1997 NIRC) A: If any person required to pay the tax is qualified and
elects to pay the tax on installment under the provisions of
Note: In case of willful neglect to file the return within the period the NIRC, but fails to pay the tax or any installment hereof,
prescribed by this Code or by rules and regulations, or in case a or any part of such amount or installment on or before the
false or fraudulent return is willfully made, the penalty to be date prescribed for its payment, or where the CIR has
imposed shall be fifty percent (50%) of the tax or of the deficiency
authorized an extension of time within which to pay a tax
tax, in case, any payment has been made on the basis of such
return before the discovery of the falsity or fraud: Provided, That a or a deficiency tax or any part thereof, there shall be
substantial underdeclaration of taxable sales, receipts or income, assessed and collected interest at the rate of 20% (the one
or a substantial overstatement of deductions, as determined by the prescribed in Sec. 249(a)) on the tax or deficiency tax or any
Commissioner pursuant to the rules and regulations to be part thereof unpaid from the date of notice and demand
promulgated by the Secretary of Finance, shall constitute prima until it is paid. (Sec. 249(d), 1997 NIRC)
facie evidence of a false or fraudulent return.
Q: When must a LA be served? Q: Within how many days must the taxpayer respond to
the NIC?
A: It must be served to the taxpayer within 30 days from its
date of issuance; otherwise, it shall become null and void. A: The taxpayer have 15 days from the date of his receipt to
The taxpayer shall then have the right to refuse the service explain his side.
of this LA, unless the LA is revalidated.
Q: What is the effect if taxpayer fails to respond to the
Q: How is LA revalidated? How often can it be NIC?
revalidated?
A: If the taxpayer fails to respond within 15 days from date
A: Revalidated through the issuance of a new LA. It can be of receipt of the NIC, he shall be considered in default, in
revalidated only once, if issued by the Regional Director; which case, the Revenue District Officer or the Chief of the
twice, if issued by the CIR. The suspended LA(s) must be Special Investigation Division of the Revenue Regional
attached to the new issued LA. (RMO 38-88) Office, or the Chief of Division in the National Office, as the
case may be, shall endorse the case with the least possible
delay to the Assessment Division of the Revenue Regional
UNIVERSITY OF SANTO TOMAS
185 FACULTY OF CIVIL LAW
Law on Taxation
Office or to the CIR or his duly authorized representative, as Q: What are the requirements of a valid PAN?
the case may be, for appropriate review and issuance of a
deficiency tax assessment, if warranted. (Sec 3.1.1, RR 12- A:
99) 1. In writing; and
2. Should inform the taxpayer of the law and the facts on
Q: What are the instances where NIC may be dispensed which the assessment is made (Sec. 228, NIRC)
with?
Note: This is to give the taxpayer the opportunity to refute the
A: NIC can be dispensed with: MEDEC findings of the examiner and give a more accurate and detailed
1. When the finding for any deficiency tax is the result of explanation regarding the assessments. The absence of any of the
requirements shall render the assessment void.
Mathematical error in the computation of the tax
appearing on the face of the tax return filed by the
Q: Within what period must the taxpayer respond to PAN?
taxpayer; or
2. When the Excise tax due on excisable articles has not
A: If the taxpayer disagrees with the findings stated in the
been paid; or
PAN, he has 15 days from receipt of the PAN, to file a
3. When a Discrepancy has been determined between
written reply contesting the proposed assessment. (Sec.
the tax withheld and the amount actually remitted by
3.1.2, RR 12-99)
the withholding agent; or
4. When an article locally purchased or imported by an
Q: What is the effect of taxpayer’s failure to respond
Exempt person, such as, but not limited to, vehicles,
within 15 days?
capital equipment, machineries and spare parts, has
been sold, traded or transferred to non-exempt
A: The taxpayer shall be considered in default, in which
persons; or
case a formal letter of demand and assessment notice shall
5. When a taxpayer who opted to claim a refund or tax
be issued by the BIR. (Sec. 3.1.2, RR 12-99)
credit of excess creditable withholding tax for a
taxable period was determined to have Carried over
EXCEPTIONS TO ISSUANCE OF PAN
and automatically applied the same amount claimed
against the estimated tax liabilities for the taxable
Q: Under what instances is PAN no longer required?
quarter or quarters of the succeeding taxable year.
(Sec 3.1.3, RR 12-99)
A: MEDEC
Note: The aforementioned cases are the instances where both 1. When the finding for any deficiency tax is the result of
notice for informal conference and preliminary assessment notice Mathematical error in the computation of the tax
shall not be required (Sec. 3.1.3, RR 12-99) appearing on the face of the tax return filed by the
taxpayer; or
Q: What is the purpose of Informal Conference? 2. When the Excise tax due on excisable articles has not
been paid; or
A: It is to afford the taxpayer the opportunity to present his 3. When a Discrepancy has been determined between
case. the tax withheld and the amount actually remitted by
the withholding agent; or
Q: What matters are taken up during the Informal 4. When an article locally purchased or imported by an
Conference? Exempt person, such as, but not limited to, vehicles,
capital equipment, machineries and spare parts, has
A: been sold, traded or transferred to non-exempt
1. Discussion on the merits of the assessment persons (Sec. 228, NIRC); or
2. Attempt of the taxpayer to convince the examiner to 5. When a taxpayer who opted to claim a refund or tax
conduct a reinvestigation and/or re-examination credit of excess creditable withholding tax for a
3. Evaluate if submission of the waiver of the statute of taxable period was determined to have Carried over
limitations is necessary because evaluation may and automatically applied the same amount claimed
extend beyond 3 years against the estimated tax liabilities for the taxable
4. Taxpayer to advise the examiner if position paper will quarter or quarters of the succeeding taxable year.
be submitted (Sec 3.1.3, RR 12-99)
ISSUANCE OF PRELIMINARY ASSESSMENT NOTICE Q: In the investigation of the withholding tax returns of AZ
Medina Security Agency (AZ) for the taxable years 1997
Q: What is a Pre-Assessment Notice (PAN)? and 1998, a discrepancy between the taxes withheld from
its employees and the amounts actually remitted to the
A: It is a communication issued by the Regional Assessment government was found. Accordingly, before the period of
Division, or any other concerned BIR Office, informing a prescription commenced to run, the BIR issued an
taxpayer who has been audited of the findings of the RO, assessment and a demand letter calling for the immediate
following the review of these findings. payment of the deficiency withholding taxes in the total
amount of P250,000.00. Counsel for AZ protested the
assessment for being null and void on the ground that no
A: No, the contention of the counsel is untenable. Sec. 228, A: The taxpayer may protest the assessment within 30 days
NIRC expressly provides that no pre-assessment notice is from receipt otherwise the assessment becomes final,
required when a discrepancy has been determined executory, demandable and not appealable to the CTA.
between the tax withheld and the amount actually remitted
by the withholding agent. Since the amount assessed Q: Taxpayer duly protested a PAN it received from the BIR.
relates to deficiency withholding taxes, the BIR is correct in Subsequently, the BIR issued a FAN to the taxpayer. The
issuing the assessment and demand letter calling for the demand letter states: “This is our final decision based on
immediate payment of the deficiency withholding taxes. investigation. If you disagree, you may appeal the final
decision within 30 days from receipt hereof, otherwise said
REPLY TO PAN deficiency tax assessment shall become final, executory
and demandable.” Instead of filing a protest on the
Q: What is a reply? assessment, the taxpayer filed a petition for review with
the CTA. The BIR filed a motion to dismiss on the ground
A: A reply is the answer of the taxpayer in contesting the that the taxpayer failed to exhaust administrative
findings of the revenue officers contained in a PAN and remedies by filing a protest on the assessment. Should the
must be filed within 15 days from receipt of the PAN. motion be granted?
Failure of the taxpayer to file a reply would now enable the
RO to issue a FAN. However no liability for additional or A: No, this case is an exception to the rule on exhaustion of
deficiency tax arises from such failure. The tax code used administrative remedies on the ground that the BIR is in
the term “reply” to distinguish it from a protest. estoppel. The taxpayer cannot be blamed for not filing a
protest against the FAN since the language used and the
ISSUANCE OF FORMAL LETTER OF DEMAND tenor of the demand letter indicate that it is the final
AND ASSESSMENT NOTICE/FINAL ASSESSMENT NOTICE. decision of the CIR on the matter. The court reminded the
CIR to indicate, in a clear and unequivocal language,
Q: What is a Final Assessment Notice (FAN)? whether its action on a disputed assessment constitutes its
final determination thereon in order for the taxpayer
A: It is a declaration of deficiency taxes issued to a taxpayer concerned to determine when his or her right to appeal to
who fails to respond to a PAN within the prescribed period the tax court accrues. Thus, the CIR is now estopped from
of time, or whose reply to the PAN was found to be without claiming that it did not intend the FAN to be a final
merit. decision. (Allied Banking Corp. v. CIR, GR 175097, Feb. 5,
2010)
Q: Who issues the FAN?
DISPUTED ASSESSMENT
A: It shall be issued by the Commissioner or his duly
authorized representative. Q: When is an assessment considered disputed?
Q: In what form shall the FAN be and what should it A: When the taxpayer, indicates its protest against the
contain? delinquent assessment of the RO and requests for
reconsideration, through a letter. After the request is filed
A: and received by the BIR, the assessment becomes a
1. In writing; and disputed assessment. (CIR v. Isabela Cultural Corp., GR
2. Shall state the facts, the law, rules and regulations, or 135210, July 11, 2001)
jurisprudence on which the assessment is based,
otherwise, the FAN shall be void. (Sec. 228, NIRC; Sec. ADMINISTRATIVE DECISION ON A DISPUTED ASSESSMENT
3.1.4 RR 12-99)
Q: Can a taxpayer go to the CIR when a protest is denied
Q: What does the phrase “in writing” under Sec. 228 by the CIR’s authorized Representative?
mean?
A: Yes, the taxpayer may elevate the protest to the CIR
A: It does not exclusively mean written words. “Writing” within 30 days from receipt of the decision for a request for
consists of letters, word, numbers, or their equivalent, set reconsideration and that his case is referred to the Bureau’s
down by handwriting, typewriting, printing, photostating, Appellate Division. Otherwise, it becomes final and appeal
photographing, magnetic impulse, mechanical or electronic to the CTA may be taken.
recording, or other form of data compilation. Indubitably,
figures are also “writings” and if the numerical presentation Note: The authority to make tax assessments may be delegated to
is understandable enough, then there is no reason why it subordinate officers. Said assessment has the same force and
should be automatically rejected as inadequate compliance effect as that issued by the CIR if not revised or reviewed by the
latter. (Oceanic Network Wireless Inc. V. CIR, GR 148380, Dec. 9,
with the law (Sevilla, et. al., v. CIR, CTA Case 6211, Oct. 4,
2005)
2004).
EFFECT OF FAILURE TO PROTEST A: The remedy is to appeal such decision to the CTA within
30 days from receipt of the decision otherwise, the
Q: What is the effect of failure to protest a FAN? assessment will become final, executory and demandable.
A: It makes the FAN final and executory, and the taxpayer IN CASE OF INACTION BY COMMISSIONER WITHIN
loses his right to contest the assessment, at the 180 DAYS FROM SUBMISSION OF DOCUMENTS
administrative and judicial levels. Thus, the filing of the
protest within 30 days from the receipt of the assessment Q: What are the options given to the taxpayer if there
would be mandatory for the taxpayer to use the other would be inaction by the CIR within 180 days from
administrative and judicial remedies. submission of the documents?
If the government makes another assessment or the DISTRAINT OF PERSONAL PROPERTY INCLUDING
assessment made is revised, the prescriptive period for GARNISHMENT
collection of such tax should be counted from the date the
last or revised assessment was made. Q: What is distraint?
If the government makes another assessment or the A: It is a summary remedy whereby the collection of tax is
assessment made is revised, the prescriptive period for enforced on the goods, chattels or effects of the taxpayer
(including other personal property of whatever character as
Note: Property so purchased may be resold by the CIR or his 3. Taxpayer has record of Transferring his bank deposits
deputy. The net proceeds shall be remitted to the National and other personal properties in the Phil. to any
Treasury and accounted as internal revenue. foreign country except if taxpayer is a banking
institution;
Q: What is the remedy of the taxpayer once the CIR or 4. Taxpayer uses Aliases in bank accounts other than the
other proper officer issues the warrant of distraint? name for which he is legally and/or popularly known;
5. Taxpayer keeps Bank deposits and other properties
A: The taxpayer may request that the warrant be lifted. The
under the name of other persons, whether or not
CIR may, in his discretion, allow the lifting of the order of
related to him, and the same are not under any lawful
distraint. He may ask for a bond as a condition for the
fiduciary or trust capacity;
cancellation of the warrant. (Sec. 207, NIRC)
6. There is big amount of Undeclared income known to
REPORT OF SALE TO THE BUREAU OF INTERNAL REVENUE the public and to the BIR and there is a strong reason
to believe that the taxpayer will hide or conceal his
Within two (2) days after the sale, the officer making the property;
same shall make a report of his proceedings in writing to
the Commissioner and shall make a report of his Note: “Big amount” of undeclared income” means an amount
proceedings in writing to the Commissioner and shall exceeding thirty percent of the gross sales, gross receipts or
himself preserve a copy of such report as an official record gross revenue declared per return.
(Sec. 211, NIRC).
7. BIR receives Complaint or information pertaining to
Note: Report on the distraint (before sale) shall, within ten (10) undeclared income (of big amount) and such is
days from receipt of the warrant, be submitted by the distraining supported by substantial and credible evidence.
officer to the Revenue District Officer, and the Revenue Regional
Director (Sec. 207, NIRC)
A: Yes, such property may, with the consent of such court, Q: May the taxpayer recover his property prior to
be subsequently distrained, subject to the prior lien of the consummation of the sale?
attachment creditor. (CIR v. Floresl, GR L- 9675, Sept. 28,
1957) A: Yes, at any time before the day fixed for the sale, the
taxpayer may discontinue all proceeding by paying the
SUMMARY REMEDY OF LEVY ON REAL PROPERTY taxes, penalties and interest. (Sec. 213, NIRC)
A: It is the seizure of real property and interest in or rights Q: May the taxpayer redeem his property after the
to such properties for the satisfaction of taxes due from the consummation of the sale?
delinquent taxpayer.
A: Yes, within 1 year from the date of sale, the taxpayer or
Q: When may levy on real property be made? anyone for him, may pay to the Revenue District Officer the
total amount of the following:
A: It may be made before, simultaneously or after the 1. Public taxes;
distraint of personal property of the same taxpayer. 2. Penalties;
3. Interest from the date of delinquency to the date
Q: How is levy on real property effected? of sale; and
4. Interest on said purchase price at the rate of 15%
A: It may be effected by serving upon the taxpayer a per annum from the date of sale to the date of
written notice of levy in the form of a duly authenticated redemption.
certificate prepared by Revenue District Officer containing:
[DNA] Note: If the property was forfeited in favor of the government, the
1. Description of the property upon which levy is made; redemption price shall include only the taxes, penalties and
2. Name of the taxpayer; interest plus costs of sale – no interest on purchase price since the
Government did not “purchase” the property, for it was forfeited.
3. Amount of tax and penalty due.
(Sec. 214, NIRC)
Q: May the BIR forfeit the property subject to levy? Q: What is the remedy for enforcement of forfeiture in
case of personal property?
A: Yes, forfeiture is allowed if:
1. there is no bidder; or A: The forfeiture of chattels and removable fixtures of any
2. bid amount is insufficient. sort shall be enforce by the seizure and sale, or destruction,
of the specific forfeited property (Sec. 224, NIRC)
Q: Define forfeiture
Q: What is the remedy of enforcement of forfeiture in
A: It is the divestiture of property without compensation, in case of real property?
consequence of a default or offense.
A: The forfeiture of real property shall be enforced by a
Q: What is the effect of forfeiture? judgment of condemnation an sale in a legal action or
proceeding, civil, or criminal, as the case may be (Sec. 224,
A: Forfeiture transfers the title to the specific thing from NIRC)
the owner to the government. Also there would no longer
be any further levy for such would be for the total ACTION TO CONTEST FORFEITURE OF CHATTEL
satisfaction of the tax due. (Sec 215, NIRC)
Q: When can an action to contest forfeiture of chattel be
Note: The erring taxpayer may still be criminally prosecuted made?
even if the property has already been forfeited (Garcia v.
Coll., 66 PHIL. 441) A: In case of the seizure of personal property under claim
of forfeiture, the owner desiring to contest the validity of
Q: What are the rules governing forfeiture? the forfeiture may, at any time before sale or destruction of
the property, bring an action against the person seizing the
A: property or having possession therof to recover the same,
1. If there is no bidder in the public sale or if the amount and upon giving proper bond, may enjoin the sale; or after
of the highest bid is insufficient to pay the taxes, the sale and within six months, he may bring an action to
penalties and costs, the real property shall be forfeited recover the net proceeds realized at the sale (Sec. 31, NIRC)
to the government.
2. The Register of Deeds shall transfer the title of Note: Forfeited chattels shall not be destroyed until at least twenty
forfeited property to the Government without days after seizure (Sec. 225 last par., NIRC)
necessity of a court order.
3. Within 1 year from the date of sale, the property may RESALE OF REAL PROPERTY TAKEN FOR TAXES
be redeemed by the delinquent taxpayer or any one
for him, upon payment of taxes, penalties and interest Note: Rev. Regs. No. 22-2002 lays down the rules in the sale
thereon and cost of sale; if not redeemed within said or disposition of real property obtained by the Government
period, the forfeiture shall become absolute. (Sec. 215, under Sec. 216 of the NIRC.
NIRC)
Q: When is resale of real property taken for taxes made?
Q: What is done with the forfeited property?
A: All acquired/forfeited real properties transferred in the
A: Property forfeited is transferred to another without name of the Republic of the Philipines, having passed the
consent of the defaulting taxpayer or wrongdoer. one-year redemption period, shall be converted into cash
from the date of acquisition or forfeiture.
Q: What is the difference between forfeiture and seizure
to enforce a tax lien? Q: How is the resale effected?
A: All taxes and expenses will be borne by the winning Q: Can there be further distraint?
bidder. Furthermore, he shall be responsible at his own
expense for the ejectment of squatters and/or occupants, if A: The remedy of distraint and levy may be repeated if
any, of the auctioned property. necessary until the full amount of the tax delinquency due
including all expenses is collected from the taxpayer (Sec.
Q: Can a private sale may be resorted to? 217, NIRC). Otherwise, a clever taxpayer who is able to
conceal most of the valuable part of his property would
A: A negotiated or a private sale shall be resorted to as a escape payment of his tax liability by sacrificing an
consequence of failed public bidding for two consecutive insignificant portion of his holdings.
times. It shall, in all cases, be approved by the Secretary of
Note: Further distraint and levy does not apply when the real
Finance.
property was forfeited to the government for it is in satisfaction of
the claim in question. (Sec 215, NIRC)
WHEN PROPERTY TO BE SOLD OR DESTROYED
TAX LIEN
Q: When is forfeited propertied sold or destroyed?
Q: What is meant by tax lien?
A: Sales of forfeited chattels and removable fixtures shall
be effected, so far as practicable, in the same manner and A: It is a legal claim or charge on property, personal or real,
under the same conditions as the public notice and the established by law as a sort of security for the payment of
time and manner of sale as are prescribed for sales of tax obligations.
personal property distrained for the non-payment of taxes.
Q: Is tax itself a lien?
Forfeited property shall not be destroyed until at least
twenty days after seizure (Sec. 225, NIRC) A: No. Tax is not a lien even upon the property against
which it is assessed, unless expressly made so by statute.
Q: How forfeited chattels disposed?
Q: What is the nature of tax lien?
A: Distilled spirits, liquors, cigars, cigarettes, other
manufactured products of tobacco, and all apparatus used A: It is enforced as payment of tax, interest, penalties, costs
in or about the illicit production of such articles may, upon upon the entire property and rights to property of the
forfeiture, be destroyed by order of the Commissioner, taxpayer. However, to be valid against any mortgagee,
when the slae of the same for consumption or use would purchaser or judgment creditor, notice of such lien has to
be injurious to public health or prejudicial to the be filed by CIR with the Registry of Deeds. (Sec. 219, NIRC)
enforcement of law.
Note: A valid assessment is required to be issued before a tax lien
All other articles subject to excise tax, which have been shall be annotated at the proper registry of property.
manufactured or removed in violation of this code, as well
as dies for the printing or making of internal revenue Q: When is tax lien applied?
stamps and labels which are in imitation of or purport to be
lawful stamps, or labels may, upon forfeiture be sold or A:
destroyed in the discretion of the commissioner (Sec. 225, 1. With respect to personal property – Tax lien attaches
NIRC). when the taxpayer neglects or refuses to pay tax after
A: It is an agreement between two or more persons who, Q: Can the court compel the CIR to compromise in cases
amicably settle their differences on such terms and when such is allowed?
conditions as they may agree on to avoid any lawsuit
between them. It implies the mutual agreement by the A: No, to assure that no improper compromise is made to
parties in regard to the thing or subject matter which is to the prejudice of the Government.
be compromised.
Q: What are the limitations on the power to compromise a
Q: What are the requisites for Compromise? tax liability?
A: No, a taxpayer who is constituted as withholding agent Q: What are the two ways to enforce civil liability through
who has deducted and withheld at source the tax on the civil actions?
income payment made by him holds the taxes in trust for
the government (Sec. 58 [D], NIRC) and is obligated to remit A:
them to the BIR. The subsequent inability of the 1. By filing a civil case for collection of a sum of money
withholding agent to pay/remit the taxes withheld is not a with the proper regular court; or
ground for compromise because the withholding tax is not 2. By filing an answer to the petition for review filed by
a tax upon the withholding agent but it is only a procedure taxpayer with CTA
for the collection of a tax.
Q: When is civil action resorted to?
Q: When is the CIR authorized to abate or cancel a tax
liability? A: It is resorted to when a tax liability becomes collectible.
It is collectible:
A: 1. When tax is assessed and the assessment became final
1. The tax or any portion thereof appears to be unjustly and executory because the taxpayer fails to file a
or excessively assessed; or protest with the CIR within 30 days from receipt.
2. The administration and collection costs involved do 2. When a protest against assessment is filed and a
not justify the collection of the amount due. (Sec. decision of the CIR was rendered but the said decision
204[B], NIRC) became final, executory and demandable for failure of
the tax payer to appeal the decision to the CTA within
Q: Explain the extent of the authority of the CIR to 30 days from the receipt of the decision.
compromise and abate taxes (1996 Bar Question) 3. When the protest is not acted upon by the CIR within
180 days from the submission of the documents and
A: The authority of the CIR to compromise encompasses the taxpayer failed to appeal with the CTA within 30
both civil and criminal liabilities of the taxpayer. The civil days from the lapse of the 180 days period. (Sec. 228,
compromise is allowed only in cases: (1) where the tax NIRC)
assessment is of doubtful validity, or (2) when the financial
position of the taxpayer demonstrates a clear inability to Q: What is the purpose for filing a criminal complaint?
pay the tax.
A: Criminal complaint is instituted not to demand payment
The compromise settlement of any tax liability shall be but to penalize taxpayer for the violation of the NIRC.
UNIVERSITY OF SANTO TOMAS
197 FACULTY OF CIVIL LAW
Law on Taxation
2. All criminal violations of the NIRC may be
Q: What is the nature of this remedy? compromised except those already filed in court or
those involving fraud. (Sec. 204, NIRC) Accordingly, if
A: Criminal action is resorted to not only for collection of Minolta makes a voluntary offer to compromise the
taxes but also for enforcement of statutory penalties of all criminal violations for non-filing and non-payment of
sorts. taxes for the year 1998, the CIR may accept the offer
which is allowed by law. However, if it can be
Q: What are the two common crimes punishable under established that a tax has not been paid as a
the NIRC? consequence of non-filing of the return, the civil
liability for taxes may be dealt with independently of
A: the criminal violations. The compromise settlement of
1. Willful attempt to evade or defeat tax (Sec. 254, NIRC) the criminal violations will not relieve the taxpayer
2. Failure to file return, supply correct and accurate from its civil liability. But the civil liability for taxes may
information, pay tax, withhold and remit tax and also be compromised if the financial position of the
refund excess taxes withheld on compensation (Sec. taxpayer demonstrates a clear inability to pay the tax.
255, NIRC)
Q: Is assessment necessary before a taxpayer may be
prosecuted for willfully attempting in any manner to SUIT TO RECOVER TAX BASED ON FALSE OR
evade or defeat any tax imposed by the NIRC? (1998 Bar FRAUDULENT RETURNS
Question)
Q: What is the rule on recovery of tax based on false or
A: No, provided there is a prima facie showing of a willful fraudulent returns?
attempt to evade taxes as in the taxpayer’s failure to
declare a specific item of taxable income in his income tax A: In the case of a false or fraudulent return with intent to
returns. A crime is complete when the violator has evade tax or of failure to file a return, a proceeding in court
knowingly and willfully filed a fraudulent return with intent for the collection of such tax may be filed without
to evade and defeat the tax (Ungab v. Cusi, GR L-41919-24, assessment, at any time within 10 years after the discovery
May 30, 1980). of the falsity, fraud or omission (Sec. 222 (a), NIRC).
Q: Minolta is an EPZA-registered enterprise enjoying Note: In a fraud assessment which has become final and executory,
preferential tax treatment under a special law. After the fact of fraud shall be judicially taken cognizance of in the civil
investigation of its withholding tax returns for the taxable or criminal action for the collection thereof.
year 1997, the BIR issued a deficiency withholding tax
This does not authorize the examination and investigation or
assessment in the amount of P150.000. On May 15, 1999, inquiry into any tax return filed in accordance with the provisions
because of financial difficulty, the deficiency tax remained of any tax amnesty law or decree (Sec. 222 (e), NIRC).
unpaid, as a result of which the assessment became final
and executory. The BIR also found that, in violation of the INFORMER’S REWARD
provisions of the NIRC, Minolta did not file its final
corporate income tax return for the taxable year 1998, Q: To whom is the informer’s reward given?
because it allegedly incurred net loss from its operations.
On May 17, 2002, the BIR filed with the RTC an action for A: To persons instrumental:
collection of the deficiency withholding tax for 1997. 1. In the discovery of violations of the NIRC; and
2. In the discovery and seizure of smuggled goods.
1. Will the BIR's action for collection prosper? As counsel
of Minolta, what action will you take? Q: What are the legal requirement/s must be complied
2. May criminal violations of the NIRC be compromised? If with to claim the reward? (2002 Bar Question)
Minolta makes a voluntary offer to compromise the
criminal violations for non-filing and non-payment of A:
taxes for the year 1998, may the CIR accept the offer? 1. Voluntarily file a confidential information under oath
(2002 Bar Question) with the Law Division of the BIR alleging therein the
specific violations constituting fraud;
A: 2. The information must not yet be in the possession of
1. Yes. BIR's action for collection will prosper because the the BIR, or refer to a case already pending or
assessment is already final and executory, it can previously investigated by the BIR;
already be enforced through judicial action. 3. One should not be a government employee or a
relative of a government employee within the sixth
As counsel of Minolta, I will introduce evidence that degree of consanguinity; and
the income payment was reported by the payee and 4. The information must result to collections of revenues
the income tax was paid thereon in 1997 so that my and/or fines and penalties (Sec. 282, NIRC)
client may only be allowed to pay the civil penalties for
non-withholding pursuant to RMO 38-83.
2. For discovery and seizure of smuggled goods - a cash Note: The 2-year prescriptive period is explicitly intended to
reward equivalent to whichever is lower between: apply only to suits or proceedings for the recovery of taxes,
penalties, or sums erroneously, excessively, illegally or
a. 10% of the fair market value of the smuggled and
wrongfully collected. Accordingly, a claim for tax credit
confiscated goods; or authorized by law, unless otherwise explicitly provided for
b. One Million Pesos (P1, 000,000) the Tax Code, would instead prescribe in ten (10) years under
Art. 1144 of the Civil Code. (Victorias Milling Co. vs. Central
Note: The informer shall not be entitled to a reward where no Bank, 13 SCRA 479)
revenue, surcharges or fees be actually recovered or collected.
Q: Is the two year period for filing tax refund
REFUND jurisdictional?
Q: What is a tax refund? A: No. The Supreme Court held that even if the two-year
period had already lapsed, the same is not jurisdictional
A: It is an actual reimbursement of tax. and may be suspended for reasons of equity and other
special circumstances (Commissioner of Internal Revenue v.
GROUNDS AND REQUISITES FOR REFUND PNB, 474 SCRA 303 [2005]).
Q: What are the grounds for filing a claim for tax refund or Q: What are instances wherein the two-year prescriptive
tax credits? period may be suspended?
LEGAL BASIS OF TAX REFUNDS Q: What are the grounds for claim for refund?
Under the Tax Code itself, the recognition of the pervasive Q: What are the requisites for a claim for refund?
quasi-contract principle may be based upon the following:
(a) erroneously or illegally assess or collected internal A:
revenue taxes; (b) penalties imposed without authority; 1. That the claim for refund was filed within the two (2)
and (c) any sum alleged to have been excessive or in any year period as prescribed under Section 230 of the
manner wrongfully collected (CIR vs. Fortune Tobacco National Internal Revenue Code;
Corporation, 559 SCRA 160 [2008]) 2. That the income upon which the taxes were withheld
were included in the return of the recipient;
STATUTORY BASIS FOR TAX REFUND UNDER THE TAX 3. That the fact of withholding is established by a copy of
CODE a statement (BIR Form 1743.1) duly issued by the
payor (withholding agent) to the payee, showing the
Q: What are the provisions of the Tax Code regarding amount paid and the amount of tax withheld
refund? therefrom (Comm. v. PERF Realty Corporation, 557
SCRA 165 [2008];,Sec. 10 of Rev. Regs. No. 6-85)
A:
Note: Under the administrative law of 1987, a year is composed of
1. Corporations entitled to refund of excess estimated
12 calendar months. Under it, the number of days is irrelevant.
quarterly income paid as shown on its final adjustment Being the more recent lay, it governs the computation of legal
return (Sec. 75 and 76, NIRC) periods. A year is not therefore 365 days as contemplated by the
2. Claims for refund of VAT-registered persons, whose Civil Code. (Comm. v. Primetown Property Group, Inc., 531 SCRA
sales are zero-rated or effectively zero-rated, with 436 [2007])
regard to their creditable input tax due, except
transitional input tax, to the extent that such input tax
Q: What is the nature of a tax refund? A: The claimants have the burden of proof to establish the
factual basis of their claim for refund or tax credit. Tax
A: GR: Tax refunds, like tax exemptions, are construed refunds, like tax exemptions, are construed strictly against
strictly against the taxpayer. The claimants have the burden the taxpayer. (Hitachi Global Storage Technologies
of proof to establish the factual basis of their claim for Philippines Corp. v. CIR, 634 SCRA 214 [2010]).
refund or tax credit. (Hitachi Global Storage Philippines v.
Comm. G.R. No. 174212 [2010]). Q: What evidence may be presented that would best
substantiate the taxpayer’s claim for tax refund?
XPN: The contention that a tax refund takes on
the nature of a tax exemption does not apply A: The pertinent invoices, receipts, and export sales
where the claim for refund is premised on documents are the best and competent pieces of evidence
erroneous payment of tax. There is parity required to substantiate a taxpayer’s claim for tax credit or
between tax refund and tax exemption only when refund. No evidence which has not been formally offered
the former is based wither on a tax exemption or shall be considered and where the pertinent invoices or
tax refund statute. (Comm. v. Fortune Tobacco, receipts purportedly evidencing the VAT paid by the
Corp., G.R. No. 167274-75, [2008]) taxpayer were not submitted, the court may not determine
the veracity of the amount of VAT that the taxpayer paid.
Q: On June 16, 1997, the BIR issued against the Estate of Mere allegations of the figures in the amended return are
Mott a notice of deficiency estate tax assessment, not sufficient proof of the amount of its refund entitlement.
inclusive of surcharge, interest and compromise penalty. (Atlas Consolidated Mining and Development Corporation v.
The Executor of the Estate of Mott filed a timely protest CIR, 546 SCRA 150 [2008])
against the assessment and requested for waiver of the
surcharge, interest and penalty. The protest was denied BURDEN OF PROOF FOR CLAIM OF REFUND
by the CIR with finality on Sept. 13, 1997. Consequently,
the Executor was made to pay the deficiency assessment Q: How are claims for refund construed?
on Oct. 10, 1997. The following day, the Executor filed a
Petition with the CTA praying for the refund of the A: Tax refunds, condonations and amnesties, being in the
surcharge, interest and compromise penalty. The CTA took nature of tax exemptions, must be strictly construed against
cognizance of the case and ordered the CIR to make a the taxpayer and liberally in favor of the government.
refund. The CIR filed a Petition for Review with the CA
assailing the jurisdiction of the CTA and the Order to make Q: Fortune Tobacco Corp. was granted a tax refund
refund to the Estate on the ground that no claim for representing excise taxes erroneously collected from its
refund was filed with the BIR. tobacco products. The tax refund is being re-claimed by
the BIR in a petition before the SC. The BIR argued that tax
UNIVERSITY OF SANTO TOMAS
201 FACULTY OF CIVIL LAW
Law on Taxation
refund partakes of the nature of a tax exemption and Q: Congress enacts a law granting grade school and high
should be construed against the claimant. Is the BIR school students a 10% discount on all school-prescribed
correct? textbooks purchased from any bookstore. The law allows
bookstores to claim the discount in full as a tax credit.
A: No, not all claims for tax refunds are in the nature of tax
exemptions. A tax refund may only be considered as a tax 1. If in a taxable year a bookstore has no tax due on
exemption when it is based either on a tax-exemption which to apply the tax credits, can the bookstore
statute or a tax-refund statute. The company’s claim for tax claim from the BIR a tax refund in lieu of tax credit?
refund is not based on either a tax-exemption statute or a 2. Can the BIR require the bookstores to deduct the
tax-refund statute, but is premised on either an erroneous amount of the discount from their gross income?
payment of tax or the government’s exaction in the 3. If a bookstore closes its business due to losses
absence of a law. Thus, what is controlling in this case is the without being able to recoup the discount, can it
well-settled doctrine of strict interpretation in the claim reimbursement of the discount from the
imposition of taxes, and not the doctrine as applied to tax government on the ground that without such
exemptions. As burdens, taxes should not be unduly reimbursement, the law constitutes taking of private
exacted nor assumed beyond the plain meaning of the tax property for public use without just compensation?
laws. (CIR v. Fortune Tobacco Corp., GR 167274-75 July 21, (2006 Bar Question)
2008.) A:
1. No, there is nothing in the law that grants a refund
NATURE OF ERRONEOUSLY PAID TAX/ when the bookstore has no tax liability against which
ILLEGALLY ASSESSED COLLECTED the tax credit can be used. A tax credit is in the nature
of a tax exemption and in case of doubt, the doubt
Q: Distinguish illegally collected tax and erroneously should be resolved in strictissimi juris against the
collected tax? claimant. (CIR v. Central Luzon Drug, GR 159647, Apr.
15, 2005)
A:
ILLEGALLY COLLECTED ERRONEOUSLY COLLECTED 2. No, tax credit which reduces the tax liability is
TAX TAX different from a tax deduction which merely reduces
Definition the tax base. Since the law allowed the bookstores to
There is a violation of No violation of the law but claim the discount in full as a tax credit, the BIR is not
certain provisions of tax there is a mistake in allowed to expand or contract the legislative mandate
law or statute. collection. (CIR v. Bicolandia Drug Corporation, GR 148083, July
On the part of the Taxpayer 21, 2006)
The tax was paid by him The payment was made
under duress. under a mistake of fact. 3. No, if the business continues to operate at a loss and
On the part of the Government no other taxes are due, thus compelling it to close
The tax was collected in The collection was made shop, the credit can never be applied and will be lost
patent disregard of the based on a misapplication altogether. (CIR v. Central Luzon Drug, GR 159647, Apr.
law. of the law. 15, 2005) The grant of the discount to the taxpayer is a
mere privilege and can be revoked anytime.
TAX REFUND VIS-À-VIS TAX CREDIT
Q: Is a transitional input tax credit a form of refund or tax
Q: What is a Tax Credit Certificate? credit?
A: It is validly issued under the provisions of the NIRC and A: A transitional input tax credit is not a tax refund per se
may be applied against any internal revenue tax, excluding but a tax credit. Logically, prior payment of taxes is not
withholding taxes, for which the taxpayer is directly liable. required before a taxpayer could avail of transitional input
(Sec. 204 [C], NIRC) tax credit. A tax credit is not synonymous to tax refund. Tax
refund is defined as the money that a taxpayer overpaid
Q: Distinguish tax refund from tax credit and is thus returned by the taxing authority. Tax credit, on
the other hand, is an amount subtracted directly from one’s
A: total tax liability. It is any amount given to a taxpayer as a
TAX REFUND TAX CREDIT subsidy, a refund, or an incentive to encourage investment.
As such being a tax credit, prior payment of taxes is not
The taxpayer asks for The taxpayer asks that the
required in order to avail of tax credit. (Fort Bonifacio
restitution of the money money paid be applied to
Development Corporation v. Comm., G.R. No. 173425,
paid as tax his existing tax liability
January 22, 2013)
2-yr period to file the 2-yr period starts from the
claim with the CIR starts date such credit was
after the payment of the allowed – in case credit is
tax or penalty wrongly made
A: As a rule, it is the taxpayer who paid the same who can claim the tax refund except under the following situations:
3. In case the taxpayer does not file a claim for 2. As an agent of the taxpayer, the withholding
refund, the withholding agent has the right to file agent has the authority to file the necessary
the claim, even when it is unrelated to, or is not a income tax return and to remit the tax
wholly owned subsidiary of, the principal taxpayer. withheld to the government impliedly includes
(Commissioner of Internal Revenue vs. Smart the authority to file a claim for refund and to
Communications, Inc., G.R. No. 179045-46; 25 bring an action for recovery of such claim.”
August 2010) (Commissioner of Internal Revenue vs. Smart
Communications, Inc., Ibid)
Note: Since this is merely an exception, the rule is, a the
withholding agent is not considered as the taxpayer,
hence he is not entitled to a tax amnesty due for the
taxpayer’s account.
Where the donor’s Donee is the proper party to claim the refund of
tax was assumed by the donor’s tax (even if the tax was advanced by
the donee the donor)
Q: Who is the proper party to question/seek a tax refund exempt from the payment of excise tax under the NIRC,
in indirect taxes? specifically Sec. 135, and under Art. 4 of the Air Transport
Agreement between the Governments of the Republic of
A: In indirect taxes, the proper party who can question or the Philippines and the Republic of Singapore (Air
seek a refund of the tax is the person on whom the tax is Agreement). The CIR denied the claim contending that
imposed by law and who paid the tax even when he shifts since the liability for the excise tax payment is imposed by
the burden thereof to another. (Cebu Portland Cement Co. law on Petron as the manufacturer of the petroleum
v. Collector, GR L-20563, Oct. 29, 1968) products, any claim for refund should only be made by
Petron as the statutory taxpayer. On appeal, the CTA
Q: Silkair purchased aviation jet fuel from Petron for use resolved to deny the claim. Silkair thus filed this Petition
on Silkair international flights. Silkair, contending that it is for Review.
exempt from the payment of excise taxes, filed a formal 1. Whether or not Silkair is the proper party to claim a
claim for refund with the CIR. Silkair claims that it is refund for the excise taxes paid.
A: No. A suit or proceeding for tax refund may be Q: What are the guidelines that must be observed with
maintained “whether or not such tax, penalty or sum has respect to administrative remedies?
been paid under protest or duress.” (Sec. 204 [3], NIRC)
A:
Note: The taxpayer’s willingness to pay the tax is no waiver to GOVERNMENT TAXPAYER
raise, defenses against the tax’s legality. (CIR v. Gonzales, GR L- If Express
19495, Nov. 24, 1966)
Must observe the legal Must observe the doctrine of
parameters set forth in exhaustion of administrative
Q: When is payment under protest required?
the law (e.g. procedure remedies. Thus, before the
A: Payment under protest is necessary in claims for refund
for distraint of personal taxpayer may question an
for real property taxes under Sec. 252, LGC and for customs
property (Sec. 207 [A], assessment before the CTA,
duties under Sec. 2308, TCC.
NIRC), for levy on real he must first file an
property (Sec. 207 B) and administrative protest
Q: Is the government liable for interests on tax refunds?
enforcement of tax lien before the BIR. (Same is true
(Sec. 219) with claims for refunds)
A: GR: There can be no interest on refund of tax.
If Implied
XPNs: Both may avail of the usual remedies for convenience
1. If interest is authorized by law. and expediency.
2. Arbitrariness in the collection of tax.
3. Under Sec. 79 C [2] with respect to income taxes TAX LIEN
withheld on the wages of the employees.
Q: What is the nature of tax lien?
Note: An action is not arbitrary when exercised honestly and upon
due consideration where there is room for two opinions, however A: It is enforced as payment of tax, interest, penalties, costs
much it may be believed that an erroneous conclusion was upon the entire property and rights to property of the
reached. Arbitrariness presupposes inexcusable or obstinate taxpayer. However, to be valid against any mortgagee,
disregard of legal provisions (Philex Mining Corp. v. CIR, GR 120324, purchaser or judgment creditor, notice of such lien has to
Apr. 21, 1999). be filed by CIR with the Registry of Deeds. (Sec. 219, NIRC)
Q: Can Tax Refunds / Tax Credit be Forfeited to the Note: A valid assessment is required to be issued before a tax lien
Government? shall be annotated at the proper registry of property.
of the the possession Q: What is the difference between forfeiture and seizure
taxpayer of the third to enforce a tax lien?
party
Acquisition by the Government A:
Personal Real property subject Personal FORFEITURE SEIZURE
property to levy is forfeited to property Ownership
distrained are the Government then garnished are Ownership is transferred Taxpayer retains ownership
purchased by sold to meet the purchased by to the Government of property seized
the deficiency. the Disposition of the proceeds of sale
Government Government Excess not returned to Excess returned to taxpayer
and resold to and resold to the taxpayer
meet meet
deficiency deficiency
FURTHER DISTRAINT AND LEVY
Advertisement of Sale
No newspaper The sale of realty No newspaper Q: Can there be further distraint?
publication subject to levy is publication
required required to be required A: The remedy of distraint and levy may be repeated if
published once a necessary until the full amount of the tax delinquency due
week for 3 including all expenses is collected from the taxpayer. (Sec.
consecutive weeks in 217, NIRC) Otherwise, a clever taxpayer who is able to
a newspaper of conceal most of the valuable part of his property would
general circulation in escape payment of his tax liability by sacrificing an
the municipality or insignificant portion of his holdings.
city where the
property is located. Note: Further distraint and levy does not apply when the real
property was forfeited to the government for it is in satisfaction of
FORFEITURE OF REAL PROPERTY TO THE GOVERNMENT the claim in question. (Sec 215, NIRC)
FOR WANT OF BIDDER
SUSPENSION OF BUSINESS OPERATION
Q: May the BIR forfeit the property subject to levy?
Q: When can the CIR suspend the business operation of a
A: Yes, forfeiture is allowed if there is no bidder; or the bid taxpayer?
amount is insufficient.
A:
Q: What are the rules governing forfeiture? 1. In the case of VAT-registered person:
a. Failure to issue receipts or invoices;
A: b. Failure to file a VAT return as required under Sec.
1. If there is no bidder in the public sale or if the amount 114; or
of the highest bid is insufficient to pay the taxes, c. Understatement of taxable sales or receipts by
penalties and costs, the real property shall be forfeited 30% or more of his correct taxable sales or
to the government. receipts for the taxable quarter.
2. The Register of Deeds shall transfer the title of
forfeited property to the Government without 2. Failure of any person to Register as required under Sec.
necessity of a court order. 236:
3. Within 1 year from the date of sale, the property may
be redeemed by the delinquent taxpayer or any one The temporary closure of the establishment shall be
for him, upon payment of taxes, penalties and interest for the duration of not less than 5 days and shall be
thereon and cost of sale; if not redeemed within said lifted only upon compliance with whatever
period, the forfeiture shall become absolute. (Sec. 215, requirements prescribed by the CIR in the closure
NIRC) order (Sec. 115 NIRC)
A: The period is 5 years from commission or discovery of STATUTORY OFFENSES AND PENALTIES
the violation, whichever is later. (Sec. 281, NIRC)
CIVIL PENALTIES
The cause of action for willful failure to pay deficiency tax
occurs when the final notice and demand for the payment Q: What is the nature of civil penalties?
thereof is served upon the taxpayer.
A: They are imposed in addition to the tax required to be
The 5-year prescriptive period commences to run only after paid.
receipt of the final notice and demand and the taxpayer
refuses to pay. SURCHARGE
Note: In addition to the fact of discovery of the filing of a Q: What is a surcharge or surtax?
fraudulent return, there must be a judicial proceeding for the
investigation and punishment of the tax offense before the 5-year A: It is a civil penalty imposed by law as an addition to the
limiting period to institute a criminal action for filing a fraudulent
main tax required to be paid. It is a civil administrative
return begins to run. The crime of filing false returns can be
considered "discovered" only after the manner of commission, and sanction provided as a safeguard for the protection of the
the nature and extent of the fraud have been definitely State revenue and to reimburse the government for the
ascertained. Note the conjunctive word “and” between the phrases expenses of investigation and the loss resulting from the
“the discovery thereof” and “the institution of judicial proceedings taxpayer’s fraud. A surcharge added to the main tax is
for its investigation and proceedings.” (Lim, Sr. v. CA, GR 48134-37, subject to interest.
Oct. 18, 1990)
Q: What are the corresponding rates of surcharges?
Q: May a criminal action be filed despite the lapse of the
period to file a civil action for collection of taxes? A:
1. Twenty-five percent (25%) of the amount due, in the
A: Yes, provided that the criminal action is instituted within following cases: F-TOP
5 years from the commission of the violation or from the a. Failure to File any return and pay the tax due
discovery thereof, whichever is later. Also the two have thereon as required under the provisions of the
different prescriptive periods and such period would run NIRC or rules and regulations on the date
independently from each other. prescribed
b. Failure to pay the deficiency tax within the Time
Q: TY Corp. filed its final adjusted income tax return for
prescribed for its payment in the notice of
1993 on Apr. 12, 1994 showing a net loss. After
assessment
investigation, the BIR issued a pre-assessment notice on
c. Unless otherwise authorized by the CIR, filing a
Mar. 30, 1996. A final notice and demand letter dated Apr.
return with an internal revenue officer Other than
15, 1997 was issued, personally delivered to and received
those with whom the return is required to be
by the company's chief accountant. For willful refusal and
filed
failure of TY Corp. to pay the tax, warrants of distraint and
d. Failure to Pay the full or part of the amount of tax
levy on its properties were issued and served upon it. On
shown on any return required to be filed under
Jan. 10, 2002, a criminal charge for violation of the NIRC
the provisions of the NIRC or rules and
was instituted in the RTC with the approval of the CIR.
regulations, or the full amount of tax due for
UNIVERSITY OF SANTO TOMAS
2013 GOLDEN NOTES 210
NATIONAL INTERNAL REVENUE CODE
which no return is required to be filed, on or the year in which received or realized. (Sec. 38, NIRC)
before the date prescribed for its payment (Sec The 50% fraud surcharge attaches only if a false or
248 [A], NIRC) fraudulent return is willfully made by Lincoln. (Sec.248,
2. The penalty shall be fifty percent (50%) of the tax or of NIRC) The fact that Lincoln included it in his 1994
the deficiency tax, in the following cases: return belies any claim of willfulness but is rather
a. Willful neglect to file the return within the period indicative of an honest mistake which was sought to
prescribed; or be rectified by a subsequent act that is the filing of the
b. False or fraudulent return is willfully made (Sec. 1994 return.
248 [B], NIRC)
2. Lincoln should have amended his 1993 income tax
Q: When is a return deemed false or fraudulent? return to allow for the inclusion of the P50,000 income
during the taxable period it was realized.
A: A prima facie evidence of false or fraudulent return
arises when there is: 3. Lincoln should file a protest questioning the 50%
1. A substantial under declaration of taxable sales, surcharge and ask for the abatement thereof.
receipts or income; or
2. A substantial overstatement of deductions (Sec. 248, 4. Lincoln should file a written claim for refund with the
NIRC) CIR of the taxes paid on the P50.000 income included
in 1994 within 2 years from payment pursuant to Sec.
Q: When is there a substantial underdeclaration of taxable 204 [3] of the NIRC. Should this remedy fail in the
sales, receipts or income? administrative level, a judicial claim for refund can be
instituted before the expiration of the 2 year period.
A: When there is failure to report sales, receipts or income
in an amount exceeding 30% of that declared per return. INTEREST, IN GENERAL
Q: When is there a substantial overstatement of Q: Are there interests to be paid in addition to the tax?
deductions?
A: Yes, there shall be assessed and collected on any unpaid
A: There is a substantial overstatement of deductions amount of tax, interest at the rate of 20% per annum, or
where a claim of deduction exceeds 30% of actual such higher rate as may be prescribed by rules and
deductions. regulations, from the date prescribed for payment until the
amount is fully paid. (Sec. 249, NIRC)
Q: Businessman Lincoln filed an income tax return for
1993 showing business net income of P350,000 on which Q: When does the period of interest commence to run?
he paid an income tax of P61,000. After filing the return
he realized that he forgot to include an item of business A: Interest shall be assessed and collected from the date
income in 1993 for P50.000. Being an honest taxpayer, he prescribed for payment until the amount is fully paid (Sec.
included this income in his return for 1994 and paid the 249, NIRC)
corresponding income tax thereon. In the examination of
his 1993 return the BIR examiner found that Lincoln failed
to report this item of P50.000 and assessed him a DEFICIENCY INTEREST
deficiency income tax on this item, plus a 50% fraud
surcharge. Q: What is Deficiency Interest?
1. Is the examiner correct? A: Any deficiency in the tax due, as the term is defined in
2. If you were the lawyer of Lincoln, what would you the NIRC, shall be subject to the interest prescribed in Sec
have advised your client before he included in his 249, NIRC
1994 return the amount of P50.000 as 1993 income to
avoid the fraud surcharge? DELINQUENCY INTEREST
3. Considering that Lincoln had already been assessed a
deficiency income tax for 1993 for his failure to Q: What is Delinquency Interest?
report the P50.000 income, what would you advise
him to do to avoid the penalties for tax delinquency? A: In case of failure to pay:
4. What would you advise Lincoln to do with regard to 1. The amount of the tax due on any return required
the income tax he paid for the P50.000 in his 1994 to be filed; or
return? In case your remedy fails, what is your other 2. The amount of the tax due for which no return is
recourse? (1995 Bar Question) required; or
3. A deficiency tax, or any surcharge or interest
A: thereon on the due date appearing in the notice
1. The examiner is correct in assessing a deficiency and demand of the CIR,
income tax for taxable year 1993 but not in imposing
the 50% fraud surcharge. The amount of all items of There shall be assessed and collected on the unpaid
gross income must be included in gross income during amount, interest at the rate prescribed in **subsec. A
UNIVERSITY OF SANTO TOMAS
211 FACULTY OF CIVIL LAW
Law on Taxation
hereof until the amount is fully paid, which interest shall Q: What are the cases which may be compromised?
form part of the tax. (Sec. 249, NIRC)
3
A: DAC N
Note: Sec. 249, SubSec. A: “There shall be assessed and collected 1. Delinquent accounts
on any unpaid amount of tax, interest at the rate of twenty percent 2. Cases under Administrative protest after issuance
(20%) per annum, or such higher rate as may be prescribed by rules
of the Final Assessment Notice to the taxpayer
and regulations, from the date prescribed for payment until the
amount is fully paid.” which are still pending in the RO, RDO, Legal
Service, Large Taxpayer Service, Collection
INTEREST ON EXTENDED PAYMENT Service, Enforcement Service, and other offices in
the National Office
Q: What is interest on extended payment? 3. Civil tax cases disputed before the courts
4. Collection cases filed in courts
A: If any person required to pay the tax is qualified and 5. Criminal violations except:
elects to pay the tax on installment under the provisions of a. Those already filed in courts; and
the NIRC, but fails to pay the tax or any installment hereof, b. Those involving criminal tax fraud. (Sec.3, RR
or any part of such amount or installment on or before the 30-2002)
date prescribed for its payment, or where the CIR has 6. Cases covered by pre-assessment notices but
authorized an extension of time within which to pay a tax taxpayer is Not agreeable to the findings of the
or a deficiency tax or any part thereof, there shall be audit office as confirmed by the review office
assessed and collected interest at the rate hereinabove
prescribed** on the tax or deficiency tax or any part Q: What are the cases which cannot be compromised?
thereof unpaid from the date of notice and demand until it 3
is paid. A: F EW-CD
1. Criminal tax Fraud cases, confirmed as such by the CIR
COMPROMISE AND ABATEMENT OF TAXES or his duly authorized representative.
2. Cases where Final reports of reinvestigation or
COMPROMISE reconsideration have been issued resulting to
reduction in the original assessment and the taxpayer
Q: What is meant by compromise? is agreeable to such decision by signing the required
agreement form for the purpose.
A: It is an agreement between two or more persons who, 3. Cases which become Final and executory after final
amicably settle their differences on such terms and judgment of a court, where compromise is requested
conditions as they may agree on to avoid any lawsuit on the ground of doubtful validity of the assessment.
between them. It implies the mutual agreement by the 4. Estate tax cases where compromise is requested on
parties in regard to the thing or subject matter which is to the ground of financial incapacity of the taxpayer.
be compromised. 5. Withholding tax cases, unless the applicant – taxpayer
invokes provisions of law that cast doubt on the
Q: When must compromise be made? taxpayer’s obligation to withhold.
6. Criminal violations already filed in courts.
A: 7. Delinquent accounts with duly approved schedule of
1. Criminal cases – Compromise must be made prior to installment payments.
Note: The CTA may issue an injunction to prevent the government
the filing of the information in court.
from collecting taxes under a compromise agreement when such
2. Civil cases – Before litigation or at any stage of the would be prejudicial to the government.
litigation, even during appeal, although legal propriety
demands that prior leave of court should be obtained. Q: What are the grounds for a compromise?
Q: What are the requisites in order that compromise 5. The taxpayer has been declared by any competent
settlement on the ground of financial incapacity may be tribunal/authority/body/government agency as
allowed? bankrupt or insolvent.
Provided, that tax liabilities corresponding to the Subscription A: GR: The CIR may compromise with respect to criminal
Receivable or Assets distributed/distributable to the stockholders and civil cases arising from violations of the NIRC as well as
representing return of capital at the time of cessation of operation
the payment of any internal revenue tax when:
or dissolution.
a. A reasonable doubt as to the validity of the claim
2. The taxpayer, as reflected in its latest Balance Sheet against the taxpayer exists provided that the
supposed to be filed with the Bureau of Internal minimum compromise entered into is equivalent
Revenue, is suffering from surplus or earnings deficit to 40% of the basic tax; or
resulting to impairment in the original capital by at b. The financial position of the taxpayer
least 50%. demonstrates a clear inability to pay the assessed
tax provided that the minimum compromise
Note: That amounts payable or due to stockholders other than entered into is equivalent to 10% of the basic
business-related transactions which are properly includible in the assessed tax.
regular “accounts payable” are by fiction of law considered as part
Q: What is the prescriptive period to enforce A: Yes, the CIR has the power to accept the offer of
compromises? compromise if the financial position of the taxpayer clearly
demonstrates a clear inability to pay the tax. (Sec. 204,
A: As a rule, the obligation to pay tax is based on law. But NIRC)
when, for instance, a taxpayer enters into a compromise
with the BIR, the obligation of the taxpayer becomes one As represented by NX in his offer, only 50% of the judgment
based on contract. Compromise is a contract whereby the award is all he could really afford. This is an offer for
parties, by reciprocal concessions, avoid litigation or put an compromise based on financial incapacity which the CIR
end to one already commenced. (Art. 2028 NCC) Since it is a shall not accept unless accompanied by a waiver of the
contract, the prescriptive period to enforce the same is 10 secrecy of bank deposits. (Sec. 6 [F], NIRC) The waiver will
years based on Art. 1144 NCC reckoned from the time the enable the CIR to ascertain the financial position of the
cause of action accrued. taxpayer, although the inquiry need not be limited only to
the bank deposits of the taxpayer but also as to his financial
position as reflected in his financial statements or other
records upon which his property holdings can be
ascertained.
Note: The abatement shall only cover the surcharge and the The CIR may also abate or cancel a tax liability when: (1) the
compromise penalty and not the interest imposed under Sec. tax or any portion thereof appears to have been unjustly or
249, NIRC (also applicable in number 5) excessively assessed; or (2) the administrative and
3. There is Late payment of the tax under meritorious collection costs involved do not justify collection of the
circumstances (i.e. Failure to beat bank cut-off time, amount due. (Sec. 204, NIRC)
surcharge erroneously imposed.)
Q: Distinguish Compromise from Abatement
4. The assessment is brought about or resulted from
taxpayer’s non-compliance with the law due to a A:
difficult Interpretation of said law. COMPROMISE ABATEMENT
Involves a reduction of Involves the cancellation of the
5. The taxpayer fails to file the return and pay the correct
the taxpayer’s liability. entire tax liability of a
tax on time due to Circumstances beyond his control.
taxpayer.
Authorized Officer
6. The taxpayer’s mistake in payment of his tax is due to
CIR and Regional CIR
Erroneous written official advice of a revenue officer
Evaluation Board
(Sec. 2, RR 13-2001)
Grounds
Q: What are the instances when the tax liabilities, 1. Reasonable 1. The tax or any portion
penalties and/or interest imposed on the taxpayer may be doubt as to the thereof appears to be
abated on the ground that tax administration and validity of unjustly or excessively
collection costs are more than the amount sought to be assessment; assessed; or
collected? 2. Financial 2. The administration and
incapacity of the collection costs
taxpayer involved do not justify 2. To Obtain information, summon, examine and take
the collection of the testimony of persons.
amount due. 3. To Terminate taxable period for reasons provided in
the NIRC;
ORGANIZATION AND FUNCTION OF THE BUREAU OF 4. To Interpret provisions of the NIRC and other tax laws
INTERNAL REVENUE subject to review by the Secretary of Finance;
5. To make or amend Return in case taxpayer fails to file
Q: Who are the Chief Officials of the BIR? a return or files a false or fraudulent return;
6. To Examine returns and determine tax due;
A: The BIR is headed by the CIR and 6 Deputy 7. To prescribe any additional Requirements for the
Commissioners, who lead the following divisions: submission or preparation of financial statements
1. Operations group accompanying tax returns;
2. Legal Inspection Group 8. To make Assessments, prescribe additional
3. Resource and Management Group requirements for tax administration and purposes;
4. Information Systems Group 9. To Inquire into bank deposits of
5. Prosecution Group a. Decedent to determine his gross income;
6. Special Concerns Group b. A taxpayer who filed application to compromise
payment of tax liability by reason of financial
Q: What are the powers and duties of the BIR? incapacity;
c. A specific taxpayer or taxpayers subject of a
A: AEJ-AdR request for the supply of tax information from a
1. Assessment and collection of all national internal foreign tax authority pursuant to an international
revenue taxes, fees and charges; convention or agreement on tax matters to
2. Enforcement of all forfeitures, penalties and fines; which the Philippines is a signatory or a party of.
3. Execution of judgments in all cases decided in its favor Provided, That the information obtained from
(by the CTA and regular courts); the banks and other financial institutions may be
4. Give effect and administer the supervisory and police used by the BIR for tax assessment, verification,
powers conferred to it by the NIRC and other laws. audit and enforcement purposes;
5. Recommend to the Secretary of Finance all needful
rules and regulations for the effective enforcement of 10. To Delegate powers vested upon him to subordinate
the provision of the NIRC. officials with rank equivalent to Division Chief or
higher, subject to limitations and restrictions imposed
Q: Is the BIR authorized to collect estate tax deficiencies under the rules and regulations.
by the summary remedy of levy upon and sale of real 11. To Prescribe real property values;
properties of the decedent without first securing the 12. To take Inventory of goods of any taxpayer, and place
authority of the court sitting in probate over the any business under observation or surveillance IF
supposed will of the decedent? (1998 Bar Question) there is reason to believe that such is not declaring his
correct income, sales or receipts for tax purposes;
A:Yes, the BIR is authorized to collect estate tax deficiency 13. To register tax Agents;
through the summary remedy of levying upon and sale of
real properties of a decedent without the cognition and Q: What are the purposes of these powers?
authority of the court sitting in probate over the supposed
will of the deceased because of the collection of estate tax A:
is executive in character. As such the estate tax is 1. To ascertain correctness of the return;
exempted from the application of the statute of non- 2. To make a return when none has been made;
claims, and this is justified by the necessity of government 3. To determine liability of any person for any internal
funding, immortalized in the maxim that taxes are the revenue tax;
lifeblood of the government. (Marcos v. CIR, GR 120880, 4. To collect such liability;
June 5, 1997) 5. To evaluate tax compliance.
Q: What are the powers of the Commissioner? Q: What is the scope of such powers?
4. To Assign or reassign internal revenue officers to A: It must contain provisions specifying, prescribing, or
establishments where articles subject to excise tax are defining: (Sec. 245, NIRC)
kept. 1. The time and manner in which Revenue Regional
Director shall canvass their respective Revenue
Q: Will errors or mistakes of administrative officials bind Regions to discover persons and property liable to
the government as to the collection of taxes? national internal revenue taxes, and the manner their
lists and records of taxable persons and taxable
A: GR: Errors or mistakes of administrative officials objects shall be made and kept.
(including the BIR) should never be allowed to jeopardize 2. The forms of labels, brands or marks to be required on
the financial position of the government goods subject to excise tax, and the manner how the
labelling, branding or marking shall be effected.
Reason: Taxes are the lifeblood of the nation through which the
government agencies continue to operate and with which the State 3. The condition and manner for goods intended for
effects its functions for the welfare of its constituents. (CIR v. export, which if not exported would be subject to an
Citytrust and CTA, GR106611, July 21 ,1994) excise tax, shall be labelled, branded or marked.
4. The conditions to be observed by revenue officers
XPN: For the purpose of safeguarding taxpayers respecting the institutions and conduct of legal actions
from any unreasonable examination, and proceedings;
investigation or assessment, our tax law provides
a statute of limitations in the collection of taxes. 5. The conditions under which goods intended for
Thus, the law on prescription, being a remedial storage in bonded warehouses shall be conveyed
measure, should be liberally construed in order to thither, their manner of storage and method of
afford such protection. As a corollary, the keeping entries and records, also the books to be kept
exceptions to the law on prescription should by Revenue Inspectors and the reports to be made by
perforce be strictly construed. (CIR v. Goodrich them in connection with their supervision of such
Philippines Inc., GR 104171, Feb. 24, 1999) houses.
6. The conditions under which denatured alcohol may be
Note: In the Citytrust case, which involves a claim for refund, the removed and dealt in, the character and quantity of
error or neglect was the failure of the Solicitor General to present the denaturing material to be used, the manner in
its evidence, as counsel for the CIR, due to the unavailability of the which the process of denaturing shall be effected, so
necessary records from BIR, prompting the Solicitor to submit the
as to render the alcohol suitably denatured and unfit
case for decision without presenting any evidence. While in
Goodrich, the error committed refers to the neglect of the BIR to for oral intake, the bonds to be given, the books and
make assessment within the 3-year period as required in Sec. 203, records to be kept, the entries to be made therein, the
NIRC. reports to be made to the CIR, and the signs to be
displayed in the business ort by the person for whom
such denaturing is done or by whom, such alcohol is
dealt in.
7. The manner in which revenue shall be collected and
paid, the instrument, document or object to which
revenue stamps shall be affixed, the mode of
cancellation, the manner in which the proper books,
records, invoices and other papers shall be kept and
A: The paradigm shift results from the realization that AUTHORITY TO PRESCRIBE PENALTIES FOR
genuine development can be achieved only by TAX VIOLATIONS
strengthening local autonomy and promoting
decentralization of governance. (Ibid.) Q: What are the powers to prescribe penalties for tax
violations of the LGU?
Q: What is the nature of the taxing power of the
provinces, municipalities and cities? (2007 Bar Question) A:
1. Limited as to the amount of imposable fine as well as
A: The taxing power of the provinces, municipalities and the length or period of imprisonment;
cities is directly conferred by the Constitution by giving 2. The Sanggunian is authorized to prescribe fines or
them the authority to create their own sources of revenue. other penalties for violations of tax ordinances, but in
The local government units do not exercise the power to no case shall fines be less than P1,000 nor more than
tax as an inherent power or by a valid delegation of the P5,000 nor shall the imprisonment be less than one (1)
power by Congress, but pursuant to a direct authority month nor more than six (6) months;
conferred by the Constitution. 3. Such fine or other penalty shall be imposed at the
discretion of the court;
Q: May Congress, under the 1987 Constitution, abolish the 4. The Sangguniang Barangay may prescribe a fine of not
power to tax of local governments? (2003 Bar Question) less than P100 nor more than P1,000. (Sec. 516, LGC)
A: No. Congress cannot abolish what is expressly granted by AUTHORITY TO GRANT LOCAL TAX EXEMPTIONS
the fundamental law. The only authority conferred to
Congress is to provide the guidelines and limitations on the Q: May LGUs grant exemptions?
local government's exercise of the power to tax (Sec. 5, Art.
X, 1987 Constitution) A: Yes. Local government units may, through ordinances
duly approved, grant tax exemptions, incentives or reliefs
Note: The authority to tax of LGUs within the Autonomous Regions under such terms and conditions as they may deem
(Muslim Mindanao and the Cordilleras) is not delegated by the necessary (Sec. 192, LGC). The power to grant tax
Constitution, but by the Organic Act creating them. exemptions, tax incentives and tax reliefs shall not apply to
regulatory fees which are levied under the police power of
Q: What are the characteristics of the taxing power of the LGU.
LGUs?
Q: What are the guidelines for granting tax exemptions,
2
A: DON G incentives and reliefs? (Rules and Regulations
1. Not inherent –May only be exercised if delegated to Implementing the LGC, Sec. 282[b])
them by national legislature or conferred by the
Constitution itself. A:
2. Direct grant from the Constitution – While a direct 1. Tax Exemptions and Reliefs
grant, the same is subject to limitations as may be set a. May be granted in cases of natural calamities, civil
by Congress. disturbance, general failure of crops or adverse
3. Not absolute –Subject to limitations and guidelines as economic conditions such as substantial decrease
may be provided by law such as progressivity etc. in prices of agricultural or agri-based products;
b. The grant shall be through an ordinance;
UNIVERSITY OF SANTO TOMAS
2013 GOLDEN NOTES 220
LOCAL GOVERNMENT CODE
c. Any exemption or relief granted to a type or kind entities. The said provision thus cannot be considered as
of business shall apply to all business similarly having amended petitioner’s franchise so as to entitle it to
situated; exemption from the imposition of local franchise taxes.
d. The same may take effect only during the (PLDT v. City of Davao, G.R. No. 143867, Aug. 22, 2002)
calendar year not exceeding 12 months as may be
provided in the ordinance; and Smart and Globe, however, are not liable to the franchise
e. In case of shared revenues, the relief or tax imposed on the provincial ordinance. The legislative
exemption shall only extend to the LGU granting franchises of Smart and Globe were granted in 1998, long
such. after the Local Government Code took effect. Congress is
deemed to have been aware of the provisions of the earlier
2. Tax incentives: law when it granted the exemption. Accordingly, the latest
a. Shall be granted only to new investments in the will of the legislature to grant tax exemption must be
locality and the ordinance shall prescribe the respected.
terms and conditions therefore;
b. The grant shall be for a definite period not Q: Is Smart Communications, Inc. (SMART) exempt from
exceeding 1 calendar year; local taxation?
c. The grant shall be through an ordinance passed
st
prior to the 1 day of January of any year; and A: Under its franchise, SMART is not exempt from local
d. Tax incentive granted to a type or kind of business and franchise taxes. Moreover, Section 23 of the
business shall apply to all businesses similarly Public Telecommunications Act does not provide legal basis
situated. for Smart’s exemption from local business and franchises
taxes. The term “exemption” in Section 23 of the Public
Q: When is tax exemption conferred? Telecommunications Act does not mean tax exemption;
rather, it refers to exemption from certain regulatory or
A: Tax exemptions shall be conferred through the issuance reporting requirements imposed by government agencies
of a non-transferable tax exemption certificate. (Article 283, such as the National Telecommunications Commission. The
IRR of LGC) thrust of the Public Telecommunications Act is to promote
the gradual deregulation of entry, pricing, and operations
Q: The Local Government Code took effect on January 1, of all public telecommunications entities, and thus to level
1992. PLDT’s legislative franchise was granted sometime the playing field in the telecommunications industry. The
before 1992. Its franchise provides that PLDT will pay only language of Section 23 and the proceedings of both Houses
3% franchise tax in lieu of all taxes. of Congress are bereft of anything that would signify the
grant of tax exemptions to all telecommunications entities.
The legislative franchise of Smart and Globe Telecoms Intent to grant tax exemption cannot therefore be
were granted in 1998. Their legislative franchises state discerned from the law; the term “exemption” is too
that they will pay only 5% franchise tax in lieu of all taxes. general to include tax exemption and runs counter to the
requirement that the grant of tax exemption should be
The Province of Zamboanga del Norte passed an stated in clear and unequivocal language too plain to be
ordinance in 1997 that imposes a local franchise tax on all beyond doubt or mistake. (The City of Iloilo v. Smart
telecommunications companies operating within the Communications Inc., G.R. No. 167260, Feb. 27, 2009)
province. The tax is 50% of 1% of the gross annual receipts
of the preceding calendar year based on the incoming The “in lieu of all taxes” clause in a legislative franchise
receipts, or receipts realized, within its territorial should categorically state that the exemption applies to
jurisdiction. both local and national taxes; otherwise, the exemption
claimed should be strictly construed against the taxpayer
Is the ordinance valid? Are PLDT, Smart and Globe liable and liberally in favor of the taxing authority. (Smart
to pay franchise taxes? Reason briefly (2007 Bar Communications, Inc., v. The City of Davao, G.R. No.
Question). 155491, Jul. 21, 2009)
Q: Does the LGU have power to adjust local tax rates? Q: Can LGUs tax the National Government?
A: Yes, provided that the adjustment of the tax rates as A: GR: LGUs cannot impose taxes, fees or charges of any
prescribed herein should not be oftener than once every kind on the National Government, its agencies and
five (5) years, and in no case shall such adjustment exceed instrumentalities.
ten percent (10%) of the rates fixed under the LGC. (Sec.
191, LGC) XPN: When specific provisions of the LGC
authorize the LGUs to impose taxes, fees or
RESIDUAL TAXING POWER OF LOCAL GOVERNMENTS charges on the aforementioned entities (City
Government of San Pablo, Laguna v. Reyes, G.R.
Q: What is the so-called “Residual Taxing Power of the No. 127708, Mar. 25, 1999)
LGU”?
AUTHORITY TO ISSUE LOCAL TAX ORDINANCES
A: LGUs may exercise the power to levy taxes, fees or
charges on any base or subject NOT otherwise specifically Q: What are the kinds of Local Tax Ordinances?
enumerated herein or taxed under the
1. Local Government Code; A:
2. National Internal Revenue Code; or 1. Those imposing a fee or tax specifically authorized by
3. Other applicable laws. (Sec. 186, LGC) the Local Government Code for the local government
units to impose.
Q: What are the conditions in the exercise of the residual 2. Those imposing a fee or tax not specifically
power of taxation? enumerated under the LGC or taxed under the
provisions of the NIRC or other applicable laws (Sec.
A: 186, LGC)
1. That the taxes, fees, or charges shall not be unjust,
excessive, oppressive, confiscatory or contrary to Q: How shall the sanggunian levy local taxes?
declared national policy; and
2. That the ordinance levying such taxes, fees or charges A: It shall be exercised through an appropriate ordinance.
shall not be enacted without any prior hearing However, the local chief executive (except the
conducted for the purpose. (Ibid.) punongbarangay) possesses veto powers as laid down in
Sec. 55 of LGC.
Note: the authority to impose taxes and fees for extraction of sand and gravel belongs to the province, and not to the municipality where they
are found (Municipality of San Fernando La Union vs. Sta. Romana, G.R. No. L-30159, March 31, 1998).
Regalian Doctrine is not applicable. Province may not invoke the doctrine to extend the coverage of its ordinance to quarry
resources extracted from private lands.
Rationale: tax statutes are construed strictissimi juris against the government. (Province of Bulacan vs. CA, G.R. No. 126232)
PROFESSIONAL TAX
Exercise or practice of profession At such amount and reasonable Not to exceed P300 Professionals
requiring government licensure classification as the sanggunian exclusively employed in
examination panlalawigan may impose the government shall
be exempt from the
payment of this tax.
Date of Payment: payable annually on or before January 31 or before beginning the practice of the profession
Place of Payment: Province where he practices his profession or where the principal office is located
UNIVERSITY OF SANTO TOMAS
2013 GOLDEN NOTES 224
LOCAL GOVERNMENT CODE
Note: TAX TO BE PAID ONLY ONCE. Person who has paid the corresponding professional tax shall be entitled to practice his profession in any
part of the Philippines without being subjected to any other national or local tax, license, or fee for the practice of such profession
AMUSEMENT TAX
Ownership, lease or Gross receipts from admission Not more than 10% of GR: The holding of
operation of theaters, fees. gross receipts from operas, concerts,
cinemas, concert halls, admission fees (as dramas, recitals,
In case of theaters or cinemas, amended by R.A. No. painting and art
circuses, boxing stadium and
the tax shall first be deducted 9640, May 21, 2009) exhibitions, flower
other places of amusement
and withheld by their proprietors, shows, musical
lessees, or operators and paid to programs, literary and
the provincial treasurer before oratorical presentation
the gross receipts are divided shall be exempt from
between said proprietors, the payment of
lessees, or operators and the amusement tax.
distributors of the
cinematographic films. XPN:
Holding of pop, rock, or
similar concerts shall be
subject to amusement
tax.
Note: The Supreme Court held that it is the intent of the Legislature not to impose VAT on persons already covered by the amusement tax.
Thus, the gross receipts derived by respondents from admission tickets in showing motion pictures, films or movies are subjected to the
Amusement Tax and not to value-added tax under the NIRC (CIR v SM Prime Holdings Inc., G.R. No. 183505, Feb 26, 2010)
Distribution of Proceeds: Tax shall be shared equally by the province and municipality where such amusement places are
located.
ANNUAL FIXED TAX FOR EVERY DELIVERY TRUCK OR VAN OF MANUFACTURER OR PRODUCERS, WHOLESALERS OF, DEALERS,
OR RETAILER IN CERTAIN PRODUCTS
Use by manufacturers, Every truck, van or vehicle Not exceeding P500 Exempt from tax on
producers, wholesalers, dealers peddlers imposed by
or retailers of truck, van or any municipalities
vehicle in the delivery or
distribution of distilled spirits,
fermented liquors, soft drinks,
cigars and cigarettes, and other
products as may be determined
by the sangguniang
panlalawigan, to sales outlets, or
consumers, whether directly or
indirectly.
Q: To whom is the tax on transfer of real property consumers within the City of Iriga and the municipalities
ownership due? of Nabua, Bato, Baao, Buhi, Bula and Balatan of the
Province of Camarines Sur, otherwise known as the
A: It is due from the seller of the property. However, if the "Rinconada area."
buyer is a foreign government, no such tax is due.
Sometime in 2003, Petitioner City of Iriga required
Q: What is meant by “franchise” in the phrase “tax on CASURECO III to submit a report of its gross receipts for
business enjoying a franchise under Sec. 137 of the Local the period 1997-2002 to serve as the basis for the
Government Code? computation of franchise taxes, fees and other charges.
The latter complied and was subsequently assessed taxes.
A: The Congress defined it in the sense of a secondary or CASURECO III refused to pay for the assessed taxes,
special franchise. It is not levied on the corporation simply asserting that the computation of the petitioner was
for existing as a corporation, upon its property or income, erroneous because it included gross receipts from service
but on its exercise of the rights or privileges granted to it by areas beyond the latter’s territorial jurisdiction.
the government. Is Casureco liable for the payment of the franchise tax on
the Rinconada area?
Q: CASURECO III is an electric cooperative duly organized
and existing by virtue of Presidential Decree (PD) 269, as A: CASURECO III is liable for franchise tax on gross receipts
amended, and registered with the National Electrification within Iriga City and Rinconada area. It should be stressed
Administration (NEA). It is engaged in the business of that what the petitioner seeks to collect from CASURECO III
electric power distribution to various end-users and is a franchise tax, which as defined, is a tax on the exercise
Cities have the broadest taxing powers, embracing both specific Q: It is City of Cagayan de Oro’s humble opinion that the
and general powers as provinces and municipalities may impose. allowable rate of increase provided under Section 151 of
the LGC applies only to those businesses identified and
Under the LGC, there are three types of cities, Component Cities,
enumerated under Section 143 thereof. Thus, it is
Independent Component Cities and Highly Urbanized Cities. ICCs
and HUCs are independent of the province (Sec. 451-452, LGC). respectfully submitted by City of Cagayan de Oro that the
This means that taxes, fees and charges levied and collected by 2% limitation prescribed under Section 143(h) applies only
ICCs and HUCs accrue solely to them. (Sec. 151, LGC) to the tax rates on the businesses identified thereunder
and does not apply to those that may thereafter be
Cagayan Electric Power and Light Company, Inc. deemed taxable under Section 186 of the LGC, such as the
(CEPALCO), who is leasing for a consideration the use of its herein assailed Ordinance No. 9503-2005. On the same
posts, poles or towers to other pole users, assails the vein, it is the respectful submission of City of Cagayan de
validity of Ordinance No. 9503-2005 passed by the Oro that the limitation under Section 151 of the LGC
Sangguniang Panlungsod of Cagayan de Oro (City Council), likewise does not apply in our particular instance,
which imposed a tax on the lease or rental of electric otherwise it will run counter to the intent and purpose of
and/or telecommunication posts, poles or towers by pole Section 186 of the LGC. Is the City of Cagayan correct?
owners to other pole users at the rate of ten (10) percent
of the annual rental income derived therefrom. CEPALCO A: No. The City of Cagayan de Oro’s imposition of a tax on
contends that if it is a city which imposes it, and as a city, the lease of poles falls under Section 143(h) which speaks
it can only impose up to one-half of what the province or of any business, not otherwise specified in the preceding
municipality may impose and since under Section 137, a paragraphs, which the sanggunian concerned may deem
province may impose 50% of 1% or 0.005, a city may proper to tax. The treatment of the lease of poles as a
therefore only impose 0.0025. separate line of business is evident in Section 4(a) of the
Is this correct? ordinance requiring CEPALCO to apply for a separate
business permit. And since "any person, who in the course
A: No. CEPALCO is mistaken when it states that a city can of trade or business x x x leases goods or properties x x x
impose a tax up to only one-half of what the province or shall be subject to the value-added tax," the imposable tax
city may impose. A more circumspect reading of the Local rate should not exceed two percent of gross receipts of the
Government Code could have prevented this error. Section lease of poles of the preceding calendar year.
151 of the Local Government Code states that, subject to
UNIVERSITY OF SANTO TOMAS
227 FACULTY OF CIVIL LAW
Law on Taxation
Section 143(h) states that "on any business subject to x x x 4. On Retailers;
value-added x x x tax under the National Internal Revenue 5. On Contractors;
Code, as amended, the rate of tax shall not exceed two 6. Banks and other financial institutions;
percent (2%) of gross sales or receipts of the preceding 7. Peddlers;
calendar year" from the lease of goods or properties. 8. Other business not specified which the sanggunian
Hence, the 10% tax rate imposed by Ordinance No. 9503- concerned my deem proper to tax.
2005 clearly violates Section 143(h) of the Local
Government Code (Cagayan Electric Power and Light Q: What is Wholesale?
Co.,Inc,. vs City of Cagayan de Oro, G.R. No. 191761,
November 14, 2012) A: A sale where the purchaser buys or imports the
commodities for resale to persons other than the end user
TAXING POWERS OF MUNICIPALITIES regardless of the quantity of the transaction.
The city or municipality where the port of loading is located shall not levy and collect reasonable fees unless the exporter maintains in said city or
municipality its principal office, a branch, sales office, or warehouse, factory, plant or plantation in which case, the rule on the matter shall apply
accordingly. (IRR)
The power to levy such tax depends on the place in which the act is performed or the occupation is engaged in; not upon the location of the
office. (Allied Thread Co., Inc. v. City Mayor of Manila, L-40296, November 21, 1984)
Sales Tax – With respect to sale, it is the place of the consummation of the sale, associated with the delivery of the things which are the subject
matter of the contract that determines the situs of the contract for purposes of taxation, and not merely the place of the perfection of the
contract. (Shell Co., Inc. v. Municipality of Sipocot, Camarines Sur, 105 Phil 1263)
A:
SOURCES OF REVENUE TAX BASE TAX RATE FEES AND
CHARGES
BARANGAY TAXES – On stores or Gross sales receipts for preceding Not exceeding 1% of
retailers with fixed business calendar year of P50,000 or less (for such gross sales or
establishments barangay in the cities); and receipts.
Q: A sari-sari store initially paid the barangay treasurer of A: The tax assessment by the barangay of 1%on the gross
Barangay T the amount of P120.00 representing 1% of the sales of P12,000.00 is obviously in accordance with Sec.
gross sales of ZP12,000.00 CY 1994 in accordance with the 152(a) of the LGC. The assessment of the municipality of an
barangay tax code. Subsequently, the same store also filed additional business tax, however, is erroneous since
application for business license with the Municipality of T pursuant to Sec. 143(d) of the LGC the barangays “shall
for which a municipal business tax and other regulatory have exclusive power to levy taxes as provided under Sec.
fees was assessed for the same store based on its capital 152” of the same Code. The municipality, nevertheless, may
investment of P12,000.00 have to issue the corresponding business permit/license in
accordance with Sec. 152(c) of the LGC, and may impose as
Are the tax assessments by the barangay and the well reasonable regulatory fees on the sari-sari store.
municipality correct?
Q: When is the presentation of community tax certificate 8. Excise taxes on articles enumerated under the NIRC, as
required? amended, and taxes, fees or charges on petroleum
products
A:
Note: LGUs may impose tax on a petroleum business. A tax
1. Acknowledgment of any document before a notary
on business is distinct from a tax on the article itself (Phil.
public; Petroleum Corporation vs Municipality of Pililia Rizal, G.R. No.
2. Taking an oath of office upon election or appointment 90776, June 3, 1991)
to any position in the government service;
3. Receiving any license, certificate. or permit from any 9. Percentage or value-added tax (VAT) on sales, barters
public authority; or exchanges or similar transactions on goods or
4. Paying any tax or fee; services except as otherwise provided herein
5. Receiving any money from any public fund;
6. Transacting other official business; or 10. Taxes on the gross receipts of transportation
7. Receiving any salary or wage from any person or contractors and persons engaged in the transportation
corporation. (Sec. 163, LGC) of passengers or freight by hire and common carriers
by air, land or water, except as provided in this Code
COMMON LIMITATIONS ON THE 11. Taxes on premiums paid by way or reinsurance or
TAXING POWERS OF LGUS retrocession
12. Taxes, fees or charges for the registration of motor
Q: Give the common limitations on the taxing powers of vehicles and for the issuance of all kinds of licenses or
the LGUs permits for the driving thereof, except tricycles
13. Taxes, fees, or other charges on Philippine products
A: The exercise of the taxing powers of provinces, cities, actually exported, except as otherwise provided in the
municipalities, and barangays shall not extend to the levy LGC;(i.e. Sec. 143(c), LGC- municipalities may impose
3 3
of the following: IDE-C AP -MENT taxes on exporters)
1. Income tax, except when levied on banks and other 14. Taxes, fees, or charges, on Countryside and Barangay
financial institutions; Business Enterprises and cooperatives duly registered
2. Documentary stamp tax; under R.A. No. 6810 and Republic Act Numbered Sixty-
3. Taxes on estates, inheritance, gifts, legacies and other nine hundred thirty-eight (R.A. No. 6938) otherwise
acquisitions mortis causa, except as otherwise known as the "Cooperative Code of the Philippines"
provided under the LGC respectively
XPN: tax on transfer of real property (Sec. 135, LGC) 15. Taxes, fees or charges of any kind on the National
Government, its agencies and instrumentalities, and
4. Customs duties, registration fees of vessel and local government units. (Sec. 133, LGC)
wharfage on wharves, tonnage dues, and all other
kinds of customs fees, charges and dues except Note: An examination of the above enumeration reveals that those
wharfage on wharves constructed and maintained by taxes, charges and fees already imposed and collected by the
the local government unit concerned National Government such as income taxes, estate taxes, donor’s
5. Taxes, fees, and charges and other impositions upon taxes, documentary stamps taxes. Simply stated, the LGUs cannot
goods carried into or out of, or passing through, the exercise taxing powers reserved to the National Government. Thus,
it is also called the “reservation rule” or the “exclusionary rule”
territorial jurisdictions of local government units in the
guise of charges for wharfage, tolls for bridges or
UNIVERSITY OF SANTO TOMAS
233 FACULTY OF CIVIL LAW
Law on Taxation
Q: What is the Principle of Pre-emption or Exclusionary A: Yes. Ordinance No. 9503-2005 is a tax on business not a
Doctrine? tax on income.Business being defined by Section 131(d) of
the Local Government Code as "trade or commercial
A: Where the National Government elects to tax a activity regularly engaged in as a means of livelihood or
particular area, it impliedly withholds form the local with a view to profit."
government the delegated power to tax the same field. This
doctrine principally rests on the intention of the Congress. CEPALCO’s act of leasing for a consideration the use of its
posts, poles or towers to other pole users falls under the
Conversely, should the Congress allow municipal Local Government Code’s definition of business. In relation
corporations to cover fields of taxation it already occupies thereto, Section 131(d), Section 143(h) of the Local
then the doctrine of pre-emption will NOT apply (Victorias Government Code provides that the city may impose taxes,
Milling Co., Inc. vs. Municipality of Victorias Negros fees, and charges on any business which is not specified in
Occidental, G.R. No. L-21183, Sept. 27, 1968) Section 143(a) to (g) and which the Sanggunian concerned
may deem proper to tax. (Cagayan Electric Power and Light
Q: When does the principle apply? Co.,Inc,. vs City of Cagayan de Oro, G.R. No. 191761,
November 14, 2012)
A: The principle applies to the following:
1. Taxes levied under the NIRC Q: What is wharfage?
2. Taxes imposed under the Tariff and Customs Code
3. Taxes under special laws. A: It is a fee assessed against the cargo of a vessel engaged
in foreign or domestic trade based on quantity, weight, or
Q: How do you classify these common limitations / measure received and/ or discharged by the vessel.
excluded impositions?
Q: What is the Authorization Limitation?
A:
1. Taxes which are levied under the NIRC unless otherwise A: With the exception of cities, each local government unit
provided by the LGC - Items 1,2,3,8,9 and 10. could not exercise the taxing powers granted to others.
2. Taxes, fees, and charges which are imposed under the Hence, a province could not exercise the powers granted to
Tariffs and Customs Code - Item 4 municipality and vice-versa. However, a city could exercise
3. Taxes, fees and charges where the imposition of which the taxing powers of both a province and a municipality.
contravenes existing governmental policies or which
are violative of the fundamental principles of taxation - COLLECTION OF BUSINESS TAX
Items 5, 6, 7, 11, 13, 14 and 15
4. Taxes, fees and charges imposed under special laws - Q: Distinguish business tax from income tax.
Item 12
A:
Q: Can LGUs levy income taxes? BUSINESS TAX INCOME TAX
As to nature
A: GR: The exercise of the taxing authority of LGUs shall not Imposed in the exercise of A tax on all yearly profits
extend to the levy of income tax. police power for arising from property,
regulatory purposes and professions, trades or
XPN: However, income tax may be levied on paid for the privilege of offices, or as a tax on a
banks and other financial institutions. (Sec. carrying on a business in person’s income,
133(a), LGC) the year the tax was paid. emoluments, profits and
the like.
Q: The Sangguniang Panlungsod of Cagayan de Oro (City As to date of payment
Council) passed Ordinance No. 9503-2005 imposing a tax Paid at the beginning of Due on or before the 15
th
3. Right of redemption – one (1) year from the date of PERIODS OF ASSESSMENT AND COLLECTION OF
the sale or from the date of forfeiture (Sec. 179, LOCAL TAXES, FEES OR CHARGES
LGC).
Q: What is the period of assessment of local taxes?
Note: The owner shall not be deprived of possession and to
rentals/income thereof until the expiration of the time
allowed for its redemption. A: GR: Local taxes, fees, or charges shall be assessed within
five (5) years from the date they became due. No action for
C. Judicial Remedies the collection of such taxes, fees, or charges, whether
1. Court Action administrative or judicial, shall be instituted after the
i. Within 30 days after receipt of decision or expiration of such period.
lapse of 60 days in case of Secretary of
Justice’s inaction (Sec. 187, LGC) XPN: In case of fraud or intent to evade the
ii. Within 300 days from receipt when protest payment of taxes, fees, or charges, the same may
of assessment is denied or lapse of 60 days be assessed within ten (10) years from discovery
in case of local treasurer’s inaction (Sec. 195, of the fraud or intent to evade payment. (Sec. 184
LGC) [a] and [b], LGC)
iii. If no action is taken by the treasurer in
refund cases and the two year period is Q: What is the period of collection of local taxes?
about to lapse (Sec. 195, LGC)
iv. If remedies available does not provide plain, A: Local taxes, fees, or charges may be collected within five
speedy and adequate remedy. (5) years from the date of assessment by administrative or
judicial action (Sec. 194(c), LGC)
2. Action for declaratory relief
PROTEST OF ASSESSMENT
Assessment becomes
conclusive and
unappealable(Sec. 195, LGC) Taxpayer has 30 days from
receipt of the denial of the
protest or from lapse of the
60 day period prescribed to
appeal with a court of
competent jurisdiction
Note:The competent court referred to is the Regional Trial Court (RTC) which acts in the exercise of its original jurisdiction.
Start Local Treasurer (LT) assesses local taxes within LT issues notice of assessment
5 years from date they become due or 10
years from discovery of fraud
yes no
LT issues notice
cancelling
If Division decides
partially/wholly the
against taxpayer, file
assessment (Sec. 195,
MR within 15 days
LGC) Local Treasurer
with the same
finds the assessment division
wholly or partly
correct
CIVIL REMEDIES BY THE LGU FOR COLLECTION OF A: Local taxes, fees, charges and other revenues constitute
REVENUES a lien, superior to all liens, charges or encumbrances in
favor of any person, enforceable
Q: What are the remedies available to the local by appropriate administrative or judicial action, not only
government units in collecting revenues? upon any property or rights therein which may be subject
to the lien but also upon property used in business,
A: occupation, practice of profession or calling, or exercise of
1. Local government lien privilege with respect to which the lien is imposed. (Sec.
2. Civil remedies 173, LGC)
a. Distraint of personal property
b. Levy of real property Q: How are they extinguished?
c. Judicial action (Secs. 173 & 174, LGC)
A: The lien may only be extinguished upon full payment of
LOCAL GOVERNMENT’S LIEN FOR the delinquent local taxes fees and charges including
DELINQUENT TAXES, FEES OR CHARGES related surcharges and interest.
Failure of the person owing any local tax, fee, or Local treasurer or his deputy issues written notice to the
charge to pay the same at the time required (Sec. taxpayer concerned informing to seize or confiscate any
175[a], LGC) personal property belonging to that person or any personal
property subject to the lien in sufficient quantity to satisfy
the tax, fee, or charge in question, together with any
increment thereto incident to delinquency and the
The officer executing the distraint shall make or expenses of seizure
cause to be made an account of the goods, chattels
or effects distrained, a copy of which signed by
himself shall be left either with the owner or person
from whose possession the goods, chattels or
effects are taken, or at the dwelling or place of
business of that person and with someone of The local treasurer or his deputy shall issue a duly
suitable age and discretion, to which list shall be authenticated certificate based upon the records of his
added a statement of the sum demanded and a office showing the fact of delinquency and the amounts of
note of the time and place of sale (Sec. 175[b], LGC) the tax, fee, or charge and penalty due. Such certificate
shall serve as sufficient warrant for the distraintof personal
property aforementioned, subject to the taxpayer’s right to
claim exemption under the provisions of existing laws (Sec.
175[a], LGC)
The officer shall forthwith cause a notification to be
exhibited in not less than three (3) public and
conspicuous places in the territory of the local
government unit where the distraint is made, Should the property distrained be not disposed of within
specifying the time and place of sale, and the articles one hundred and twenty (120) days from the date of
distrained.(Sec. 175[c], LGC) distraint, the same shall be considered as sold to the local
Note: The time of sale shall not be less than twenty government unit concerned for the amount of the
(20) days after the notice to the owner or possessor assessment made thereon by the Committee on Appraisal
of the property as above specified and the and to the extent of the same amount, the tax
publication or posting of the notice. One place for delinquencies shall be cancelled. (Sec. 175 [e], LGC)
the posting of the notice shall be at the office of the
chief executive of the local government unit in which
the property is distrained. (Sec. 175[c], LGC)
Failure of the person owing any local tax, fee, or Levy of real property before, simultaneously or
charge to pay the same at the time required. (Sec. after distraint of personal property belonging to
176, LGC) the delinquent taxpayer.
Written notice of the levy shall be mailed to or The provincial city or municipal treasurer shall:
served upon the: a. prepare a duly authenticated
a. assessor and certificate
b. Register of Deeds of the province or city b. showing the name of the taxpayer
where the property is located who shall and the amount of the tax, fee, or
annotate the levy on the tax declaration charge, and penalty due from
and certificate of title of the property, him.(Sec. 176, LGC)
respectively, and
c. delinquent taxpayer or,
d. if he be absent from the Philippines, to
his agent or the manager of the business
in respect to which the liability arose, or Report on levy within ten (10) days from levy by
e. if there be none, to the occupant of the the levying officer. (Sec. 176, LGC)
property in question. (Sec. 176, LGC)
Q: May the levy of real property be simultaneously issued Q: When may LGU purchase real property advertised for
with the warrant of distraint? sale?
Q: What are the properties exempt from distraint or levy? A: The LGU concerned may enforce the collection of
delinquent taxes, fees, charges and other revenues by civil
A: The following property shall be exempt from distraint action in any court of competent jurisdiction. The civil
and the levy, attachment or execution thereof for action shall be filed by the local treasurer within five (5)
delinquency in the payment of any local tax, fee or charge, years from delinquent taxes, fees or charges become due.
including the related surcharge and interest: ToBe-ChoP-
LBM Q: What is the proper mode of appeal from the decision of
1. Tools and implements necessarily used by the the Regional Trial Court involving local taxes?
delinquent taxpayer in his trade or employment;
2. One (1) horse, cow, carabao, or other Beast of burden, A: RA 9282, which took effect on April 23, 2004, expanded
such as the delinquent taxpayer may select, and the jurisdiction of the Court of Tax Appeals (CTA) to include,
necessarilly used by him in his ordinary occupation; among others, the power to review by appeal decisions,
3. His necessary Clothing, and that of all his family; orders or resolutions of the Regional Trial Courts in local tax
4. Household furniture and utensils necessary for cases originally decided or resolved by them in the exercise
housekeeping and used for that purpose by the of their original or appellate jurisdiction.
delinquent taxpayer, such as he may select, of a value (City of Iriga vs Camarines Sur Electric Cooperative, Inc G.R.
not exceeding Ten thousand pesos (P10,000.00) No. 192945, September 5, 2012)
MTC
If principal amount of taxes, fees, exclusive of charges and penalties does not exceed
Original P300,000 or P400,000 in Metro Manila
RTC
If principal amount of taxes, fees exclusive of charges and penalties exceeds P300,000
or P400,000 in Metro Manila
Original
Provided, the amount is less than 1 million
The RTC shall exercise appellate jurisdiction over all cases decided by the MeTC, MTC,
Appellate and MCTC in their respective territorial jurisdiction
CTA DIVISION
If principal amount of taxes, fees exclusive of charges and penalties is P 1 million or
Original above
Over appeals from the judgments, resolutions or orders of the RTC in tax collection
Appellate cases originally decided by them in their respective jurisdiction.
CTA EN BANC
1. Decisions or resolutions over petitions for review of the Court in Divisions in the
exercise of its exclusive appellate jurisdiction over local taxes decided by the RTC in
the exercise of their original jurisdiction;
2. Over Petitions for review of the judgments, resolutions or orders of the RTC in the
Appellate exercise of their appellate jurisdiction over tax collection cases originally decided
by the MeTC, MTC and MCTC in their respective territorial jurisdiction.
The present law on real property taxation (R.A. 7160, Local Note: the NIRC and the LGC code prevail in classifying property for
Government Code) adopts actual use of real property as basis of tax purposes.
assessment. (Sec. 199[b], LGC)
Q: What is an Improvement?
Q: What are the local government units responsible for
the administration of real property tax? A: It is a valuable addition made to a property or an
amelioration in its condition, amounting to more than a
A: LGUs Responsible mere repair or replacement of parts involving capital
1. Provinces expenditures and labor, which is intended to enhance its
2. Cities value, beauty or utility or to adapt it for new or further
3. Municipalities in Metro Manila Area purposes. (Sec. 199 [m], LGC)
Q: What are the kinds of real property tax and special Q: What is the extent of the local taxing power in real
levies? property taxation?
EXEMPTION FROM REAL PROPERTY TAX A: Yes. While it is true that carriageways and terminal
stations are anchored, at certain points, on public roads,
Q: Under the Local Government Code, what properties are said improvements do not form part of the public roads
exempt from real property taxes? (2002 Bar Question) since the former are constructed over the latter in such a
way that the flow of vehicular traffic would not be
A: RP-PWC impaired. The carriageways and terminals serve a function
1. Real property owned by the Republic of the Philippines different from the public roads. The former are part and
or any of its political subdivisions except when the parcel of the light rail transit (LRT) system which, unlike the
beneficial use thereof has been granted for latter, are not open to use by the general public. The
consideration or otherwise to a taxable person. carriageways are accessible only to the LRT trains, while the
terminal stations have been built for the convenience of
2. Charitable institutions, churches, parsonages, or LRTA itself and its customers who pay the required fare.
convents appurtenant thereto, mosques, non-profit or Even granting that the national government owns the
religious cemeteries, and all lands, buildings, and carriageways and terminal stations, the property is not
improvements actually, directly and exclusively used exempt because their beneficial use has been granted to
for religious, charitable, or educational purposes. LRTA which is a taxable entity. (LRTA v. CBAA, G.R. No.
127316, Oct. 12, 2000)
Note: the tax exemption herein rest on the premise that they
are actually, directly and exclusively used by said entities or Q: Are the airport lands and buildings of Manila
institutions for their stated purposes and not necessarily International Airport Authority (MIAA) exempt from real
because they are owned by religious, charitable or estate tax under existing laws?
educational institutions.
A: Yes. First, MIAA is not a government-owned or
3. All machineries and equipment that are actually, controlled corporation but an instrumentality of the
directly and exclusively used by local Water utilities National Government and thus exempt from local taxation.
and government-owned or controlled corporations MIAA is a government instrumentality vested with
engaged in the supply and distribution of water and/or corporate powers to perform efficiently its governmental
generation and transmission of electric power. functions. MIAA is like any other government
3. The real property taxes collected shall accrue solely to 3. Reproduction cost approach – a formal approach used
the benefit of the local government unit concerned. exclusively in appraising manmade improvements such
(Sec. 5, Art. X, 1987 Constitution) as buildings and other structures, based on such data
as materials and labor costs to reproduce a new
RULE ON APPRAISAL OF REAL PROPERTY replica of the improvement. (Allied Banking
AT FAIR MARKET VALUE Corporation, et. al., v. Quezon City Government, G.R.
No. 154126, Oct. 11, 2005)
Q: How is a real property appraised?
Q: How is the fair market value (FMV) determined?
A: All real property, whether taxable or exempt, appraised
at the current and fair market value prevailing in the A:
locality where the property is situated (Sec. 201, LGC) a. Assessor of the province/city or municipality may
summon the owners of the properties to be affected
Q: What is the fair market value of properties? and may take depositions concerning the property, its
ownership, amount, nature and value (Sec. 213, LGC)
A: Fair market value (FMV) is the price at which a property b. Assessor prepares a schedule of FMV for different
may be sold by a seller who is not compelled to sell and classes of properties.
bought by a buyer who is not compelled to buy. (Sec. 199(I), c. The schedule of FMV is published in a newspaper of
LGC) general circulation in the province, city or municipality
concerned or in the absence thereof, shall be posted in
Q: Define assessed value the provincial Capitol, city or municipal hall and in two
other conspicuous public places therein (Sec. 212, LGC)
A: Assessed value is the fair market value of the real d. General revision of property assessment is made (Sec.
property multiplied by the assessment level. It is 219, LGC)
synonymous to taxable value (Sec.199(h), LGC) e. Sanggunian enacts a real property tax ordinance.
3. Determining the real property tax - Real property tax is A: Actual use refers to the purpose for which the property
computed by multiplying the with the applicable RPT is principally or predominantly utilized by the person in
rate. possession thereof. (Sec. 199[b], LGC)
A: When real property is assessed for the first time or when XPN: Treasurer may deputize the barangay treasurer
an existing assessment is increased or decreased, the to collect all taxes on real property located in the
provincial, city or municipal assessor shall within thirty (30) barangay, provided that:
days give written notice of such new or revised assessment 1. The barangay treasurer is properly bonded for
to the person in whose name the property is declared. The the purpose: provided, further,
notice may be delivered personally or by registered mail or 2. The premium on the bond shall be paid by the
through the assistance of the punongbarangay to the last city or municipal government concerned. (Sec.
known address of the person to be served. (Sec. 223, LGC) 247, LGC)
APPRAISAL AND ASSESSMENT OF MACHINERY DUTY OF ASSESSOR TO FURNISH LOCAL TREASURER WITH
ASSESSMENT ROLLS
Q: How are Machineries classified? (Sec. 199[o], LGC)
Q: What is the duty of the Assessor after assessment or
A: reassessment?
A. Realty by Destination – machinery essential to the
business A: The provincial, city or municipal assessor shall prepare
and submit to the treasurer of the local government unit,
Note: Movable equipments to be immobilized in st
on or before the thirty-first (31 ) day of December each
contemplation of the law must first be “essential and
year, an assessment roll containing a list of all persons
principal elements” of an industry or works without which
such industry orworks would be “unable to function or carry whose real properties have been newly assessed or
on the industrial purpose for which it was established.” reassessed and the values of such properties (Sec. 248,
(Mindanao Bus Co. v. City Assessor, G.R. no. L-17870, LGC).
September 29, 1962)
NOTICE OF TIME FOR COLLECTION OF TAX
B. Realty by Incorporation – Machinery permanently
attached Q: When is the time for collection of tax?
Appraisal and Assessment of Machinery A: Treasurer shall post the notice of the dates when the tax
a. For brand new machinery, FMV is the acquisition may be paid without interest in a publicly accessible place
cost at the city or municipal hall. Notice shall likewise be
Note: The share of each barangay shall be released, without need LOCAL GOVERNMENT’S LIEN
of any further action, directly to the barangay treasurer on a
quarterly basis within five (5) days after the end of each quarter Q: What are the guidelines in the exercise of local
and shall not be subject to any lien or holdback for whatever
government lien?
purpose.
Q: What happens to proceeds of the tax on idle lands? Q: What are the remedies of the local government units
for the collection of real property tax?
A: It shall accrue to the:
1. Respective general fund of the province or city A:
where the land is located 1. Administrative action
2. In the case of a municipality within the a. Exercise of lien on the property subject to tax
Metropolitan Manila Area, the proceeds shall i. Superior to all liens, charges or
accrue equally to the Metropolitan Manila encumbrances and is enforceable by
Authority and the municipality where the land is administrative or judicial action. It is
located. (Sec. 273, LGC) extinguished only upon payment of tax and
other expenses. (Sec. 257, LGC)
Q: What happens to proceeds of the special levy? b. Levy on the real property subject of the tax
c. Distraint of personal property
A: The proceeds of the special levy on lands benefited by 2. Judicial action
public works, projects and other improvements shall accrue
Q: May the owner of the delinquent property redeem the
to the general fund of the local government unit which
property?
financed such public works, projects or other
improvements. (Sec. 274, LGC)
A: Yes. Within one (1) year from the date of sale, the
owner of the delinquent real property or person having
legal interest therein, or his representative, shall have the
Note: From the date of sale until the expiration of the period of A:
redemption, the delinquent real property shall remain in 1. There is no bidder; or
possession of the owner or person having legal interest therein 2. The highest bid is for an amount insufficient to pay the
who shall be entitled to the income and other fruits thereof.
real property tax, fees, charges, surcharges, interests
or penalties. (Sec. 263, LGC)
Q: What happens in case there is failure to redeem?
RESALE OF REAL ESTATE TAKEN FOR TAXES, FEES OR
A: In case the owner or person having legal interest fails to
CHARGES
redeem the delinquent property, the treasurer shall
execute a deed conveying to the purchaser said property,
Q: May the sanggunian dispose of the real property
free from lien of the delinquent tax, interest due thereon
acquired?
and expenses of sale.
A: Yes.The sanggunian concerned may, by ordinance duly
Q: How is distraint of personal property effected under
approved an upon notice of not less than twenty (20) days,
real property taxation?
sell and dispose of the real property acquired under the
preceding Section at public auction. The proceeds of the
A: When notice of delinquency has been accordingly posted
sale shall accrue to the general fund of the local
and published, the local treasurer shall proceed to sell the
government unit concerned. (Sec. 264, LGC)
personal property of the delinquent taxpayer in order to
satisfy his unpaid obligation. (Sec. 254, LGC)
FURTHER LEVY UNTIL FULL PAYMENT OF AMOUNT DUE
Q: Quezon City published on January 30, 2006 a list of
Q: May a levy be repeated?
delinquent real property taxpayers in 2 newspapers of
general circulation and posted this in the main lobby of
A: Levy may be repeated if necessary until the full amount
the City Hall. The notice requires all owners of real
due, including all expenses, is collected. (Sec. 265, LGC)
properties in the list to pay the real property tax due
within 30 days from the date of publication, otherwise the
properties listed shall be sold at public auction.
A:
1. I will resolve the issue in favor of Joachin. In auction
Tax constitutes a lien on the property superior to all liens and may only be extinguished upon payment of the tax and charges
(Sec. 257, LGC)
Time for payment of real property tax expires (Sec. 258, LGC)
Warrant of levy issued by LT, which has the force of legal execution in the LGU concerned. (Sec. 258, LGC)
Warrant mailed to or served upon the delinquent owner. Written notice of levy and warrant is mailed/served upon the
assessor and the Register of Deeds of the LGU (Sec. 258, LGC)
IF there is a bidder AND highest bid is sufficient to pay real IF there is no bidder OR highest bid is
property tax and related interests and costs, bidder pays and insufficient to pay real property tax and
treasurer reports sale to sanggunian 30 days after the sale. LT will related interest and costs, LT shall purchase
deliver to purchaser the certificate of sale. Proceeds of sale in the prop in behalf of the LGU.
excess of delinquent tax, interest, expenses of sale remitted to
owner. (Sec. 260, LGC) Registrar of Deeds shall transfer the title of
forfeited prop to LGU without need of
Within one year from sale, owner may redeem upon payment of Court order.
the delinquent tax, interest due, expenses of sale (from date of
delinquency to date of sale), and additional interest of 2% per Within one year from forfeiture, owner may
month on the purchase price from date of sale to date of redeem prop by paying to Treasurer full
redemption. Delinquent owner retains possession and right to the amount of tax, interest, costs of sale(Sec. 263,
fruits. Price paid plus interest of 2% per month shall be returned LGC)
to the buyer.(Sec. 261, LGC)
Sanggunian concerned may by ordinance,
IF not redeemed, deed of conveyance shall be issued to the sell/dispose by public auction of prop acquired
purchaser(Sec. 262, LGC) by forfeiture.(Sec. 264, LGC)
Levy may be repeated until full amount due; including all expenses is collected (Sec. 265, LGC)
In case of denial, appeal to the LBAA within 30 days REPAYMENT OF EXCESSIVE COLLECTIONS
as in protest case.
Q: What is the remedy of a taxpayer whose real property
was erroneously assessed?
Appeal to CBAA within 30 days if LBAA gives and
A: When an assessment of basic real property tax, or any
adverse decision.
other tax levied under this Title, is found to be illegal or
erroneous and the tax is accordingly reduced or adjusted,
PAYMENT UNDER PROTEST the taxpayer may file a written claim for refund or credit for
taxes and interests with the provincial or city treasurer
Q: What are the guidelines in paying tax under protest? within two (2) years from the date the taxpayer is entitled
to such reduction or adjustment. (Sec. 253, LGC)
A:
1. No protest shall be entertained unless the taxpayer TAXPAYER’S REMEDIES
first pays the tax. There shall be annotated on the tax
receipts the words "paid under protest" The protest in Q: What are the remedies available to the taxpayer under
writing must be filed within thirty (30) days from real property taxation?
payment of the tax to treasurer who shall decide the
protest within sixty (60) days from receipt. A:
2. The tax or a portion paid under protest shall be held in 1. Dispute assessment (Protest)
trust by the treasurer concerned. a. Any owner or person having legal interest in the
3. In the event that the protest is finally decided in favor property who is not satisfied with the action of
of the taxpayer, the amount or portion of the tax the assessor in the assessment of his property; or
protested shall be refunded to the protestant, or b. Any owner of real property affected by a special
applied as tax credit against his existing or future tax levy or any person having legal interest therein
liability. may PROTEST the assessment by filing an appeal
4. In the event that the protest is denied or upon the to the LBAA within 60 days from receipt of notice
lapse of the sixty day period, the taxpayer may avail of the assessment.
appeal the assessment before the Local Board of
Assessment Appeals. (Sec. 252, LGC) 2. Claim for refund or tax credit
CONTESTING AN ASSESSMENT OF Note: The CBAA can be appointed by the Supreme Court to act as a
VALUE OF REAL PROPERTY court-appointed fact finding commission to assist the Court in
resolving the factual issues raised in the cases before it. In that
regard, the CBAA is not acting in its appellate jurisdiction. (Mathay
Q: What is the remedy of a taxpayer contesting an
v. Undersecretary of Finance, En banc Minute Resolution, Nov. 5,
assessment? 1991)
A: Any owner or person having legal interest in the The owner of the property or the person having legal interest
property not satisfied with the action of the assessor in the therein or the assessor who is not satisfied with the decision of the
assessment of his property may within sixty (60) days from Board may, within thirty (30) days after receipt of the decision of
the date of receipt of the written notice of assessment said Board, appeal to the Central Board of Assessment Appeals, as
appeal to the Board of Assessment Appeals of the herein provided. The decision of the Central Board shall be final
and executory. (Sec. 230, LGC)
provincial or city by filing a petition under oath in the form
prescribed for the purpose, together with copies of the tax
Q: Does the CBAA have the authority to hear purely legal
declarations and such affidavits or documents submitted in
issues?
support of the appeal. (Sec. 226, LGC)
A: No. Such authority is lodged with the regular courts.
APPEAL TO THE LOCAL
Thus, the issue of whether R.A. 7160 repealed P.D. 921, is
BOARD OF ASSESSMENT APPEALS (LBAA)
an issue which does not find referral to the CBAA before
resort is made to the courts (Ty, v. Trampe, G.R. No.
Q: What is the composition of the LBAA?
117577. December 1, 1995)
A:
Q: Will the appeal to LBAA or CBAA suspend the collection
1. The Registrar of Deeds, as Chairman;
of tax?
2. The provincial or city prosecutor as member;
3. The provincial or city engineer as a member. (Sec. 227,
A: No. An appeal on assessments of real property shall in no
LGC)
case, suspend the collection of the corresponding realty
taxes the property involved as assessed. This is without
Q: What is the jurisdiction of the LBAA?
prejudice to subsequent adjustment depending upon the
final outcome of the appeal. (Sec. 231)
A: Jurisdiction to hear appeals of owners or persons having
legal interest of owners having legal interest in a property NOTE: No court shall have the authority to enjoin or restrain the
who are not satisfied with the action of the assessor on an collection of any tax, fee, or charge collected by the provincial, city
assessment. or municipal treasurer. “No injunction rule”
Note: In the exercise of its appellate jurisdiction, the LBAA shall Q: A Co., a Philippine corporation, is the owner of
have the power to summon witnesses, administer oaths, conduct machinery, equipment and fixtures located at its plant in
ocular inspection, take depositions, and issue subpoena and
Muntinlupa City. The City Assessor characterized all these
subpoena duces tecum. The proceedings of the Board shall be
conducted solely for the purpose of ascertaining the facts without properties as real properties subject to the real property
necessarily adhering to technical rules applicable in judicial tax. A Co. appealed the matter to the Muntinlupa Board of
proceedings. (Sec. 229[b], LGC) Assessment Appeals. The Board ruled in favor of the City.
A Co. brought a petition for review before the CTA to
Q: Within what period should the appeal be decided? appeal the decision of the City Board of Assessment
Appeals. Is the Petition for Review proper? Explain. (1999
A: The LBAA shall decide the appeal within one hundred Bar Question)
twenty (120) days from the date of receipt of such appeal.
The Board, after hearing, shall render its decision based on A: No. The CTA’s devoid of jurisdiction to entertain appeals
substantial evidence or such relevant evidence on record as from the decision of the City Board of Assessment Appeals.
a reasonable mind might accept as adequate to support the Said decision is instead appealable to the Central Board of
conclusion. (Sec 229[a], LGC) Assessment Appeals, which under the Local Government
UNIVERSITY OF SANTO TOMAS
2013 GOLDEN NOTES 258
LOCAL GOVERNMENT CODE
Code, has appellate jurisdiction over decisions of Local Q: The Province of Quezon assessed Mirant Pagbilao
Board of Assessment Appeals (Caltex Phils. v. CBAA, G.R. Corporation (Mirant) for unpaid real property taxes.
No. L50466, May 31, 1982). Napocor, which entered into a Build-Operate-Transfer
(BOT) Agreement with Mirant, protested the assessment
Q: What are instances where CTA (En Banc) has exclusive before the Local Board of Assessment Appeals (LBAA),
appellate jurisdiction over cases filed with CBAA? claiming entitlement to the tax exemptions provided
under Section 234 of the Local Government Code (LGC).
A: The real property taxes assessed were not paid prior to
1. In the exercise of its appellate jurisdiction the protest. The LBAA dismissed Napocor’s petition for
2. Over cases involving the assessment and taxation of exemption for its failure to comply with Section 252 of the
real property LGC requiring payment of the assailed tax before any
3. Originally decided by the provincial or CBAA protest can be made. The Central Board of Assessment
Appeals (CBAA) ultimately dismissed Napocor’s appeal for
Q: What is the period within which CBAA should resolve a failure to meet the requirements for tax exemption;
case submitted to it for decision? however, the CBAA agreed with Napocor’s position that
the protest contemplated in Section 252 (a) is applicable
A: The Central Board shall decide cases brought on appeal only when the taxpayer is questioning the reasonableness
within 12 months from the date of receipt thereof, which or excessiveness of an assessment. The CBAA ruled that
decision shall become final and executor after the lapse if the requirement of payment prior to protest does not
15 days from the date of receipt thereof by the appellant. apply where the legality of the assessment is put in issue
on account of the taxpayer’s claim that it is exempt from
EFFECT OF PAYMENT OF TAX tax. The Court of Tax Appeals (CTA) en banc agreed with
the CBAA’s discussion.
Q: What is the effect of appeal on the payment of real 1. If the taxpayer claims that the property is exempt
property tax? from real property tax, is the taxpayer required to
pay the tax pursuant to Section 252?
A: Appeal on assessments of real property shall, in no case, 2. Is Napocor’s action before the LBAA prematurely
suspend the collection of the corresponding realty taxes on filed?
the property involved as assessed – but without prejudice
to subsequent adjustment depending upon the final A:
outcome of the appeal. (Sec. 231, LGC) 1. Yes. By claiming exemption from realty taxation,
Napocor is simply raising a question of the correctness
PAYMENT OF REAL PROPERTY UNDER PROTEST of the assessment. As such, the real property tax must
be paid prior to the making of a protest. On the other
Q: Why is there a need of prior payment before protest hand, if the taxpayer is questioning the authority of
may be entertained by the courts? the local assessor to assess real property taxes, it is
not necessary to pay the real property tax prior to the
A: The basis for requiring payment before protest can be protest. A claim for tax exemption, whether full or
entertained is that taxes are the lifeblood of the nation and partial, does not question the authority of local
as such collection cannot be restrained by injunction or any assessor to assess real property tax.
like action. (Manila Electric Company v. Barlis, et. al., G.R.
No. 114231, May 18, 2001) 2. Yes. It was an ill-advised move for Napocor to directly
file an appeal with the LBAA under Section 226
Q: Give the rules as to the necessity of paying real without first paying the tax as required under Section
property tax prior to protest 252. Sections 252 and 226 provide successive
administrative remedies to a taxpayer who questions
A: GR: The taxpayer must pay the real property tax the correctness of an assessment. Section 226, in
assessed prior to protesting a real property tax assessment. declaring that “any owner or person having legal
(Sec. 252, LGC) interest in the property who is not satisfied with the
action of the provincial, city, or municipal assessor in
XPN: The payment of the tax prior to protest is the assessment of his property may appeal to the
not necessary where the taxpayer questions the Board of Assessment Appeals,” should be read in
authority and power of the assessor to impose conjunction with Section 252 (d), which states that in
the assessment and of the treasurer to collect the the event that the protest is denied, the taxpayer may
tax. (Ty, et. al., v. Trampe, G.R. No. 117577. avail of the remedies as provided for in Chapter 3, Title
December 1, 1995) II, Book II of the LGC [Chapter 3 refers to Assessment
Appeals, which includes Sections 226 to 231]. The
Note: The protest contemplated under Section 252 is required “action” referred to in Section 226 (in relation to a
where there is a question as to the reasonableness or correctness protest of real property tax assessment) thus refers to
of the amount assessed. Hence, if a taxpayer disputes the the local assessor’s act of denying the protest filed
reasonableness of an increase in a real property tax assessment, he pursuant to Section 252. Without the action of the
is required to “first pay the tax” under protest. Otherwise, the city local assessor, the appellate authority of the LBAA
or municipal treasurer will not act on his protest. (Ibid.)
cannot be invoked. Napocor’s action before the LBAA
2. Special tariffs or custom duties - these are additional Q: Are there instances where there could be exemptions
import duties imposed on specific kinds of imported from customs duties?
articles under certain conditions. They are imposed for
the protection of consumers and manufacturers, as A: GR: There shall be no exemptions from the payment of
well as Philippine products from undue competition customs duties.
posed by foreign made products.
XPNS:
Q: What is the concept of Preferential Tariffs? 1. Those provided under the Tariffs and Customs
Code (e.g. conditionally-free importations)
A: It is the imposition of high customs duties which results 2. Those granted to government agencies,
to making the foreign goods more expensive compared instrumentalities or government-owned or
with locally produced articles. This is to protect Philippine controlled corporation with existing contracts,
manufacturers from competition posed by foreign commitments, agreements, or obligations
manufacturers. (requiring such exemptions) with foreign
countries;
3. International institutions, associations or
organization entitled to exemption pursuant to
agreements or special laws;
Note: Upon certification of the head of the department or political REQUIREMENTS OF IMPORTATION
subdivision concerned, with the approval of the COA, that the
imported article is actually being used by the government or any of Q: When are tariff and customs law applicable?
its political subdivision concerned, the amount of duty, tax, fee or
charge shall be refunded to the government or the political
subdivision which paid it. A: After importation has begun but before importation is
terminated.
FLEXIBLE TARIFF CLAUSE
BEGINNING AND ENDING OF IMPORTATION
Q: What do you understand by the term "flexible tariff
clause" as used in the Tariff and Customs Code? (2001 Bar Q: When does importation begin and when does it end?
Question)
A:
A: The term "flexible tariff clause" refers to the authority 1. Importation begins when the conveying vessel or
given to the President to adjust tariff rates under Section aircraft enters the jurisdiction of the Philippines with
401 of the Tariff and Customs Code, which is the enabling intention to unload therein.
law that made effective the delegation of the taxing power
to the President under the Constitution. 2. Importation is deemed terminated upon payment of
duties, taxes and other charges due upon the articles,
Q: What is provided for under Section 401 of the Tariff and or secured to be paid, at the port of entry; and upon
Customs Code (TCC)? grant of the legal permit for withdrawal; In case the
articles are free of duties, taxes and other charges,
A: In the interest of national economy, general welfare until they have legally left the jurisdiction of the
and/or national security, and subject to the limitations customs. (Sec. 1202, TCC)
provided in the TCC, the President, upon recommendation
of the National Economic and Development Authority Note: Intention to unload is essential. Even if the cargo is not yet
unloaded and there is unmanifested cargo, forfeiture may take
(NEDA), is empowered to:
place because importation has already begun.
1. Increase, reduce or remove existing protective
rates of import duty (including any necessary
Q: Why is it important to know whether importation has
change in classification). The existing rates may
already begun or not?
be increased or decreased to any level, in one or
several stages but in no case shall the increased
A: It is because the jurisdiction of the BOC to enforce the
rate of import duty be higher than a maximum of
provisions of the TCC, including seizure and forfeiture,
one hundred (100) per cent ad valorem;
begins from the commencement of importation. The BOC
2. Establish import quota or to ban imports of any
loses jurisdiction to enforce the TCC after importation is
commodity, as may be necessary;
deemed terminated.
CARGO MANIFEST 2. Formal entry – The TCC does not provide for a listing
of articles that are required to be cleared on a formal
Q: What is a manifest? entry. The Customs Commissioner may, upon
instruction for the protection of the Finance
A: It is a listing of the passengers or cargoes carried by a Secretary, for the protection of domestic industry,
vessel or aircraft, whether engaged in the coastwise or require articles regardless of value to be cleared by a
foreign trade. formal entry.
Q: When is a manifest required? Q: Who are the persons authorized to make import entry?
A: No. Articles subject to seizure do not have to be Q: When is the period for filing import entry?
imported goods. Manifests are also required for articles
found on vessels or aircraft engaged in coastwise trade A: Imported articles must be entered in the customhouse at
(Rigor v. Rosales, G.R. No. L-33756, October 23, 1982). the port of entry within 30 days, which shall not be
extendible, from the discharge of the last package from the
Q: Is unmanifested cargo subject to forfeiture? vessel or aircraft. (Sec. 1301, TCC as amended by R.A. 9135)
A: Yes. Unmanifested cargo is subject to forfeiture whether Q: When is the “discharge of the last package”?
the act of smuggling is established or not under the
principle of res ipsa loquitur. It is enough that the cargo A: It is when the unloading of the shipment from the carrier
was unmanifested and that there was no showing that is completed. In case of transshipment, the discharge of the
payment of duties thereon had been made for it to be last package from the domestic carrier at the port of final
subject to forfeiture. destination.
A: It is a declaration to the Bureau of Customs showing the A: It is a government form accomplished by an importer or
description, value, tariff classification and other particulars his representative, which is ultimately submitted to the
of the imported article to enable the customs authorities proper office of the Bureau of Customs as a basis for
to determine the correct customs duties and internal inspection of the importations of an importer and for the
revenue taxes due on the importation. computation of the correct customs duties and internal
revenue taxes due on importation.
Q: When is import entry required?
Liquidation is considered to have been made when the Note: The fact that the importer/broker denies the authorized
entry is officially stamped “liquidated” (Pilipinas Shell customs officer full and free access to importation records during
Petroleum Corporation v. Republic of the Philippines, etc., the conduct of a post-entry audit shall create a presumption of
inaccuracy in the transaction value declared for their imported
G. R. No. 161953, Mar. 6, 2008).
goods and constitutes grounds for the Bureau of Customs to
conduct a re-assessment of such goods.
Q: When is liquidation deemed final?
Q: What is the effect of the failure to pay correct duties
A: An assessment or liquidation by the Bureau of Customs and taxes after post-entry audit and investigation?
attains finality and conclusiveness three (3) years from the
date of the final payment of duties except when: A: Any person who, after being subjected to post-entry
1. There was fraud; audit and examination and is found to have incurred
2. There is a pending protest; or deficiencies in duties and taxes paid for imported goods,
3. The liquidation of import entry was merely shall be penalized according to the three (3) degrees of
tentative. (Sec. 1603 TCC, as amended by R.A. culpability subject to any mitigating, aggravating or
9135) extraordinary factors that clearly established by the
available evidence. (Sec. 3611, TCC as amended by R.A
Q: When is there tentative liquidation? 9135)
A: If to determine the exact amount due under the law in IMPORTATION IN VIOLATION OF TAX CREDIT CERTIFICATE
part some future action is required, the liquidation shall be
deemed to be tentative as to the item or items affected SMUGGLING
and shall to that extent be subject to future and final
readjustment and settlement within a six (6) months from Q: What is smuggling?
date of tentative liquidation. (Sec. 1602, TCC)
A: Any act of a person who shall:
KEEPING OF RECORDS 1. fraudulently import or bring into the Philippines,
any article, contrary to law; or
Q: What is the Compliance Audit under the Tariff and 2. assist in so doing; or
Customs Code? 3. receive, conceal, buy, sell or in any manner
facilitate the transportation, concealment, or sale
A: The Bureau of Customs shall examine, inspect and verify of such article after importation, knowing the
the books, records and documents necessary or relevant same to have been imported contrary to law.
for the purpose of collecting the proper duties and taxes. (Sec. 3601, TCC)
Q: What is required from the importer for purposes of Note: The Philippines is divided into various ports of entry. Entry in
compliance audit? any place other than those ports will be considered smuggling.
A: All importers are required to keep at their principal Q: What are the elements of smuggling or illegal
place of business, in the manner prescribed by regulations importation?
to be issued by the Commissioner of Customs and for a
UNIVERSITY OF SANTO TOMAS
265 FACULTY OF CIVIL LAW
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A: that the textile is smuggled becomes punishable under
1. That the merchandise must have been fraudulently or Section 3601 of the Code (Rodriguez v. CA, G.R. No. 115218,
knowingly imported contrary to law; Sept. 18, 1995)
2. That the defendant, if he is not the importer himself,
must have received, concealed, bought, sold or in any Q: What are contrabands?
manner facilitated the transportation, concealment or
sale of the merchandise; and A: These are articles of prohibited importation or
3. That the defendant must be shown to have knowledge exportation. (Sec. 3519, TCC)
that the merchandise has been illegally imported.
Q: When are imported goods not considered as
Q: An information was filed against Jardeleza in violation contrabands?
of the TCC for bringing 20.1 kilograms of assorted gold
jewelry with an estimated value of P7,562,231.50. Such A: Imported goods must be entered into a customhouse at
was effected by hiding said jewelry inside a hanger bag their port of entry, otherwise they shall be considered as
and, by not declaring it in the Customs Declaration form contraband and the importer is liable for smuggling. (Sec.
and, by verbally denying that she is carrying said items by 101, TCC)
answering “no” when asked by Bureau of Customs if she
has anything to declare prior to the actual inspection of Q: What is port of entry?
her luggage. The accused denied the allegations against
her. Is the accused guilty of smuggling the jewelries? A: It is a domestic port open to both foreign and coastwise
trade including “airport of entry”. (Sec. 3514, TCC). All
A: Yes. A person arriving in the Philippines with baggage articles imported into the Philippines whether subject to
containing dutiable articles is bound to declare the same in duty or not shall be entered through a customs house at a
all respects. Adequate reporting of dutiable merchandise port of entry.
being brought into the country is absolutely necessary to
the enforcement of customs laws, and failure to comply OTHER FRAUDULENT PRACTICES
with those requisites is as condemnable as failure to pay
customs fees. Any administrative penalty imposed on the Q: What are the types of valuation frauds?
person arriving in the Philippines with undeclared dutiable
articles is separate from and independent of criminal A:
liability for smuggling under Sec. 3601 of the TCC and for 1. Undervaluation – reporting lower values than the
violation of other provisions in the TCC. actual transaction value
2. Overvaluation – reporting values higher than the
The phrase “contrary to law” in Sec. 3601 of the TCC transaction value
qualifies the phrases “imports or brings into the 3. False invoice description through reporting lower
Philippines” and “assists in so doing,” and not the word qualities in the invoice not identifying branded items as
“article”. The word “law” includes regulations having the such
force and effect of law, meaning substantive or legislative 4. False country of origin
type rules as opposed to general statements of policy or
rules of agency, organization, procedures or positions. Q: What are the fraudulent practices considered as
(Jardeleza v. People of the Philippines,G.R. No. 165265, Feb. criminal offenses against Customs Revenue Laws?
06, 2006)
A:
Q: What needs to be proved before a person may be 1. Unlawful importation
found guilty of smuggling? 2. Entry of imported or exported article by means of any
false or fraudulent practices, invoice, declaration,
A: GR: Mere possession of the articles in question. affidavit, or other documents
3. Entry of goods at less than their true weights or
XPN: If defendant could explain that his measures or upon a classification as to quality or value
possession is lawful. 4. Payment of less than the amount due
5. Filing any false or fraudulent claim for the payment of
Q: Is mere possession of the alleged smuggled goods drawback or refund of duties upon the exportation of
enough evidence for the conviction of smuggling? merchandise
6. Filing any affidavit, certificate or other document to
A: Yes. After importation, the act of facilitating the secure to himself or others the payment of any
transportation, concealment or sale of the unlawfully drawback, allowance or refund of duties on the
imported article must be with the knowledge that the exportation of merchandise greater than that legally
article was smuggled. However, if upon trial the defendant due thereon. (Sec. 3602, TCC)
is found to have been in possession of such article, this shall
be sufficient to authorize conviction unless the defendant
explains his possession to the satisfaction of the court.The
receipt, concealment, sale, purchase or the facilitation
thereof after the unlawful importation with the knowledge
UNIVERSITY OF SANTO TOMAS
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TARIFF AND CUSTOMS CODE
Q: Does the acquittal in criminal charge in seizure or to take the life of, or inflict bodily harm upon any
forfeiture proceedings operate as res judicata? person in the Philippines.
Q: What is the classification of articles subject to tariff XPN: Those tickets authorized by the Philippine
and customs laws? Government
2. Written or printed articles in any form containing any A: Where articles are of prohibited importation or subject
matter advocating or inciting treason, or rebellion, to importation only upon conditions prescribed by law, it
insurrection, sedition, or subversion against the shall be the duty of the Collector to exercise such
Government of the Philippines, or forcible resistance jurisdiction in respect thereto as will:
to any law of the Philippines, or containing any threat 1. Prevent importation; or
UNIVERSITY OF SANTO TOMAS
267 FACULTY OF CIVIL LAW
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2. Otherwise secure compliance with all legal
requirements. (Sec. 1207, TCC)
CONDITIONALLY-FREE IMPORTATION
A: Those:
1. Provided in Sec. 105, TCC;
2. Granted to government agencies, instrumentalities
and GOCCs in agreements with foreign countries;
3. Given to international institutions entitled to
exemption by agreement or special laws;
4. Granted by the President upon recommendation of
NEDA;
5. Those provided in the Code in favor of RETURNING
RESIDENTS with respect to their personal and
household effects:
a. Personal and household effects including luxury
items brought out of the Philippines and
returned;
b. Personal and household effects except luxury
items purchased abroad and imported to the
Philippines;
c. The purchase abroad of consumables, livelihood
tools, personal and household effects by
Overseas Filipino Workers (OCW) and
Balikbayans;
d. The purchase abroad of consumables, livelihood
tools, personal and household effects by
Overseas Filipino Workers (OCW) and
Balikbayans at Philippine duty-free shops; and
e. Personal and household effects of members of
Philippine diplomatic missions including civil or
military attaches.
A:
ARTICLES REQUIREMENTS EXCEPTIONS
1. Aquatic products a. Caught or gathered by fishing vessels of Philippine
registry
b. Imported in such vessels or in crafts attached
thereto
c. Have not landed in any foreign territory; or
d. If so landed, solely for transshipment without
having been advanced in condition
2. Equipment for salvage of vessels and a. Payment of bond equal to 1 ½ times the
aircrafts unavailable locally ascertained duties, taxes and other charges (DTO)
thereon
b. Conditioned on:
i. Exportation or
ii. Payment of DTO within 6 months from acceptance
of import entry
3. Cost of repairs made in foreign Satisfactory proof to the Collector of Customs of:
countries on Philippine- a. Adequate facilities for repairs not afforded in the
registered/licensed vessels or aircrafts Philippines
b. Vessel/aircraft was compelled by stress of weather
or other casualty to dock into a foreign port to
secure safety and sea/air-worthiness
c. Excluding the value of the article used
4. Articles brought for repairs, processing Bond in amount equal to 1 ½ times the ascertained DTO
or reconditioning to be exported upon thereon, conditioned on:
completion of repairs a. exportation
b. payment of DTO within 6 months from acceptance
of import entry
5. Medals, badges, cups and other small Bestowed or received as honorary distinction
articles
6. a. Formally declared and listed before departure Vehicles, aircraft
a. Personal and household effects of b. Identified under oath before Collector and animals
residents of the Philippines c. Personal and household effects shall neither be in purchased in
returning from abroad(include commercial quantities nor intended for barter, sale, foreign countries
jewelry, precious stone and other hire necessary,
articles of luxury) d. Dutiable value not exceeding P10,000 Appropriate,
b. Personal and household effects e. Returning residents have not previously received normally used for
purchased in foreign countries by the benefit within 365 days prior to his arrival comfort and
residents of the Philippines which f. 50% ad valorem duty across the board shall be convenience in
were necessary, appropriate and levied in excess of the P 10,000 their stay abroad.
normally used for the g. Personal and household effects of returning
convenience in their journey and residents who have not stayed abroad for 6 months
during their stay abroad (include shall be subject to 50% ad valorem duty across the
wearing apparel, articles of board, the total dutiable value of which does not
personal adornment, toilet exceed P 2,000
articles, portable appliances and
instruments)
7. Wearing apparel, articles of personal Written commitment or bond equal to 1 ½ times the Not applicable to
adornment, theatrical costumes and ascertained DTO articles intended
similar effects accompanying travelers or for other persons
tourists, in quantities and kind necessary or for barter, sale
and suitable to the profession, rank or or hire.
position of the person importing them for
their own use.
8. Personal and household effects and In quantities and of the kind necessary and suitable to the
vehicles belonging to foreign consultants profession, rank or position of the person importing
and experts hired by and/or rendering them.
services to the Government and their
staff or personnel and families.
The requirements are: Q: What are the kinds of regular customs duties? Discuss
1. The officer or employee is for reassignment to his each.
home office, or dies, resigns or is retired from the
service; A:
2. The motor car must have been ordered or purchased 1. Ad valorem duty – Customs duties that are computed
prior to the receipt by the mission or consulate of the on the basis of value of imported article
order of recall, must be registered in the employee’s 2. Specific duty – Customs duties that are computed on
name; the basis of dutiable weight of goodi.e. a unit of
3. The personal effects should not exceed 30% of the measure such as per kilogram, per liter, etc.
total amount received by such employee or officer in 3. Compound duty – Customs duties that impose both ad
salary and allowances during his latest assignment valorem and specific customs duties. E.g. 10% ad
abroad but not to exceed four years; valorem plus P100 per liter.
4. The exemption shall not be availed of oftener than 4. Alternating duty – alternates between ad valorem and
once every four years; specific
5. The officer or employee concerned must have served
abroad for not less than two years. (Sec. 105, TCC) Q: State and explain the basis of dutiable value of an
imported article subject to an ad valorem tax under the
Q: Mr. Balikbayan has a used car among the items he TCC? (2005 Bar Question)
brought home to the Philippines where he will resettle
permanently after living forty years in California, USA. He A: The basis of dutiable value of an imported article subject
also brought along a VCD machine and a stereo. Discuss to an ad valorem tax under the TCC is its transaction value
whether or not he is liable for payment of import duties which shall be the price actually paid or payable for the
for bringing to the Philippines the above-mentioned items goods when sold for export to the Philippines, adjusted by
(1988 Bar Question). adding certain cost elements to the extent that they are
incurred by the buyer but are not included in the price
A: Mr. Balikbayan is considered as a returning resident actually paid or payable for the imported goods. (Sec. 201,
entitled to tax and duty free entry of his VCD machine and TCC). If such value could not be determined, then the
stereo, the said articles being considered as used personal following values are to be used respectively; transaction
and household effects. He is, however, required to pay value of identical goods, transaction value of similar goods,
import duties for the used car which is not considered as computed value and fallback value.
part of his personal and household effects entitled to tax
and duty free entry. AD VALOREM; METHODS OF VALUATION
CLASSIFICATION OF DUTIES Q: What are the methods in assessing the dutiable value
of an imported article subject to an ad valorem rate of
Q: What is customs valuation? duty?
3. TRANSACTION VALUE OF SIMILAR GOODS – where Q: For customs valuation, when are goods identical and
the dutiable value cannot be determined under the when are they similar?
preceding method, the dutiable value shall be the
transaction value of similar goods sold for export to A:
the Philippines and exported at or about the same 1. Identical goods – goods which are the same in all
time as the goods being valued. respects, including physical characteristics, quality and
reputation. Minor differences in appearances shall not
4. DEDUCTIVE VALUE – the dutiable value of the preclude goods otherwise conforming to the definition
imported goods under this method shall be the from being regarded as identical.
deductive value which shall be based on the unit price 2. Similar goods – goods which although not alike in all
at which the imported goods or identical or similar respects have like characteristics and like component
imported goods are sold in the Philippines, in the materials which enable them to perform the same
same condition as when imported, in the greatest functions and to be commercially interchangeable.
aggregate quantity, at or about the time of the The quality of the goods, their reputation and the
importation of the goods being valued, to persons not existence of a trademark shall be among the factors to
related to the persons from whom they buy such be considered in determining whether goods are
goods, subject to deductions: similar.
a. Either the commissions usually paid or agreed to
be paid or the additions usually made for profit SPECIFIC
and general expenses in connection with sales.
b. The usual costs of transport and insurance and SPECIAL DUTIES
associated costs;
c. The costs and charges; Q: What are the kinds of special customs duties?
d. Customs duties and other national taxes
A:
5. COMPUTED VALUE – the dutiable value of this method 1. Under the Tariff and Customs Code
shall be the computed value which shall be the SUM 1. Anti-Dumping duty;
of: 2. Countervailing duty;
a. The COST OR THE VALUE OF MATERIALS and 3. Marking duty;
fabrication of other processing employed in 4. Discriminatory duty; and
producing the imported goods; 5. Safeguard duty.
b. The AMOUNT FOR PROFIT AND GENERAL 2. Additional tariff imposed as a safeguard measure
EXPENSES equal to that usually reflected in the under the Safeguard Measure Act (R.A. 8800).
sale of goods of the same class or kind as the
goods being valued which are made by producers Q: What are the PROHIBITED METHODS OF VALUATION?
in the country of exportation for export to the
Philippines; A: No customs value shall be determined under the
c. The FREIGHT, INSURANCE FEES AND OTHER provisions of this Article on the basis of:
TRANSPORTATION EXPENSES for the importation 1. the selling price in the country of importation of
of the goods; goods produced in such country;
d. ANY ASSIST, if its value is not included under 2. a system which provides for the acceptance for
paragraph 1 hereof; and customs purposes of the higher of two alternative
e. The COST OF CONTAINERS AND PACKING, if their values;
values are not included under paragraph 1 3. the price of goods on the domestic market of the
hereof. country of exportation;
UNIVERSITY OF SANTO TOMAS
273 FACULTY OF CIVIL LAW
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4. the cost of production other than computed 5. the price of the goods for export to a country
values which have been determined for identical other than the country of importation;
or similar goods in accordance with the provisions 6. minimum customs values; or
of Article 6; 7. arbitrary or fictitious values
AMOUNT/ IMPOSING
SPECIAL DUTY NATURE PURPOSE JUDICIAL REVIEW
RATE AUTHORITY
Duty imposed on an
MARKING DUTY ad valorem basis To prevent 5% ad Commissioner
imposed for possible valorem of of Customs
improperly marked deception the goods
articles.
Duty imposed on
imported goods
whenever it is found
as a fact that the
DISCRIMINATORY country of origin NONE
/RETALIATORY discriminates against
DUTY the commerce of the
Philippines in such a
manner as to place To protect Not President of
the commerce of the the national exceeding the Philippines
Philippines at a interest 100% ad
disadvantage valorem
compared with the
commerce of any
foreign country.
a. GENERAL – To protect a. GENERAL a. GENERAL – Any interested party who is
imposed upon goods domestic – tariff Secretary of adversely affected by the
or products imported industries increase, Trade and ruling of the Secretary in
in increased and either ad Industry and connection with the
SAFEGUARD quantities producers valorem or Secretary of imposition of a safeguard
from specific or Agriculture measure may file with the
b. SPECIAL – volume increased both, to be CTA a petition for review of
of imports exceed a imports paid through b. SPECIAL – such ruling within thirty (30)
base trigger level or a cash bond Secretary of days from receipt thereof BUT
price falls below a set at a level Agriculture the filing of such petition for
trigger price level sufficient to review shall not in any way
redress or stop, suspend or otherwise
prevent toll the imposition or
injury to the collection of the appropriate
domestic tariff duties or the adoption
industry of other appropriate
safeguard measures, as the
b. SPECIAL case may be.
i. Volume
Test
ii. Price Test
Q: What is the amount generally imposed as an anti- 2. Subsidy – financial incentives not in the form of direct
dumping duty? or cash award to encourage manufacturers or
exporters
A: The amount imposed shall be equal to the margin of 3. Subvention – any assistance other than a bounty or
dumping on such product, commodity or article and on like subsidy given by the government for the manufacture
product, commodity or article thereafter imported to the and/or exportation of an article.
Philippines under similar circumstances, in addition to
ordinary duties, taxes and charges imposed by law on the Q: When may the Customs Commissioner exempt
imported product, commodity or article. (Sec. 3(a), R.A. imported articles from the marking requirement?
8752)
A: If –
Q: What happens when products are not imported directly 1. Such article is incapable of being marked
from the country of origin but exported to the Philippines 2. Such article cannot be marked prior to shipment to the
from an intermediate country? Philippines without injury
3. Such article cannot be marked prior to shipment to the
A: The price at which the products are sold from the Philippines, except at an expense economically
country of export to the Philippines shall normally be prohibitive of its importation
compared with the comparable price in the country of 4. The marking of a container of such article will
export. However, comparison may be made with the price reasonably indicate the origin of such article
in the country of origin if, for example, the products are 5. Such article is a crude substance
merely transshipped through the country of export, or such 6. Such article is imported for use by the importer and
products are not produced in the country of export, or not intended for sale in its imported or any other form
there is no comparable price for them in the country of 7. Such article is to be processed in the Philippines by the
export. (Ibid.) importer or for his account otherwise than for the
purpose of concealing the origin of such article and in
Q: What are the kinds of specific subsidy? such manner that any mark contemplated by this
section would necessarily be obliterated, destroyed or
A: permanently concealed
1. Bounty – cash award paid to an exporter or 8. An ultimate purchaser, by reason of the character of
manufacturer such article or by reason of the circumstances of its
importation must necessarily know the country of
A: GR: In case of settlement of any seizure. XPN: Common carriers which are not privately
chartered cannot be confiscated.
XPNs:
1. When importation is absolutely prohibited; Note: Common carriers are generally not subject to forfeiture
2. If release would be contrary to law; except if the owner has knowledge of and consented to its use in
3. When there is an actual and intentional smuggling. Lack of personal knowledge of the owner or carrier
does not constitute a valid defense in forfeiture cases.
fraud.
Q: What properties are not subject to forfeiture in the
Q: When can forfeiture be effected?
absence of prima facie evidence?
A:
A: The forfeiture of a vehicle, vessel or aircraft shall not be
1. Forfeiture shall be effected only when and while the
effected if it is established that the owner thereof or his
article is in the custody or within the jurisdiction of the
agent in charge of the means of conveyance used has no
customs authority;
knowledge of or participation in an unlawful act.
2. In the hands or subject to the control of
importer/exporter, original owner, consignee, agent,
Q: When is there prima facie presumption of knowledge
or other person effecting the importation entry or
of or participation in the unlawful act?
exportation;
3. In the hands or subject to the control of some person
A:
who shall receive, conceal, buy, sell or transport or aid
1. If the conveyance has been used for smuggling at
in such acts with knowledge.
least twice before.
2. If the owner is not in the business for which the
Q: What are the requirements for customs forfeiture of
conveyance is generally used.
imported goods?
3. If the owner is financially not in the position to own
such conveyance.
A:
1. The wrongful making by the owner, importer, exporter
Q: In smuggling a shipment of garlic, the smugglers used
or consignee of any declaration or affidavit, or the
an eight-wheeler truck which they hired for the purpose of
wrongful making or delivery by the same persons of
taking out the shipment from the customs zone. Danny,
any invoice, letter or paper - all touching on the
the truck owner, did not have a certificate of public
importation or exportation of merchandise.;
convenience to operate his trucking business. Danny did
2. That such declaration, affidavit, invoice, letter or paper
not know that the shipment of garlic was illegally
is false; and
imported. Can the Collector of Customs of the port seize
3. An intention on the part of the importer/consignee to
and forfeit the truck as an instrument in the smuggling?
evade the payment of the duties due. (Republic, etc., v.
(1994 Bar Question)
CTA, et al., G.R. No. 139050, Oct. 2, 2001)
A: Yes, since the same was used unlawfully in the
Q: State the rule in settlement of forfeiture cases.
importation of smuggled articles. The mere carrying of such
articles on board the truck (in commercial quantities) shall
A: GR: Settlement of cases by fine or redemption is
subject the truck to forfeiture, since it was not being used
generally allowed.
as a duly authorized common carrier, which was chartered
or leased as such. (Sec. 2530 [a], TCC)
XPNS:
1. The importation is absolutely prohibited;
Moreover, although forfeiture of the vehicle will not be
2. The surrender of the property to the person
effected if it is established that the owner thereof had no
offering to redeem would be contrary to
knowledge of or participation in the unlawful act, there
law; or
arises a prima facie presumption or knowledge or
3. There is fraud. (Sec. 2307, TCC)
participation if the owner is not in the business for which
Note: At any time prior to the sale, the delinquent importer may the conveyance is generally used. Thus, not having a
settle his obligations with the Bureau of Customs, in which case certificate of public convenience to operate a trucking
the aforesaid articles may be delivered upon payment of the business, he is legally deemed not to have been engaged in
corresponding duties and taxes and compliance with all other legal the trucking business. (Sec. 2531, TCC)
requirements (Sec. 1508, TCC)
Q: On January 30, 1972, the vessel S/S "Pacific Hawk"
Q: What are the things subject to confiscation in arrived at the Port of Manila carrying, among others, 80
smuggling cases? bales of screen net consigned to Bagong Buhay Trading.
Since the customs examiner found the subject shipment
A: The Collector of Customs upon probable cause that the RULES ON APPEAL INCLUDING JURISDICTION
articles imported or exported, or are attempted to be
imported or exported are contrary to the TCC. (Sec. 6, Title Q: When can judicial remedy of either civil or criminal
III, C.A.O. No. 9-93) action be availed of?
Q: How may customs officers effect seizure and arrest? A: It is availed of when the tax lien is lost by the release of
the goods. The government can seek payment of the tax
A: liability through judicial action since the tax liability of the
1. May seize any vessel, aircraft, cargo, article, animal or importer constitutes a personal debt to the government
other movable property when the same is subject to
forfeiture or liable for any time as imposed under tariff Q: The Collector of Customs of the Port of Cebu issued
and customs laws, rules & regulations; warrants of seizure and detention against the importation
2. May exercise such powers only in conformity with the of machineries and equipment by LLD Import and Export
laws and provisions of the TCC. Co. (LLD) for alleged nonpayment of tax and customs
duties in violation of customs laws. LLD was notified of
Q: On the basis of a warrant of seizure and detention the seizure, but, before it could be heard, the Collector of
issued by the Collector of Customs for the purpose of Customs issued a notice of sale of the articles. In order to
enforcing the Tariff and Customs Laws, assorted brands of restrain the Collector from carrying out the order to sell,
cigarettes said to have been illegally imported into the LLD filed with the CTA a petition for review with
Philippines were seized from a store where they were application for the issuance of a writ of prohibition. It also
openly offered for sale. Dissatisfied with the decision filed with the CTA an appeal for refund of overpaid taxes
rendered after hearing by the Collector of Customs on the on its other importations of raw materials which has been
confiscation of the articles, the importer filed a petition pending with the Collector of Customs. The Bureau of
for review with the CTA. The Collector moved to dismiss Customs moved to dismiss the case for lack of jurisdiction
the petition for lack of Jurisdiction. of the CTA.
1. Rule on the motion. 1. Does the CTA have jurisdiction over the petition for
2. Under the same facts, could the importer file an review and writ of prohibition? Explain.
action in the RTC for replevin on the ground that the 2. Will an appeal to the CTA for tax refund be possible?
articles are being wrongfully detained by the Explain. (2002 Bar Question)
UNIVERSITY OF SANTO TOMAS
2013 GOLDEN NOTES 280
TARIFF AND CUSTOMS CODE
government, therefore, enforceable by action. In this
A: case judicial remedy is normally availed of instead of
1. No, because there is no decision as yet by the the administrative remedy.
Commissioner of Customs which can be appealed to
the CTA. Neither the remedy of prohibition would lie Q: If the decision of the Collector or the Commissioner in a
because the CTA has not acquired any appellate protest is adverse to the Government, what is the remedy
jurisdiction over the seizure case. The writ of of the latter?
prohibition being merely ancillary to the appellate
jurisdiction, the CTA has no jurisdiction over it until it A:
has acquired jurisdiction on the petition for review. 1. Automatic review by the Commissioner - If the
Since there is no appealable decision, the CTA has no Collector renders a decision adverse to the
jurisdiction over the petition for review and writ of Government (the importer’s protest is granted).
prohibition. (Commissioner of Customs v. Alikpala, G.R
No. L-32542, 1970). 2. Automatic review by the Secretary of Finance - If the
decision of the Commissioner of Customs is adverse to
2. No, because the Commissioner of Customs has not yet the Government.
rendered a decision on the claim for refund. The
jurisdiction of the Commissioner and the CTA are not Q: Whenever the decision of the Collector of Customs is
concurrent in so far as claims for refund are adverse to the government, it is automatically elevated to
concerned. The only exception is when the Collector the Commissioner for review and, if it is affirmed by him,
has not acted on the protested payment for a long it is automatically elevated to the Secretary of Finance for
time, the continued inaction of the Collector or review. What is the basis of the automatic review
Commissioner should not be allowed to prejudice the procedure in the Bureau of Customs? Explain your answer
taxpayer. (Nestle Philippines, Inc. v. CA, G.R. No. (2002 Bar Question)
134114, July 6, 2001).
A: Automatic review is intended to protect the interest of
Q: TCC allows the Bureau of Customs to resort to the the Government in the collection of taxes and customs
administrative remedy of seizure, such as by enforcing the duties in seizure and protest cases. Without such
tax lien on the imported article, and to the judicial automatic review, neither the Commissioner of Customs
remedy of filing an action in court. nor the Secretary of Finance would know about the
decision laid down by the Collector favoring the taxpayer.
When does the Bureau of Customs normally avail itself: The power to decide seizure and protest cases may be
1. Of the administrative, instead of the judicial remedy? abused if no checks are instituted. Automatic review is
2. Of the latter, instead of the former remedy? (1997 necessary because nobody is expected to appeal the
Bar Question) decision of the Collector which is favorable to the taxpayer
and adverse to the Government. This is the reason why
A: whenever the decision of the Collector is adverse to the
1. The Bureau of Customs avails of the administrative Government, the said decision is automatically elevated to
remedy of seizure if the imported article which is the Commissioner for review; and if such decision is
burdened by a lien for the unpaid customs duties affirmed by the Commissioner, the same shall be
could still be found. automatically elevated to and be finally reviewed by the
Secretary of Finance (Yaokasin v. Commissioner of
The Bureau of Customs normally avails itself of the Customs, G.R. No. 84111, Dec. 22, 1989)
administrative remedy of seizure, such as by enforcing
the tax lien on the imported articles, instead of the REMEDIES OF THE TAXPAYER
judicial remedy when the goods to which the tax lien
attaches, regardless of ownership, is still in the Q: What are the remedies of the taxpayer?
custody or control of the Government. In the case,
however, of importations which are prohibited or A:
undeclared, the remedy of seizure and forfeiture may 1. Administrative
still be exercised by the Bureau of Customs even if the a. Protest;
goods are no longer in its custody. b. Abandonment
c. Refund, drawback, abatement;
2. If the imported article could no longer be found, or if d. Payment of fine or redemption;
it has perished, then judicial action through an e. Appeal to the Customs Commissioner
ordinary suit for the collection of sum of money is 2. Judicial
then filed. a. Appeal to the CTA;
b. Action to question the legality of seizure.
On the other hand, when the goods are properly
released and thus beyond the reach of tax lien, the
government can seek payment of the tax liability
through judicial action since the tax liability of the
importer constitutes a personal debt to the
UNIVERSITY OF SANTO TOMAS
281 FACULTY OF CIVIL LAW
Law on Taxation
ADMINISTRATIVE 3. States the Grounds relied upon for relief;
4. Limited to the subject matter of a single adjustment;
PROTEST 5. Filed when the amount claimed is paid or within 15
days after payment;
Q: Who can make a protest and how is protest made? 6. Sample of goods under protest must be furnished by
the protestant, when required.
A:
1. Any importer or interested party - if dissatisfied with Q: What is the procedure on customs protest cases?
published value within 15 days from date of
publication or within 5 days from date the importer is A:
entitled to refund in case payment is rendered 1. Collector (within his jurisdiction) shall cause the
erroneous or illegal by events occurring after the imported goods to be entered at the customhouse
payment. 2. Collector shall assess, liquidate and collect the duties
thereon or detain the said goods, in case of non-
2. Taxpayer - within 15 days from assessment. Payment payment
under protest is necessary. 3. The party adversely affected (protestant) may file a
written protest on his assessed liability to the
Q: Is protest an exclusive remedy? Collector of Custom within 15 days after paying the
liquidated amount (payment under protest)
A: In all cases subject to protest, the interested party who 4. Collector shall conduct a hearing within 15 days from
desires to have the action of the Collector reviewed, shall receipt of the duly presented protest
make a protest, otherwise the action of the collector shall 5. Decision shall be made by the Collector within 30 days
be final and conclusive against him. upon termination of the hearing (Sec. 2312, TCC)
Q: What is the effect of the failure of the importer to file a Q: What is the remedy if the decision is adverse to the
written protest on the assessment of the Collector? protestant?
A: Protest is required to be filed only in case the liability of A: Abandonment in customs is the renunciation by an
the taxpayer for duties, taxes, fees and other charges is importer of all his interests and property rights in the
determined and the taxpayer disputes said liability. importer article.
A: When there is no dispute as to the correctness of the A: Abandonment may be made expressly or impliedly.
duties and taxes paid but the claim for the refund arises by
reason of the happening of supervening events such as Q: When is abandonment express?
when the raw material imported is utilized in the
production of finished products subsequently reported and A: When the owner, importer, consignee of the imported
a duty drawback is claimed. article expressly signifies in writing and under oath to the
Collector of Customs his intention to abandon his shipment
Q: What are the requirements for protest? in favor of the government. (Sec. 1801, TCC)
A: All claims for refund of duties shall be made in writing Q: What is duty drawback?
and forwarded to the Collector whom duties are paid; and
upon receipt of claim, the Collector shall verify the same A: A device resorted to for enabling a commodity affected
through his records; and shall certify to the Commission by taxes to be exported and sold in foreign markets upon
with his recommendations together with all necessary the same terms as if it had not been taxed at all.
papers and documents; and upon receipt by the
Commission, he shall cause the same to be paid if found Q: Compare the taxpayer's remedies under the National
correct. Internal Revenue Code and the Tariff and Customs Code
A:
Observance
of Entry to
Submission of Papers the Vessel or
Air Craft
Passenger and Cargo Manifest, Cargo Storage Plan, Store List showing Store laden
Except those
entry by
necessity Unloading of Cargo
Within 30 days
from discharge of
Entry into the Customs House last package
(Filing of Import Entry)
Examination of Goods
BOC Internal
Processes
Appraisal of Goods
Payment of Duties
Compliance Audit
Note:
Formal* and Informal Entry – generally depending on the value (if the dutiable value is 2000 or less) or personal and household
effects, not in quantity for personal use
*under penalties of falsification or perjury
Submission of the bill of lading, commercial invoices and supporting documents to evidence quantity and dutiable value.
Liquidation of entries: may be tentative – subject to future and final readjustment and settlement within a period of six months
from date of tentative liquidation – or final.
CASES WITHIN THE JURISDICTION OF THE 1. Exclusive original or appellate jurisdiction to review by
COURT EN BANC appeal the following:
a. Decisions of the Commissioner of Internal
Q: What are the cases within the jurisdiction of the CTA en Revenue
banc? b. Inaction by the Commissioner of Internal
Revenue
A: The Court en banc shall exercise exclusive appellate c. Decisions, resolutions or orders of the RTC in
jurisdiction to review by appeal the following: local tax cases decided by them in the
exercise of their original jurisdiction;
1. Decisions or resolutions on motions for d. Decisions of the Commissioner of Customs in
reconsideration or new trial of the Court in Divisions in cases involving liability arising under the
the exercise of its exclusive appellate jurisdiction over: Customs Law or other laws administered by
a. Cases arising from administrative agencies – the Bureau of Customs;
Bureau of Internal Revenue, Bureau of e. Decisions of the Secretary of Finance on
Customs, Department of Finance, customs cases elevated to him automatically
Department of Trade and Industry, for review from decisions of the
Department of Agriculture; Commissioner of Customs adverse to the
b. Local tax cases decided by the RTC in the Government under Section 2315 of the TCC;
exercise of their original jurisdiction; and and
c. Tax collection cases decided by the RTC in f. Decisions of the Secretary of Trade and
the exercise of their original jurisdiction Industry, in the case of nonagricultural
involving final and executor assessments for product, commodity or article, and the
taxes, fees, charges and penalties, where the Secretary of Agriculture, in the case of
principal amount of taxes and penalties agricultural product, commodity or article,
claimed is less than P1million; involving dumping and countervailing duties
d. criminal offenses arising from violations of under Section 301 and 302, respectively, of
the NIRC or the Tariff and Customs Code and the TCC, and safeguard measures under
other laws administered by the Bureau of Republic Act No. 8800, where either party
Internal Revenue or Bureau of Customs may appeal the decision to impose or not to
impose said duties;
2. Decisions, resolutions or orders on motions for
reconsideration or new trial of the Court in Division in 2. Exclusive jurisdiction over cases involving criminal
the exercise of its exclusive original jurisdiction over: offenses, to wit:
a. tax collection cases a. Original jurisdiction over all criminal offenses
b. involving criminal offenses arising from arising from violations of the NIRC or TCC
violations of the NIRC or the Tariff and and other laws administered by the BIR or
Customs Code and other laws administered the Bureau of Customs, where the principal
by the Bureau of Internal Revenue or Bureau amount of taxes and fees, exclusive of
of Customs; charges and penalties, claimed is 1 million
pesos or more; and
3. Decisions, resolutions or orders of the RTC in decided b. Appellate jurisdiction over appeals from the
or resolved by them in the exercise of their appellate judgments, resolutions or orders of the RTC
jurisdiction over: in their original jurisdiction in criminal
a. local tax cases offenses arising from violations of the NIRC
b. tax collection cases or TCC and other laws administered by the
c. criminal offenses arising from violations of BIR or Bureau of Customs, where the
the NIRC or the Tariff and Customs Code and principal amount of taxes and fees, exclusive
other laws administered by the Bureau of of charges and penalties, claimed is less than
Internal Revenue or Bureau of Customs. 1 million pesos or where there is no specified
amount claimed;
4. Decisions of the Central Board of Assessment Appeals
(CBAA) in the exercise of its appellate jurisdiction over 3. Exclusive jurisdiction over tax collections cases, to wit:
cases involving the assessment and taxation of real a. Original jurisdiction in tax collection cases
property originally decided by the provincial or city involving final and executory assessments for
board of assessment appeals;(Sec. 2., Rule 4, A.M. No. taxes, fees, charges and penalties, where the
05-11-07-CTA). principal amount of taxes and fees, exclusive
of charges and penalties, claimed is 1 million
pesos or more; and
b. Appellate jurisdiction over appeals from the
judgments, resolutions or orders of the
UNIVERSITY OF SANTO TOMAS
287 FACULTY OF CIVIL LAW
Law on Taxation
Regional Trial Courts in tax collection cases
originally decided by them within their e. Decisions of the Central Board of Assessment
respective territorial jurisdiction. (Sec. 3., Appeals in the exercise of its appellate jurisdiction
Rule 4, A.M. No. 05-11-07-CTA). over cases involving the assessment and taxation
of real property originally decided by the
EXCLUSIVE ORIGINAL JURISDICTION provincial or city board of assessment appeals;
EXCLUSIVE APPELLATE JURISDICTION
f. Decisions of the Secretary of Finance on custom
Q: Discuss the jurisdiction of the CTA as provided for cases elevated to him automatically for review
under R.A. 9282: from decisions of the Commissioner of Customs
1. Exclusive appellate jurisdiction to review by appeal which are adverse to the Government under
Section 2315 of the Tariff and Customs Code;
2. Jurisdiction over criminal offenses g. Decisions of the Secretary of Trade and Industry,
a. Exclusive original jurisdiction in the case of non-agricultural product,
b. Exclusive appellate jurisdiction commodity or article, and the Secretary of
3. Jurisdiction over tax collection cases Agriculture in the case of agricultural product,
a. Exclusive original jurisdiction commodity or article, involving dumping and
b. Exclusive appellate jurisdiction countervailing duties under Sections 301 and 302,
respectively of the Tariff and Customs Code, and
A: safeguard measures under RA 8800, where either
1. Exclusive appellate jurisdiction to review by appeal party may appeal the decision to impose or not to
2 impose said duties.
(DIRT- FC )
a. Decisions of the Commissioner on Internal
Revenue in cases involving: DRO 2. Jurisdiction over cases involving criminal offenses
i. Disputed assessments; a. Exclusive original jurisdiction over all criminal
offenses arising from
Note: Ordinary courts have jurisdiction over i. Violations of the National Internal Revenue
undisputed assessments. Code(NIRC); or
ii. The Tariff and Customs Code(TCC) and
ii. Refunds of internal revenue taxes, fees or iii. Other laws administered by the Bureau of
other charges and penalties imposed Internal Revenue(BIR) or the Bureau of
thereto; Customs(BOC).
iii. Other matters arising under NIRC or other
laws administered by the BIR. Note: If the principal amount of taxes and fees, exclusive of
charges and penalties, claimed is less than 1M or if there is no
b. Inaction by the Commissioner of Internal Revenue specified amount claimed, shall be tried by the regular courts
– the CTA’s jurisdiction shall be appellate.
in cases involving: DRO
i. DIsputed assessments; Despite any provision of law or of the Rules of Court, the
ii. Refunds of internal revenue taxes, fees or criminal action and the corresponding civil action for the
other charges and penalties imposed recovery of the civil liability for taxes and penalties, shall at all
thereto; times be simultaneously instituted with, and jointly
iii. Other matters arising under NIRC or other determined in the same proceeding by the CTA – the filing of
laws administered by the BIR, where the the criminal action is deemed to necessarily carry with it the
NIRC provides a specific period for action, in filing of civil action.
which case the inaction shall be deemed a
Hence, no right to reserve the filing of such civil action
denial. separately from the criminal action will be recognized.
b. Exclusive appellate jurisdiction in tax collection A: The following are the instances that will suspend the
cases: running of the prescriptive period for assessment and
i. Over appeals from the judgments, resolutions collection of local taxes:
or orders of the RTC; in tax collection cases a. The Treasurer is legally prevented from making
originally decided by them, in their respective the assessment or collection;
territorial jurisdiction. b. The taxpayer requests for a reinvestigation and
ii. Over petitions for review of the judgments, executes a waiver in writing before the expiration
resolutions or orders of the RTCs in the of the period within which to assess or collect;
exercise of their appellate jurisdiction over tax and
collection cases originally decided by the c. The taxpayer is out of the country or otherwise
Metropolitan Trial Courts, Municipal Trial cannot be located (Sec. 194, LGC)
Courts and Municipal Circuit Trial Courts, in
their respective jurisdiction. CIVIL CASES
JUDICIAL PROCEDURES Q: What are the ways by which the civil tax liability of a
taxpayer is enforced by the government through civil
JUDICIAL ACTION FOR COLLECTION OF TAXES actions?
Q: How does the LGU concerned enforce the judicial Note: Civil action is available only when a tax liability becomes
remedy in collection of taxes? delinquent and collectible. Effective April 2004, jurisdiction over
civil action for the collection of delinquent taxes amounting to over
A: The LGU concerned may enforce the collection of 1 million shall be filed with the CTA. The RTC retains jurisdiction
delinquent taxes, fees, charges and other revenues by civil over amounts upto P1million.
action in any court of competent jurisdiction. The civil
WHO MAY APPEAL, MODE OF APPEAL, EFFECT OF APPEAL
action shall be filed by the local treasurer within five (5)
years from the date of assessment. ( Sec. 194, LGC) The Q: Who may appeal?
term “civil action” would preclude a criminal case as a
proper remedy for collection of delinquent local taxes. A: The following may appeal:
(Republic vs. Patanao, 20 SCRA 712)
1. A party adversely affected by a decision, ruling or the
Note: The local government files an ordinary suit for the collection
of sum of money before the MTC, RTC or CTA depending upon the
inaction of the Commissioner of Internal Revenue on
jurisdictional amount. disputed assessments or claims for refund of internal
revenue taxes, or by a decision or ruling of the
PRESCRIPTIVE PERIOD Commissioner of Customs, the Secretary of Finance,
the Secretary of Trade and Industry, the Secretary of
Q: What are the prescriptive periods of assessment and Agriculture, or a Regional Trial Court in the exercise of
collection of local taxes? its original jurisdiction may appeal to the Court by
petition for review filed within 30 days after receipt of
A: a copy of such decision or ruling, or expiration of the
PRESCRIPTIVE PERIOD FOR TAXES, FEES, OR CHARGES period fixed by law for the Commissioner of Internal
Assessment 3 years from date Revenue to act on the disputed assessments. In case of
they became due inaction of the Commissioner of Internal revenue on
claims for refund of internal revenue taxes erroneously
Collection No action can be brought whether
or illegally collected, the taxpayer must file a petition
administrative or judicial shall be
for review within the two-year period prescribed by
instituted after the expiration of the
law from payment or collection of the taxes.
period to assess
1. An appeal from a decision or ruling or the inaction of A: A party adversely affected by a ruling, order or decision
the Commissioner of Internal Revenue on disputed of a Division of the CTA may file a motion for
assessments or claim for refund of internal revenue reconsideration or new trial before the same Division of the
taxes erroneously or illegally collected, the decision or CTA within fifteen (15) days from notice thereof.
ruling of the Commissioner of Customs, the Secretary
of Finance, the Secretary of Trade & Industry, the However in criminal cases, the general rule applicable in
Secretary of Agriculture, and the Regional Trial Court regular Courts on matters of prosecution and appeal shall
in the exercise of their original jurisdiction, shall be likewise apply.
taken to the Court by filing before it a petition for
review as provided in Rule 42 of the Rules of Court. Q: What is the remedy of a party affected by a resolution
The Court in Division shall act on the appeal. of a Division of the CTA?
2. An appeal from a decision or resolution of the Court in A: The aggrieved party may file a motion for
Division on a motion for reconsideration or new trial reconsideration or new trial before the same Division of the
shall be taken to the Court by petition for review as CTA within 15 dyas from notice thereof. In case of an
provided in Rule 43 of the Rules of Court. The Court en adverse resolution by the said Division, he may file a
banc shall act on the appeal. Petition for Review before the CTA en banc within 15 days
from receipt thereof.
3. An appeal from a decision or ruling of the Central
Board of Assessment Appeals or the Regional Trial Q: How about the remedy of a party affected by a decision
Court in the exercise of their appellate jurisdiction or ruling of the CTA en banc?
shall be taken to the Court by filing before it a petition
for review as provided in Rule 43 of the Rules of Court. A: A party adversely affected by a decision or ruling of the
The Court en banc shall act on the appeal. (Sec. 4., CTA en banc may file with the Supreme Court a verified
Rule 8, A.M. No. 05-11-07-CTA). petition for review on certiorari pursuant to Rule 45 of the
1997 Rules of Civil Procedure within 15 days from receipt
Note: The 30 day prescriptive period is jurisdictional. thereof. (Sec. 11 &12, RA 9282)
Q: BIR issued a Final Assessment Notice of income tax and Q: What is the effect of the perfection of an appeal?
VAT deficiencies to a taxpayer on August 6, 2003 which
the latter contested by letter of September 23, 2003. The A: GR: Appeal to the CTA shall not suspend payment, levy,
BIR thereafter issued a Final Decision on Disputed distraint and/or sale of any property of taxpayer for the
Assessment (FDDA) dated August 2, 2005 which the satisfaction of his liability.
taxpayer received on August 4, 2005 denying the letter of
protest and requesting the immediate payment thereof XPN: If in the opinion of the CTA, the collection may
inclusive of penalties incident to delinquency. It added jeopardize the interest of the government and/or the
that if he disagrees, he may appeal to the CTA within 30 taxpayer.
days from date of its receipt otherwise the deficiency
Note: Appeal to the CTA shall not suspend the payment, levy, Q: What is the effect of filing a motion for reconsideration
distraint and sale of taxpayer’s property unless enjoined by the CTA or new trial?
when it is clear that the collection will jeopardize the interest of
the government and/or taxpayer.
A: The filing of a motion for reconsideration or new trial
shall suspend the running of the period within which an
TAKING OF EVIDENCE
appeal may be perfected. (Sec. 4., Rule 15, A.M. No. 05-11-
07-CTA).
Q: How are evidence taken in the proceedings before the
CTA?
Note: No party shall be allowed to file a second motion for
reconsideration of a decision, final resolution or order; or for new
A: Evidence can be taken by a justice assigned to take trial (Sec. 4., Rule 15, A.M. No. 05-11-07-CTA).
evidence, the hearing before such justice shall proceed in
all respects as though the same had been made before the A pro forma request for reconsideration or one that is
Courtor by a court official in default or ex parte hearings, or directed to the Secretary of Finance, does not suspend the
in any case where the parties agree in writing, but the period.
Court official have no power to rule on objections to any
question or to the admission of exhibits, which objections APPEAL TO CTA, EN BANC
shall be resolved by the Court upon submission of his
report and the transcripts within ten days from termination Q: May a decision or resolution of the CTA in Division be
of the hearing (Sec. 3 & 4., Rule 12, A.M. No. 05-11-07-CTA). appealable directly to the CTA En Banc in its exercise of its
exclusive appellate jurisdiction?
In case of voluminous documents or long accounts the
A: All criminal actions before the Court in Division in the 3. An appeal to the Court in criminal cases decided by the
exercise of its original jurisdiction shall be instituted by the Regional Trial Courts in the exercise of their appellate
filing of an information in the name of the People of the jurisdiction shall be taken by filing a petition for review
Philippines. In criminal actions involving violations of the as provided in Rule 43 of the Rules of Court within
National Internal Revenue Code and other laws enforced by fifteen days from receipt of a copy of the decision or
the Bureau of Internal Revenue, the Commissioner of final order appealed from. The Court en banc shall act
Internal Revenue must approve their filing. In criminal on the appeal (Sec. 9, Rule 9, A.M. No. 05-11-07-CTA)
actions involving violations of the tariff and Customs Code Q: Who shall represent the People in the criminal action?
and other laws enforced by the Bureau of Customs, the
Commissioner of Customs must approve their filing. (Sec. A: The Solicitor General shall represent the People of the
2., Rule 9, A.M. No. 05-11-07-CTA). Philippines and government officials sued in their official
capacity in all cases brought to the Court in the exercise of
Note: The institution of the criminal action shall interrupt the its appellate jurisdiction. He may deputized the legal
running of the period of prescription. (Ibid) officers of the Bureau of Internal Revenue in cases brought
under the National Internal Revenue Code or other laws
Q: How are criminal actions prosecuted? enforced by the Bureau of Internal Revenue, or the legal
officers of the Bureau of Customs in cases brought under
A: All criminal actions shall be conducted and prosecuted the Tariff and Customs Code of the Philippines or other
under the direction and control of the public prosecutor. In laws enforced by the Bureau of Customs, to appear in
criminal actions involving violation of the National Internal behalf of the officials of said agencies sued in their official
Revenue Code or other laws enforced by the Bureau of capacity: Provided, however, such duly deputized legal
Internal Revenue, and violations of the Tariff and Customs officers shall remain at all times under the direct control
Code or other laws enforced by the Bureau of Customs, the and supervision of the Solicitor General (Sec. 10, Rule 9,
prosecution may be conducted by their respective duly A.M. No. 05-11-07-CTA).
deputized legal officers (Sec. 3., Rule 9, A.M. No. 05-11-07-
CTA). PETITION FOR REVIEW ON CERTIORARI
TO THE SUPREME COURT
Q: What is the rule on the Institution on civil action in
criminal action? Q: Who may file an appeal to the Supreme Court by
petition for review on certiorari?
A: In cases within the jurisdiction of the Court, the criminal
action and the corresponding civil action for the recovery of A: A party adversely affected by a decision or ruling of the
civil liability for taxes and penalties shall be deemed jointly Court en banc may appeal therefrom by filing with the
instituted in the same proceeding. The filing of the criminal Supreme Court a verified petition for review on certiorari
action shall necessarily carry with it the filing of the civil within 15 days from receipt of a copy of the decision or
action. No right to reserve the filing of such civil action resolution, as provided in Rule 45 of the Rules of Court. If
separately from the criminal action shall be allowed or such party has filed a motion for reconsideration or for new
recognized (Sec. 11, Rule 9, A.M. No. 05-11-07-CTA) trial, the period herein fixed shall run from the party’s
receipt of a copy of the resolution denying the motion for
APPEAL AND PERIOD TO APPEAL reconsideration or for new trial. (Sec. 1., Rule 16, A.M. No.
05-11-07-CTA).
Q: How to appeal and what is the period to appeal?
Q: What is the effect of the appeal?
A:
1. An appeal to the Court in criminal cases decided by a A: The motion for reconsideration or for new trial filed
Regional Trial Court in the exercise of its original before the Court shall be deemed abandoned if, during its
jurisdiction shall be taken by filing a notice of appeal pendency, the movant shall appeal to the supreme Court
pursuant to Sections 3(a) and 6, Rule 122 of the Rules (Sec. 1., Rule 16, A.M. No. 05-11-07-CTA).
of Court within 15 days from receipt of a copy of the
decision or final order with the court which rendered Q: What does “other matters” under the NIRC or TCC Law
the final judgment or order appealed from and by mean?
serving a copy upon the adverse party. The Court in
Division shall act on the appeal. A: The term “other matters” includes cases which can be
considered within the scope of the function of the BIR and
2. An appeal to the Court en banc in criminal cases
BOC by applying the ejusdem generis rule (that is, such
decided by the Court in Division shall be taken by filing
cases should be of the same nature as those that have
a petition for review as provided in Rule 43 of the
preceded them.)
With respect to taxpayer’s suits, Terr v. Jordan held that Q: When may a taxpayer's suit be allowed?.(1996 Bar
"the right of a citizen and a taxpayer to maintain an action Question)
in courts to restrain the unlawful use of public funds to his
injury cannot be denied." (David vs. Macapagal-Arroyo, A: A taxpayer's suit may only be allowed when an act
G.R. No. 171396, May 3, 2006) complained of, which may include a legislative enactment,
directly involves the illegal disbursement of public funds
Q: What are the requisites before a citizen may file a derived from taxation (Pascual v. Secretary of Public Works,
taxpayer’s suit? 110 Phil. 331)
either party may appeal the decision to impose or not to impose said duties.
Decisions of the Secretary of Agriculture in the case of agricultural product, commodity or article, involving dumping and
countervailing duties under Secs. 301 and 302, respectively of the Tariff and Customs Code, and safeguard measures under RA
8800, where either party may appeal the decision to impose or not to impose said duties.
EXCLUSIVE ORIGINAL JURISDICTION
Criminal Case/s: Civil Case/s:
1. Violations of: 1. Tax collection cases involving final and executory
a. NIRC, assessments for taxes, fees, charges and penalties
b. Tariff and Customs Code, where the principal amount of taxes and fees,
c. Other laws administered by BIR and BOC, exclusive of charges and penalties claimed is P1M and
…where the principal amount of taxes and fees, exclusive of above.
charges and penalties claimed is P1M and above.
EXCLUSIVE APPELLATE JURISDICTION
Criminal Case/s: Civil Case/s:
1. Violations of : 1. Tax collection cases from judgments, resolutions or
a. NIRC orders of the RTC in tax cases originally decided by
b. Tariff and Customs Code, them.
c. Other laws administered by BIR and BOC
…originally decided by the regular court where the principal
amount of the taxes is less than P1M or no special amount
claimed.
2. Judgments, resolutions or orders of the RTC in tax cases 2. Tax collection cases from judgments, resolutions or
originally decided by them. orders of the RTC in the exercise of its appellate
3. Judgments, resolutions or orders of the RTC in the exercise jurisdiction over tax cases originally decided by the
of its appellate jurisdiction over tax cases originally MeTC, MTC and MCTC.
decided by the MeTC, MTC and MCTC.
Legend:
= Discretionary upon the Commissioner on Internal Revenue
= Period to file
= Days within receipt of the Notice
*Note: The prescriptive period for “assessment” shall be 10 years from the discovery of none filing or false or fraudulent return.
= Period to file
= Days within receipt of the Notice
*Note: The prescriptive period for “assessment” shall be 10 years from the discovery of none filing or false or fraudulent return