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ii
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TABLE OF CONTENTS
TAXATION 1
I. GENERAL PRINCIPLES OF TAXATION .......2
A. DEFINITION, CONCEPT AND PURPOSE OF TAXATION
............................................................................... 2
A.1. TAXATION .............................................................. 2
A.2. PURPOSE ............................................................. 2
B. NATURE AND CHARACTERISTICS OF TAXATION ..... 2
B.1 NATURE ................................................................. 2
B.2 CHARACTERISTICS................................................. 3
C. POWER OF TAXATION AS DISTINGUISHED FROM
POLICE POWER AND EMINENT DOMAIN ................... 3
E. PRINCIPLES OF A SOUND TAX SYSTEM ................. 5
F. SCOPE AND LIMITATIONS OF TAXATION ................ 5
F.1. INHERENT LIMITATIONS ......................................... 5
F.2. CONSTITUTIONAL LIMITATIONS .............................. 8
G. STAGES OR ASPECTS OF TAXATION .................... 13
H. DEFINITION, NATURE AND CHARACTERISTICS OF
TAXES ................................................................... 14
H.1 TAXES .................................................................. 14
I. REQUISITES OF A VALID TAX ................................ 14
J. TAX AS DISTINGUISHED FROM OTHER FORMS OF
EXACTIONS............................................................ 14
K. KINDS OF TAXES ................................................ 16
L. SITUS OF TAXATION ............................................ 18
M. CONSTRUCTION AND INTERPRETATION OF ........ 19
M.1. TAX LAWS .......................................................... 19
M.2. TAX EXEMPTION AND EXCLUSION ....................... 19
M.3. TAX RULES AND REGULATIONS ........................... 20
M.4. PENAL PROVISIONS OF TAX LAWS ...................... 21
M.5. NON-RETROACTIVE APPLICATION OF TAX LAWS TO
TAXPAYERS ................................................................ 21
N. SOURCES OF TAX LAWS ..................................... 21
O. DOCTRINES IN TAXATION ................................... 22
O.1. PROSPECTIVITY OF TAX LAWS .............................. 22
O.2. IMPRESCRIPTIBILITY OF TAXES ........................... 22
O.3. DOUBLE TAXATION .............................................. 23
O.4. POWER TO TAX INVOLVES POWER TO DESTROY .... 24
O.5. ESCAPE FROM TAXATION .................................... 24
iv
O.6. EXEMPTION FROM TAXATION .............................. 25
O.7. DOCTRINE OF EQUITABLE RECOUPMENT............. 27
O.8. COMPENSATION AND SET-OFF............................ 27
O.9. COMPROMISE AND TAX AMNESTY ...................... 27
O.10. TAXPAYER‘S SUIT ............................................. 28
II. NATIONAL TAXATION ........................... 29
A. ORGANIZATION AND FUNCTIONS OF THE BUREAU
OF INTERNAL REVENUE .......................................... 29
A.1. RULE-MAKING AUTHORITY OF THE SECRETARY OF
FINANCE ................................................................... 29
A.2. JURISDICTION, POWER AND FUNCTIONS OF THE
COMMISSIONER OF INTERNAL REVENUE ................... 30
B. NATIONAL INTERNAL REVENUE CODE (NIRC) OF
1997, AS AMENDED .............................................. 31
B.1. INCOME TAXATION.............................................. 31
B.2. INCOME ............................................................. 37
B.3. GROSS INCOME ................................................. 41
B.4. DEDUCTIONS FROM GROSS INCOME .................. 62
C. INCOME TAX ON INDIVIDUALS ............................ 79
C.1. INCOME TAX ON RESIDENT CITIZENS, NON-
RESIDENT CITIZENS AND RESIDENT ALIENS ............... 79
C.2. INCOME TAX ON NON-RESIDENT ALIENS ENGAGED
IN TRADE OR BUSINESS............................................. 85
C.3. INCOME TAX ON NON-RESIDENT ALIENS NOT
ENGAGED IN TRADE OR BUSINESS............................. 86
C.4. INDIVIDUAL TAXPAYERS EXEMPT FROM INCOME TAX
................................................................................. 86
D. INCOME TAX ON CORPORATIONS ....................... 90
D.1. INCOME TAX ON DOMESTIC CORPORATIONS AND
RESIDENT FOREIGN CORPORATIONS ......................... 90
D.2. INCOME TAX ON NON-RESIDENT FOREIGN
CORPORATIONS ........................................................ 96
D.3. INCOME TAX ON SPECIAL CORPORATIONS .......... 97
D.4. IMPROPERLY ACCUMULATED EARNINGS TAX .... 100
D.5 EXEMPTION FROM TAX ON CORPORATIONS ....... 102
D.6. TAX ON GENERAL PARTNERSHIPS, GENERAL
PROFESSIONAL PARTNERSHIPS, CO-OWNERSHIPS,
JOINT VENTURES AND CONSORTIUMS ...................... 103
E. FILING OF RETURNS AND PAYMENT OF INCOME TAX
........................................................................... 104
E.1. DEFINITION OF A TAX RETURN AND INFORMATION
RETURN................................................................... 104
 E.2. PERIOD TO FILE INCOME TAX RETURN OF
INDIVIDUALS AND CORPORATIONS .......................... 105
E.3. PERSONS LIABLE TO FILE INCOME TAX RETURNS105
E.4. WHERE TO FILE INCOME TAX RETURNS .............. 106
E.5. PENALTIES FOR NON-FILING OF RETURNS ......... 107
F. WITHHOLDING OF TAXES .................................. 107
F.1. CONCEPT OF WITHHOLDING TAXES .................... 107
F.2. KINDS OF WITHHOLDING TAXES ......................... 107
TAXATION 2
I. ESTATE TAX ........................................... 109
A. BASIC PRINCIPLES .......................................... 109
B. DEFINITION..................................................... 109
C. NATURE ........................................................... 109
D. PURPOSE OR OBJECT ...................................... 109
E. TIME AND TRANSFER OF PROPERTIES .............. 109
F. CLASSIFICATION OF DECEDENT ........................ 110
F.1. CONCEPT OF RESIDENCE .................................. 110
F.2. RULE OF RECIPROCITY....................................... 111
G. GROSS ESTATE VIS-À-VIS NET ESTATE .............. 112
H. DETERMINATION OF GROSS ESTATE AND NET
ESTATE (AND COMPOSITION) ............................... 112
VALUATION OF GROSS ESTATE (SEC 88) ............... 114
J. ITEMS TO BE INCLUDED IN GROSS ESTATE ........ 114
K. DEDUCTIONS FROM ESTATE............................. 117
K.1. ORDINARY DEDUCTIONS ................................... 117
L. EXCLUSIONS FROM ESTATE.............................. 123
M. TAX CREDIT FOR ESTATE TAXES PAID IN A FOREIGN
COUNTRY ............................................................ 124
N. FILING OF NOTICE OF DEATH ............................ 128
O. ESTATE TAX RETURN ........................................ 128
II. DONOR’S TAX ....................................... 131
A. BASIC PRINCIPLES .......................................... 131
B. DEFINITION ..................................................... 131
C. NATURE ........................................................... 131
D. PURPOSE OR OBJECT ...................................... 131
E. REQUISITES OF VALID DONATION ..................... 131
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F. TRANSFERS WHICH MAY BE CONSTITUTED AS
DONATION ........................................................... 131
G. TRANSFER FOR LESS THAN ADEQUATE AND FULL
CONSIDERATION ................................................. 132
H. CLASSIFICATION OF DONOR ............................ 132
I. DETERMINATION OF GROSS GIFT (INCLUDING
COMPOSITION OF GROSS GIFT)............................ 133
J. VALUATION OF GIFTS MADE IN PROPERTY ......... 134
K. TAX CREDIT FOR DONOR‘S TAXES PAID IN A
FOREIGN COUNTRY .............................................. 135
L. EXEMPTIONS OF GIFTS FROM DONOR‘S TAX ..... 136
M. PERSON LIABLE .............................................. 136
N. TAX BASIS ....................................................... 136
III. VALUE-ADDED TAX (VAT) ................... 143
A. CONCEPT ......................................................... 143
B. CONSTITUTIONALITY OF VAT ............................. 143
C. CHARACTERISTICS/ELEMENTS OF A VAT-TAXABLE
TRANSACTION ..................................................... 143
D. IMPACT OF TAX V. INCIDENT OF TAX .................. 144
E. TAX CREDIT METHOD ........................................ 144
F. DESTINATION PRINCIPLE .................................. 144
G. PERSONS LIABLE............................................. 145
H. VAT ON SALE OF GOODS OR PROPERTIES ......... 145
I. ZERO-RATED SALES OF GOODS OR PROPERTIES,
AND EFFECTIVELY ZERO-RATED SALES OF GOODS OR
PROPERTIES ........................................................ 148
J. TRANSACTIONS DEEMED SALE (SEC. 106 (B) .... 150
K. CHANGE OR CESSATION OF STATUS AS VAT-
REGISTERED PERSON (SEC 106[C]) ..................... 150
L. VAT ON IMPORTATION OF GOODS ..................... 151
M. VAT ON SALE OF SERVICE AND USE OR LEASE OF
PROPERTIES ........................................................ 152
N. ZERO-RATED SALE OF SERVICES ...................... 154
O. VAT EXEMPT TRANSACTIONS ............................ 154
Q. SOURCES OF INPUT TAX ................................... 161
R. PERSONS WHO CAN AVAIL OF INPUT TAX CREDIT
........................................................................... 161
S. DETERMINATION OF OUTPUT/INPUT TAX; VAT
PAYABLE; EXCESS INPUT TAX CREDITS ................. 162
S.1. DETERMINATION OF OUTPUT TAX ...................... 162
 S.2. DETERMINATION OF INPUT TAX CREDITABLE ...... 162
S.3. ALLOCATION OF INPUT TAX ON MIXED
TRANSACTIONS ....................................................... 162
T. SUBSTANTIATION OF INPUT TAX CREDITS .......... 162
U. REFUND OR TAX CREDIT OF EXCESS INPUT TAX (CF
REFUND OF ERRONEOUSLY PAID TAXES) .............. 167
V. INVOICING REQUIREMENTS ............................. 168
W. FILING OF RETURN AND PAYMENT ................... 171
X. WITHHOLDING OF FINAL VAT ON SALES TO
GOVERNMENT ..................................................... 171
IV. TAX REMEDIES UNDER THE NIRC ....... 182
A. TAXPAYER‘S REMEDIES ................................... 182
B. GOVERNMENT‘S REMEDIES ............................. 190
V. ORGANIZATION AND FUNCTION OF THE
BUREAU OF INTERNAL REVENUE............ 199
A. POWERS OF THE CIR ........................................ 199
B. ORGANIZATION AND FUNCTION OF THE BIR ...... 200
VI. LOCAL GOVERNMENT CODE OF 1991, AS
AMENDED ................................................ 209
A. LOCAL GOVERNMENT TAXATION ....................... 209
C. TAXING POWERS OF MUNICIPALITIES ............... 214
C.1. TAX ON VARIOUS TYPES OF BUSINESSES........... 214
C.2 CEILING ON BUSINESS TAX IMPOSSIBLE ON
MUNICIPALITIES WITHIN METRO MANILA.................. 216
C.3. TAX ON RETIREMENT ON BUSINESS................... 216
C.4 RULES ON PAYMENT OF BUSINESS TAX .............. 216
C.5. FEES AND CHARGES FOR REGULATION &
LICENSING .............................................................. 216
C.6. SITUS OF TAX COLLECTED ................................. 216
D. TAXING POWERS OF BARANGAYS .................... 217
E. COMMON REVENUE RAISING POWERS ............. 217
F. COMMUNITY TAX .............................................. 219
F.1. TAX PERIOD AND MANNER OF PAYMENT ............ 220
F.2. ACCRUAL OF TAX ............................................... 220
F.3. TIME OF PAYMENT ............................................. 221
F.4. PENALTIES ON UNPAID TAXES, FEES OR CHARGES
............................................................................... 221
F.5. AUTHORITY OF TREASURER IN COLLECTION AND
INSPECTION OF BOOKS............................................ 221
G. TAXPAYER‘S REMEDIES ................................... 221
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G.1. PERIODS OF ASSESSMENT AND COLLECTION OF
LOCAL TAXES, FEES OR CHARGES ............................ 221
G.2. PROTEST OF ASSESSMENT ............................... 221
G.3. CLAIM FOR REFUND OF TAX CREDIT FOR
ERRONEOUSLY OR ILLEGALLY COLLECTED TAX, FEE OR
CHARGE .................................................................. 221
H. CIVIL REMEDIES BY THE LGU FOR COLLECTION OF
REVENUES ........................................................... 221
H.1. LOCAL GOVERNMENT‘S LIEN FOR DELINQUENT
TAXES, FEES OR CHARGES ....................................... 221
H.2. CIVIL REMEDIES, IN GENERAL........................... 221
I. REAL PROPERTY TAXATION ................................ 222
I.1. FUNDAMENTAL PRINCIPLES (CAPUE) ................. 222
I.2. NATURE OF REAL PROPERTY TAX ........................ 223
I.3. IMPOSITION OF REAL PROPERTY TAX .................. 223
I.4. APPRAISAL AND ASSESSMENT OF REAL PROPERTY
TAX.......................................................................... 225
I.5. DECLARATION OF REAL PROPERTY ..................... 225
I.6. LISTING OF REAL PROPERTY IN THE ASSESSMENT
ROLLS ..................................................................... 225
I.7. APPRAISAL AND VALUATION OF REAL PROPERTY 225
I.8. ASSESSMENT OF REAL PROPERTY ..................... 226
I.9. COLLECTION OF REAL PROPERTY TAX ................. 227
I.10. SPECIAL RULES ON PAYMENT .......................... 227
J. TAXPAYER‘S REMEDIES..................................... 228
J.1. ADMINISTRATIVE ............................................... 228
J.2. JUDICIAL ........................................................... 229
VII. TARIFF AND CUSTOMS CODE OF 1978,
AS AMENDED ........................................... 233
A. TARIFF AND DUTIES, DEFINED .......................... 233
B. GENERAL RULE: ALL IMPORTED ARTICLES ARE
SUBJECT TO DUTY [SEC. 101, TCC; SEC. 104, CMTA]
........................................................................... 233
C. PURPOSE FOR IMPOSITION .............................. 233
D. FLEXIBLE TARIFF CLAUSE ................................. 233
E. REQUIREMENTS OF IMPORTATION .................... 234
E.1. BEGINNING AND ENDING OF IMPORTATION....... 234
E.2. OBLIGATIONS OF IMPORTER ............................. 234
F. IMPORTATION IN VIOLATION OF TCC ................. 238
F.1. SMUGGLING ..................................................... 238
F.2. OTHER FRAUDULENT PRACTICES ....................... 238
 G. CLASSIFICATION OF GOODS ............................ 239
G.1. TAXABLE IMPORTATION .................................... 239
G.2. PROHIBITED IMPORTATION ............................... 239
G.3. CONDITIONALLY-FREE IMPORTATION ................ 239
H. CLASSIFICATION OF DUTIES............................. 244
H.1. ORDINARY/REGULAR DUTIES ........................... 244
H.2. SPECIAL DUTIES ............................................... 247
I. REMEDIES ........................................................ 247
I.1. GOVERNMENT.................................................... 247
I.2. TAXPAYER .......................................................... 248
VIII. JUDICIAL REMEDIES .......................... 254
A. JURISDICTION OF THE COURT OF TAX APPEALS . 254
A.1. CIVIL TAX CASES ............................................... 254
A.2. CRIMINAL CASES .............................................. 254
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B. JUDICIAL PROCEDURES ................................... 255
B.1. JUDICIAL ACTION FOR COLLECTION OF TAXES ... 255
B.2. CIVIL CASES ..................................................... 256
B.3. CRIMINAL CASES ............................................. 258
C. TAXPAYER‘S SUIT IMPUGNING THE VALIDITY OF TAX
MEASURES OR ACTS OF TAXING AUTHORITIES ...... 258
C.1. TAXPAYER‘S SUIT, DEFINED .............................. 258
C.2. DISTINGUISHED FROM CITIZEN‘S SUIT .............. 259
C.3. REQUISITES FOR CHALLENGING THE
CONSTITUTIONALITY OF A TAX MEASURE OR ACT OF
TAXING AUTHORITY .................................................. 259
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TAXATION LAW
TAXATION 1

PAGE 1 OF 275
UP LAW BOC
I. General Principles of
Taxation
A. DEFINITION, CONCEPT AND PURPOSE
OF TAXATION
A.1. TAXATION
(1) Is a mode of raising revenue for public purpose; the
exercise of sovereign power to raise revenue for the
expense of the government.
(2) The process or means by which the sovereign,
through its law-making body, raises income to defray
the necessary expenses of government; a method of
apportioning the cost of government among those who
in some measure are privileged to enjoy its benefits and
must, therefore, bear its burdens [51 Am. Jur. 34; 1
Cooley 72-93].
(3) As a power, it refers to the inherent power of the
state to demand enforced contributions for public
purpose or purposes.
(4) Is described as a destructive power which interferes
with the personal and property rights of the people and
takes from them a portion of their property for the
support of the government. [Paseo Realty &
Development Corporation v. CA, G.R. No. 119286
(2004)]
A.2. PURPOSE
1) Revenue-raising
Primary purpose of taxation is to provide funds or
property with which to promote the general welfare and
protection of its citizens.
Fees may be properly regarded as taxes even though
they also serve as an instrument of regulation. If the
purpose is primarily revenue, or if revenue is, at least,
one of the real and substantial purposes, then the
exaction is properly called a tax. [PAL v. Edu, G.R. No. L-
41383 (1988)]
2) Non-revenue/special or regulatory
Taxation is often employed as a device for regulation by
means of which certain effects or conditions envisioned
by governments may be achieved. Taxes may be levied
with a regulatory purpose to provide means for the
rehabilitation and stabilization of a threatened industry
which is affected with public interest as to be within the
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TAXATION 1 TAXATION LAW
police power of the state. These regulatory purposes are
also known as Sumptuary. Thus, taxation can:
(1) Strengthen anemic enterprises or provide incentive
to greater production through grant of tax
exemptions or the creation of conditions conducive
to their growth.
(2) Protect local industries against foreign competition
by imposing additional taxes on imported goods, or
encourage foreign trade by providing tax incentives
on imported goods.
(3) Be a bargaining tool by setting tariff rates first at a
relatively high level before trade negotiations are
entered into with another country.
(4) Halt inflation in periods of prosperity to curb
spending power; ward off depression in periods of
slump to expand business.
(5) Reduce inequalities in wealth and incomes, as for
instance, the estate, donor's and income taxes,
their payers being the recipients of unearned wealth
or mostly in the higher income brackets. Progressive
system of taxation prevents the undue concentration
of wealth in the hands of a few individuals.
Progressivity is keystoned on the principle that those
who are able to pay shoulder the bigger portion of
the tax burden. [Mamalateo]
(6) Taxes may be levied to promote science and
invention (see RA. No. 5448) or to finance
educational activities (see RA. No. 5447) or to
improve the efficiency of local police forces in the
maintenance of peace and order through grant of
subsidy (see RA.No. 6141).
(7) Be an implement of the police power to promote the
general welfare.
(8) Protect local industries from foreign competition.
Taxation is no longer envisioned as a measure
merely to raise revenue to support the existence of
the government; taxes may be levied with a
regulatory purpose to provide means for the
rehabilitation and stabilization of a threatened
industry which is affected with public interest as to
be within the police power of the state. [Caltex v.
COA, G.R. No. 92585 (1992)]
B. NATURE AND CHARACTERISTICS OF
TAXATION
B.1 NATURE
UP LAW BOC TAXATION 1
1) Inherent in sovereignty – The power to tax is an
attribute of sovereignty. It is a power emanating from
necessity. It is a necessary burden to preserve the
State's sovereignty and a means to give the citizenry an
army to resist an aggression, a navy to defend its shores
from invasion, a corps of civil servants to serve, public
improvement designed for the enjoyment of the
citizenry and those which come within the State's
territory, and facilities and protection which a
government is supposed to provide [Phil. Guaranty Co.,
Inc. v. Commissioner, G.R. No. L-22074 (1965)].
2) Essentially a legislative function – The power to tax is
peculiarly and exclusively legislative and cannot be
exercised by the executive or judicial branch of the
government [1 Cooley 160-161]. Hence, only Congress,
our national legislative body, can impose taxes. The
levy of a tax, however, may also be made by a local
legislative body subject to such limitations as may be
provided by law. It includes the authority to:
(a) Determine the nature, purpose, extent, coverage,
apportionment, situs, and method of collection of
the tax;
(b) Grant tax exemptions or condonations; and
(c) Specify or provide for the administrative as well as
judicial remedies that either the government or the
taxpayers may avail themselves in the proper
implementation of the tax measure.
3) Subject to constitutional and inherent limitations –
The power to tax is said to be the strongest of all the
powers of government. It is unlimited, plenary,
comprehensive and supreme, in the absence of
constitutional restrictions, the principal check on its
abuse resting in the responsibility of members of
Congress to their constituents. However, the power of
taxation is subject to constitutional and inherent
limitations [Mamalateo]. These limitations are those
provided in the fundamental law or implied therefrom,
while the rest spring from the nature of the taxing power
itself although they may or may not be provided in the
Constitution.
B.2 CHARACTERISTICS
C. POWER OF TAXATION AS DISTINGUISHED FROM POLICE POWER AND EMINENT DOMAIN
([Mamalateo, Reviewer on Taxation 2nd Edition (2008), Rex Bookstore, Inc., pp. 11-12)
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TAXATION LAW
(1) It is an enforced contribution for its imposition is in
no way dependent upon the will or assent of the
person taxed. It is not contractual, either express or
implied, but positive acts of government.
(2) It is generally payable in the form of money,
although the law may provide payment in kind (e.g.
backpay certificates under Sec. 2, R.A. No. 304, as
amended);
(3) It is proportionate in character or is laid by some
rule of apportionment which is usually based on
ability to pay.
―The rule of taxation shall be uniform and equitable.
The Congress shall evolve a progressive system of
taxation.‖ [Sec. 28 (1), Art. VI, 1987 Constitution]
(4) It is levied on persons, property, rights, acts,
privileges, or transactions.
(5) It is levied by the State which has jurisdiction or
control over the subject to be taxed.
(6) It is personal to the taxpayer.
(7) It is levied by the law-making body of the State. The
power to tax is a legislative power but is also
granted to local governments, subject to such
guidelines and limitations as law may be provided
by law.
―Each local government unit shall have the power to
create its own sources of revenues and to levy taxes,
fees, and charges subject to such guidelines and
limitations as the Congress may provide, consistent
with the basic policy of local autnomy. Such taxes,
fees, and charges shal accrue exclusively to the
local governments.‖ [Sec. 5, Art. X, 1987
Constitution];
(8) It is levied for public purpose. Revenues derived
from taxes cannot be used for purely private
purposes or for the exclusive benefit of private
persons. [Gaston v. Republic Planters Bank, G.R. No.
77194 (1988)]. The ―public purpose or purposes‖
of the imposition is implied in the levy of tax.
[Mendoza v. Municipality, G.R. No. L-7373 (1954)].
A tax levied for a private purpose constitutes a
taking of property without due process of law; and
(9) It is also an important characteristic of most taxes
that they are commonly required to be paid at
regular periods or intervals (see 1 Cooley 64) every
year.
UP LAW BOC
TAXATION
Authority (who May be exercised only by the
exercises the Power) government or its political
subdivisions.
Purpose The property (generally in the
form of money) is taken for the
support of the government.
Persons Affected Operates upon a community
or class of individuals.
Effect The money contributed
becomes part of the public
funds.
Benefits Received It is assumed that the
individual receives the
equivalent of the tax in the
form of protection and
benefits he receives from the
government.
Amount of Generally, there is no limit on
Imposition the amount of tax that may be
imposed.
Relationship to Subject to constitutional
Constitution limitations, including the
prohibition against
impairment of the obligation
of contracts.
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TAXATION 1
EMINENT DOMAIN
May be exercised by the
government or its political
subdivisions or may be
granted to public service
companies or public utilities.
Merely a power to take private
property for public use.
Operates on an individual as
the owner of a particular
property.
There is a transfer of the right
to property.
He receives the market value
of the property taken from
him.
No amount imposed but
rather the owner is paid the
market value of property
taken.
Inferior to the impairment
prohibition; government
cannot expropriate private
property, which under a
contract had previously bound
itself to purchase from the
other contracting party.
TAXATION LAW
POLICE POWER
May be exercised only by the
government or its political
subdivisions.
The use of the property is
―regulated‖ for the purpose of
promoting the general
welfare; it is not
compensable.
Operates upon a community
or a class of individuals.
There is no transfer of title. At
most, there is restraint on the
injurious use of property.
The person affected receives
indirect benefits as may arise
from the maintenance of a
healthy economic standard of
society.
Amount imposed should not
be more than sufficient to
cover the cost of the license
and necessary expenses.
Relatively free from
constitutional limitations and
is superior to the impairment
of contract provision.
UP LAW BOC
D. THEORY AND BASIS OF TAXATION
(1) Lifeblood theory
Taxes are the lifeblood of the government and their
prompt and certain availability is an imperious need.
[CIR v. Pineda, G.R. No. L-22734 (1967)]
Taxes are the lifeblood of the government and so
should be collected without unnecessary hindrance.
It is said that taxes are what we pay for civilized
society. Without taxes, the government would be
paralyzed for lack of the motive power to activate
and operate it [CIR v. Algue, G.R. No. L-28896
(1988)].
(2) Necessity theory
The power of taxation proceeds upon theory that the
existence of government is a necessity; that is
cannot continue without means to pay its expenses;
and that for those means it has the right to compel
all citizens and property within its limits to
contribute.
The power to tax, an inherent prerogative, has to be
availed of to assure the performance of vital state
functions. It is the source of the bulk of public funds.
[Sison v. Ancheta, G.R. No. L-59431 (1984)]
The obligation to pay taxes rests upon the necessity
of money for the support of the state. For this reason,
no one is allowed to object to or resist the payment
of taxes solely because no personal benefit to him
can be pointed out. [Lorenzo v. Posadas, G.R. No. L-
43082 (1937)]
(3) Benefits-protection Theory (Symbiotic
Relationship)
This principle serves as the basis of taxation and is
founded on the reciprocal duties of protection and
support between the State and its inhabitants.
Despite the natural reluctance to surrender part of
one's hard earned income to the taxing authorities,
every person who is able to must contribute his
share in the running of the government. The
government for its part is expected to respond in the
form of tangible and intangible benefits intended to
improve the lives of the people and enhance their
moral and material values. This symbiotic
relationship is the rationale of taxation and should
dispel the erroneous notion that it is an arbitrary
method of exaction by those in the seat of power.
[CIR v. Algue, supra]
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TAXATION 1 TAXATION LAW
(4) Jurisdiction over subject and objects
The limited powers of sovereignty are confined to
objects within the respective spheres of
governmental control. These objects are the proper
subjects or objects of taxation and none else.
E. PRINCIPLES OF A SOUND TAX
SYSTEM
(1) Fiscal adequacy
The sources of tax revenue should coincide with, and
approximate the needs of, government expenditures.
The revenue should be elastic or capable of
expanding or contracting annually in response to
variations in public expenditures.
(2) Administrative feasibility
Tax laws should be capable of convenient, just and
effective administration. Each tax should be capable
of uniform enforcement by government officials,
convenient as to the time, place, and manner of
payment, and not unduly burdensome upon, or
discouraging to business activity.
(3) Theoretical justice or equality
The tax burden should be in proportion to the
taxpayer‘s ability to pay. This is the so-called ability
to pay principle. Taxation should be uniform as well
as equitable
Note: The non-observance of the above principles
will not necessarily render the tax imposed invalid
except to the extent those specific constitutional
limitations are violated. (De Leon)
F. SCOPE AND LIMITATIONS OF
TAXATION
F.1. INHERENT LIMITATIONS
(a) Public Purpose
The proceeds of the tax must be used (a) for the
support of the State or (b) for some recognized
objects of government or directly to promote the
welfare of the community.
Test: Whether the statute is designed to promote the
public interest, as opposed to the furtherance of the
advantage of individuals, although each advantage
to individuals might incidentally serve the public.
[Pascual v. Sec. of Public Works, G.R. No. L-10405
(1960)]
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The protection and promotion of the sugar industry
is a matter of public concern; the legislature may
determine within reasonable bounds what is
necessary for its protection and expedient for its
promotion. [Lutz v. Araneta, G.R. No. L-7859
(1955)]
The public purpose of a tax may legally exist even if
the motive which impelled the legislature to impose
the tax was to favor one industry over another. [Tio v.
Videogram, G.R. No. L-75697 (1987)]
Tests in Determining Public Purpose:
(1) Duty Test - Whether the thing to be furthered by
the appropriation of public revenue is something
which is the duty of the State as a government to
provide.
(2) Promotion of General Welfare Test - Whether the
proceeds of the tax will directly promote the
welfare of the community in equal measure.
(3) Character of the Direct Object of the Expenditure
– It is the essential character of the direct object
of the expenditure which must determine its
validity as justifying a tax and not the magnitude
of the interests to be affected nor the degree to
which the general advantage of the community,
and thus the public welfare, may be ultimately
benefited by their promotion. Incidental
advantage to the public or to the State, which
results from the promotion of private enterprises
or business, does not justify their aid with public
money. [Pascual v. Sec. of Public Works, supra]
(b) Inherently Legislative
Stated in another way, taxation may exceptionally
be delegated, subject to such well-settled
limitations as:
(1) The delegation shall not contravene any
constitutional provision or the inherent
limitations of taxation;
(2) The delegation is effected either by the
Constitution or by validly enacted legislative
measures or statute; and
(3) The delegated levy power, except when the
delegation is by an express provision of the
Constitution itself, should only be in favor of the
local legislative body of the local or municipal
government concerned. [Vitug and Acosta]
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TAXATION 1 TAXATION LAW
(i) General Rule: Delegata potestas non potest
delegari. The power to tax is exclusively vested in the
legislative body and it may not be re-delegated.
Judge Cooley enunciates the doctrine in the
following oft-quoted language: "One of the settled
maxims in constitutional law is that the power
conferred upon the legislature to make laws cannot
be delegated by that department to any other body
or authority. Where the sovereign power of the state
has located the authority, there it must remain; and
by the constitutional agency alone the laws must be
made until the Constitution itself is charged.‖
[People v. Vera, G.R. No. L-45685, November 16,
1937]
Legislature has the power to determine the:
(1) nature (kind),
(2) object (purpose),
(3) extent (rate),
(4) coverage (subjects) and
(5) situs (place) of taxation.
(ii) Exceptions
(a) Delegation to local governments – This
exception is in line with the general principle
that the power to create municipal corporations
for purposes of local self-government carries
with it, by necessary implication, the power to
confer the power to tax on such local
governments. (1 Cooley 190). This is logical for
after all, municipal corporations are merely
instrumentalities of the state for the better
administration of the government in respect to
matters of local concern. [Pepsi-Cola Bottling Co.
of the Phil. Inc. v. Mun. of Tanauan, G.R. No. L-
31156 (1976)]. Under the new Constitution,
however, LGUs are now expressly given the
power to create its own sources of revenue and
to levy taxes, fees and charges, subject to such
guidelines and limitations as the Congress may
provide which must be consistent with the basic
policy of local autonomy. [Art. X, Sec 5, 1987
Constitution]
(b) Delegation to the President
(1) to enter into Executive agreements; and
(2) to ratify treaties which grant tax
exemption subject to Senate
concurrence.
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The Congress may, by law, authorize the
President to fix within specified limits, and
subject to such limitations and restrictions as it
may impose, tariff rates, import and export
quotas, tonnage and wharfage dues, and other
duties or imposts within the framework of the
national development program of the
Government. [Art. 6, Sec. 28(2), 1987
Constitution]
(c) Delegation to administrative agencies –
Limited to the administrative implementation
that calls for some degree of discretionary
powers under sufficient standards expressed
by law or implied from the policy and purposes
of the Act.
(1) There are certain aspects of the taxing
process that are not legislative and they
may, therefore, be vested in an
administrative body. The powers which
are not legislative include: (1) the power
to value property for purposes of
taxation pursuant to fixed rules; (2) the
power to assess and collect the taxes;
and (3) the power to perform any of the
innumerable details of computation,
appraisement, and adjustment, and the
delegation of such details.
(2) The exercise of the above powers is
really not an exception to the rule as no
delegation of the strictly legislative
power to tax is involved.
(3) The powers which cannot be delegated
include the determination of the
subjects to be taxed, the purpose of the
tax, the amount or rate of the tax, the
manner, means, and agencies of
collection, and the prescribing of the
necessary rules with respect thereto.
(c) Territorial
Rule: A state may not tax property lying outside its
borders or lay an excise or privilege tax upon the
exercise or enjoyment of a right or privilege derived
from the laws of another state and therein exercise
and enjoyed. (51 Am.Jur. 87-88).
Reasons:
(1) Tax laws (and this is true of all laws) do not
operate beyond a country‘s territorial limits.
(2) Property which is wholly and exclusively within
the jurisdiction of another state receives none of
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the protection for which a tax is supposed to be a
compensation.
Note: Where privity of relationship exists. It does not
mean, however, that a person outside of state is no
longer subject to its taxing powers. The fundamental
basis of the right to tax is the capacity of the
government to provide benefits and protection to
the object of the tax. A person may be taxed where
there is between him and the taxing state, a privity
of the relationship justifying the levy. Thus, the
citizen‘s income may be taxed even if he resides
abroad as the personal (as distinguished from
territorial) jurisdiction of his government over him
remains. In this case, the basis of the power to tax is
not dependent on the source of the income nor upon
the location of the property nor upon the residence
of the taxpayer but upon his relation as a citizen to
the state. As such citizen, he is entitled, wherever he
may be, inside or outside of his country, to the
protection of his government.
(d) International Comity
Comity – respect accorded by nations to each other
because they are sovereign equals. Thus, the
property or income of a foreign state or government
may not be the subject of taxation by another state.
Reasons:
(1) In par in parem non habet imperium. As
between equals there is no sovereign (Doctrine
of Sovereign Equality among states under
international law). One state cannot exercise its
sovereign powers over another.)
(2) In international law, a foreign government may
not be sued without its consent → useless to
impose a tax which could not be collected.
(3) Usage among states that when a foreign
sovereign enters the territorial jurisdiction of
another, there is an implied understanding that
the former does not intend to degrade its dignity
by placing itself under the jurisdiction of the
other.
(e) Exemption of Government Entities, Agencies, and
Instrumentalities
If the taxing authority is the National Government:
General Rule: Agencies and instrumentalities of the
government are exempt from tax.
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Note: Unless otherwise provided by law, the
exemption applies only to government entities
through which the government immediately and
directly exercises its sovereign powers. With respect
to government-owned or controlled corporations
performing proprietary (not governmental) functions,
they are generally subject to tax in the absence of
tax exemption provisions in their charters or the law
creating them.
Reasons for the exemption:
(a) To levy a tax upon public property would render
necessary new taxes on other public property for the
payment of the tax so laid and thus, the government
would be taxing itself to raise money to pay over for
itself.
(b) This immunity also rests upon fundamental
principles of government, being necessary in order
that the functions of government shall not be unduly
impeded. (1 Cooley 263).
(c) The practical effect of an exemption running to
the benefit of the government is merely to reduce
the amount of money that has to be handled by the
government in the course of its operations: For
these reasons, provisions granting exemptions to
government agencies may be construed liberally in
favor of non-tax liability of such agencies. [Maceda v.
Macaraig, Jr., G.R. No. 88291 (1991)].
Exception: There is no constitutional prohibition
against the government taxing itself. [Coll. v. Bisaya
Land Transportation, 105 Phil. 338 (1959)].
If the taxing authority is a local government unit: RA
7160 expressly prohibits LGUs from levying tax on
the National Government, its agencies and
instrumentalities and other LGUs. [Sec. 133 (o),
Local Government Code]
F.2. CONSTITUTIONAL LIMITATIONS
(a) Provisions Directly Affecting Taxation
(i) Prohibition against imprisonment for non-
payment of poll tax
No person shall be imprisoned for debt or non-
payment of a poll tax. [Art. III, Sec. 20, 1987
Constitution]
(ii) Uniformity and equality of taxation
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TAXATION 1 TAXATION LAW
The rule of taxation shall be uniform and equitable.
Congress shall evolve a progressive system of
taxation. [Art. VI, Sec. 28(1), 1987 Constitution]
(1) Uniformity – All taxable articles or properties of
the same class shall be taxed at the same rate.
[City of Baguio v. de Leon, G.R. No. L-24756
(1968)].
(a) Uniformity of operation throughout tax unit -
The rule requires the uniform application and
operation, without discrimination, of the tax
in every place where the subject of it is found.
This means, for example, that a tax for a
national purpose must be uniform and equal
throughout the country and a tax for a
province, city, municipality, or barangay must
be uniform and equal throughout the
province, city, municipality or barangay.
(b) Equality in burden – Uniformity implies
equality in burden, not equality in amount or
equality in its strict and literal meaning. The
reason is simple enough. If legislation
imposes a single tax upon all persons,
properties, or transactions, an inequality
would obviously result considering that not
all persons, properties, and transactions are
identical or similarly situated. Neither does
uniformity demand that taxes shall be
proportional to the relative value or amount
of the subject thereof. Taxes may be
progressive.
(2) Equity
(a) Uniformity in taxation is effected through the
apportionment of the tax burden among the
taxpayers which under the Constitution must be
equitable. ―Equitable‖ means fair, just, reasonable
and proportionate to the taxpayer‘s ability to pay.
Taxation may be uniform but inequitable where the
amount of the tax imposed is excessive or
unreasonable.
(b) The constitutional requirement of equity in
taxation also implies an approach which employees
a reasonable classification of the entities or
individuals who are to be affected by a tax. Where
the ―tax differentiation is not based on material or
substantial differences,‖ the guarantee of equal
protection of the laws and the uniformity rule will
likewise be infringed.
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Taxation does not require identity or equality under shall be exempt from taxation.
all circumstances, or negate the authority to classify
(c) The tax exemption under this constitutional
the objects of taxation.
provision covers property taxes only and not
Classification, to be valid, must be reasonable and
other taxes [Lladoc v. Commissioner, G.R. No. L-
this requirement is not deemed satisfied unless:
19201 (1965)].
(1) It is based upon substantial distinctions which
make real differences;
In general, special assessments are not covered by
(2) These are germane to the purpose of the
the exemption because by nature they are not
legislation or ordinance;
classified as taxes. [Apostolic Prefect v. City
(3) The classification applies not only to present Treasurer of Baguio, G.R. No. L-47252 (1941)]
conditions but also to future conditions
substantially identical to those of the present;
and To be entitled to the exemption, the petitioner must
(4) The classification applies equally to all those prove that:
who belong to the same class. [Pepsi-Cola v. (1) It is a charitable institution
Butuan City, G.R. No. L-22814 (1968)]
(2) Its real properties are actually, directly and
The progressive system of taxation would place exclusively used for charitable purposes.
stress on direct rather than indirect taxes, on non-
essentiality rather than essentiality to the taxpayer
of the object of taxation, or on the taxpayer‘s ability Revenue or income from trade, business or other
to pay. Example is that individual income tax system activity, the conduct of which is not related to the
that imposes rates progressing upwards as the tax exercise or performance of religious, educational
base (taxpayer‘s taxable income) increases. A and charitable purposes or functions shall be
progressive tax, however, must not be confused with subject to internal revenue taxes when the same is
a progressive system of taxation. not actually, directly or exclusively used for the
intended purposes. [BIR Ruling 046-2000]
While equal protection refers more to like treatment
of persons in like circumstances, uniformity and
equity refer to the proper relative treatment for tax
Test of Use of the property, and not the
purposes of persons in unlike circumstances.
Exemption ownership
Actual, direct and exclusive use
(iii) Grant by Congress of authority to the President Nature of Use for religious, charitable or
to impose tariff rates educational purposes.
Delegation of Tariff powers to the President under
the flexible tariff clause [Sec. 28(2), Art. VI, 1987 Real property taxes on facilities
Constitution], which authorizes the President to which are
modify import duties. [Sec. 1608, Customs (1) actual,
Modernization and Tariff Act; previously, Sec. 401,
(2) incidental to, or
TCC]
(3) reasonably necessary for the
accomplishment of said
(iv) Prohibition against taxation of religious, Scope of purposes such as in the case
charitable entities, and educational entities Exemption of hospitals, a school for
Art. VI, Sec. 28(3), 1987 Constitution: training nurses, a nurses‘
home, property to provide
(a) Charitable institutions, churches and
housing facilities for interns,
personages or convents appurtenant thereto,
resident doctors and other
mosques, non-profit cemeteries, and all lands,
members of the hospital staff,
buildings, and improvements,
and recreational facilities for
(b) Actually, directly, and exclusively used for student nurses, interns and
religious, charitable, or educational purposes residents, such as athletic
PAGE 9 OF 275
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fields. [Abra Valley College v.
Aquino, G.R. No. L-39086
(1988)]
TEST: Whether an enterprise is charitable or not:
whether it exists to carry out a purpose recognized in
law as charitable or whether it is maintained for gain,
profit, or private advantage.
A charitable institution does not lose its character
as such and its exemption from taxes simply
because it derives income from paying patients,
whether out-patient, or confined in the hospital, or
receives subsidies from the government, so long as
the money received is devoted or used altogether to
the charitable object which it is intended to achieve;
and no money inures to the private benefit of the
persons managing or operating the institution.
―Exclusive" - possessed and enjoyed to the
exclusion of others; debarred from participation or
enjoyment; "Exclusively" - "in a manner to exclude;
as enjoying a privilege exclusively.‖
If real property is used for one or more commercial
purposes, it is not exclusively used for the exempted
purposes but is subject to taxation. The words
"dominant use" or "principal use" cannot be
substituted for the words "used exclusively" without
doing violence to the Constitution and the law.
Solely is synonymous with exclusively. [Lung Center
of the Philippines v. Quezon City, G.R. No. 144104
(2004)]
Note: Lung Center did not necessarily overturn the
case of Abra Valley College v. Aquino. Lung Center
just provided a stricter interpretation. In Abra Valley,
the Court held: The primary use of the school lot and
building is the basic and controlling guide, norm
and standard to determine tax exemption, and not
the mere incidental use thereof. Under the 1935
Constitution, the trial court correctly held that the
school building as well as the lot where it is built,
should be taxed, not because the second floor of the
same is being used by the Director and his family for
residential purposes (incidental to its educational
purpose), but because the first floor thereof is being
used for commercial purposes. However, since only
a portion is used for purposes of commerce, it is
only fair that half of the assessed tax be returned to
the school involved.
(v) Prohibition against taxation of non-stock, non-
profit educational institutions
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TAXATION 1 TAXATION LAW
Art. XIV, Sec. 4, 1987 Constitution
(3) All revenues and assets of non-stock, non-profit
educational institutions used actually, directly, and
exclusively for educational purposes shall be
exempt from taxes and duties.
Proprietary educational institutions, including those
cooperatively owned, may likewise be entitled to
such exemptions subject to the limitations provided
by law, including restrictions on dividends and
provisions for reinvestment.
(4) Subject to conditions prescribed by law, all
grants, endowments, donations, or contributions
used actually, directly, and exclusively for
educational purposes shall be exempt from tax.
This provision covers only non-stock, non-profit
educational institutions.
The exemption covers income, property, and donor‘s
taxes, custom duties, and other taxes imposed by
either or both the national government or political
subdivisions on all revenues, assets, property or
donations, used actually, directly and exclusively for
educational purposes. (In the case of religious and
charitable entities and non-profit cemeteries, the
exemption is limited to property tax.)
The exemption does not cover revenues derived from,
or assets used in, unrelated activities or enterprise.
Similar tax exemptions may be extended to
proprietary (for profit) educational institutions by
law subject to such limitations as it may provide,
including restrictions on dividends and provisions
for reinvestment. The restrictions are designed to
insure that the tax-exemption benefits are used for
educational purposes.
Lands, buildings, and improvements actually,
directly and exclusively used for educational
purposes are exempt from property tax [Sec. 28(3),
Art. VI, 1987 Constitution], whether the educational
institution is proprietary or non-profit.
Art. VI, Sec. 28, par. 3 Art. XIV, Sec. 4, par. 3
Charitable institutions, Non-stock, non-profit
churches and parsonages educational
or convents appurtenant institutions.
thereto, mosques, non-
profit cemeteries, and all
lands, buildings, and
improvements, actually,
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Art. VI, Sec. 28, par. 3 Art. XIV, Sec. 4, par. 3 conditions as they may deem necessary. [Sec.
192, LGC]
directly, and exclusively
used for religious, (2) The President of the Philippines may, when
charitable, or public interest so requires, condone or reduce
educational purposes. the real property tax and interest for any year in
any province or city or a municipality within the
Property taxes Income, property, and Metropolitan Manila Area. [Sec. 277, LGC]
donor‘s taxes and
custom duties.
(vii) Prohibition on use of tax levied for special
purpose
(vi) Majority vote of Congress for grant of tax All money collected on any tax levied for a special
exemption purpose shall be treated as a special fund and paid
Art. VI, Sec. 28, 1987 Constitution. No law granting out for such purpose only.
any tax exemption shall be passed without the
concurrence of a majority of all the Members of the If the purpose for which a special fund was created
Congress. has been fulfilled or abandoned, the balance, if any,
shall be transferred to the general funds of the
Government. [Gaston v. Republic Planters Bank,
Basis: The inherent power of the state to impose G.R. No. L-77194 (1988)].
taxes carries with it the power to grant tax
exemptions.
(viii) President‘s veto power on appropriation,
revenue, tariff bills
Exemptions may be created by: Art. VI, Sec. 27(2), 1987 Constitution. The President
shall have the power to veto any particular item or
(1) The Constitution, or items in an appropriation, revenue, or tariff bill, but
(2) Statutes, subject to constitutional limitations the veto shall not affect the item or times to which
he does not object.
Vote required for the grant of exemption: Absolute
majority of the members of Congress (at least ½ + 1
of ALL the members voting SEPARATELY)
(ix) Non-impairment of jurisdiction of the Supreme
Vote required for withdrawal of such grant of Court
exemption: Relative majority is sufficient (majority Art VIII, Sec. 2, 1987 Constitution. The Congress
of the quorum). shall have the power to define, prescribe, and
apportion the jurisdiction of the various courts but
The provision guaranteeing equal protection of the
may not deprive the Supreme Court of its
laws and that mandating the rule of taxation shall
jurisdiction over cases enumerated in Section 5
be uniform and equitable likewise limit, although
not expressly, the legislative power to grant tax hereof.
exemption.
Grants in the nature of tax exemptions: Art. VIII, Sec. 5(2(b)), 1987 Constitution. The
Supreme Court shall have the following powers:
(1) Tax amnesties
(2) Review, revise, modify or affirm on appeal or
(2) Tax condonations certiorari, as the laws or the Rules of Court may
(3) Tax refunds provide, final judgments and orders of lower courts
in
(b) all cases involving the legality of any tax,
Note: impost, assessment or toll or any penalty
(1) Local government units may, through imposed in relation thereto.
ordinances duly approved, grant tax exemptions,
incentives or reliefs under such terms and
Even the legislative body cannot deprive the SC of
its appellate jurisdiction over all cases coming from
PAGE 11 OF 275
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inferior courts where the constitutionality or validity
of an ordinance or the legality of any tax, impost,
assessment, or toll is in question. [San Miguel Corp
v. Avelino, G.R. No. L-39699 (1979)]
Art. VI, Sec. 30, 1987 Constitution. No law shall be
passed increasing the appellate jurisdiction of the
Supreme Court without its advice and concurrence.
Scope of Judicial Review in taxation: limited only to
the interpretation and application of tax laws. Its
power does not include inquiry into the policy of
legislation. Neither can it legitimately question or
refuse to sanction the provisions of any law
consistent with the Constitution. [Coll. v. Bisaya
Land Transportation, 105 Phil. 338 (1959)].
(x) Grant of power to the local government units to
create its own sources of revenue
LGUs have power to create its own sources of
revenue and to levy taxes, fees and charges, subject
to such guidelines and limitations as the Congress
may provide which must be consistent with the basic
policy of local autonomy. [Art. X, Sec. 5, 1987
Constitution]
(xi) Flexible tariff clause
Delegation of tariff powers to the President under
the flexible tariff clause [Art. VI, Sec. 28(2), 1987
Constitution]
Flexible tariff clause: the authority given to the
President, upon the recommendation of NEDA, to
adjust the tariff rates under Sec. 1608 of the CMTA
(previously, Sec. 401, CMTA) in the interest of
national economy, general welfare and/or national
security.
(xii) Exemption from real property taxes
Art. VI, Sec. 28(3), 1987 Constitution
Charitable institutions, churches and personages or
convents appurtenant thereto, mosques, non-profit
cemeteries, and all lands, buildings, and
improvements, actually, directly, and exclusively
used for religious, charitable, or educational
purposes shall be exempt from taxation.
(xiii) No appropriation or use of public money for
religious purposes
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TAXATION 1 TAXATION LAW
Art. VI, Sec. 29, 1987 Constitution
(1) No money shall be paid out of the Treasury
except in pursuance of an appropriation made
by law.
(2) No public money or property shall be
appropriated, applied, paid, or employed,
directly or indirectly, for the use, benefit, or
support of any sect, church, denomination,
sectarian institution, or system of religion, or of
any priest, preacher, minister, other religious
teacher, or dignitary as such, except when such
priest, preacher, minister, or dignitary is
assigned to the armed forces, or to any penal
institution, or government orphanage or
leprosarium.
(3) All money collected on any tax levied for a
special purpose shall be treated as a special
fund and paid out for such purpose only. If the
purpose for which a special fund was created
has been fulfilled or abandoned, the balance, if
any, shall be transferred to the general funds of
the Government
(b) Provisions Indirectly Affecting Taxation
(i) Due process
Art. III, Sec. 1, 1987 Constitution. No person shall
be deprived of life, liberty, or property without due
process of law, nor shall any person be denied the
equal protection of the laws.
(1) Substantive Due Process – An act is done under
the authority of a valid law or the Constitution
itself.
(2) Procedural Due Process – An act is done after
compliance with fair and reasonable methods or
procedure prescribed by law.
Due Process in Taxation requirements:
(1) Public purpose
(2) Imposed within taxing authority‘s territorial
jurisdiction
(3) Assessment or collection is not arbitrary or
oppressive
The due process clause may be invoked where a
taxing statute is so arbitrary that it finds no support
in the Constitution, as where it can be shown to
amount to the confiscation of property. [Sison v.
Ancheta, G.R. No. L-59431(1984)]
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Instances of violations of the due process clause:
(1) If the tax amounts to confiscation of property;
(2) If the subject of confiscation is outside the
jurisdiction of the taxing authority;
(3) If the tax is imposed for a purpose other than a
public purpose;
(4) If the law which is applied retroactively imposes
just and oppressive taxes.
(5) If the law violates the inherent limitations on
taxation.
(ii) Equal protection
Art. III, Sec. 1, 1987 Constitution. No person shall be
deprived of life, liberty, or property without due
process of law, nor shall any person be denied the
equal protection of the laws.
All persons subject to legislation shall be treated
alike under similar circumstances and conditions
both in the privileges conferred and liabilities
imposed. (1 Cooley 824-825; See Sison v. Ancheta,
supra).
The doctrine does not require that persons or
properties different in fact be treated in laws as
though they were the same. Indeed, to treat them
the same or alike may offend the Constitution. What
the Constitution prohibits is class legislation which
discriminates against some and favors others. As
long as there are rational or reasonable grounds for
so doing, Congress may, therefore, group the
persons or properties to be taxed and it is sufficient
―if all of the same class are subject to the same rate
and the tax is administered impartially upon them.‖
(1 Cooley 608).
The equal protection clause is subject to reasonable
classification (See requisites for valid classification,
supra).
(iii) Religious freedom
Art. III, Sec. 5, 1987 Constitution. No law shall be
made respecting an establishment of religion, or
prohibiting the free exercise thereof. (Non-
establishment clause)
The free exercise and enjoyment of religious
profession and worship, without discrimination or
preference, shall forever be allowed. (Free exercise
clause)
No religious test shall be required for the exercise of
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TAXATION 1 TAXATION LAW
civil and political rights.
The free exercise clause is the basis of tax
exemptions.
The imposition of license fees on the distribution
and sale of bibles and other religious literature by a
non-stock, non-profit missionary organization not
for purposes of profit amounts to a condition or
permit for the exercise of their right, thus violating
the constitutional guarantee of the free exercise and
enjoyment of religious profession and worship which
carries with it the right to disseminate religious
beliefs and information. [American Bible Society v.
City of Manila, G.R. No. L-9637 (1957)] It is actually
in the nature of a condition or permit for the exercise
of the right. This is different from a tax in the income
of one who engages in religious activities or a tax on
property used or employed in connection with those
activities. It is one thing to impose a tax on the
income or property of a preacher. It is quite another
thing to exact a tax for the privilege of delivering a
sermon.
The Constitution, however, does not prohibit
imposing a generally applicable tax on the sale of
religious materials by a religious organization.
[Tolentino v. Secretary of Finance, G.R. No. 115455
(1994)]
(iv) Non-impairment of obligations of contracts
Art. III, Sec. 10, 1987 Constitution. No law
impairing the obligation of contracts shall be
passed.
The Contract Clause has never been thought as a
limitation on the exercise of the State's power of
taxation save only where a tax exemption has been
granted for a valid consideration. [Tolentino v.
Secretary of Finance, supra]
G. STAGES OR ASPECTS OF TAXATION
The exercise of taxation involves the following
stages:
(1) Levy or imposition – This process involves the
passage of tax laws or ordinances through the
legislature. The tax laws to be passed shall
determine those to be taxed (person, property or
rights), how much is to be collected (the rate and
the base of tax), and how taxes are to be
UP LAW BOC TAXATION 1 TAXATION LAW

implemented (the manner of imposing and
collecting tax). It also involves the granting of tax
exemptions, tax amnesties or tax condonation.
(2) Assessment and collection – This process
involves the act of administration and
implementation of tax laws by the executive
through its administrative agencies such as the
Bureau of Internal Revenue or Bureau of
Customs.
(3) Payment – this process involves the act of
compliance by the taxpayer in contributing his
share to pay the expenses of the government.
Payment of tax also includes the options,
schemes or remedies as may be legally open or
available to the taxpayer.
(4) Refund – A claim for refund must first be filed
with the Commissioner of Internal Revenue. A
suit or proceeding may be filed within two years
from the date of payment of the tax or penalty
regardless of any supervening cause that may
arise after payment. The Commissioner may,
even without a written claim therefor, refund or
credit any tax, where on the face of the return,
such payment appears clearly to have been
erroneously paid. [Sec. 229, NIRC]
H. DEFINITION, NATURE AND
CHARACTERISTICS OF TAXES
(b) It is assessed in accordance with some
reasonable rule of apportionment which
means that conformably with the
constitutional mandate for Congress to evolve
a progressive tax system, taxes must be based
on taxpayer‘s ability to pay [Art VI, Sec 28[a],
1987 Constitution]
(c) It is a pecuniary burden payable in money.
(d) It is imposed by the State on persons, property,
or exercise within its jurisdiction, in
accordance with the principle of territoriality.
(e) It is levied by the legislative body of the State.
(f) It is levied for a public purpose.
(g) It is personal to the taxpayer.
I. REQUISITES OF A VALID TAX
(1) For a public purpose;
(2) Rule of taxation should be uniform;
(3) The person or property taxed is within the
jurisdiction of the taxing authority;
(4) Assessment and collection is in consonance
with the due process clause; AND
(5) The tax must not infringe on the inherent and
constitutional limitations of the power of
taxation.

H.1 TAXES
J. TAX AS DISTINGUISHED FROM OTHER
(a) Are enforced proportional contributions from
FORMS OF EXACTIONS
persons and property levied by the law-making body
of the State by virtue of its sovereignty for the (1) Tariff
support of the government and all public needs. Taxes Tariff
(b) Are the enforced proportional and pecuniary All embracing term to A kind of tax imposed on
contributions from persons and property levied by include various kinds of articles which are traded
the law-making body of the state having jurisdiction enforced contributions internationally
over the subject of the burden for the support of the upon persons for the
government and public needs. attainment of public
purposes
(c) Are what we pay for civilized society. Without
taxes, the government would be paralyzed for lack of
the motive power to activate and operate it. [CIR v.
(2) Toll
Algue, supra]
Taxes Toll
Paid for the support of Paid for the use of
Essential Characteristics the government another‘s property.
(a) It is a forced charge, imposition or contribution. Demand of sovereignty Demand of
As such, it operates ad infinitum. proprietorship

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Taxes Toll License is in the nature of a special privilege, of a

permission or authority to do what is within its terms.
Generally, no limit on the Amount paid depends
It makes lawful an act which would otherwise be
amount collected as long upon the cost of
unlawful. A license granted by the State is always
as it is not excessive, construction or
revocable. [Gonzalo Sy Trading vs. Central Bank of
unreasonable or maintenance of the
the Phil.,G.R. No. L-41480 (1976)]
confiscatory public improvement
used.
Importance of the distinctions
Imposed only by the Imposed by the (1) It is necessary to determine whether a particular
government government or by private imposition is a tax or a license fee because some
individuals or entities. limitations apply only to one and not to the other,
A toll is a sum of money for the use of something, and for the reason that exemption from taxes
generally applied to the consideration which is paid may not include exemption from license fee.
for the use of a road, bridge or the like, of a public (2) The power to regulate as an exercise of police
nature. (1 Cooley 77.)
power does not include the power to impose fees
The view has been expressed, however, that the for revenue purposes. The amount of tax bears
taking of tolls is only another method of taxing the no relation at all to the probable cost of
public for the cost of the construction and repair of regulating the activity, occupation, or property
the improvement for the use of which the toll is being taxed. [Progressive Development Corp. vs.
charged. (71 Am. Jur. 2d 351.) Quezon City, G.R. No. L-36081 (1989)]
(3) An exaction, however, may be considered both a
tax and a license fee. This is true in the case of
(3) License fee
car registration fees which may be regarded as
Taxes License and Regulatory
taxes even as they also serve as an instrument of
Fee
regulation. If the purpose is primarily revenue, or
Imposed under the Levied under the police if revenue, is, at least, one of the real and
taxing power of the state power of the state. substantial purposes, then the exaction is
for purposes of revenue. properly called a tax. [Phil. Airlines, Inc. vs. Edu,
G.R. No. L- 41383 (1988)]
Forced contributions for Exacted primarily to
the purpose of regulate certain (4) But a tax may have only a regulatory purpose.
maintaining government businesses or The general rule, however, is that the imposition
functions. occupations. is a tax if its primary purpose is to generate
revenue, and regulation is merely incidental; but
Generally unlimited as to Should not unreasonably if regulation is the primary purpose, the fact that
amount exceed the expenses of incidentally revenue is also obtained does not
issuing the license and make the imposition a tax. [Progressive
of supervision. Development Corp. vs. Quezon City, supra]
Imposed on persons, Imposed only on the
property and the right to right to exercise a
exercise a privilege. privilege Primary purpose test (as seen in Progressive
Development Corp v. QC):
Failure to pay does not Failure to pay makes the
necessarily make the act act or business illegal. (1) Imposition must relate to an occupation or
or business illegal. activity that so engages the public interest in
health, morals, safety and development as to
Penalty for non-payment: require regulation for the protection and
surcharges or promotion of such public interest;
imprisonment (except
poll tax). (2) Imposition must bear a reasonable relation to
the probable expenses of regulation, taking into
account not only the costs of direct regulation
License or permit fee is a charge imposed under the but also its incidental consequences as well.
police power for purposes of regulation.
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Note: Taxes may also be imposed for regulatory Taxes Debt

purposes. It is called regulatory tax.
assigned
Fees may be properly regarded as taxes even though
they also served as an instrument of regulation. If Generally paid in money May be paid in kind
the purpose is primarily revenue, or if revenue is, at Cannot be a subject of Can be a subject of set
least, one of the real and substantial purposes, then set off or compensation off or compensation (see
the exaction is properly called a tax. [PAL v. Edu, Art. 1279, Civil Code)
supra]
Imprisonment is a A person cannot be
sanction for non- imprisoned for non-
(4) Special assessment payment of tax, except payment of debt (except
Taxes Special Assessment poll tax when it arises from a
Levied not only on land Levied only on land crime)

Imposed regardless of Imposed because of an Governed by the special Governed by the ordinary
public improvements increase in value of land prescriptive periods periods of prescription
benefited by public provided for in the NIRC
improvement Does not draw interest Draws interest when it is
Contribution of a Contribution of a person except only when so stipulated or where
taxpayer for the support for the construction of a delinquent there is default
of the government public improvement Imposed only by public Can be imposed by
It has general Exceptional both as to authority private individual
application both as to time and locality
time and place
A tax is not a debt in the ordinary sense of the word.

A special assessment is not a personal liability of (6) Penalty

the person assessed, i.e., his liability is limited only Taxes Penalty
to the land involved. It is based wholly on benefits
(not necessity). Violation of tax laws may Any sanction imposed as
give rise to imposition of a punishment for
A charge imposed only on property owners benefited penalty violation of law or acts
is a special assessment rather than a tax deemed injurious
notwithstanding that the statute calls it a tax. The
rule is that an exemption from taxation does not Generally intended to Designed to regulate
include exemption from special assessment. But the raise revenue conduct
power to tax carries with it the power to levy a May be imposed only by May be imposed by the
special assessment. the government government or private
Note: The term "special levy" is the name used in individuals or entities
the present Local Government Code (RA. No. 7160). Cannot be a subject of Can be a subject of set
A province, city, or municipality, or the National set off or compensation off or compensation (see
Government, may impose a special levy on lands Art. 1279, Civil Code)
especially benefited by public works or
improvements financed by it. [Sec. 240, RA 7160]
K. KINDS OF TAXES
(5) Debt (1) As to object
Taxes Debt (a) Personal, Poll or Capitation Tax – tax of a
fixed amount imposed on persons residing
Based on laws Generally based on within a specified territory, whether citizens
contract, express or or not, without regard to their property or the
implied. occupation or business in which they may be
Generally cannot be Assignable engaged (e.g. community (formerly
residence) tax). Taxes of a specified amount
PAGE 16 OF 275
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imposed upon each person performing a
certain act or engaging in a certain business
or profession are not, however, poll taxes.
(71 Am. Jur. 2d 357).
(b) Property Tax – tax imposed on property, real
or personal, in proportion to its value or in
accordance with some other reasonable
method of apportionment (e.g., real estate
tax). The obligation to pay the tax is absolute
and unavoidable and is not based upon the
voluntary action of the person assessed.
(c) Privilege/Excise Tax – any tax which does not
fall within the classification of a poll tax or a
property tax. Thus, it is said that an excise
tax is a charge imposed upon the
performance of an act, the enjoyment of a
privilege, or the engaging in an occupation,
profession, or business. The obligation to pay
the tax is based on the voluntary action of the
person taxed in performing the act or
engaging in the activity which is subject to
the excise. The term ―excise tax‖ is
synonymous with ―privilege tax‖ and the two
are often used interchangeably (e.g., income
tax, value added tax, estate tax, donor‘s tax).
(2) As to burden or incidence
(a) Direct Taxes – taxes which are demanded
from persons who also shoulder them; taxes
for which the taxpayer is directly or primarily
liable, or which he cannot shift to another
(e.g., income tax, estate tax, donor‘s tax,
community tax)
(b) Indirect Taxes – taxes which are demanded
from one person in the expectation and
intention that he shall indemnify himself at
the expense of another, falling finally upon
the ultimate purchaser or consumer; taxes
levied upon transactions or activities before
the articles subject matter thereof, reach the
consumers who ultimately pay for them not
as taxes but as part of the purchase price.
Thus, the person who absorbs or bears the
burden of the tax is other than the one on
whom it is imposed and required by law to
pay the tax. Practically all business taxes are
indirect (e.g., VAT, percentage tax, excise
taxes on specified goods, customs duties).
(3) As to tax rates
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TAXATION 1 TAXATION LAW
(a) Specific Tax – a tax of a fixed amount
imposed by the head or number or by some
other standard of weight or measurement. It
requires no assessment (valuation) other
than the listing or classification of the
objects to be taxed (e.g., taxes on distilled
spirits, wines, and fermented liquors; cigars
and cigarettes)
(b) Ad Valorem Tax – a tax of a fixed proportion
of the value of the property with respect to
which the tax is assessed. It requires the
intervention of assessors or appraisers to
estimate the value of such property before
the amount due from each taxpayer can be
determined. The phrase ―ad valorem‖ means
literally, ―according to value.‖ (e.g., real
estate tax, excise tax on automobiles, non-
essential goods such as jewelry and
perfumes, customs duties (except on
cinematographic films)).
(c) Mixed
(4) As to purpose
(a) General or Fiscal Tax – levied for the general
or ordinary purposes of the Government, i.e.,
to raise revenue for governmental needs (e.g.,
income tax, VAT, and almost all taxes).
(b) Special/Regulatory/Sumptuary Tax – levied
for special purposes, i.e., to achieve some
social or economic ends irrespective of
whether revenue is actually raised or not (e.g.,
protective tariffs or customs duties on
imported goods to enable similar products
manufactured locally to compete with such
imports in the domestic market).
Tariff duties intended mainly as a source of
revenue are relatively low so as not to
discourage imports.
(5) As to scope (or authority imposing the tax)
(a) National – taxes imposed by the national
government (e.g., national internal revenue
taxes, customs duties, and national taxes
imposed by laws).
(b) Municipal or Local – taxes imposed by local
governments (e.g., business taxes that may
be imposed under the Local Government
Code, professional tax).
UP LAW BOC TAXATION 1 TAXATION LAW

(6) As to graduation (4) Citizenship of the taxpayer;

(a) Progressive – The rate of tax increases as the tax
(5) Residence of the taxpayer;
base or bracket increases, e.g., income tax,
estate tax, donor‘s tax. (6) Source of income.
(b) Regressive – The rate of tax decreases as the tax
base or bracket increases. There is no regressive
(b) Situs of Income Tax
tax in the Philippines.
Taxpayer Source of Income
(c) Proportionate – The rate of tax is based on a
fixed percentage of the amount of the property, Citizen-ship Residency Within Without
receipts or other basis to be taxed, e.g., real Phils. Phils.
estate tax, VAT, and other percentage taxes.
Filipino Resident Taxable Taxable
(d) Digressive – A fixed rate is imposed on a certain
amount and diminishes gradually on sums below Filipino Non- Taxable Non-
it. The tax rate in this case is arbitrary because Resident Taxable
the increase in tax rate is not proportionate to Alien Resident Taxable Non-
the increase of tax base. Taxable
Alien Non- Taxable Non-
Regressive/Progressive system of taxation Resident Taxable
A regressive tax must not be confused with the
regressive system of taxation.
(c) Situs of Property Tax
In a society where the majority of the people have
low incomes, regressive taxation system exists when Kind of Property Situs
there are more indirect taxes imposed than direct Real property Where it is located (lex
taxes. Since the low-income sector of the population rei sitae)
as a whole buys more consumption goods on which
the indirect taxes are collected, the burden of Tangible Personal Where property is
indirect taxes rests more on them than on the more property physically located
affluent groups. although the owner
resides in another
A progressive tax is, therefore, also different from a jurisdiction.
progressive system of taxation.
Intangible personal Gen Rule: Domicile of
property (e.g., credits, the owner. Mobilia
L. SITUS OF TAXATION bills receivables, bank sequuntur personam
deposits, bonds, (movables follow the
(a) Meaning: Situs of taxation literally means the promissory notes, person)
place of taxation. The basic rule is that the state mortgage loans,
where the subject to be taxed has a situs may judgments and
rightfully levy and collect the tax; and the situs is corporate stocks) Exceptions:
necessarily in the state which has jurisdiction or
which exercises dominion over the subject in (1) When property has
question. Within the territorial jurisdiction, the acquired a business
taxing authority may determine the situs. situs in another
jurisdiction; or
(2) When the law
Factors that Determine Situs: provides for the situs
(1) Nature of the tax; of the subject of tax
(2) Subject matter of the tax (person, property, act (e.g., Sec 104, NIRC)
or activity);
(3) Possible protection and benefit that may accrue (d) Situs of Excise Tax
both to the government and the taxpayer;
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Kind of Excise Tax Situs doubt as to the legislative intent. (see 51

Am.Jur.368). In such case, the words employed
Income Tax Source of the income, are to be given their ordinary meaning. E.g. Word
nationality or residence ―individual‖ was changed by the law to ―person‖.
of taxpayer (Sec. 23,
This clearly indicates that the tax applies to both
NIRC) natural and juridical persons, unless otherwise
Donor‘s Tax Location of property; expressly provided.
nationality or residence (2) The rule does not apply where the taxpayer
of taxpayer claims exemption from the tax.
Estate Tax Location of property; Tax statutes are to receive a reasonable
nationality or residence construction or interpretation with a view to carrying
of taxpayer out their purpose and intent. They should not be
construed as to permit the taxpayer easily to evade
the payment of tax. (Carbon Steel Co. v. Lewellyn,
(e) Situs of Business Tax 251 U.S. 201). Thus, the good faith of the taxpayer
Kind of Business Tax Situs is not a sufficient justification for exemption from
the payment of surcharges imposed by the law for
VAT Where transaction is failing to pay tax within the period required by law.
made
Sale of Real Property Where the real property
is located M.2. TAX EXEMPTION AND EXCLUSION
Sale of Personal Where the personal Tax exemptions must be shown to exist clearly and
Property property was sold categorically, and supported by clear legal
provisions. [NPC v. Albay, G.R. No. 87479 (1990)]
General Rule: In the construction of tax statutes,
exemptions are not favored and are construed
M. CONSTRUCTION AND strictissimi juris against the taxpayer. [Republic
INTERPRETATION OF Flour Mills v. Comm. & CTA, G.R. No. L-25602
(1970)].
M.1. TAX LAWS
(a) NPC v. Albay [supra]: Tax exemptions must be
General Rule: Tax laws are construed strictly against shown to exist clearly and categorically, and
the government and liberally in favor of the taxpayer. supported by clear legal provisions.
[Manila Railroad Co. v. Coll. of Customs, G.R. No. L-
30264 (1929)]. (b) Floro Cement v. Gorospe [supra]: Claims for an
exemption must be able to point out some
No person or property is subject to taxation unless provision of law creating the right, and cannot be
within the terms or plain import of a taxing statute. allowed to exist upon a mere vague implication
(see72 Am.Jur. 2d 44). or inference.
Taxes, being burdens, they are not to be presumed (c) CIR v. CA [supra]: Refunds are in the nature of
beyond what the statute expressly and clearly exemption, and must be construed strictly
declares. [Coll. v. La Tondena, G.R. No. L-10431 against the grantee/taxpayer.
(1962)]. Thus, a tax payable by ―individuals‖ does
not apply to ―corporations.‖ (d) Comm. v. Kiener Co. Ltd. [G.R. No. L-24754
(1975)]: Taxation is the rule and exemption the
Tax statutes offering rewards are liberally construed exception, and therefore, he who claims
in favor of informers. [Penid v. Virata, G.R. No. L- exemption must be able to justify his claim or
44004 (1983)]. right thereto, by a grant expressed in terms ―too
plain to be mistaken and too categorical to be
misinterpreted.‖
Exceptions:
(1) The rule of strict construction as against the
government is not applicable where the Exceptions:
language of the statute is plain and there is no
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(a) When the law itself expressly provides for a
liberal construction, that is, in case of doubt, it
shall be resolved in favor of exemption; and
(b) When the exemption is in favor of the
government itself or its agencies, or of religious,
charitable, and educational institutions because
the general rule is that they are exempt from tax.
(c) When the exemption is granted under special
circumstances to special classes of persons.
(d) If there is an express mention or if the taxpayer
falls within the purview of the exemption by clear
legislative intent, the rule on strict construction
does not apply. [Comm. v. Arnoldus Carpentry
Shop, Inc., G.R. No. 71122 (1988)].
M.3. TAX RULES AND REGULATIONS
General Rule: The Secretary of Finance, upon
recommendation of the CIR, shall promulgate all
needful rules and regulations for the effective
enforcement of the provisions of the NIRC. [Sec.
244, NIRC]
It is an elementary rule in administrative law that
administrative regulations and policies enacted by
administrative bodies to interpret the law which they
are entrusted to enforce have the force of law and
entitled to great respect. They have in their favor a
presumption of legality [Gonzales v. Land Bank, G.R.
No. 76759 (1990)]
Requisites for validity and effectivity of regulations
(1) Reasonable
(2) Within the authority conferred
(3) Not contrary to law and the Constitution [Art. 7,
NCC]
(4) Must be published
Tax regulations whose purpose is to enforce of
implement existing law must comply with the
following requisites to be effective [RP v. Pilipinas
Shell Petroleum Corp., G.R. No. 173918 (2008)]:
(1) Be published in a newspaper of general
circulation [Art. 2, NCC]; AND
(2) Filed with the UP Law Center Office of the
National Administrative Register (ONAR) [Ch 2,
Book VII, EO 292]
Note: Administrative rules and regulations must
always be in harmony with the provisions of the law.
In case of conflict with the law or the Constitution,
the administrative rules and regulations are null and
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TAXATION 1 TAXATION LAW
void. As a matter of policy, however, courts will
declare a regulation or provision thereof invalid only
when the conflict with the law is clear and
unequivocal.
Administrative interpretations and opinions
The power to interpret the provisions of the Tax Code
and other tax laws is under the exclusive and
original jurisdiction of the Commissioner of Internal
Revenue subject to review by the Secretary of
Finance [Sec. 4, par.1, NIRC].
Revenue regulations are the formal interpretation of
the provisions of the NIRC and other laws by the
Secretary of Finance upon the recommendation of
the Commissioner of Internal Revenue.
General rule: The Commissioner has the sole
authority to issue rulings but he also has the power
to delegate said authority to his subordinates with
the rank equivalent to a division chief or higher.
Exceptions: The Commissioner may not delegate the
following:
(a) The power to recommend the promulgation of
rules and regulations by the Secretary of
Finance;
(b) The power to issue rulings of first impression or
to reverse, revoke, or modify any existing ruling
of the Bureau;
(c) The power to compromise or abate any tax
liability as provided by Sec. 204 and 205 of the
NIRC
Exception to the exception: BUT assessments issued
by RDOs involving (a) Php500,000 or less, and (b)
minor criminal violations as determined by the
Secretary of Finance as recommended by the
Commissioner, may be compromised by a Regional
Evaluation Board (CHAIRMAN: Regional Director;
MEMBERS: Assistant Regional Director, heads of
the Legal, Assessment and Collection Divisions, and
the Revenue District Officer having jurisdiction over
the taxpayer.) [Sec. 7, NIRC].
Decisions of the Supreme Court applying or
interpreting existing tax laws are binding on all
subordinate courts and have the force and effect of
law. As provided for in Article 8 of the Civil Code,
they ―form part of the law of the land‖.
The same is also true with respect to decisions of
the Court of Tax Appeals. However, by the nature of
its jurisdiction, the decisions of this court are still
UP LAW BOC
appealable to the Supreme Court by a petition for
review on certiorari (Rule 45). [Sec. 11, RA 9282]
M.4. PENAL PROVISIONS OF TAX LAWS
Penal provisions of tax laws must be strictly
construed. It is not legitimate to stretch the
language of a rule, however beneficent its intention,
beyond the fair and ordinary meaning of its
language.
A penal statute should be construed strictly against
the State and in favor of the accused. The reason for
this principle is the tenderness of the law for the
rights of individuals and the object is to establish a
certain rule by conformity to which mankind would
be safe, and the discretion of the court limited.
[People v. Purisima, G.R. No. L-42050-66 (1978)].
M.5. NON-RETROACTIVE APPLICATION OF
TAX LAWS TO TAXPAYERS
General rule: Tax laws are prospective in operation.
The reason is that the nature and amount of the tax
could not be foreseen and understood by the
taxpayer at the time the transaction which the law
seeks to tax was completed.
Exception: Tax laws may be applied retroactively
provided it is expressly declared or clearly the
legislative intent. [Lorenzo v. Posadas, supra].
Exception to the exception: a tax law should not be
given retroactive application when it would be so
harsh and oppressive for in such case, the
constitutional limitation of due process would be
violated [Republic v. Fernandez, supra].
N. SOURCES OF TAX LAWS
(a) Constitution of the Philippines
A constitutional provision regarding taxation is
primarily intended to limit and regulate the exercise
of taxation power. The State can exercise the power
to tax even if the Constitution is completely silent
about taxation.
(b) Statutes
The present tax statutes of the Philippines are
embodied in R.A. 8424, which is not the prevailing
National Internal Revenue Code (NIRC) effective
January 1, 1998, which was amended per R.A. 9337
(The VAT Reform Law).
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TAXATION 1 TAXATION LAW
(c) Judicial Decisions
These refer to the decisions for application made
concerning tax issues by the proper courts
exercising judicial authority of competent
jurisdiction. These courts may be the Supreme Court
and the Court of Tax Appeals. Their decisions on tax
laws comprise the greater portion of tax
jurisprudence. They form part of the legal system of
the Philippines.
By the nature of its jurisdiction, the decisions of the
Court of Tax Appeals are still appealable to the
Supreme Court. The decision of the Supreme Court
on any matter is fuanl and executory.
(d) Executive Orders
Executive Orders are regulations issued by the
President or some administrative authority under his
direction for the purpose of interpreting,
implementing, or giving administrative effect to a
provision of the Constitution or of some law or treaty.
(e) Tax Treaties and Conventions
These refer to the treaties or international
agreements with foreign countries regarding tax
enforcement and exemptions. They have the force
and effect of alw.
(f) Revenue Regulations by the Department of
Finance
Revenue Regulations are rules or orders having
force of law issued by executive authority of the
government to ensure uniform application of the tax
law.
In order that administrative regulations may be
considered valid, all of the following requisites must
be complied with:
(1) The regulations must be useful, practical and
necessary for the enforcement of the law;
(2) They must be reasonable in their provisions;
(3) They must not be contrary to law; and
(4) They must be duly published in the Official
Gazette. [Inter-provincial Auto Bus Co. v.
Collector, 52 O.G. No. 2, p. 791; Lim Hoa Ting
v. Central Bank, L-10666, (1958)]
Note: Ruling of the Secretary of Finance are not
binding on the courts because the duty or power of
interpreting laws is primarily a function of the
judicialry.
UP LAW BOC
The Secretary of Finance is vested with authority to
revoke, repeal or abrogate acts or previous rulings of
his predecessors in office because these are not
binding on their successors. [Hilado v. Collector of
Internal Revenue, et al., 100 Phil 295]
(g) BIR Revenue Memorandu Circulars and Bureau
of Customs Memorandum Orders
These are administrative rulings or opinions which
are less general interpretations of tax laws being
issued form time to time by the Commissioner of the
Internal Revenue or Commissioner of the Bureau of
Customs, as the case may be. They are primarily
intended to maintain uniform application of tax laws
within the department or area of authority.
Memoranda have the status of advisory or sort of
information service. For this reason, they can be
reversed anytime.
Note: The Courts generally respect the
interpretations made by the executive officer whose
duty is to enforce the law. However, such
interpretations are not conclusive and shall be
disregarded if found erroneous by the Court. [Molina
v. Rafferty, 37 Phil 545]
(h) BIR Rulings
BIR Rulings are expressed official interpretations of
the tax laws as applied to specific transactions.
Unlike a Revenue Regulation, it is more limited in
application.
BIR Rulings are not the final interpreations of the tax
laws. They are considered the best opinion or
advisory at the moment and are considered sound
law until chagned by the court. [CIR v. Ledesma,
(1970)]
(i) Local Tax Ordinances
These are tax ordinances issued by the province, city,
municipality and baranggay subjct to such
limitations as provided by the Local Government
Code. [Valencia and Roxas]
O. DOCTRINES IN TAXATION
O.1. PROSPECTIVITY OF TAX LAWS
General rule: Tax laws are prospective in operation.
Reason: Nature and amount of the tax under tax
laws enacted after the transaction could not have
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been foreseen and understood by the taxpayer at
the time of the transaction.
Exception: Tax laws may be applied retroactively
provided it is expressly declared or it is clearly the
legislative intent (e.g., increase taxes on income
already earned) except when retroactive application
would be so harsh and oppressive. [Republic v.
Fernandez, G.R. No. L-9141 (1956)]
It is a cardinal rule that laws shall have no
retroactive effect, unless the contrary is provided
(Art. 4, Civil Code). [Hydro Resources v. CA, G.R. No.
80276 (1990)]
The language of the statute must clearly demand or
press that it shall have a retroactive effect. [Lorenzo
v. Posadas, supra]
Exception to the exception:
Collection of interest in tax cases is not penal in
nature; it is but a just compensation to the State.
The constitutional prohibition against ex post facto
laws is not applicable to the collection of interest on
back taxes. [Central Azucarera v. CTA, G.R. No. L-
23236 (1967)]
Non-retroactivity of rulings [Sec. 246, NIRC]
General rule: Rulings do not have retroactive
application if the revocation, modification, or
reversal will be prejudicial to the taxpayer.
Exceptions:
(1) Taxpayer‘s deliberate misstatement or omission
of facts
(2) BIR‘s gathered facts is materially different from
the facts from which the ruling was based on
(3) Taxpayer acted in bad faith
Note: The rule on non-retroactivity of rulings may be
applied only if the parties in the ruling involve the
taxpayer himself/itself. The taxpayer cannot invoke
the rulings granted in favor of the other taxpayers.
O.2. IMPRESCRIPTIBILITY OF TAXES
Unless otherwise provided by law, taxes are
imprescriptible. [CIR v. Ayala Securities Corporation
G.R. No. L-29485 (1980)]
The law on prescription, being a remedial measure,
should be liberally construed in order to afford such
protection. As a corollary, the exceptions to the law
UP LAW BOC
on prescription should perforce be strictly construed.
[Commissioner v. CA, G.R. No. 104171 (1999)]
Prescriptions found in statutes
(1) National Internal Revenue Code - statute of
limitations in the assessment and collection of
taxes therein imposed.
Summary of prescription on assessment and
collection:
Prescription of assessment AND
collection from the:
a. prescribed last day of filing of
returns (even if return was filed
3 YEARS
earlier than the deadline); OR
b. the day when the return was
actually filed if filed later than the
last day of filing [Sec. 203, NIRC]
Prescription of assessment in cases
of:
a. false or fraudulent return with
10 intent to evade tax; OR
YEARS b. failure to file a return [Sec. 222,
NIRC]
From the discovery of the fraud,
falsity, or omission.
Prescription of collection of tax if:
a. assessed within the 3-year and
10-year prescriptive periods
b. assessed within the extended
5 YEARS period agreed upon by the
Commissioner and taxpayer (waiver
of the prescriptive period)
Collected by distraint, levy or by a
proceeding in court. [Sec. 222, NIRC]
Note: The prescriptive period from final liquidation is
three (3) years, except in cases of: (1) tentative
liquidation; (2) payment under protest; (3) fraud;
and (4) compliance audit.
(2) Customs Modernization and Tariffs Act (CMTA) –
repealed the Tariff and Customs Code (TCC). Under
Sec. 430, it provides that ―[i]n the absence of fraud
and when the goods have been finally assessed and
released, the assessment shall be conclusive upon
all parties three (3) years from the date of final
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payment or duties, or upon completion of the post-
clearance audit. (Note: The same rule was provided
under Sec. 1603 of the TCC, but it was worded
differently).
(3) Local Government Code – prescribes
prescriptive periods for the assessment from the
date they became due (5 years) and collection (5
years) of taxes (including Real Property Taxes) from
the date of assessment by administrative or judicial
action. The prescriptive period is 3 years if the tax
accrued before the effectivity of the Local
Government Code. [Sec. 194 and 270, RA 7160 or
the LGC]. In case of fraud or intent to evade the
payment of taxes, fees, or charges, the same may be
assessed from discovery of the fraud or intent to
evade payment (10 years).
The prescriptive period is tolled when:
(a) The treasurer is legally prevented from
making the assessment or collection
(b) The taxpayer requests for a reinvestigation
and executes a waiver in writing before
expiration of the period within which to
assess or collect; and
(c) The taxpayer is out of the country or
otherwise cannot be located.
O.3. DOUBLE TAXATION
Means taxing twice the same taxpayer for the same
tax period upon the same thing or activity, when it
should be taxed once, for the same purpose and
with the same kind of character of tax.
(a) Strict sense (Direct Duplicate Taxation)
(1) The same property must be taxed twice when it
should be taxed once;
(2) Both taxes must be imposed on the same
property or subject matter;
(3) For the same purpose;
(4) By the same State, Government, or taxing
authority;
(5) Within the same territory, jurisdiction or taxing
district;
(6) During the same taxing period; and
(7) Of the same kind or character of tax.
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(b) Broad sense (Indirect Duplicate Taxation)
There is double taxation in the broad sense or there
is indirect duplicate taxation if any of the elements
for direct duplicate taxation is absent.
It extends to all cases in which there is a burden of
two or more pecuniary impositions. For example, a
tax upon the same property imposed by two different
states.
Double taxation, standing alone and not being
forbidden by our fundamental law, is not a valid
defense against the legality of a tax measure [Pepsi
Cola v. Mun. of Tanauan, G.R. No. L-31156 (1976)].
But from it might emanate such defenses against
taxation as oppressiveness and inequality of the tax.
Constitutionality of double taxation
There is no constitutional prohibition against double
taxation in the Philippines. It is something not
favored, but is permissible, provided some other
constitutional requirement is not thereby violated.
[Villanueva v. City of Iloilo, G.R. No. L-26521
(1968)]
If the tax law follows the constitutional rule on
uniformity, there can be no valid objection to taxing
the same income, business or property twice. [China
Banking Corp. v. CA, G.R. No. 146749 (2003)]
Double taxation in its narrow sense is undoubtedly
unconstitutional but that in the broader sense is not
necessarily so. (De Leon, citing 26 R.C.L 264-265).
Where double taxation (in its narrow sense) occurs,
the taxpayer may seek relief under the uniformity
rule or the equal protection guarantee. (De Leon,
citing 84 C.J.S.138).
Modes of eliminating double taxation
(a) Allowing reciprocal exemption either by law or
by treaty;
(b) Allowance of tax credit for foreign taxes paid;
(c) Allowance of deductions such as for foreign
taxes paid, and vanishing deductions in estate
tax; OR
(d) Reduction of Philippine tax rate.
O.4. POWER TO TAX INVOLVES POWER TO
DESTROY
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According to Chief Justice John Marshall, "the
power to tax involves the power to destroy."
[McCulloch vs. Maryland, 17 U.S. [4 Wheat.] 316-
428, 4L. ed. 579.] To say, however, that the power
to tax is the power to destroy is to describe not the
purposes for which the taxing power may be used
but the extent to which it may be employed in order
to raise revenues. (see1 Cooley 178.) Thus, even if a
tax should destroy a business, such fact alone could
not invalidate the tax. (84 C.J.S. 46.)
Incidentally, our Constitution mandates that "the
rule of taxation shall be uniform and equitable." In a
case, our Supreme Court said: "The power of
taxation is sometimes called also the power to
destroy. Therefore, it should be exercised with
caution to minimize injury to the proprietary rights of
the taxpayer. It must be exercised fairly, equally and
uniformly, lest the tax collector kills the 'hen that
lays the golden eggs.' And in order to maintain the
general public's trust and confidence in the
government, this power must be used justly and not
treacherously." [Roxas v. Court of Tax Appeals, 23
SCRA 276, App120, 1968; Philex Mining Corp. vs.
Comm. of Internal Revenue, 97 SCAD 777,294
SCRA 687 (Aug. 28, 1998)].
Note: Justice Holmes once said: ―The power to ta is
not the power to destroy while this Court (the
Supreme Court) sits.‖ The two limitations on the
power of taxation are the inherent and constitutional
limitations which are intended to prevent abuse on
the exercise of the otherwise plenary and unlimited
power. It is the Court‘s role to see to it that the
exercise of the power does not transgress these
limitations.
O.5. ESCAPE FROM TAXATION
a. Shifting of tax burden
Shifting - the transfer of the burden of a tax by the
original payer or the one on whom the tax was
assessed or imposed to someone else. What is
transferred is not the payment of the tax but the
burden of the tax. All indirect taxes may be shifted;
direct taxes cannot be shifted.
(i) Ways of shifting the tax burden
(1) Forward shifting - When the burden of the tax
is transferred from a factor of production
through the factors of distribution until it
finally settles on the ultimate purchaser or
consumer. Examples: VAT, percentage tax.
(2) Backward shifting - When the burden of the
tax is transferred from the consumer or
UP LAW BOC
purchaser through the factors of distribution
to the factor of production. Example:
Consumer or purchaser may shift tax imposed
on him to retailer by purchasing only after the
price is reduced, and from the latter to the
wholesaler, and finally to the manufacturer or
producer.
(3) Onward shifting - When the tax is shifted two
or more times either forward or backward.
(ii) Taxes that can be shifted
(a) Value-added Tax
(b) Percentage Tax
(c) Excise Tax
(iii) Meaning of impact and incidence of taxation
Impact of taxation is the point on which a tax is
originally imposed. In so far as the law is concerned,
the taxpayer, the subject of tax, is the person who
must pay the tax to the government.
Incidence of taxation is that point on which the tax
burden finally rests or settles down. It takes place
when shifting has been effected from the statutory
taxpayer to another.
Relationship between Impact, Shifting, and
Incidence of a Tax
The impact is the initial phenomenon, the shifting is
the intermediate process, and the incidence is the
result. Impact is the imposition of the tax; shifting is
the transfer of the tax; while incidence is the setting
or coming to rest of the tax. (e.g. impact in VAT is on
the producer who shifts the burden to the customer
who finally bears the incidence of the tax)
b. Tax avoidance (Tax Minimization)
The exploitation by the taxpayer of legally
permissible alternative tax rates or methods of
assessing taxable property or income in order to
avoid or reduce tax liability. It is politely called ―tax
minimization‖ and is NOT punishable by law.
Example: A person refrains from engaging in some
activity or enjoying some privilege in order to avoid
the incidental taxation or to lower his tax bracket for
a taxable year.
c. Tax evasion (Tax Dodging)
Tax Evasion - is the use by the taxpayer of illegal or
fraudulent means to defeat or lessen the payment of
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a tax. It is also known as ―tax dodging.‖ It is
punishable by law.
Example: Deliberate failure to report a taxable
income or property; deliberate reduction of income
that has been received; overstatement of expenses.
Elements of Tax Evasion
(1) The end to be achieved. Example: the payment
of less than that known by the taxpayer to be
legally due, or in paying no tax when such is due.
(2) An accompanying state of mind described as
being ―evil,‖ ―in bad faith,‖ ―willful‖ or
―deliberate and not accidental.‖
(3) A course of action (or failure of action) which is
unlawful.
Since fraud is a state of mind, it need not be proved
by direct evidence but may be inferred from the
circumstances of the case. Thus:
(1) The failure of the taxpayer to declare for taxation
purposes his true and actual income derived
from his business for two consecutive years has
been held as an indication of his fraudulent
intent to cheat the government of its due taxes.
[Republic v. Gonzales, G.R. No. L-17962 (1965)]
(2) The substantial underdeclaration of income in
the income tax returns of the taxpayer for four (4)
consecutive years coupled with his intentional
overstatement of deductions justifies the finding
of fraud. [Perez v. CTA and Collector, G.R. No. L-
10507 (1958)].
Other matter(s):
Transformation – method of escape in taxation
whereby the manufacturer or producer upon whom
the tax has been imposed pays the tax and
endeavors to recoup himself by improving his
process of production thereby turning out his units
of products at a lower cost. The taxpayer escapes by
a transformation of the tax into a gain through the
medium of production.
O.6. EXEMPTION FROM TAXATION
(a) Meaning of exemption from taxation
The grant of immunity to particular persons or
corporations or to person or corporations of a
particular class from a tax which persons and
corporations generally within the same state or
UP LAW BOC
taxing district are obliged to pay. It is an immunity or
privilege; it is freedom from a financial charge or
burden to which others are subjected. It is strictly
construed against the taxpayer.
Taxation is the rule; exemption is the exception. He
who claims exemption must be able to justify his
claim or right thereto, by a grant expressed in terms
―too plain to be mistaken and too categorical to be
misinterpreted.‖ If not expressly mentioned in the
law, it must at least be within its purview by clear
legislative intent.
Grounds for Tax Exemption
(1) It may be based on contract.
(2) It may be based on some ground of public policy.
(3) It may be created in a treaty on grounds of
reciprocity or to lessen the rigors of international
or multiple taxation.
But equity is NOT a ground for tax exemption.
Exemption from tax is allowable only if there is a
clear provision. While equity cannot be used as a
basis or justification for tax exemption, a law may
validly authorize the condonation of taxes on
equitable considerations.
(b) Nature of tax exemption
(1) Mere personal privilege - cannot be assigned or
transferred without the consent of the
legislature. The legislative consent to the transfer
may be given either in the original act granting
the exemption or in a subsequent law
(2) General rule: revocable by the government.
Exception: if founded on a contract which is
protected from impairment. But the contract
must contain the essential elements of other
contracts. An exemption provided for in a
franchise, however, may be repealed or
amended pursuant to the Constitution [Art. XII,
Sec. 11, 1987 Constitution]. A legislative
franchise is a mere privilege.
(3) Implies a waiver on the part of the government
of its right to collect taxes due to it, and, in this
sense, is prejudicial thereto. Hence, it exists only
by virtue of an express grant and must be strictly
construed.
(4) Not necessarily discriminatory, provided it has
reasonable foundation or rational basis. Where,
however, no valid distinction exists, the
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exemption may be challenged as violative of the
equal protection guarantee or the uniformity rule.
(c) Kinds of tax exemption
(i) Express or Affirmative - either entirely or in part,
may be made by provisions of the Constitution,
statutes, treaties, ordinances, franchises, or
contracts.
(ii) Implied or Exemption by Omission - when a tax is
levied on certain classes without mentioning the
other classes. Every tax statute, in a very real
sense, makes exemptions since all those not
mentioned are deemed exempted. The omission
may be either accidental or intentional.
Exemptions are not presumed, but when public
property is involved, exemption is the rule, and
taxation is the exception.
(iii) Contractual - The legislature of a State may, in
the absence of special restrictions in its
constitution, make a valid contract with a
corporation in respect to taxation, and that such
contract can be enforced against the State at the
instance of the corporation [Casanovas v. Hord,
G.R. No. 3473 (1907)]. In the real sense of the
term and where the non-impairment clause of
the Constitution can rightly be invoked, this
includes those agreed to by the taxing authority
in contracts, such as those contained in
government bonds or debentures, lawfully
entered into by them under enabling laws in
which the government, acting in its private
capacity, sheds its cloak of authority and waives
its governmental immunity.
These contractual tax exemptions, however, are
not to be confused with tax exemptions granted
under franchises. A franchise partakes the
nature of a grant which is beyond the purview of
the non-impairment clause of the Constitution.
[Manila Electric Company v. Province of Laguna,
G.R. No. 131359 (1999)]
(d) Rationale of Tax Exemption
Such exemption will benefit the body of the people
and not particular individuals or private interest and
that the public benefit is sufficient to offset the
monetary loss entailed in the grant of the
exemption.
Principles of Tax Exemption:
(1) As the power of taxation is a high prerogative of
sovereignty, the relinquishment is never presumed
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and any reduction or diminution thereof with respect
to its mode or its rate, must be strictly construed,
and the same must be couched in clear and
unmistakable terms in order that it may be applied.
[Floro Cement v. Gorospe, G.R. No. L-46787 (1991)]
(2) When granted, they are strictly construed against
the taxpayer [Luzon Stevedoring Co. v. CTA, G.R. No.
L-30232 (1988)]
(3) Tax exemptions are strictly construed against the
taxpayer, they being highly disfavored and may
almost be said ―to be odious to the law.‖ [Manila
Electric Company v. Vera, G.R. No. L-29987 (1975)]
(e) Revocation of Tax Exemption
General Rule: revocable by the government.
Exception: Contractual tax exemptions may not be
unilaterally so revoked by the taxing authority
without thereby violating the non-impairment clause
of the Constitution.
O.7. DOCTRINE OF EQUITABLE
RECOUPMENT
A claim for refund barred by prescription may be
allowed to offset unsettled tax liabilities. The
doctrine finds NO application in this jurisdiction.
O.8. COMPENSATION AND SET-OFF
General rule: Internal revenue taxes cannot be the
subject of set-off or compensation [Republic v.
Mambulao Lumber, G.R. No. L-17725 (1962)]
Reasons:
(1) This would adversely affect the government
revenue system [Philex Mining v. CA, G.R. No.
125704 (1998)].
(2) Government and the taxpayer are not creditors
and debtors of each other. The payment of taxes
is not a contractual obligation but arises out of a
duty to pay. [Republic v. Mambulao Lumber,
supra]
Exception: If the claims against the government
have been recognized and an amount has already
been appropriated for that purpose. Where both
claims have already become (1) due and (2)
demandable as well as (3) fully liquidated,
compensation takes place by operation of law under
Art. 1200 in relation to Articles 1279 and 1290 of
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TAXATION 1 TAXATION LAW
the NCC, and both debts are extinguished to the
concurrent amount. [Domingo v. Garlitos, G.R. No.
L-18994 (1963)]
O.9. COMPROMISE AND TAX AMNESTY
COMPROMISE
(a) A contract whereby the parties, by making
reciprocal concessions avoid litigation or put an
end to one already commenced. (Art. 2028, Civil
Code). It involves a reduction of the taxpayer‘s
liability.
(b) Requisites of a tax compromise:
(1) The taxpayer must have a tax liability.
(2) There must be an offer (by the taxpayer or
Commissioner) of an amount to be paid by
the taxpayer.
(3) There must be acceptance (by the
Commissioner or the taxpayer, as the case
may be) of the offer in settlement of the
original claim.
TAX AMNESTY
(a) Definition
A tax amnesty partakes of an absolute forgiveness
or waiver by the Government of its right to collect
what otherwise would be due it, and in this sense,
prejudicial thereto, particularly to give tax evaders,
who wish to relent and are willing to reform a chance
to do so and become a part of the new society with a
clean slate. [Republic v. IAC, G.R. No. L-69344
(1991)]
A tax amnesty, much like a tax exemption, is never
favored nor presumed in law. If granted, the terms of
the amnesty, like that of a tax exemption, must be
construed strictly against the taxpayer and liberally
in favor of the taxing authority. The State cannot
strip itself of the most essential power of taxation by
doubtful words. He who claims an exemption (or an
amnesty) from the common burden must justify his
claim by the clearest grant of organic or state law. It
cannot be allowed to exist upon a vague implication.
If a doubt arises as to the intent of the legislature,
that doubt must be resolved in favor of the state.
[CIR v. Marubeni Corp., G.R. No. 137377 (2001)].
(b) Amnesty distinguished from tax exemption
Tax amnesty is immunity from all criminal and civil
obligations arising from non-payment of taxes. It is a
UP LAW BOC
general pardon given to all taxpayers. It applies to
past tax periods, hence of retroactive application.
[People v. Castañeda, G.R. No. L-46881 (1988)]
Tax exemption is immunity from all civil liability only.
It is an immunity or privilege, a freedom from a
charge or burden of which others are subjected.
[Greenfield v. Meer, C.A. No.-156 (1946)]. It is
generally prospective in application (Dimaampao,
2005, p. 111).
O.10. TAXPAYER’S SUIT
a. Nature and Concept
Taxpayer‘s suit – refers to a case where the act
complained of directly involves the illegal
disbursement of public funds derived from taxation.
[Kilosbayan v. Guingona, Jr. (1994)]
b. As distinguished from a citizen‘s suit
The plaintiff in a taxpayer's suit is in a different
category from the plaintiff in a citizen's suit. In the
former, the plaintiff is affected by the expenditure of
public funds, while in the latter, he is but the mere
instrument of the public concern. [De Castro v.
Judicial and Bar Council (2010)]
c. Requisites of a taxpayer‘s suit challenging the
constitutionality of a tax measure or act of a taxing
authority; concept of locus standi, doctrine of
transcendental importance and ripeness for judicial
determination
(1) Concept of locus standi as applied in taxation
The doctrine of locus standi is the right of
appearance in a court of justice. The doctrine
requires a litigant to have a material interest in the
outcome of a case. In private suits, locus standi
requires a litigant to be a "real party in interest,"
which is defined as "the party who stands to be
benefited or injured by the judgment in the suit or
the party entitled to the avails of the suit."
In public suits, this Court recognizes the difficulty of
applying the doctrine especially when plaintiff
asserts a public right on behalf of the general public
because of conflicting public policy issues. On one
end, there is the right of the ordinary citizen to
petition the courts to be freed from unlawful
government intrusion and illegal official action. At
the other end, there is the public policy precluding
excessive judicial interference in official acts, which
may unnecessarily hinder the delivery of basic
public services.
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TAXATION 1 TAXATION LAW
The Court has adopted the "direct injury test" to
determine locus standi in public suits. In People v.
Vera, it was held that a person who impugns the
validity of a statute must have "a personal and
substantial interest in the case such that he has
sustained, or will sustain direct injury as a result."
the "direct injury test" in public suits is similar to
the "real party in interest" rule for private suits
under section 2, Rule 3 of the 1997 Rules of Civil
Procedure. [Planter‘s Products, Inc. v. Fertiphil
Corporation, G.R. no. 166006, (March 14, 2008)]
As applied to taxation:
It is well-stated that the validity of a statute may be
contested only by one who will sustain a direct injury
in consequence of its enforcement. Yet, there are
many decisions nullifying, at the instance of
taxpayers, laws providing for the disbursement of
public funds, upon the theory that "the expenditure
of public funds by an officer of the state for the
purpose of administering an unconstitutional act
constitutes a misapplication of such funds," which
may be enjoined at the request of a taxpayer.
[Pascual v. Secretary of Public Works (1960)]
A taxpayer is allowed to sue where there is a claim
that public funds are illegally disbursed, or that the
public money is being deflected to any improper
purpose, or that there is wastage of public funds
through the enforcement of an invalid or
unconstitutional law. A person suing as a taxpayer,
however, must show that the act complained of
directly involves the illegal disbursement of public
funds derived from taxation. He must also prove that
he has sufficient interest in preventing the illegal
expenditure of money raised by taxation and that he
will sustain a direct injury because of the
enforcement of the questioned statute or contract.
In other words, for a taxpayer‘s suit to prosper, two
requisites must be met:
(1) public funds derived from taxation are disbursed
by a political subdivision or instrumentality and in
doing so, a law is violated or some irregularity is
committed and
(2) the petitioner is directly affected by the alleged
act. [Mamba v. Lara, G.R. no. 165109, (Dec. 14,
2009)]
(2) Doctrine of transcendental importance
Recognizing that a strict application of the "direct
injury" test may hamper public interest, this court
relaxed the requirement in cases of "transcendental
importance" or with "far reaching implications."
UP LAW BOC
being a mere procedural technicality, it has also
been held that locus standi may be waived in the
public interest. [Ibid]
Planters Products, Inc. v. Fertiphil Corp.: even
assuming arguendo that there is no direct injury, We
find that the liberal policy consistently adopted by
this court on locus standi must apply. The issues
raised by Fertiphil are of paramount public
importance. It involves not only the constitutionality
of a tax law but, more importantly, the use of taxes
for public purpose. Former President Marcos issued
LOI no. 1465 with the intention of rehabilitating an
ailing private company. This is clear from the text of
the LOI. PPI is expressly named in the LOI as the
direct beneficiary of the levy. Worse, the levy was
made dependent and conditional upon ppi
becoming financially viable. The LOI provided that
"the capital contribution shall be collected until
adequate capital is raised to make PPI viable."
The constitutionality of the levy is already in doubt
on a plain reading of the statute. It is our
constitutional duty to squarely resolve the issue as
the final arbiter of all justiciable controversies. The
doctrine of standing, being a mere procedural
technicality, should be waived, if at all, to
adequately thresh out an important constitutional
issue.
(3) Ripeness for judicial determination
―Ripeness for judicial determination‖ means that
litigation is inevitable or there is no adequate relief
available in any other form or proceeding.
CJH Development Corp. V. BIR (2008): However, CJH
is not left without recourse. The tariff and customs
code provides for the administrative and judicial
remedies available to a taxpayer who is minded to
contest an assessment, subject of course to certain
reglementary periods. The TCC provides that a
protest can be raised provided that payment first be
made of the amount due. The decision of the
Collector can be reviewed by the Commissioner of
Customs who can approve, modify or reverse the
decision or action of the Collector. If the party is not
satisfied with the ruling of the Commissioner, he
may file the necessary appeal to the Court of Tax
Appeals. Afterwards, the decision of the Court of Tax
Appeals can be appealed to this Court.
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TAXATION 1 TAXATION LAW
II. National Taxation
A. ORGANIZATION AND FUNCTIONS OF
THE BUREAU OF INTERNAL REVENUE
A.1. RULE-MAKING AUTHORITY OF THE
SECRETARY OF FINANCE
a. Authority of the Secretary of Finance to
promulgate rules and regulations (Sec. 244, NIRC)
The Secretary of Finance, upon recommendation of
the CIR, shall promulgate all needful rules and
regulations for effective enforcement of the
provisions of the Code.
b. Specific provisions to be contained in rules and
regulations (Sec. 245, NIRC)
(a) The time and manner in which Revenue

Regional Director shall canvass their respective
Revenue Regions for the purpose of discovering
persons and property liable to national internal
revenue taxes, and the manner in which their lists
and records of taxable persons and taxable objects
shall be made and kept; 

(b) The forms of labels, brands or marks to be
required on goods subject to an excise tax, and the
manner in which the labelling, branding or marking
shall be effected; 

(c) The conditions under which and the manner in
which goods intended for export, which if not
exported would be subject to an excise tax, shall be
labelled, branded or marked;
(d) The conditions to be observed by revenue
officers respecting the institutions and conduct of
legal actions and proceedings; 

(e) The conditions under which goods intended for
storage in bonded warehouses shall be conveyed
thither, their manner of storage and the method of
keeping the entries and records in connection
therewith, also the books to be kept by Revenue
Inspectors and the reports to be made by them in
connection with their supervision of such houses; 

(f) The conditions under which denatured alcohol
may be removed and dealt in, the character and
quantity of the denaturing material to be used, the
manner in which the process of denaturing shall be
effected, so as to render the alcohol suitably
denatured and unfit for oral intake, the bonds to be
UP LAW BOC
given, the books and records to be kept, the entries
to be made therein, the reports to be made to the
CIR, and the signs to be displayed in the business
ort by the person for whom such denaturing is done
or by whom, such alcohol is dealt in; 
 comes earlier:
(g) 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 of the same, the manner in which the
proper books, records, invoices and other papers
shall be kept and entries therein made by the person
subject to the tax, as well as the manner in which
licenses and stamps shall be gathered up and
returned after serving their purposes;
(h) The conditions to be observed by revenue
officers respecting the enforcement of Title III
imposing a tax on estate of a decedent, and other
transfers mortis causa, as well as on gifts and such
other rules and regulations which the CIR may
consider suitable for the enforcement of the said
Title III; 
 with annual income tax paid or payable of at least
(i) The manner in which tax returns, information and
reports shall be prepared and reported and the tax
collected and paid, as well as the conditions under
which evidence of payment shall be furnished the
taxpayer, and the preparation and publication of tax
statistics;
(j) The manner in which internal revenue taxes, such
as income tax, including withholding tax, estate and
donor's taxes, value-added tax, other percentage
taxes, excise taxes and documentary stamp taxes
shall be paid through the collection officers of the
Bureau of Internal Revenue or through duly
authorized agent banks which are hereby deputized
to receive payments of such taxes and the returns,
papers and statements that may be filed by the
taxpayers in connection with the payment of the tax:
Provided, however, That notwithstanding the other
provisions of this Code prescribing the place of filing
of returns and payment of taxes, the CIR may, by
rules and regulations, require that the tax returns,
papers and statements that may be filed by the
taxpayers in connection with the payment of the tax.
Provided, however, That notwithstanding the other
provisions of this Code prescribing the place of filing
of returns and payment of taxes, the CIR may, by
rules and regulations require that the tax returns,
papers and statements and taxes of large taxpayers
be filed and paid, respectively, through collection
officers or through duly authorized agent banks:
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TAXATION 1 TAXATION LAW
Provided, further, That the CIR can exercise this
power within six (6) years from the approval of
Republic Act No. 7646 or the completion of its
comprehensive computerization program, whichever
Provided, finally, That separate venues for the
Luzon, Visayas and Mindanao areas may be
designated for the filing of tax returns and payment
of taxes by said large taxpayers.
For the purpose of this Section, 'large taxpayer'
means a taxpayer who satisfies any of the following
criteria:
(1) Value-Added Tax (VAT) - Business establishment
with VAT paid or payable of at least P100,000 for
any quarter of the preceding taxable year;
(2) Excise tax - Business establishment 
with
excise tax paid or payable of at least P1,000,000
for the preceding taxable year; 

(3) Corporate Income Tax - Business establishment
P1,000,000 for the preceding taxable year; and 

(4) Withholding tax - Business establishment with
withholding tax payment or remittance of at least
P1,000,000 for the preceding taxable year. 

Provided, however, That the Secretary of Finance,
upon recommendation of the CIR, may modify or
add to the above criteria for determining a large
taxpayer after considering such factors as inflation,
volume of business, wage and employment levels,
and similar economic factors.
The penalties prescribed under Section 248 shall be
imposed on any violation of the rules and
regulations issued by the Secretary of Finance, upon
recommendation of the CIR, prescribing the place of
filing of returns and payments of taxes by large
taxpayers.
A.2. JURISDICTION, POWER AND
FUNCTIONS OF THE COMMISSIONER OF
INTERNAL REVENUE
a. Powers and duties of the Bureau of Internal
Revenue (Sec. 2, NIRC)
(1) To assess and collect national internal taxes,
fees, and charges;
(2) To enforce all forfeitures, penalties and fines
connected therewith;
UP LAW BOC
(3) To execute judgment in all cases decided in its
favor by the CTA and the ordinary courts; and
(4) To effect and administer the supervisory and
police powers conferred upon it by the Tax Code or
other special laws.
b. Power of the Commissioner to interpret tax laws
and to decide tax cases
(1) Shall be under the exclusive and original
jurisdiction of the CIR, subject to review by the
Secretary of Finance. (Sec. 4, NIRC)
(2) A ruling by the BIR Commissioner shall be
presumed valid unless modified, reversed or
superseded by the Secretary of Finance. 
 Income tax is generally classified as an excise tax. It
(3) A taxpayer who receives an adverse ruling from
the CIR may, within thirty (30) days from the date of
receipt of such ruling, seek its review by the
Secretary of Finance, either by himself/itself or
though his/its duly authorized representative. 
 General Principles
(4) A reversal or modification of the BIR ruling shall
terminate its effectivity upon 
the receipt by the
taxpayer or the BIR of written notice of reversal or
modification, whichever came earlier.
**The Secretary of Finance may now also review the
rulings MOTU PROPRIO. (DOF ORDER 7-02)
c. Non-retroactivity of rulings (Sec. 246, NIRC)
General Rule: No retroactive application if the
revocation, modification or reversal of rules and
regulations, rulings or circulars will be prejudicial to
the taxpayers.
Exceptions:
(a) Where the taxpayer deliberately misstates or
omits material facts from his return or any document
required of him by the BIR;
(b) Where the facts subsequently gathered 
by the
BIR are materially different from 
the facts on
which the ruling is based; or 
 Rafferty & Concepcion, G.R. No. L-12287 (1918)].
(c) Where the taxpayer acted in bad faith. 

B. NATIONAL INTERNAL REVENUE
CODE (NIRC) OF 1997, AS AMENDED
B.1. INCOME TAXATION
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TAXATION 1 TAXATION LAW
a. DEFINITION, NATURE AND GENERAL PRINCIPLES
Definition
Income Tax is defined as a tax on all yearly profits
arising from property, professions, trades, or offices,
or as a tax on the person‘s income, emoluments,
profits and the like [Fisher v. Trinidad, G.R. No. L-
2118643 (1924)].
It may be succinctly defined as a tax on income,
whether gross or net, realized in one taxable year.
Nature
is not levied upon persons, property, funds or profits
but upon the right of a person to receive income or
profits.
In the Philippines, income tax is imposed on the net
income of citizens, resident aliens, domestic
corporations, and nonresident aliens and foreign
corporations engaged in trade or business within the
Philippines [Sec. 24 (A), Sec. 25 (A), Sec. 27 (A),
Sec. 28 (A), NIRC]. It is also imposed on the gross
income of nonresident aliens and foreign
corporations not doing business in the Philippines
[Sec. 25 (B), (C), (D), Sec. 28 (B), NIRC]. It is further
imposed as a final tax on certain passive income
(interests, royalties, prizes, and other winnings),
cash and property dividends, capital gains from the
sale of domestic shares of stock and real property
classified as capital assets located in the
Philippines (Sec. 24 (B), Sec. 25 (A) (2), (3), Sec. 27
(D), Sec. 28 (A), NIRC).
Income Tax Law aims to mitigate the evils arising
from the inequalities of wealth by a progressive
scheme of taxation which places the burden of
taxation on those best able to pay [Madrigal v.
a.1. Income Tax Systems
(a) Global Tax System
Under a global tax system, it did not matter whether
the income received by the taxpayer is classified as
compensation income, business or professional
income, passive investment income, capital gain, or
other income. All items of gross income, deductions,
UP LAW BOC
and personal and additional exemptions, if any, are
reported in one income tax return, and one set of tax
rates are applied on the tax base.
(b) Schedular Tax System
Different types of incomes are subject to different
sets of graduated or flat income tax rates. The
applicable tax rate(s) will depend on the
classification of the taxable income and the basis
could be gross income or net income. Separate
income tax returns (or other types of return
applicable) are filed by the recipient of income for
the particular types of income received.
(c) Semi-schedular or Semi-global Tax System
All compensation income, business or professional
income, capital gain and passive income not subject
to final tax, and other income are added together to
arrive at the gross income, and after deducting the
sum of allowable deductions, the taxable income is
subjected to one set of graduated tax rates or
normal corporate income tax. With respect to such
income the computation is global.
For those other income not mentioned above, they
remain subject to different sets of tax rates and
covered by different returns.
Note: The Philippines, under EO 37 (1986) and RA
8424 (1998), follows a semi-schedular and semi-
global tax system.
a.2. Features of the Philippine Income Tax Law
(1) Direct Tax – The tax burden is borne by the
income recipient upon whom the tax is imposed.
(2) Progressive – The tax rate increases as the tax
base increases. It is founded on the ability to pay
principle and is consistent with Sec. 28, Art. VI,
1987 Constitution.
(3) Comprehensive – The Philippines has adopted
the most comprehensive system of imposing income
tax by adopting the citizenship principle, the
residence principle, and the source principle. Any of
the three principles is enough to justify the
imposition of income tax on the income of a resident
citizen and a domestic corporation that are taxed on
a worldwide income.
(4) Semi-Schedular or Semi-Global Tax System –
The Philippines follows the semi-schedular or semi-
PAGE 32 OF 275
TAXATION 1 TAXATION LAW
global system of income taxation, although certain
passive investment incomes and capital gains from
sale of capital assets (namely: (a) shares of stock of
domestic corporations, and (b) real property) are
subject to final taxes at preferential tax rates.
a.3. Criteria in Imposing Philippine Income Tax
(1) Citizenship or Nationality Principle
A citizen of the Philippines is subject to Philippine
income tax:
(a) On his worldwide income, if he resides in the
Philippines; or
(b) Only on his income from sources within the
Philippines, if he qualifies as a nonresident
citizen.
(b) Residence Principle
A resident alien is liable to pay Philippine income
tax on his income from sources within the
Philippines but is exempt from tax on his income
from sources outside the Philippines.
(c) Source of Income Principle
An alien is subject to Philippine income tax because
he derives income from sources within the
Philippines. Thus, a non-resident alien or non-
resident foreign corporation is liable to pay
Philippine income tax on income from sources
within the Philippines, such as dividend interest,
rent, or royalty, despite the fact that he has not set
foot in the Philippines.
The income tax law adopts the most comprehensive
tax situs of nationality and residence of the taxpayer
and of the generally accepted and internationally
recognized income tax base [Tan v. De Rosario, G.R.
No. 109289 (1994)]. Resident citizens and
domestic corporations are subjected to income tax
liability on their income from all sources within and
without the Philippines. The law adopts the source
rule with respect to income received by taxpayers
other than resident citizens and domestic
corporations.
a.4. Types of Philippine Income Tax
(1) Graduated income tax on individuals
(2) Normal corporate income tax on corporations
UP LAW BOC TAXATION 1 TAXATION LAW

(3) Minimum corporate income tax on corporations iv. When the taxpayer dies.
(4) Special income tax on certain corporations "Taxable year" means the calendar year, or the
fiscal year ending during such calendar year, upon
(5) Capital gains tax on sale or exchange of shares
the basis of which the net income is computed
of stock of a domestic corporation classified as
under Title II (Tax on Income).
capital assets
Taxable year includes, in the case of return made for
(6) Capital gains tax on sale or exchange of real
a fractional part of a year under the provisions of
property classified as capital asset
Title II, the period for which such return is made
(7) Final withholding tax on certain passive [Sec. 22 (P), NIRC].
investment income paid to residents
(8) Final withholding tax on income payments
a.6. Kinds of Taxpayers
made to non-residents
(9) Fringe benefits tax on fringe benefits of
Taxpayer – any person subject to tax imposed by
supervisory or managerial employees
Title II of the Tax Code [Sec. 22(N), NIRC].
(10) Branch profit remittance tax
Person – means an individual, a trust, estate or
(11) Tax on improperly accumulated earnings of corporation [Sec. 22(A), NIRC].
corporations
For income tax purposes, taxpayers are classified
generally as follows:
a.5. Taxable Period (1) Individuals;
The accounting periods used in determining the (2) Corporations ;
taxable income of taxpayers are:
(3) Partnerships (Ordinary and General Professional
(1) Calendar Year - Accounting period of 12 months Partnerships);
ending on the last day of December. Instances
(4) Estates and Trusts;
when the Calendar Year is used for the
computation of income: (5) Co-ownerships
i. If the taxpayer's annual accounting period
is other than a fiscal year; or
ii. If the taxpayer has no annual accounting
period; or
iii. If the taxpayer does not keep books of
accounts; or
iv. If the taxpayer is an individual [Sec. 43,
NIRC].
(2) Fiscal Year - Accounting period of 12 months
ending on the last day of any month other than
December [Sec. 22(Q), NIRC].
(3) Short Period - Accounting period which starts
after the first month of the tax year or ends
before the last month of the tax year (less than
12 months). Instances whereby short accounting
period arises:
i. When a corporation is newly organized.
ii. When a corporation is dissolved.
iii. When a corporation changes accounting
period.
PAGE 33 OF 275
UP LAW BOC TAXATION 1 TAXATION LAW

Primary
Sub-Classification(s)
Classification
Citizens of the Residents citizens
Philippines Non-resident citizens
Residents
Engaged in Trade or Business in the Philippines
Aliens
Individuals Non-residents Not Engaged in Trade or Business in the
Philippines

Special Classes of
Minimum Wage Earner
Individuals

Domestic Corporations
Corporations Resident Corporations
Foreign Corporations
Non-resident Corporations
Estates and
Trusts
General Business Partnership
Partnerships
General Professional Partnership
Co-ownerships

PAGE 34 OF 275
UP LAW BOC TAXATION 1
(a) Individual Taxpayers
(i) Citizens
(a) Resident Citizens (RC)
(b) Non-resident Citizens (NRC)
(a) Citizen of the Philippines who establishes to the
satisfaction of the Commissioner the fact of his
physical presence abroad with a definite
intention to reside therein.
(b) Citizen who leaves the Philippines during the
taxable year to reside abroad, either as an
immigrant or for employment on a permanent
basis.
(c) Citizen of the Philippines who works and derives
income from abroad and whose employment
thereat requires him to be physically present
abroad most of the time during the taxable year
(183 DAYS).
(d) Citizen previously considered as non-resident
citizen and who arrives in the Philippines at any
time during the taxable year to reside
permanently in the Philippines  Treated as
NRC with respect to his income derived from
sources abroad until the date of his arrival in the
Philippines
(ii) Aliens
(a) Resident Alien
An alien actually present in the Philippines who is not a
mere transient or sojourner is a resident for income tax
purposes.
No/Indefinite Intention = RESIDENT: If he lives in the
Philippines and has no definite intention as to his stay,
he is a resident. A mere floating intention indefinite as
to time, to return to another country is not sufficient to
constitute him a transient.
Definite Intention = TRANSIENT: One who comes to the
Philippines for a definite purpose, which in its nature
may be promptly accomplished, is a transient.
Exception: Definite Intention but such cannot be
promptly accomplished; If his purpose is of such nature
that an extended stay may be necessary for its
accomplishment, and thus the alien makes his home
temporarily in the Philippines, then he becomes a
resident.
(b) Non-resident Alien
(1) Engaged in trade or business within the Philippines -
PAGE 35 OF 275
TAXATION LAW
If the aggregate period of his stay in the Philippines is
more than 180 days during any calendar year.
(2) Not engaged in trade or business within the
Philippines - If the aggregate period of his stay in the
Philippines does not exceed 180 days.
(iii) Special class of individual employees
(a) Minimum Wage Earner
a. A worker in the private sector paid the statutory
minimum wage;
b. An employee in the public sector with
compensation income of not more than the statutory
minimum wage in the non-agricultural sector where
he/she is assigned.
(b) Corporations
Includes all types of corporations, partnerships (no
matter how created or organized), joint stock
companies, joint accounts, associations, or
insurance companies, whether or not registered
with the SEC.
Excludes general professional partnerships (GPP),
joint venture or consortium formed for the purpose
of undertaking construction projects, joint venture
or consortium engaging in petroleum, coal,
geothermal and other energy operations pursuant
to an operating or consortium agreement under a
service contract with the government.
(i) Domestic corporations – A corporation created
and organized under its laws (the law of
incorporation test).
(ii) Foreign corporations – A corporation which is
not domestic.
(a) Resident foreign corporations – Foreign
corporation engaged in trade or business within the
Philippines.
Doing business – The term implies a continuity of
commercial dealings and arrangements, and
contemplates, to that extent, the performance of
acts or works or the exercise of some of the
functions normally incident to, and in progressive
prosecution of commercial gain or for the purpose
and object of the business organization (RA 7042,
Foreign Investments Act).
In order that a foreign corporation may be regarded
as doing business within a State, there must be
continuity of conduct and intention to establish a
UP LAW BOC TAXATION 1
continuous business, such as the appointment of a
local agent, and not one of a temporary character
[CIR v. British Overseas Airways Corporation, G.R.
No. 65773-74 (1987)].
(b) Non-resident foreign corporations – Foreign
corporation not engaged in trade or business within
the Philippines
(iii) Joint venture and consortium – Essential
factors of a joint venture or consortium:
(a) Each party must make a contribution, not
necessarily of capital but by way of services, skill,
knowledge, material or money;
(b) Profits must be shared among the parties;
(c) There must be a joint proprietary interest and
right of mutual control over the subject matter of
the enterprise;
(d) There is a single business transaction.
(c) Partnerships
The Tax Code mandates that every other type of
business partnership (Ordinary Partnerships) is subject
to income tax in the same manner and at the same rate
as an ordinary corporation.
General Professional Partnerships (GPP)
A general professional partnership is a partnership
formed by persons for the sole purpose of exercising
their common profession, no part of the income of
which is derived from engaging in any trade or business.
Not considered as a taxable entity for income tax
purposes. The partners themselves, not the partnership,
are liable for the payment of income tax in their
individual capacities.
(d) Estates and Trusts
Taxable estates and trusts are taxed in the same
manner and on the same basis as an individual.
(e) Co-ownership
For income tax purposes, the co-owners in a co-
ownership report their share of the income from the
property owned in common by them in their individual
tax returns for the year and the co-ownership is not
considered as a separate taxable entity or a corporation.
INCOME TAX
PAGE 36 OF 275
TAXATION LAW
b.1. Definition, Nature and General Principles
Definition
Income Tax is defined as a tax on all yearly profits
arising from property, professions, trades, or offices, or
as a tax on the person‘s income, emoluments, profits
and the like [Fisher v. Trinidad, supra]
Nature
Income tax is generally classified as an excise tax. It is
not levied upon persons, property, funds or profits but
upon the right of a person to receive income or profits.
General Principles
(a) A resident citizen of the Philippines is taxable on all
income derived from sources within and without the
Philippines;
(b) A nonresident citizen is taxable only on income
derived from sources within the Philippines;
(c) An individual citizen of the Philippines who is
working and deriving income from abroad as an
overseas contract worker is taxable only on income
derived from sources within the Philippines:
Provided, That a seaman shall be treated as an
overseas contract worker if he is a:
(1) citizen of the Philippines; and
(2) receives compensation for services rendered
abroad as a member of the complement of a
vessel engaged exclusively in international trade
(d) An alien individual, whether a resident or not of the
Philippines, is taxable only on income derived from
sources within the Philippines;
(e) A domestic corporation is taxable on all income
derived from sources within and without the
Philippines; and
(f) A foreign corporation, whether engaged or not in
trade or business in the Philippines, is taxable only
on income derived from sources within the
Philippines. [Sec. 23, NIRC]
Taxpayer Within Without
Resident Citizen  
Non-resident Citizen and OCW  X
UP LAW BOC TAXATION 1 TAXATION LAW

Taxpayer Within Without Mertens, Sec. 5.06) The increase in the value of
property is also known as appraisal surplus or
Resident and Non-resident Alien  X
revaluation increment.
Domestic Corporation  
Foreign Corporation  X Income v. Capital {Madrigal v. Rafferty, supra]
Income Capital
B.2. INCOME Denotes a flow of wealth Fund or property existing
during a definite period at one distinct point in
b.2.1. Definition and Nature of time. time.

Definition Service of wealth Wealth itself

(a) Income means all wealth which flows to the
taxpayer other than a mere return of capital. It
includes gain derived from the sale or other
disposition of capital assets. Income is a gain
derived from labor or capital, or both labor and
capital; and includes the gain derived from the sale
or exchange of capital assets.
(b) It is an amount of money coming to a person within
a specified time, whether as payment for services,
interest or profit from investment. Unless otherwise
specified. It means cash or its equivalent. Income
can also be thought of as a flow of the fruits of one's
labor. [Conwi v. CTA , G.R. No. 48532 (1992)]
(c) Income may be received in the form of cash,
property, service, or a combination of the three.
Nature
Income includes earnings, lawfully or unlawfully
acquired, without consensual recognition, express or
implied, of an obligation to repay and without
restriction as their disposition. [James v. US, 366 US
213(1961)]
b.2.2. When Income is Taxable
i. Existence of Income
(1) There is INCOME, gain or profit
(2) RECEIVED or REALIZED during the taxable year
(3) NOT EXEMPT from income tax
(a) "The fact is that property is a tree, income is the
fruit; labor is a tree, income the fruit; capital is a tree,
income the fruit." A tax on income is not a tax on
property. "Income," as here used, can be defined
as "profits or gains." [Madrigal v. Rafferty, supra]
(b) A mere increase in the value of property is not
income, but merely unrealized increase in capital. (1
PAGE 37 OF 275
Subject to tax Return of capital is not
subject to tax
Fruit Tree
ii. Realization of Income
Income is realized when there is a gain or profit derived
from a closed and completed transaction.
Actual vis-à-vis Constructive receipt
(1) Actual receipt – Income is actually reduced to
possession. The realization of gain may take the
form of actual receipt of cash.
(2) Constructive receipt – An income is considered
constructively received when it is credited to the
account of, or segregated in favor of a person. The
person may withdraw the said account credited in
his favor anytime without any substantial limitations
or conditions upon which payment or enjoyment is
to be made or exercised.
Examples:
(a) Interest credited on savings bank deposit
(b) Matured interest coupons not yet collected by
the taxpayer
(c) Dividends applied by the corporation against the
indebtedness of a stockholder
(d) Share in the profit of a partner in a general
professional partnership, although not yet
distributed, is regarded as constructively
received; or
(e) Intended payment deposited in court
(consignation).
The doctrine of constructive receipt is designed to
prevent the taxpayer using the cash basis from
deferring or postponing the actual receipt of taxable
UP LAW BOC
income. Without the rule, the taxpayer can
conveniently select the year in which he will report
the income. (Dimaampao)
For a taxpayer using the accrual method, the
determinative question is, when do the facts present
themselves in such a manner that the taxpayer must
recognize income or expense? The accrual of income
and expense is permitted when the all-events test has
been met. This test requires: (1) fixing of a right to
income or liability to pay; and (2) the availability of the
reasonable accurate determination of such income or
liability [CIR v. Isabela Cultural Corporation, G.R. No.
135210 (2001) ].
The ―As If‖ Theory of Constructive Income is designed to
prevent a cash basis taxpayer to delay reporting of
income. It also resumes the existence of income on
transactions supposedly not subject to tax. [Valencia
and Roxas]
iii. Recognition of Income
Income realized pertains to the accrual basis of
accounting.
Recognition of income in the books is when it is realized
and expenses are recognized when incurred. It is the
right to receive and not the actual receipt that
determines the inclusion of the amount in gross income
Examples:
(1) Interest or rent income earned but not yet
received
(2) Rent expense accrued but not yet paid
(3) Wages due to workers but remaining unpaid
Generally, trade and manufacturing businesses use
accrual method while servicing businesses use cash
method. If the service business opted to report on
accrual basis, such method can only be applied when it
comes to reporting of expense. To prevent tax evasion,
individual taxpayers whose business consists of the
sale of inventories cannot use cash method. [Valencia
and Roxas]
iv. Cash Method of Accounting versus Accrual Method
of Accounting
Cash method generally reports income upon cash
collection and reports expenses upon payment. If
earned from rendering of services, income is to be
reported in the year when collected, whether earned or
unearned.
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TAXATION 1 TAXATION LAW
Accrual method generally reports income when earned
and reports expense when incurred. If earned from sale
of goods, income is to be reported in the year of sale,
irrespective of collection.
Methods of accounting in reporting income and
expenses
[N.B. Not in syllabus; Additional matter]
Installment method vis-à-vis Deferred method vis-à-vis
Percentage of completion method (in long- term
contracts)
Installment Method is a special method of accounting
whereby income on installment sales of property during
the year is allowed to be reported in installments in
proportion to the installment payments actually
received in that year, which the gross profit realized or
to be realized when payment is completed, bears to the
total contract price (Sec. 49, NIRC).
Income may be reported on the installment basis in the
following cases:
Sales of personal property by a dealer
A dealer who regularly sells or otherwise disposes of
personal property on the installment plan
Sales of real property (inventory) and casual sales of
personalty
(1) casual sale or other casual disposition of personal
property (not of a kind which would be includible in
the inventory of the taxpayer if on hand at the close
of the taxable year) where the selling price >
P1,000 and the initial payments do not exceed 25%
of the selling price, or
(2) sale or other disposition of real property (inventory),
if the initial payments do not exceed 25% of the
selling price. Note: This sale is subject to creditable
withholding tax and normal tax which is 30% for
corporate taxpayer or 5% to 32% for individual
taxpayer.
Sales of real property considered as capital asset by
individuals
An Individual who sells or disposes of real property,
considered as capital asset, if initial payments do not
UP LAW BOC TAXATION 1 TAXATION LAW

exceed 25% of the selling price, may pay the capital Personal Property Real Property
gains tax in installments (Sec. 49(C), NIRC). Note: This Dealer
sale is subject to a capital gains tax of 6% based on the Dealer in personal Installment method;
selling price or zonal value, whichever is higher. property who regularly Provided, initial
sells in installment payments do not
Note: Initial payments are the total payments received
plan: Installment exceed 25% of selling
in cash or property (other than evidences of
method price
indebtedness such as promissory notes, mortgages
*held as ordinary asset If exceeds 25%--
given) by the seller upon or before the execution of the
regardless of amount Deferred payment
instrument of sale during the taxable year of the
of percentage of initial method
disposition of the real property. Considered as initial
payments *held as inventory
payments are the downpayment and all other payments
Casual Sale
received by the seller during the year of sale, including
excess mortgage assumed by the buyer over the basis Installment method;
Provided:
or cost of the property sold. It contemplates at least
one other payment in addition to the initial payment. If (1)Selling price
the entire purchase price is to be paid in a lump sum in exceeds php1,000
a later year, there being no payment during the first year, (2)Initial payments do
the income may not be returned on the installment not exceed 25% of
basis. selling price
If either of 2 or both
Selling price is the total amount or price of the sale conditions not met—
including the cash or property received and all notes of Deferred payment
the buyer or mortgages assumed by him. method
Contract price is the amount which the purchaser *personal property not
contracts to pay the seller in cash. It includes the considered inventory
excess of the mortgages assumed over the cost or other Sale by Individuals
basis of the property sold. Installment method;
Provided, initial
payments do not
Change from accrual to installment basis exceed 25% of selling
A taxpayer entitled to the benefits of a dealer in price
personal property may elect for any taxable year to *held as capital asset
report his taxable income on the installment basis. In
computing his income for the year of change or any Percentage of completion (in long-term contracts)
subsequent year, amounts actually received during any
such year on account of sales or other dispositions of Income from long-term construction contracts refers to
property made in any prior year shall not be excluded. the earnings derived from construction of a building,
[see Sec. 49(D), NIRC]. installation or other construction contract usually
covering a period in excess of one year. When income is
derived from long-term construction contracts, it is
Deferred Payment generally reported on the basis of percentage of
completion made every year that will be evidence by the
(a) If the initial payments exceed 25% of the selling certificates of engineers or architects. The reportable
price, the gain realized may be reported on a income is calculated by deducting from the contract
deferred payment method. price the actual cost of construction.
(b) The taxable gain or income returnable during the In recognizing realized revenue for long-term
year of sale is the difference between the selling or construction contracts, accountants usually follow two
contract price and the cost of the property, even methods:
though the entire purchase price has not been
actually received in the year of sale. (a) Completed contract method – requires recognition
of revenue only when the contract is finally
(c) The obligations of the purchaser received by the completed; and
vendor are to be considered as equivalent of cash.

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UP LAW BOC TAXATION 1 TAXATION LAW

(b) Percentage of completion method – requires v. All Events Test – Under the accrual method of
recognition of income based on the progress of work. accounting, expenses are deductible in the taxable year
in which: (1) all events have occurred which determine
Long-term contracts are no longer allowed to be
the liability; and (2) the amount of liability can be
reported based on the completed contract method
determined with reasonable accuracy.
basis beginning January 1, 1998 pursuant to RA
8424; hence, all long-term contracts must be ―All events test‖ requires:
reported using the percentage of completion
(a) Fixing a right to income or liability to pay; and
method.
(b) The availability of reasonably accurate
determination of such income or liability.
b.2.3. Tests in Determining Whether Income is Earned
All of the above tests are followed in the Philippines for
for Tax Purposes
purposes of determining whether income is received by
i. Realization test – no taxable income until there is a the taxpayer or not during the year (Mamalateo).
separation from capital of something of exchangeable
value, thereby supplying the realization or
transmutation which would result in the receipt of b.2.4. Classification of Income
income [Eisner v. Macomber, 252 U.S. 189, 190 Income may be classified as follows:
(1920)]. Thus, stock dividends are not income subject
to income tax on the part of the stockholder when he
(1) Compensation Income
merely holds more shares representing the same equity The gain derived from labor, especially employment
interest in the corporation that declared stock
(earned form employer-employee relationship) such as
dividends [Fisher v Trinidad, supra]. salaries and commissions,. These earnings are subject
to normal tax.
ii. Claim of right doctrine (or Doctrine of Ownership,
(2) Profession or Business Income
command, or control) – a taxable gain is conditioned
The value derived from an exercise of profession,
upon the presence of a claim of right to the alleged gain
business or utiliation of capital including profit and gain
and the absence of a definite unconditional obligation
derived from sale or converstion of assets.
to return or repay that which would otherwise constitute
a gain. To collect a tax would give the government an
Examples are net income from business and gain from
unjustified preference as to the part of the money that
the sale of assets used in trade or business. These
rightfully and completely belongs to the victim. The
earnings are subject to normal tax.
embezzler‘s title is void.
(3) Passive Income
An income in which the taxpayer merely waits for the
iii. Economic benefit test, Doctrine of Proprietary
amount to come in. Examples are royalty, interest,
Interest – any economic benefit to the employee that
prizes, and winnings. Generally, passive income is
increases his net worth, whatever may have been the
subject to final tax.
mode by which it is effected, is taxable. Thus, in stock
options, the difference between the fair market value of
(4) Capital Gain
the shares at the time the option is exercised and the
An income derived from sale of assets not used in trade
option price constitutes additional compensation
or business. Examples are sale of family home and
income to the employee at the time of exercise (not
other sales of shares of stocks which are subject to final
upon the grant or vesting of the right).
taxes. Other sales of capital assets are subject to
normal tax. [Valencia and Roxas]
iv. Severance Test – under the doctrine of severance
test of income, in order that income may exist, is b.2.5. Situs of Income Taxation
necessary that there be a separation from capital of
something of exchangeable value. The income required
a realization of gain. Income Situs
Interest Residence of the debtor

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UP LAW BOC TAXATION 1 TAXATION LAW

Income Situs (h) Dividends

Dividends Residence of the corporation (i) Gains derived from dealings in property
Services Place of performance (j) Pensions
Rentals Location of the property (k) Partner‘s distributive share from the net income
of the general professional partnership (GPP)
Royalties Place of exercise [Sec 32A, NIRC]
Sale of Real Location of realty
Property
The list here is NOT exclusive
Sale of (a) Tangible
Personal The term ―gross income‖ whenever used without
Purchase and sale: Location of qualification is comprehensive, as defined above, and
Sale is different from the limited meaning of gross income
Manufactured w/in and sold w/o: for purposes of minimum corporate income tax or the
Partly w/in and partly w/o gross income tax of corporations. Gross income
includes gross profit from ordinary business and other
Manufactured w/o and sold w/in: income not subject to passive income tax or final
Partly w/in and partly w/o withholding tax.
Gross income means income, gain, or profit subject to
(b) Intangible income tax. It includes the compensation for personal
services, business income, profits, and income derived
General rule: Place of Sale from any source whatever (whether legal or illegal),
Exception: Shares of stock of unless it is exempt from income tax under the
domestic corporations: Place of Constitution, tax treaty, or statute or it is subject to final
incorporation withholding income tax in accordance with the semi-
global or semi-schedular tax system adopted by the
Shares of Place of incorporation Philippines.
Stock of
Domestic It is the difference between gross sales/revenue and
Corporation the cost of goods sold/services. The definition of gross
income is broad and comprehensive to include
proceeds from sales of transport documents.
B.3. GROSS INCOME (Mamalateo)
b.3.1. Definition
Gross Income means the pertinent items of income b.3.2. Concept of Income From Whaterver Source
referred to in Section 32(A) of the Tax Code. It includes Derived
all income derived from whatever source (unless
exempt from tax by law), including, but not limited to, ―Income derived from whatever source‖ means
the following items: inclusion of all income not expressly exempted within
the class of taxable income under the laws irrespective
(a) Gross income derived from the conduct of trade of the voluntary or involuntary action of the taxpayer in
or business or the exercise of a profession producing the gains, and whether derived from legal or
(b) Rents illegal sources (i.e. gambling, extortion, smuggling,
etc.)
(c) Interests
(d) Prizes and winnings
b.3.3. Gross Income vis-à-vis Net Income vis-à-vis
(e) Compensation for services in whatever form Taxable Income
paid, including, but not limited to fees, salaries,
wages, commissions, and similar items Gross income – means income, gain or profit subject to
tax.
(f) Annuities
Taxable income – means the pertinent items of gross
(g) Royalties income specified in the Tax Code, less the deductions
PAGE 41 OF 275
UP LAW BOC TAXATION 1
and/or personal and additional exemptions, if any,
authorized for such types of income by the Tax Code or
other special laws (Sec. 31, NIRC).
b.3.4. Sources of Income Subject to Tax
Source is ascribed to the place wherein the income is
earned. It is governed by the situs of taxation. This
classification of income is necessary to determine
whether such income is subject to tax or not. Income
may be:
(i) Derived entirely from sources within the Philippines
[Sec. 42(A), NIRC]. Examples: compensation for labor
or service derived from Philippine sources; interest on
bonds, notes, deposits and the like earned in the
Philippines; dividends declared by domestic
corporations; rentals and royalties from property
located within the Philippines; and gains, profits and
income from sale of real property as well as from
personal property in the Philippines. As a rule, incomes
earned within the Philippines are taxable.
(ii) Derived entirely from sources without the Philippines
[Sec. 42(C), NIRC]. Examples: compensation for labor
or service rendered by overseas contract workers;
interest on bonds, notes, deposits and the like earned
abroad; dividends declared by nonresident foreign
corporation; rental and royalties from property located
outside the Philippines; and gains, profits and income
from sale of real property as well as from personal
property located outside the Philippines. As a rule,
income earned from outside the Philippines are not
taxable except for resident citizens and domestic
corporations.
(iii) Derived from sources partly within or partly without
the Philippines. Examples: gains, profits and income
from transportation or other services rendered partly
within and partly outside, and dividend received by a
resident citizen from a resident foreign corporation.
(Sec. 43(E), NIRC). In general, when an income is
earned partly from within and partly from without, only
income within is taxable in the Philippines, except if the
taxpayer is a resident citizen or a domestic corporation.
A Filipino citizen or a domestic corporation whose
income is derived from within and without the
Philippines is generally subject to tax.
b.3.5. Classification of Income Subject to Tax
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TAXATION LAW
i. Compensation Income
Income arising from an employer-employee (ER-EE)
relationship. It means all remuneration for services
performed by an EE for his ER, including the cash value
of all remuneration paid in any medium other than cash
[Sec. 78(A)], unless specifically excluded by the Tax
Code.
It includes, but is not limited to, salaries and wages,
honoraria and emoluments, allowances (e.g.,
transportation, representation, entertainment),
commissions, fees (including directors‘ fees, if the
director is, at the same time, an employee of the payor-
corporation), tips, taxable bonuses, fringe benefits
except those subject to Fringe Benefit Tax (FBT) under
Section 33 of the Tax Code, and taxable pensions and
retirement pay (e.g., retirement benefits earned without
meeting the conditions for exemption thereof, such as
retirement of less than 50 years of age.)
General Rule: every form of compensation income is
taxable regardless of how it is earned, by whom it is
paid, the label by which it is designated, the basis upon
which it is determined, or the form in which it is received.
The basis upon which remuneration is paid is
immaterial. It may be paid on the basis of piece of work,
percentage of profits, hourly, weekly, monthly, or
annually.
Exception: The term wages does NOT include
remuneration paid:
a) For agricultural labor paid entirely in products
of the farm where the labor is performed
b) For domestic service in a private home
c) For casual labor not in the course of the
employer's trade or business
d) For services by a citizen or resident of the
Philippines for a foreign government or an int‘l
organization. [Sec. 78(A), NIRC]
The term ―remuneration for domestic services‖ refers to
remuneration paid for services of a household nature
performed by an employee in or about the private home
of the person whom he is employed. The services of
household personnel furnished to an employee (except
rank and file employees) by an employer shall be
subject to the fringe benefits tax pursuant to Sec. 33 of
the Tax Code. A private home is the fixed place of
abode of an individual or family. If the home is utilized
primarily for the purpose of supplying board or lodging
to the public as a business enterprise, it ceases to be a
UP LAW BOC TAXATION 1
private home and remuneration paid for services
performed therein is not exempted. Services of the
household nature in or about a private home include
services rendered by cooks, maids, butlers, valets,
laundresses, gardeners, chauffeurs of automobiles for
family use. The remuneration paid for the services which
are performed in or about rooming or lodging houses,
boarding houses, clubs, hotels, hospitals or
commercial officer or establishments is considered as
compensation. Remuneration paid for services
performed as a private secretary, even if they are
performed in the employer‘s home is considered as
compensation.
The term ―casual labor‖ includes labor which is
occasional, incidental or regular. ―Not in the course of
the employer‘s trade or business‖ includes labor that
does not promote or advance the trade or business of
the employer.
The term ―remuneration paid for services performed as
an employee of a foreign government or an
international organization‖ includes not only
remuneration paid for services performed by
ambassadors, ministers and other diplomatic officers
and employees but also remuneration paid for services
performed as consular or other officer or employee of a
foreign government or as a non-diplomatic
representative of such government.
Compensation income including overtime pay, holiday
pay, night shift differential pay, and hazard pay, earned
by MINIMUM WAGE EARNERS (MWE) who has no other
returnable income are NOT taxable and not subject to
withholding tax on wages [RA 9504]; Provided, however,
that an employee shall not enjoy the privilege of being a
MWE and, therefore, his/her entire earning are not
exempt from income tax and, consequently, from
withholding tax if he receives/earns additional
compensation such as commissions, honoraria, fringe
benefits, benefits in excess of the allowable statutory
amount of P82,000 [RA 10653], taxable allowance,
and other taxable income other than the statutory
minimum wage (SMW), holiday pay, overtime pay,
hazard pay and night shift differential pay.
MWEs receiving other income, such as income from the
conduct of trade, business, or practice of profession,
except income subject to final tax, in addition to
compensation income are not exempted from income
tax on their income earned during the taxable year.
This rule, notwithstanding, the SMW, Holiday Pay,
overtime pay, night differential pay and hazard pay shall
still exempt from withholding tax.
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TAXATION LAW
Forms of compensation and how they are assessed
Cash – If compensation is paid in cash, the full amount
received is the measure of the income subject to tax.
Medium other than money – If services are paid for in a
medium other than money (e.g., shares of stock, bonds,
and other forms of property), the fair market value
(FMV) of the thing taken in payment is the amount to be
included as compensation subject to tax. If the services
are rendered at a stipulated price, in the absence of
evidence to the contrary, such price will be presumed to
be the FMV of the remuneration received.
Living quarters or meals
General Rule: The value to the employee of the living
quarters and meals given by the employer shall be
added to his compensation subject to withholding.
Exception: If living quarters/meals are furnished to an
employee for the convenience of the employer, the
value need NOT be included as part of compensation
income.
Facilities and privileges of a relatively small value -
Facilities and privileges (such an entertainment,
medical services, or so called ―courtesy‖ discounts on
purchases), otherwise known as ―de minimis benefits‖
furnished or offered by an employer to his employees
generally, are NOT considered as compensation subject
to income tax and therefore withholding tax if such
facilities are offered or furnished by the employer
merely as means of promoting the health, goodwill,
contentment, or efficiency of his employees.
Convenience of the Employer Rule
Allowances in kind furnished to the employee for and as
necessary incident to the performance of his duties are
not taxable [Valencia and Roxas].
If meals, living quarters, and other facilities and
privileges are furnished to an employee for the
convenience of the employer, and incidental to the
requirement of the employee‘s work or position, the
value of that privilege need not be included as
compensation [Henderson v. Collector]
The amount of ―de minimis‖ benefits confirming to the
ceiling prescribed shall not be considered in
determining the P82,000 [RA 10653] ceiling of ―other
benefits‖ excluded from gross income under Section 32
(b)(7)(e) of the Tax Code, Provided, that the excess of
the ‗de minimis‘ benefits over their respective ceilings
prescribed by these regulations shall be considered as
UP LAW BOC TAXATION 1
part of ―other benefits‖ and the employee receiving it
will be subject to tax only on the excess over the
P82,000 ceiling, Provided, further, that MWEs receiving,
‗other benefits‘ exceeding the P82,000 limit shall be
taxable on the excess benefits, as well as on his
salaries, wages, and allowances, just like an employee
receiving compensation income beyond the SMW. Any
amount given by the employer as benefits to its
employees, whether classified as ―de minimis‖ benefits
or fringe benefits, shall constitute as deductible
expense upon such employer. Where compensation is
paid in property other than money, the employer shall
make necessary arrangements to ensure that the
amount of the tax required to be withheld is available
for payment to the BIR.
Classification of Gross Compensation Income
Basic salary or wage
Salary – earnings received periodically for a regular
work other than manual labor, e.g., monthly salary of an
employee
Wages – earnings received usually according to
specified intervals of work, as by the hour, day, or week,
e.g., a carpenter‘s wage.
Backwages are subject to income tax and withholding
tax on wages [BIR Ruling No. DA-073-2008]
Honoraria – payments given in recognition for services
performed for which the established practice
discourages charging a fixed fee, e.g., honorarium of a
guest lecturer
Fixed or variable allowances, i.e. Transportation,
Representation, and other allowances such as Cost of
Living Allowances (COLA)
General Rule: Fixed or variable transportation,
representation or other allowances that are received by
a public officer or employee of a private entity, in
addition to the regular compensation fixed for his
position or office is COMPENSATION subject to
withholding tax. (Rev. Regs. 2-98)
Exception: Any amount paid specifically, either as
advances or reimbursements for travelling,
representation and other bona fide ordinary and
necessary expenses incurred or reasonably expected to
be incurred by the employee in the performance of his
duties are NOT COMPENSATION subject to withholding
tax, provided the following conditions are satisfied:
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TAXATION LAW
a) It is for ordinary and necessary traveling and
representation or entertainment expenses
paid or incurred by the employee in the pursuit
of the employer‘s trade, business or
profession; and
b) The employee is required to account or
liquidate for the foregoing expenses.
The excess of actual expenses over advances made
shall constitute taxable income if such amount is not
returned to the employer. The employee is required to
account/liquidate for the expenses in accordance with
the specific requirements of substantiation for each
category of expenses pursuant to Sec.34 of the Tax
Code.
Note: Reasonable amounts of
reimbursements/advances for traveling and
entertainment expenses which are pre-computed on a
daily basis and are paid to an employee while he is on
an assignment or duty are NOT subject to withholding
tax on wages and substantiation requirements.
Commission – usually a percentage of total sales or on
certain quota of sales volume attained as part of
incentive such as sales commission.
Fees – received by an employee for the services
rendered to the employer including a director‘s fee of
the company, fees paid to the public officials such as
clerks of court or sheriffs for services rendered in the
performance of their official duty over and above their
regular salaries.
Tips and Gratuities – those paid directly to the
employee (usually by a customer of the employer) which
are not accounted for by the employee to the employer
(taxable income but not subject to withholding tax) [RR
NO. 2-98, Sec. 2.78.1]
Hazard or Emergency Pay – additional payment
received due to the workers‘ exposure to danger or
harm while working. It is normally added to the basic
salary together with the overtime pay and night
differential to arrive at gross salary.
Retirement Pay – a lump sum payment received by an
employee who has served a company for a considerable
period of time and has decided to withdraw from work
into privacy. [RR 6-82, Sec. 2b]
UP LAW BOC TAXATION 1
In general, retirement pay is taxable except in the
following instances:
a) SSS or GSIS retirement pays.
b) Retirement pay (R.A. 7641) due to old age
provided the following requirements are met:
i. The retirement program is approved by
the BIR Commissioner;
ii. It must be a reasonable benefit plan.
(Its implementation must be fair and
equitable for the benefit of all
employees)
iii. The retiree should have been employed
for 10 years in the said company;
iv. The retiree should have been 50 years
old or above at the time of retirement;
and
v. It should have been availed of for the
first time.
Separation pay – taxable if VOLUNTARILY availed of. It
shall not be taxable if involuntary, i.e., death, sickness,
disability, reorganization/ merger of company and
company at the brink of bankruptcy or for any cause
beyond the control of the said official or employee.
―For any cause beyond the control.‖ – Connotes
involuntariness on the part of the official or employee.
The separation from the service of the official or
employee must not be asked for or initiated by him or it
was not of his own making. Such fact shall be duly
established by the employer by competent evidence
which should be attached to the monthly return for the
period in which the amount paid due to the involuntary
separation was made.
Amounts received by reason of involuntary separation
remain EXEMPT from income tax even if the official or
the employee, at the time of separation, had rendered
less than ten (10) years of service and/or is below fifty
(50) years of age.
Any payment made by an employer to an employer to an
employee on account of dismissal, constitutes
compensation regardless of whether the employer is
legally bound by contract, statute, or otherwise, to
make such payment.
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TAXATION LAW
Pension – a stated allowance paid regularly to a person
on his retirement or to his dependents on his death, in
consideration of past services, meritorious work, age,
loss, or injury. Pension is taxable unless the law states
otherwise, OR unless the BIR approves the pension plan
of a private company.
Vacation and sick leave – rules in determining whether
money received for vacation and sick leave is taxable or
not:
If paid or availed of as salary of an employee who is on
vacation or on sick leave notwithstanding his absence
from work, it constitutes TAXABLE compensation
income. [RR 6-82, 2d]
Monetized value of unutilized VACATION leave credits of
ten (10) days or less which were paid to private
employees during the year, and the monetized value of
vacation and sick leave credits paid to government
officials and employees are NOT subject to income tax
and to the withholding tax. These are ‗de minimis‘
benefits.‘ [RR no. 5-2011, Sec 2.78.1(A)(7)] Note:
Monetization of sick leave credits of private employees
even if not exceeding 10 days is not exempt from
income tax and withholding tax on wages.
Terminal leave or money value of accumulated vacation
and sick leave benefits received by heir upon death of
employee is not taxable.
Thirteenth month pay and other benefits - Not taxable if
the total amount received is P82,000 [RA 10653] or
less. Any amount exceeding P82,000 is taxable. [Sec.
32(7)e, NIRC]
Fringe Benefits and De Minimis
Fringe Benefits – any good, service, or other benefit
furnished or granted by an employer, in cash or in kind,
in addition to basic salaries of an individual employee
[Sec. 33, NIRC]
De Minimis – privileges of relatively small value as
given by the employer to his employees.
Fringe Benefits and De Minimis are not considered
compensation subject to income tax and withholding
tax.
Overtime Pay – premium payment received for working
beyond regular hours of work which is included in the
UP LAW BOC TAXATION 1
computation of gross salary of employee. It constitutes
compensation.
Profit Sharing – the proportionate share in the profits of
the business received by the employee in addition to his
wages.
Awards for special services – awards for past services or
suggestions to employers resulting in the prevention of
theft or robbery, etc. are also compensations.
Beneficial Payments – such as where employer pays the
income tax owed by an employee are additional
compensation income.
Other forms of compensation – other forms received
due to services rendered are compensation paid in kind,
e.g., insurance premium paid by the employer for
insurance coverage where the heirs of the employee are
the beneficiaries is the employee‘s income.
Note: Any amount which is required by law to be
deducted by the employer from the compensation of an
employee including the withheld tax is considered as
part of the employee‘s compensation and is deemed to
be paid to the employee as compensation at the time
the deduction is made. (This also applies to deductions
not required by law.)
Withholding Tax on Compensation Income
The income recipient (i.e., EE) is the person liable to pay
the tax on income, yet to improve the collection of
compensation income of EEs, the State requires the ER
to withhold the tax upon payment of the compensation
income.
ii. Fringe Benefits
(a) Special treatment of fringe benefits
Persons liable: The Employer (as a withholding agent),
whether individual, professional partnership or a
corporation, regardless of whether the corporation is
taxable or not, or the government and its
instrumentalities, is liable to remit the fringe benefit tax
to the BIR once fringe benefit is given to a managerial
or supervisory employee.
The fringe benefit tax (FBT) is a final tax on the
employee‘s income to be withheld by the employer. The
PAGE 46 OF 275
TAXATION LAW
withholding and remittance of FBT shall be made on a
calendar quarterly basis.
Managerial employee: one who is vested with the
powers or prerogatives to lay down and execute
management policies and/or to hire, transfer, suspend,
lay-off, recall, discharge, assign or discipline
employees.
Supervisory employees: those who, in the interest of the
employer, effectively recommend such managerial
actions if the exercise of such authority is not merely
routinary or clerical in nature but requires the use of
independent judgment.
All employees not falling within any of the above
definitions are considered rank-and-file employees.
Fringe benefit tax is imposed on fringe benefits received
by supervisory and managerial employees. The fringe
benefits of rank and file employees are treated as part
of compensation income subject to income tax and
withholding tax on compensation.
(b) Definition
Fringe benefit means any good, service, or other benefit
furnished or granted by an employer, in cash or in kind,
in addition to basic salaries, to an individual employee
(except rank and file employees) such as, but not
limited to the following:
(a) Housing
(b) Expense Account
(c) Vehicle of any kind
(d) Household personnel, such as maid, driver and
others
(e) Interest on loan at less than market rate to the
extent of the difference between the market
rate and actual rate granted.
(f) Membership fees, dues and other expenses
borne by the employer for the employee in
social and athletic clubs and similar
organizations
(g) Expenses for foreign travel
(h) Holiday and vacation expenses
(i) Educational assistance to the employee or his
dependents; and
(j) Life or health insurance and other non-life
insurance premiums or similar amounts on
excess of what the law allows.[Sec. 33(B)]
UP LAW BOC TAXATION 1
Tax Rate and Tax Base
Tax base is based on the grossed-up monetary value
(GMV) of fringe benefits. Rate is generally 32%.
GMV represents: (a) the whole amount of income
realized by the employee which includes the net amount
of money or net monetary value of property that has
been received; and (b) the amount of fringe benefit tax
due from the employee which has been withheld and
paid by the employer for and in behalf of his employee..
How GMV is determined
GMV is determined by dividing the actual monetary
value of the fringe benefit by 68% [100% - tax rate of
32%]. For example, the actual monetary value of the
fringe benefit is P1,000. The GMV is equal to
P1,470.59 [P1,000 / 0.68]. The fringe benefit tax,
therefore, is P470.59 [P1470.59 x 32%].
Special Cases:
a) For fringe benefits received by non-resident
alien not engaged in trade of business in the
Philippines (NRANETB), the tax rate is 25% of
the GMV. The GMV is determined by dividing
the actual monetary value of the fringe benefit
by 75% [100% - 25%].
b) For fringe benefits received by alien individuals
and Filipino citizens employed by regional or
area headquarters, regional operating
headquarters, offshore banking units (OBUs),
or foreign service contractor or by a foreign
subcontractor engaged in petroleum
operations in the Philippines, or by any of their
Filipino individual employees who are
employed and occupying the same positions
as those occupied by the alien employees, the
tax rate is 15% of the GMV. The GMV is
determined by dividing the actual monetary
value of the fringe benefit by 85% [100% -
15%].
What is the tax implication if the employer gives ‗fringe
benefits‘ to rank-and-file employees? Fringe benefits
given to a rank-and-file employee are treated as part of
his compensation income subject to normal tax rate
and withholding tax on compensation income, except
de minimis benefits and benefits provided for the
convenience of the employer.
Payor of Fringe Benefit Tax (FBT): The employer
withholds and pays the FBT but the law allows him to
deduct such tax from his gross income.
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TAXATION LAW
(c) Taxable and non-taxable fringe benefits
Fringe Benefits NOT subject to Tax
i. Fringe benefits not considered as gross
income – if it is required or necessary to the
business of employer; if it is for the
convenience or advantage of employer
ii. Fringe Benefit that is not taxable under Sec.
32 (B) – Exclusions from Gross Income
Fringe benefits not subject to Fringe Benefit Tax:
a) Fringe Benefits which are authorized and
exempted from income tax under the Code or
under special laws;
b) Contributions of the employer for the benefit of
the employee for retirement, insurance and
hospitalization benefit plans;
c) Benefits given to the rank-and-file employees,
whether granted under a collective bargaining
agreement or not; and
d) Fringe benefits granted for the convenience of
the employer;
e) De minimis benefits
The exemption of any FB from the FBT shall not be
interpreted to mean exemption from any other income
tax imposed under the Tax Code except if the same is
likewise expressly exempt from any other income tax
imposed under the Tax Code or under any other existing
law. Thus, if the FB is exempted from the FBT, the same
may, however, still form of the employee‘s gross
compensation income which is subject to income tax;
hence, likewise subject to withholding tax on
compensation income payment.
De minimis benefits (exempt from income tax and
withholding tax on compensation income of both
managerial and rank and file EEs) [Revenue Regulation
No. 5-2011]:
a) Monetized unused vacation leave credits of
private employees not exceeding ten (10) days
during the year;
b) Monetized value of vacation and sick leave
credits paid to government officials and
employees;
UP LAW BOC TAXATION 1 TAXATION LAW

c) Medical cash allowance to dependents of Fringe Benefit Tax

employees, not exceeding P750 per employee Housing Privilege Base (Monetary
per semester or P125 per month; Value)
d) Rice subsidy of P1,500 or one (1) sack of 50 value of the FB
kg. rice per month amounting to not more than
P1,500; Assignment of residential MV= [5% (FMV or ZV,
property owned by employer whichever is higher) x
e) Uniform and clothing allowance not exceeding for use of employees 50%]
P5,000 per annum (RR 8-2012)
Purchase of residential MV= 5% x acquisition
f) Actual medical assistance, e.g., medical property in installment basis cost exclusive of
allowance to cover medical and healthcare for the use of the employee interest x 50%
needs, annual medical/executive check-up,
maternity assistance, and routine Purchase of residential MV= FMV or ZV,
consultations, not exceeding P10,000.00 per property and ownership is whichever is higher
annum; transferred in the name of the
employee
g) Laundry allowance not exceeding P300 per
month; ZV = Zonal Value = value of the land or improvement, as
declared in the Real Property Declaration Form
h) Employees achievement awards, e.g., for
length of service or safety achievement, which FMV = Fair Market Value = FMV as determined by the
must be in the form of a tangible personal Commissioner of Internal Revenue
property other than cash or gift certificate, with
an annual monetary value not exceeding
P10,000 received by the employee under an Non-taxable housing fringe benefit:
established written plan which does not a) Housing privilege of the Armed Forces of the
discriminate in favor of highly paid employees; Philippines (AFP) officials – i.e, those of the
i) Gifts given during Christmas and major Philippine Army, Philippine Navy, or Philippine
anniversary celebrations not exceeding Air Force
P5,000 per employee per annum; and b) A housing unit, which is situated inside or
j) Daily meal allowance for overtime work and adjacent to the premises of a business or
night/graveyard shift not exceeding twenty- factory – maximum of 50 meters from
five percent (25%) of the basic minimum wage perimeter of the business premises
on a per region basis; c) Temporary housing for an employee who stays
in housing unit for three months or less

All other benefits given by employers which are not

included in the above enumeration shall NOT be Motor Vehicle
considered as "de minimis" benefits and hence, shall
Motor Vehicle Fringe Benefit Tax
be subject to withholding tax on compensation (rank
Base
and file employees) and FBT (managerial/supervisory
employees). Purchased in the name of the MV= acquisition cost
employee

Housing Cash given to employee to MV= cash received by

purchase in his own name employee
Fringe Benefit Tax
Housing Privilege Base (Monetary Purchase on installment, in MV= acquisition cost
Value) the name of employee exclusive of interest

LEASE of residential property MV= 50% of lease Employee shoulders part of MV= amount
for the residential use of payments the purchase price, ownership shouldered by
employees in the name of employee employer
Employer owns and maintains MV= (AC/5) x 50%
where MV = monetary a fleet of motor vehicles for
PAGE 48 OF 275
UP LAW BOC TAXATION 1 TAXATION LAW

use of the business and of Deductions from Gross

employees Income
Employer leases and MV= 50% of rental
maintains a fleet for the use payment (a) Types of Properties
of the business and of
employees Capital v. Ordinary Asset

iii. Professional Income Ordinary Assets Capital Assets

Refers to fees received by a professional from the

practice of his profession, provided that there is NO (1) Stock in trade of the Property held by the
employer-employee relationship between him and his taxpayer/ other property of taxpayer, whether or not
clients. a kind which would properly connected with his trade
be included in the inventory or business which is not
of the taxpayer if on hand an ordinary asset.
iv. Income from Business at the close of the taxable
- Any income derived from doing business year.
Generally, they include:
Doing business: The term implies a continuity of (2) Property held by the
commercial dealings and arrangements, and taxpayer primarily for sale (1) stocks and securities
contemplates, to that extent, the performance of acts or to customers in the held by taxpayers other
works or the exercise of some of the functions normally ordinary course of his trade than dealers in securities
incident to, and in progressive prosecution of, the or business. (2) real property not used
purpose and object of its organization. (3) Property used in the in trade or business,
trade or business of a such as residential
character which is subject house and lot, idle or
v. Income from Dealings in Property to the allowance for vacant land or building
Dealings in property such as sales or exchanges may depreciation, or
(3)investment property,
result in gain or loss. The kind of property involved (i.e., (4) Real property used in such as interest in a
whether the property is a capital asset or an ordinary the trade or business of the partnership, stock
asset) determines the tax implication and income tax taxpayer, including investment
treatment, as follows: property held for rent. (4)Personal or non-
Taxable Ordinary Net Capital Gains business properties,
Net Net Income (other than those such as family car, home
= +
Income subject to final appliances, jewelry.
CGT)

(b) Types of Gains from dealings in property

Ordinary Asset Capital Asset (1) Ordinary income vis-à-vis Capital gain. –
Gain from sale, exchange or other disposition If the asset involved is classified as ordinary, the entire
Ordinary Gain (part of Capital Gain amount of the gain from the transaction shall be
Gross Income) included in the computation of gross income [Sec
Loss from sale, exchange, or other disposition 32(A)], and the entire amount of the loss shall be
Ordinary Loss (part of deductible from gross income. [Sec 34(D)]. (See
Allowable Deductions Capital Loss Allowable Deductions from Gross Income - Losses
from Gross Income)
Excess of Gains over Losses If the asset involved is a capital asset, the rules on
capital gains and losses apply in the determination of
Part of Gross Income Net Capital Gain
the amount to be included in gross income. (See
Excess of Losses over Gains Capital Gains and Losses). These rules do not apply to:
Part of Allowable Net Capital Loss (a) real property with a capital gains tax (final tax), or (2)
shares of stock of a domestic corporation with a capital
PAGE 49 OF 275
UP LAW BOC TAXATION 1
gains tax (final tax). Also, sale of shares of stock of a
domestic corporation, held as capital assets, through
the stock exchange by either individual or corporate
taxpayers, is subject to ½ of 1% percentage tax based
on gross selling price.
The following percentages of the gain or loss recognized
upon the sale or exchange of a capital asset shall be
taken into account in computing net capital gain, net
capital loss, and net income:
a) If the taxpayer is an individual –
 100% if the capital asset has been
held for not more than 12 months;
and
 50% of the capital asset has been
held for more than 12 months
b) If the taxpayer is a corporation –
 100%, regardless of the holding
period of the capital asset (Sec.
39(B), NIRC)
The tax rules for the gains or losses from sales or
exchanges of capital assets over ordinary assets are as
follows:
a) Net capital gain is added to ordinary gain but
net capital loss is not deductible from ordinary
gain.
b) Net ordinary loss is deductible from ordinary
gain.
c) Capital losses are deductible only to the extent
of the capital gain.
d) There is a net capital loss carry-over on the net
capital asset‘s loss in a taxable year which
may be deducted as a short-term capital loss
from the net capital gain of the subsequent
taxable year; provided that the following
conditions shall be observed:
e) The taxpayer is other than a corporation;
f) The amount of loss does not exceed the
income before exemptions at the year when
the loss was sustained; and
g) The holding period should not exceed 12
months. (Valencia)
When a capital gain or capital loss is sustained by a
corporation, the following rules shall be observed:
a) There is no holding period; hence, there is no
net capital loss carry-over.
PAGE 50 OF 275
TAXATION LAW
b) Capital gains and losses are recognized to the
extent of their full amount.
c) Capital losses are deductible only to the extent
of capital gains.
d) Net capital losses are not deductible from
ordinary gain or income but ordinary losses are
deductible from net capital gains.
Note: For sale, barter, exchange or other forms of
disposition of shares of stock subject to the 5% or 10%
capital gains tax on the net capital gain during the
taxable year, the capital losses realized from this type
of transaction during the taxable year are deductible
only to the extent of capital gains from the same type of
transaction during the same period. If the transferor of
the shares is an individual, the rule on holding period
and capital loss carry-over will not apply,
notwithstanding the provisions of Section 39 of the Tax
Code. (RR 6-2008, c.4)
(2) Actual gain vis-à-vis Presumed gain
Presumed Gain: In the sale of real property located in
the Philippines, classified as capital asset, the tax base
is the gross selling price or fair market value, whichever
is higher. The law presumes that the seller makes a gain
from such sale. Thus, whether or not the seller makes a
profit from the sale of real property, he has to pay 6%
capital gains tax. In fact, he has to pay the tax, even if
he incurs an actual loss from the sale thereof. (However,
when the buyer is the government, the individual seller
has the option whether to be taxed at the graduated
income tax rates or at 6% capital gains tax.)
Actual Gain: The tax base in the sale of real property
classified as an ordinary asset is the actual gain. If the
seller incurs a loss from the sale, such loss may be
deducted from his gross income during the taxable year.
The ordinary gain shall be added to the operating
income and the net taxable income shall be subject to
the graduated rates from 5% to 32% (if an individual) or
to 30% corporate tax or to 2% MCIT (if a corporation).
Computation of the amount of gain or loss
Amount realized from sale or other
disposition of property
Less: Basis or Adjusted Basis
NET GAIN (LOSS)
Note: Amount realized from sale or other disposition of
property = sum of money received + fair market value of
the property (other than money) received
UP LAW BOC TAXATION 1
Note: When a taxpayer sells a real or personal property,
he should deduct its cost from its selling price to
measure the gain or loss from the sales transaction
(Sec. 40, NIRC).
(3) Long term capital gain vis-à-vis Short term capital
gain
Long-term capital gain: Capital asset is held for more
than twelve months before it is sold. Only 50% of the
gain is recognized.
Short-term capital gain: Capital asset is held for 12
months or less, 100% of the gain is subject to tax.
(4) Net Capital Gain vis-à-vis Net Capital Loss
Net Capital Gain: Excess of the gains over the losses on
sales or exchange of capital assets during the taxable
year.
Net Capital Loss: Excess of the losses over the gains on
sales or exchanges of capital assets during the taxable
year. [Sec. 39A, NIRC]
(5) Income tax treatment of capital loss
(a) Capital loss limitation rule (applicable to both
corporations and individuals)
General Rule: Losses from sales or exchanges of capital
assets shall be allowed only to the extent of the gains
from such sales or exchanges (Sec. 39(C), NIRC).
Exception for Banks and Trust Companies: If a bank or
trust company incorporated under the laws of the
Philippines, a substantial part of whose business is the
receipt of deposits, sells any bond, debenture, note,
certificate or other evidence of indebtedness issued by
any corporation (including one issued by a government
or political subdivision thereof) with interest coupons or
in registered form, any loss resulting from such sale
shall not be subject to the foregoing limitation and shall
not be included in determining the applicability of such
limitation to other losses (Sec. 39(C), NIRC).
(b) Net loss carry-over rule (applicable only to
individuals)
If an individual sustains in any taxable year a net capital
loss, such loss (in an amount not in excess of the net
income for the year) shall be treated in the succeeding
taxable year as a loss from the sale or exchange of a
PAGE 51 OF 275
TAXATION LAW
capital asset held for not more than 12 months (Sec.
39(D), NIRC).
(6) Dealings in real property situated in the Philippines
Persons Liable and Transactions Affected:
(a) Individual taxpayers, estates and trusts
(b) Sale or exchange or other disposition of real
property considered as capital assets.
(c) Includes "pacto de retro sale" and other
conditional sale.
(d) Domestic Corporation
(e) Sale or exchange or disposition of lands
and/or building which are not actually used in
business and are treated as capital asset.
Rate and Basis of Tax
A final withholding tax of 6% is based on the gross
selling price or fair market value or zonal value
whichever is higher.
Note: Gain or loss is immaterial, there being a
conclusive presumption of gain.
(7) Dealings in shares of stock of Philippine
corporations
Persons Liable to the Tax:
(a) Individual taxpayer, whether citizen or alien;
(b) Corporate taxpayer, whether domestic or
foreign; and
(c) Other taxpayers not falling under (a) and (b)
above, such as estate, trust, trust funds and
pension funds, among others.
Persons not liable:
(a) Dealers in securities
(b) Investor in shares of stock in a mutual fund
company
(c) All other persons who are specifically exempt
from national internal revenue taxes under
existing investment incentives and other
special laws.
(a) Shares listed and traded through the stock exchange
other than sale by a dealer in securities:
UP LAW BOC TAXATION 1
½ of 1% of the gross selling price of the stock or gross
value in money of the shares of stock sold, bartered,
exchanged or otherwise disposed which shall be
assumed and paid by the seller or transferor through
the remittance of the stock transaction tax by the seller
or transferor‘s broker.
Note: In the nature of percentage tax and not income
tax; exempt from income tax per Section 127 (d):
―Any gain derived from the sale, barter, exchange or
other disposition of share of stock under this section
shall be exempt from taxes imposed in Sections 24(C),
27(D)(2), 28(A)(8)(c), and 28(B)(5)(c) of this Code and
from the regular individual or corporate income tax.‖
Note: Percentage tax under Sec. 127 is NOT
DEDUCTIBLE for income tax purposes.
(b) Shares not listed and traded through the stock
exchange
Net capital gains derived during the taxable year from
sale, exchange, or transfer shall be taxed as follows (on
a per transaction basis):
Amount of Capital Gain Tax Rate
Not over P 100,000 5%
On any amount in excess 10%
of P 100,000
(8) Sale of principal residence
Principal residence: the family home of the individual
taxpayer (RR 14-2000)
Disposition of principal residence (capital asset) is
exempt from Capital Gains Tax, provided:
(1) Sale or disposition of the old principal
residence;
(2) By natural persons - citizens or aliens provided
that they are residents taxable under Sec. 24
of the Code (does not include an estate or a
trust);
(3) The proceeds of which is fully utilized in (a)
acquiring or (b) constructing a new principal
residence within eighteen (18) months from
date of sale or disposition;
(4) Notify the Commissioner within thirty (30) days
from the date of sale or disposition through a
PAGE 52 OF 275
TAXATION LAW
prescribed return of his intention to avail the
tax exemption;
(5) Can only be availed of onlyonce every ten (10)
years;
(6) The historical cost or adjusted basis of his old
principal residence shall be carried over to the
cost basis of his new principal residence
(7) If there is no full utilization, the portion of the
gains presumed to have been realized shall be
subject to capital gains tax.
(8) Portion of presumed gains subject to CGT:
(Unutilized/GSP) x (higher of GSP or FMV)
vi. Passive Investment Income
Under Sec 24(B) of the Tax Code, a final tax is imposed
upon gross passive income of citizen and resident
aliens. An income is considered passive if the taxpayer
merely waits for it to be realized.
(a) Interest Income
An earning derived from depositing or lending of money,
goods or credits [Valencia and Roxas] e.g., interest
income from government securities such as Treasury
Bills.
Unless exempted by law, interest income received by
the taxpayer, whether or not usurious, is subject to
income tax.
(b) Dividend Income
A form of earnings derived from the distribution made
by a corporation out of its earnings or profits and
payable to its stockholders, whether in money or in
property.
In general, dividends are subject to final tax under the
Tax Code.
(1) Cash dividends
Dividends are subject to final tax under the NIRC.
However, dividends received by a domestic corporation
from another domestic corporation, and a non-resident
foreign corporation from a domestic corporation is
exempt from income tax.
UP LAW BOC TAXATION 1 TAXATION LAW

Cash dividend is the most common form of dividend,

valued at the amount of money received by the
stockholder. Cash dividends and property dividends are
subject to income tax.

(2) Stock dividends

Stock dividend is generally exempt from income tax,
EXCEPT:
(a) If a corporation cancels or redeems stock
issued as a dividend at such time and in such
manner as to make the distribution and
cancellation or redemption, in whole or in part,
essentially equivalent to the distribution of a
taxable dividend, the amount so distributed in
redemption or cancellation of the stock shall
be considered as taxable income to the extent
that it represents a distribution of earnings or
profits (Sec. 73(B), NIRC); or
(b) Where there is an option that some
stockholders could take cash or property
dividends instead of stock dividends; some
stockholders exercised the option to take cash
of property dividends; and the exercise of
option resulted in a change of the
stockholders‘ proportionate share in the (c) Royalty Income
outstanding share of the corporation.
Royalty is a valuable property that can be developed
and sold on a regular basis for a consideration; in which
(3) Property dividends case, any gain derived therefrom is considered as an
active business income subject to the normal corporate
Property dividends or dividends in the form of property tax.
are subject to tax at preferential rate under the NIRC.
Where a person pays royalty to another for the use of its
intellectual property, such royalty is generally a passive
(4) Liquidating dividends income of the owner thereof subject to withholding tax.

Represents distribution of all the property or assets of a

corporation in complete liquidation or dissolution. It is
strictly not dividend income, but rather is treated in
effect, a return of capital to the extent of the
shareholder‘s investment. The difference between the
cost or other basis of the stock and the amount received
in liquidation of the stock is a capital gain or a capital
loss. Where property is distributed in liquidation, the
amount received is the FMV of such property. The
income is subject to ordinary income tax rates. It is
subject neither to the FWT on dividends nor to the CGT
on sale of shares.
PAGE 53 OF 275
(d) Rental Income
Refers to earnings derived from leasing real estate as
well as personal property. Aside from the regular
amount of payment for using the property, it also
includes all other obligations assumed to be paid by the
lessee to the third party in behalf of the lessor (e.g.,
interest, taxes, loans, insurance premiums, etc.) [RR
19-86]
Rent income may be in the following forms:
(1) Cash, at the stipulated price
(2) Obligations of the lessor to third persons paid
or assumed by the lessee in consideration of
UP LAW BOC TAXATION 1 TAXATION LAW

the contract of lease, e.g., real estate tax on Lessor Tax Rate
the property leased assumed by the lessee
Domestic Corporation Net taxable income shall
(3) Advance payment be subject to 30%
Resident Foreign
If the advance payment is actually a loan to the lessor, corporate income tax or
Corporation
its gross income will be
or an option money for the property, or a security
deposit for the faithful performance of certain subject to 2% MCIT
obligations of the lessee, such advance payment is not Non-resident Foreign Gross rental income
income to the lessor. Corporation from real property
However, a security deposit that is applied to rental is located in the
taxable income to the lessor. Philippines shall be
subject to 30%
If the advance payment is, in fact, a pre-paid rental, corporate income tax,
received by the lessor under a claim of right and without such tax to be withheld
restriction as to its use, then such payment is income to and remitted by the
the lessor. lessee in the Philippines
Pre-paid rent must be reported in full in the year of
receipt, regardless of the accounting method used by
the lessor. (3) Tax treatment of:

(1) Lease of personal property (a) Leasehold improvements by lessee

Rental income on the lease of personal property Rent Income from leasehold improvements:
located in the Philippines and paid to a non-resident (i) Outright method- lessor shall report as income
taxpayer shall be taxed as follows: FMV of the buildings or improvements subject
NRFC NRA-NETB to the lease in the year of completion.
(ii) Spread-out method- lessor shall spread over
Vessel 4.5% 25%
the remaining term of the lease the estimated
Aircraft, machineries 7.5% 25% depreciated (book) value of such buildings or
and other Equipment improvements at the termination of the lease,
and reports as income for each remaining term
Other assets 30% 25%
of the lease an aliquot part thereof.
estimated BV at the end of the lease
(2) Lease of real property contract/ remaining lease term = Income per
year
Lessor Tax Rate
If for any reason than a bona fide purchase from the
Citizen lessee by the lessor, the lease is terminated, so that the
Resident Alien Net taxable income shall lessor comes into possession or control of the property
be subject to the prior to the time originally fixed, lessor receives
Non-resident alien additional income for the year which the lease is so
graduated income tax
engaged in trade or terminated to the extent of the value of such buildings
rates
business in the or improvements when he became entitled to such
Philippines possession exceeds the amount already reported as
Non-resident alien not Rental income from real income on account of the erection of such building or
engaged in trade or property located in the improvement. No appreciation in value due to causes
business in the Philippines shall be other than the premature termination of lease shall be
Philippines subject to 25% final included (Sec. 49, Rev. Reg. No. 2).
withholding tax unless a If the building or other leasehold improvement is
lower rate is imposed destroyed before the expiration of the lease, the lessor
pursuant to an effective is entitled to deduct as a loss for the year when such
tax treaty destruction takes place, the amount previously reported
as income because of the erection of the improvement,
PAGE 54 OF 275
UP LAW BOC TAXATION 1
less any salvage value, to the extent that such loss was
not compensated by insurance (Sec. 49, Rev. Reg. No.
2),
(b) VAT added to rental/paid by the lessee
If the lessee is VAT-registered, treat VAT paid as input
VAT;
If the lessee is not VAT-registered OR not liable to VAT,
treat VAT paid as additional rent expense deductible
from gross income.
(c) Advance Rental/ Long Term Lease
Pre-paid rent must be reported in full in the year of
receipt, regardless of the accounting method used by
the lessor.
vii. Annuities, Proceeds from Life insurance or Other
Types of Insurance
Annuities are installment payments received for life
insurance sold by insurance companies.
The aleatory contract of life annuity binds the debtor to
pay an annual pension or income during the life of one
or more determinate persons in consideration of a
capital consisting of money or other property, whose
ownership is transferred to him at once with the burden
of the income. [Art. 2021, New Civil Code]
The annuity payments represent a part that is taxable
and not taxable. If part of annuity payment represents
interest, then it is a taxable income. If the annuity is a
return of premium, it is not taxable.
viii. Prizes and Awards
A prize is a reward for a contest or a competition. It
represents remuneration for an effort reflecting one‘s
superiority.
Contest prizes and awards received are generally
taxable. Such payment constitutes gain derived from
labor.
The EXCEPTIONS are as follows:
(a) Prizes and awards made primarily in
recognition of religious, charitable, scientific,
educational, artistic, literary or civic
achievements are EXCLUSIONS from gross
income if:
PAGE 55 OF 275
TAXATION LAW
(b) The recipient was selected without any action
on his part to enter a contest or proceedings;
and
(c) The recipient is not required to render
substantial future services as a condition to
receiving the prize or award.
(d) Prizes and awards granted to athletes in local
and international sports competitions and
tournaments held in the Philippines and
abroad and sanctioned by their national
associations shall be EXEMPT from income tax.
ix. Pensions, Retirement Benefit, or Separation Pay
Paid for past employment services rendered.
A stated allowance paid regularly to a person on his
retirement or to his dependents on his death, in
consideration of past services, meritorious work, age,
loss or injury. It is generally taxable unless the law
states otherwise. [VALENCIA, Income Taxation 5th ed.
(2009)]
x. Income from Any Source Whatever
Inclusion of all income not expressly exempted within
the class of taxable income under the laws irrespective
of the voluntary or involuntary action of the taxpayer in
producing the gains, and whether derived from legal or
illegal sources
(a) Forgiveness of indebtedness
The cancellation or forgiveness of indebtedness may
have any of three possible consequences:
It may amount to payment of income. If, for example, an
individual performs services to or for a creditor, who, in
consideration thereof, cancels the debt, income in that
amount is realized by the debtor as compensation for
personal services.
It may amount to a gift. If a creditor wishes merely to
benefit the debtor, and without any consideration
therefore, cancels the debt, the amount of the debt is a
gift to the debtor and need not be included in the
latter‘s report of income.
It may amount to a capital transaction. If a corporation
to which a stockholder is indebted forgives the debt, the
transaction has the effect of a payment of dividend.
UP LAW BOC TAXATION 1 TAXATION LAW

Tax Benefit Rule

This is a general principle in taxation which states that In Case A, the entire amount recovered (P2,000) is
is a taxpayer deducted an item on his income tax return included in the computation of gross income in Year 2
and enjoyed a tax benefit (reduced his income tax) because the taxpayer benefited by the same extent.
thereby, and in a subsequent year recovers all or part of Prior to the write-off, the taxable income was
that item, he will recognize gross income in the year the P300,000; after the write-off, the taxable income was
deducted item is recovered. The rule has both an reduced to P298,000.
inclusionary and an exclusionary component, i.e., the
In Case B, none of the P2,000 recovered would be
recovery is included in the taxpayer‘s gross income to
recognized as gross income in Year 2. Note that even
the extent that the taxpayer obtained a tax benefit from
without the write-off, the taxpayer would not have paid
the prior year‘s deduction, and the recovery is excluded
any income tax anyway. The ―taxable income‖ before
to the extent that the prior year‘s deduction did not
the write-off was actually a net loss.
provide a tax benefit.
In Case C, only P5,000 of the P6,000 recovered would
(b) Recovery of accounts previously written-off
be recognized as gross income in Year 2. It was only to
this extent that the taxpayer benefited from the write-off.
Bad debts claimed as a deduction in the preceding
The taxpayer did not benefit from the extra P1,000
year(s) but subsequently recovered shall be included as
because at this point, the P1,000 was already a net
part of the taxpayer‘s gross income in the year of such
loss.
recovery to the extent of the income tax benefit of said
deduction. There is an income tax benefit when the
deduction of the bad debt in the prior year resulted in (c) Receipt of tax refunds or credit
lesser income and hence tax savings for the company.
(Sec. 4, RR 5-99)
General rule: A refund of a tax related to the business or
Illustration: the practice of profession, is taxable income (e.g.,
refund of fringe benefit tax) in the year of receipt to the
Case A Case B Case C
extent of the income tax benefit of said deduction (i.e.,
Year 1 the tax benefit rule applies).
Gross Income 500,000 400,000 500,000
Less: Allowable Exceptions: However, the following tax refunds are not
Deductions to be included in the computation of gross income:
(before write-off (1) Philippine income tax, except the fringe
of Uncollectible benefit tax
Accounts/Debts (200,000 (480,000 (495,000
) ) ) ) (2) Income tax imposed by authority of any foreign
Taxable Income country, if the taxpayer claimed a credit for
(Net Loss) 300,000 (60,000) 5,000 such tax in the year it was paid or incurred.
before write-off (3) Estate and donor‘s taxes
Deduction for
Accounts (4) Taxes assessed against local benefits of a kind
Receivable (2,000) (2,000) (6,000) tending to increase the value of the property
written off assessed (Special assessments)
Taxable Income (5) Value Added Tax
(Net Loss) after 298,000 (62,000) (1,000)
write-off (6) Fines and penalties due to late payment of tax
(7) Final taxes
Year 2 (8) Capital Gains Tax
Recovery of
Amounts Written 2,000 2,000 6,000 Note: The enumeration of tax refunds that are not
Off taxable (income) is derived from an enumeration of tax
payments that are not deductible from gross income.
Taxable Income 2,000 - 5,000
on the Recovery

PAGE 56 OF 275
UP LAW BOC TAXATION 1
If a tax is not an allowable deduction from gross income
when paid (no reduction of taxable income, hence no
tax benefit), the refund is not taxable.
(d) income from any source whatever
(e) Source rules in determining income from within and
without
The following items of gross income shall be treated as
gross income from sources WITHIN the Philippines:
(1) Interests
Derived from sources within the Philippines, and
interests on bonds, notes or other interest-bearing
obligation of residents.
Ultimately, the situs of interest income is the
residence of the debtor.
(2) Dividends
Dividends received:
from a domestic corporation; and
from a foreign corporation, UNLESS less than 50%
of its gross income for the previous 3-year period
was derived from sources within the Philippines [in
which case it will be treated as income partly from
within and partly from without].
The income which is considered as derived from within
the Philippines is obtained by using the following
formula:
Philippine Gross Income* x Dividend = Income Within
Worldwide Gross Income*
NOTE: * of the corporation giving the dividend
As a rule, the situs of dividend income is the residence
of the corporation declaring the dividend.
(3) Services
Compensation for labor or personal services performed
in the Philippines: As a rule, the situs of compensation
is the place of performance of the services.
(4) Rentals and Royalties
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TAXATION LAW
From property located in the Philippines or from any
interest in such property, including rentals or royalties
for –
(a) The use of or the right or privilege to use in the
Philippines any copyright, patent, design or
model, plan, secret formula or process,
goodwill, trademark, trade brand or other like
property or right;
(b) The use of, or the right to use in the Philippines
any industrial, commercial or scientific
equipment;
(c) The supply of scientific, technical, industrial or
commercial knowledge or information;
(d) The supply of any assistance that is ancillary
and subsidiary to, and is furnished as a means
of enabling the application or enjoyment of,
any such property or right as is mentioned in
(a), any such equipment as is mentioned in (b)
or any such knowledge or information as is
mentioned in (c);
(e) The supply of services by a nonresident person
or his employee in connection with the use of
property or rights belonging to, or the
installation or operation of any brand,
machinery or other apparatus purchased from
such nonresident person;
(f) Technical advice, assistance or services
rendered in connection with technical
management or administration of any
scientific, industrial or commercial
undertaking, venture, project or scheme; and
(g) The use of or the right to use:
(1) Motion picture films;
(2) Films or video tapes for use in connection
with television; and
(3) Tapes for use in connection with radio
broadcasting.
As a rule, the situs of rental income is the place where
the property is located. The situs of royalty income is
where the rights are exercised.
(5) Sale of Real Property
As a rule, the situs of the income from sale of real
property is where the realty is located.
(6) Sale of Personal Property
UP LAW BOC TAXATION 1 TAXATION LAW

General Rule: Gains, profits and income from the sale Exclusions from gross income refer to income received
of personal property, subject to the following rules: or earned but is not taxable as income because it is
exempted by law or by treaty. Such tax-free income is
not to be included in the income tax return unless
Place of Place of Treatment** information regarding it is specifically called for.
PURCHASE SALE Receipts which are not in fact income are, of course,
excluded from gross income.
Philippines Abroad Income from
Without The exclusion of income should not be confused with
the reduction of gross income by the application of
Abroad Philippines Income from
allowable deductions. While exclusions are simply not
Within
taken into account in determining gross income,
** in other words, the situs of the income from the sale deductions are subtracted from gross income to arrive
of personal property is the place of sale. at net income. [De Leon]

Exceptions: Items of Exclusions representing return of capital

(a) Gain from the sale of shares of stock in a Amount of capital is generally recovered through
domestic corporation deduction of the cost or adjusted basis of the property
sold from the gross selling price or consideration, or
(b) Treated as derived entirely from sources within
through the deduction from gross income of
the Philippines regardless of where the said
depreciation relating to the property used in trade or
shares are sold.
business before it is sold.
(c) Gains from the sale of (manufactured)
It may also related to indemnities, such as proceeds of
personal property:
life insurance paid to the insured‘s beneficiaries and
(d) produced (in whole or in part) by the taxpayer return of premiums paid by the insurance company to
within and sold without the Philippines, or the insured under a life insurance, endowment or
annuity contract.
(e) produced (in whole or in part) by the taxpayer
without and sold within the Philippines Damages, in certain instances, may also be exempt
because they represent return of capital.
(f) Treated as derived partly from sources within
and partly from sources without the
Philippines.
Items of Exclusion because it is subject to another
internal revenue tax
Place of Place of Treatment The value of property acquired by gift, bequest, devise
PRODUCTION SALE or descent is exempt from income tax on the part of the
recipient because the receipt of such property is already
Philippines Abroad Partly within,
subject to transfer taxes (estate tax or donor‘s tax)
partly without
Abroad Philippines Partly within,
partly without Items of Exclusions because they are expressly exempt
from income tax
(1) Under the Constitution
(8) Shares of Stock of Domestic Corporation
(2) Under a tax treaty
Treated as derived entirely from sources within the
Philippines regardless of where the said shares are sold. (3) Under special laws

i. Rationale for the Exclusions

B.3.6. Exclusions from gross income The term ―exclusions‖ refers to items that are not
included in the determination of gross income because:

PAGE 58 OF 275
UP LAW BOC TAXATION 1
(a) They represent return of capital or are not
income, gain or profit;
(b) They are subject to another kind of internal
revenue tax;
(c) They are income, gain or profit expressly
exempt from income tax under the
Constitution, tax treaty, Tax Code, or a general
or special law. [Mamalateo]
ii. Taxpayers Who May Avail of the Exclusions
Exclusion Taxpayer
Return of capital All taxpayers since there is
no income.
Already subject to internal All taxpayers unless
revenue tax provided that income is to
be included.
Express exclusion As expressly provided.
iii. Exclusions Distinguished from Deductions and Tax
Credit
Exclusions from gross income refer to flow of wealth to
the taxpayer which are not treated as part of gross
income for purposes of computing the taxpayer‘s
taxable income, due to the following reasons: (1) it is
exempted by the Constitution or a statute; or (2) it does
not come within the definition of income.
Deductions, on the other hand, are the amounts which
the law allows to be subtracted from gross income in
order to arrive at net income.
Exclusions pertain to the computation of gross income,
while deductions pertain to the computation of net
income.
Exclusions are something received or earned by the
taxpayer which do not form part of gross income while
deductions are something spent or paid in earning
gross income.
Tax Credit refers to amounts subtracted from the
computed tax in order to arrive at taxes payable.
iv. Exclusions Under the Constitution
a) Income derived by the government or its
political subdivisions from the exercise of any
essential governmental function
PAGE 59 OF 275
TAXATION LAW
b) Also, all assets and revenues of a non-stock,
non-profit private educational institution used
directly, actually and exclusively for private
educational purposes shall be exempt from
taxation.
v. Exclusions Under the Tax Code (Sec. 32(b), NIRC)
(a) Proceeds of life insurance policies.—
General rule: The proceeds of life insurance policies
paid to his estate or to any beneficiary (but not a
transferee for a valuable consideration), directly or in
trust, upon the death of the insured, are excluded from
the gross income of the beneficiary. However, if such
amounts are held by the insurer under an agreement to
pay interest thereon, the interest payments received by
the insured shall be included in gross income. The
interest income shall be taxed at the graduated income
tax rates.
(b) Return of premium paid.—
General rule: The amount received by the insured as a
return of premiums paid by him under life insurance,
endowment, or annuity contracts, either during the term
or at the maturity of the term mentioned in the contract
or upon surrender of the contract is a return of capital
and not income.
This refers to the cash surrender value of the contract.
Exception: If the amounts received by the insured (when
added to the amounts already received before the
taxable year under such contract) exceed the aggregate
premiums or considerations paid (whether or not paid
during the taxable year), then the excess shall be
included in gross income.
(c) Amounts received under life insurance, endowment
or annuity contracts.— Amounts received (other than
amounts paid by reason of the death of the insured and
interest payments on such amounts) under a life
insurance, endowment or annuity contracts are
excluded from gross income, but if such amounts (when
added to amounts already received before the taxable
year under such contract) exceed the aggregate
premiums of considerations paid (whether or not paid
during the taxable year), then the excess shall be
included in gross income. However, in the case of a
transfer for valuable consideration, by assignment or
otherwise, of a life insurance, endowment , or annuity
contract, or any interest therein, only the actual value of
such consideration and the amount of the premiums
UP LAW BOC TAXATION 1 TAXATION LAW

and other sums subsequently paid by the transferee are (f) Income exempt under tax treaty.— Income of any kind,
exempt from taxation. to the extent required by any treaty obligation binding
upon the Government of the Philippines.

(d) Value of property acquired by gift, bequest, devise or

descent.— Gifts, bequests and devises (which are (g) Retirement benefits, pensions, gratuities, etc.—
subject to estate or gift taxes) are excluded from gross These are:
income, BUT not the income from such property. If the
(1) Retirement benefits under RA 7641, RA 4917,
amount received is on account of services rendered,
and Section 60(B) of the NIRC
whether constituting a demandable debt or not, or the
use or opportunity to use of capital, the receipt is (2) Terminal pay
income [Pirovano v. Commissioner G.R. No. L- (3) Retirement Benefits from foreign government
19865, July 31, 1965] agencies
(4) Veterans benefits
(e) Amount received through accident or health (5) Benefits under the Social Security Act
insurance (Compensation for damages).— As a rule,
amounts received through accident or health insurance (6) GSIS benefits
or under workmen‘s compensation acts, as
compensation for personal injuries or sickness, plus the
amount of any damages received, whether by suit or Retirement benefits received under RA 7641(The
agreement, on account of such injuries or sickness are Retirement Pay Law) and those received by officials and
excluded from gross income. employees of private firms under a reasonable private
benefit plan (RPBP) maintained by the employer under
RA 4917 (now Section 32(B)(6)(a) of NIRC) are
Examples of nontaxable and taxable damages excluded from gross income subject to income tax.
recoveries are:
Nontaxable – Taxable – compensation RA 7641 RPBP
compensation for for damages on account
damages on account of of Retiring employee must Retiring official or
be in the service of same employee must have been
Personal (physical) Actual damages for loss employer CONTINUOUSLY in the service of the same
injuries or sickness of anticipated profits for at least five (5) years employer for at least ten
(10) years.
Any other damages .Moral and exemplary
recovered on account of damages awarded as a Retiring employee must Retiring official or
personal injuries or result of break of contract be at least sixty (60) years employee must be at least
sickness old but not more than 65 fifty (50) years old at the
years of age at the time of time of retirement
Exemplary and moral Interest for non-taxable retirement
damages for out-of-court damages above
settlement, including Availed of only once, and Retiring employee shall
attorney‘s fees only when there is no not have previously
RPBP availed of the privilege
Alienation of affection, or Any damages as under a retirement benefit
breach of promise to marry compensation for plan of the same or
unrealized income another employer

Any amount received as a Plan must be reasonable.

return of capital or Its implementation must
reimbursement of be fair and equitable for
expenses the benefit of all
employees (e.g. from
president to laborer)

PAGE 60 OF 275
UP LAW BOC TAXATION 1
Plan must be approved by
BIR
A 'reasonable private benefit plan' means a pension,
gratuity, stock bonus or profit-sharing plan maintained
by an employer for the benefit of some or all of his
employees wherein contributions are made by such
employer, or employees, or both for the purpose of
distributing to such employees the earnings and
principal of the fund thus accumulated by the trust in
accordance with such plan (trust fund)
Further, it should be provided in the plan that at no time
prior to the satisfaction of all liabilities with respect to
employees under any trust, shall any part of the corpus
or income of the fund be used for, or be diverted to, any
purpose other than for the exclusive benefit of his
employees.
Terminal pay/Separation pay
Any amount received by an employee or by his heirs
from the employer as a consequence of separation of
such official or employee from the service of the
employer because of death, sickness, other physical
disability or for any cause beyond the control of the
employee. The phrase ―for any cause beyond the
control of the said official or employee‖ means that the
separation of the employee must be involuntary and not
initiated by him.
The separation must not be of his own making.
Notes:
Sickness must be life-threatening or one which renders
the employee incapable of working
Retrenchment of the employee due to unfavorable
business conditions or financial reverses is considered
as involuntary. However, resignation or availment of an
optional early retirement plan is voluntary and bars a
claim under this provision.
BIR Ruling 143-98: The ―terminal leave pay‖ (amount
paid for the commutation of leave credits) of retiring
government employees is considered not part of the
gross salary, and is exempt from taxes. The government
recognizes that for most public servants, retirement pay
is always less than generous if not meager and scrimpy.
Terminal leave payments are given not only at the same
time but also for the same policy considerations
governing retirement benefits. (Commissioner v.
Castaneda, 203 SCRA 72).
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TAXATION LAW
Retirement BENEFITS from foreign government
agencies – The social security benefits, retirement
gratuities, pensions and other similar benefits received
by resident or non-resident citizens or aliens who come
to reside permanently in the Philippines from foreign
government agencies and other institutions, private or
public;
Payments of VETERANS benefits under U.S. Veterans
Administration – Payments of benefits due or to
become due to any person residing in the Philippines
under the laws of the United States administered by the
United States Veterans Administration
Social Security Act benefits – Payments of benefits
received under the Social Security Act of 1954 (RA
8282), as amended, e.g., Maternity Benefits
GSIS benefits – Benefits received from GSIS under the
GSIS Act of 1937, as amended, and the retirement
gratuity received by government officials and
employees are not taxable. [Sec. 32B6., NIRC; Sec. B1,
RR 2-98]
(h) Winnings, prizes and award, including those in
sports competitions.—All prizes and awards granted to
athletes:
in local and international sports competitions and
tournaments whether held in the Philippines or abroad,
AND
sanctioned by their national sports associations
shall not be included in gross income and shall be tax
exempt. [Sec. 32 B7d, NIRC]
Prizes and awards made primarily in recognition of
charitable, literary, educational, artistic, religious,
scientific, or civic achievement are not taxable,
provided:
Recipient was selected without any action on his part to
enter the contest or proceeding; and
Recipient is not required to render substantial future
services as a condition to receiving the prize or award
vi. Exclusions Under Special Laws
(a) Personal Equity and Retirement Account
Under R.A. 6657 (Comprehensive Agrarian Reform
Package Law), gain arising from the transfer of
UP LAW BOC TAXATION 1
agricultural property covered by the law shall be exempt
from capital gains tax.
Under R.A. 6938 (Cooperative Code of the Philippines),
as amended by R.A. 9520, cooperatives transacting
business with both members and non-members shall
not be subject to tax on their transactions with
members. In relation to this, the transactions of
members with the cooperative shall not be subject to
any taxes and fees, including but not limited to final
taxes on members' deposits.
Under R.A. 7916 (PEZA Law), as amended, PEZA-
registered enterprises are given income tax holidays of
six or four years from the date of commercial operations,
depending on whether their activities are considered
pioneer or non-pioneer.
Under R.A. 9178 (Barangay Micro Business Enterprises
Act of 2002), BMBEs shall be exempt from income tax
for income arising from the operation of the enterprise.
B.4. DEDUCTIONS FROM GROSS INCOME
Deductions are items or amounts which the law allows
to be deducted from the gross of income of a taxpayer
in order to arrive at taxable income.
In general, deductions or allowable deductions are
business expenses and losses incurred which the law
allows to reduce gross business income to arrive at net
income subject to tax. [Sec. 65, Rev. Reg. No. 2]
Deductions are in the nature of an exemption from
taxation; they are strictly construed against the
claimant, who must point to a specific provision
allowing them and who has the burden of proving that
they falls within the purview of such provision. Thus, all
deductions must be substantiated, except when the law
dispenses with the records, documents or receipts to
support the deductions.
If the exemption is not expressly stated in the law, the
taxpayer must at least be within the purview of the
exemption by clear legislative intent [Commissioner of
Customs v. Philippine Acetylene Co., G.R. No. L-22443
May 29, 1971]
However, if there is an express mention in the law or if
the taxpayer falls within the purview of the exemption by
clear legislative intent, the rule on strict construction
will not apply. [Commissioner v. Anoldus Caprentry
Shop, G.R. No. 71122 March 25, 1988]
The purpose of deductions from gross income is to
provide the taxpayer a just and reasonable tax amount
as the basis of income tax. It is because many
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TAXATION LAW
taxpayers spend adequate expenditures in order to
obtain a legitimate income.
Types of deductions
There are three (3) types of deductions from gross
income:
itemized deductions in Section 34(A) to (J) and (M)
available to all kinds of taxpayers engaged in trade or
business or practice of profession in the Philippines;
optional standard deduction in Section 34(L) available
only to individual taxpayers deriving business,
professional, capital gains and passive income not
subject to final tax, or other income; and
the special deductions in Sections 37 and 38 of the
NIRC, and in special laws like the BOI law (E.O. 226).
B.4.1. General rules
(a) Deductions must be paid or incurred in
connection with the taxpayer‘s trade, business or
profession
(b) Deductions must be supported by adequate
receipts or invoices (except standard deduction)
(c) Additional requirement relating to withholding
B.4.2. Return of captial
Income tax is levied by law only on income; hence,
the amount representing return of capital should
be deducted from proceeds from sales of assets
and should not be subject to income tax.
Costs of goods purchased for resale, with proper
adjustment for opening and closing inventories, are
deducted from gross sales in computing gross
income (Sec. 65, Rev. Reg. 2)
(a) Sale of inventory of goods by manufacturers and
dealers of properties:
In sales of goods representing inventory, the
amount received by the seller consists of return of
capital and gain from sale of goods or properties.
That portion of the receipt representing return of
capital is not subject to income tax. Accordingly,
cost of goods manufactured and sold (in the case
of manufacturers) and cost of sales (in the case of
dealers) is deducted from gross sales and is
reflected above the gross income line in a profit
and loss statement.
UP LAW BOC TAXATION 1
(b) Sale of stock in trade by a real estate dealer and
dealer in securities:
Real estate dealers and dealers in securities are
ordinarily not allowed to compute the amount
representing return of capital through cost of sales.
Rather they are required to deduct the total cost
specifically identifiable to the real property or
shares of stock sold or exchanged.
(c) Sale of services:
Their entire gross receipts are treated as part of
gross income.
B.4.3. Itemized Deductions
These are enumerated in Section 34 of the NIRC.
Additional deductions are granted to insurance
companies in Section 37, while losses from wash
sales of stock or securities by a dealer in securities
are provided for in Section 38 of the NIRC. Other
itemized deductions could be granted under
general or special laws, e.g. additional training
expenses are allowed to enterprises registered with
PEZA, BOI, and SBMA.
Timing of Claiming Deductions
A taxpayer has the right to deduct all authorized
allowances for the taxable year. As a rule, if he does not
within any year deduct certain of his expenses, losses,
interest, taxes or other charges, he cannot deduct them
from the income of the next of any succeeding year [Sec.
76, Income Tax Regulations]
(a) Expenses
Business expenses deductible from gross income
include the ordinary and necessary expenditures
directly connected with or pertaining to the taxpayer‘s
trade or business. The cost of goods purchased for
resale, with proper adjustment for opening and closing
inventories, is deducted from gross sales in computing
gross income.
Includes:
(i) Salaries, wages, and other forms of
compensation for personal services actually
rendered, including the grossed-up monetary
value of fringe benefits furnished or granted by
the employer to the employee
(ii) Travel expenses
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TAXATION LAW
(iii) Rentals
(iv) Entertainment, recreation and amusement
expenses
(v) Other expenses such as repairs or those
incurred by farmers and other persons in
agribusiness
(1) Requisites for deductibility of business expenses.—
(a) Ordinary AND necessary;
ORDINARY - normal and usual in relation to the
taxpayer's business and surrounding circumstances;
need not be recurring
NECESSARY - appropriate and helpful in the
development of taxpayer's business or are proper for
the purpose of realizing a profit or minimizing a loss
Paid or incurred during the taxable year;
Others: (not in the SC syllabus)
(b) Paid or incurred in carrying on or which are directly
attributable to the development, management,
operation and/or conduct of the trade, business or
exercise of profession;
(c) Substantiated by adequate proof – documented by
official receipts or adequate records, which reflect the
amount of expense deducted and the connection or
relation of the expense to the business/trade of the
taxpayer);
Legitimately paid (not a BRIBE, kickback, or otherwise
contrary to law, morals, public policy);
If subject to withholding tax, the tax required to be
withheld on the expense paid or payable is shown to
have been properly withheld and remitted to the BIR on
time;
Amount must be reasonable.
Note: The expenses allowable to a non-resident alien or
a foreign corporation consist of only such expenses as
are incurred in carrying on any business or trade
conducted within the Philippines exclusively. [Sec. 77
RR 2]
UP LAW BOC TAXATION 1
COHAN Rule: This relief will apply if the taxpayer has
shown that it is usual and necessary in the trade to
entertain and to incur similar kinds of expenditures,
there being evidence to show the amounts spent and
the persons entertained, though not itemized. In such a
situation, deduction of a portion of the expenses
incurred might be allowed even if there are no receipts
or vouchers. Absence of invoices, receipts or vouchers,
particularly lack of proof of the items constituting the
expense is fatal to the allowance of the deduction
[Gancayco v. Collector, G.R. No. L-13325, (1961)]
Substantiation requirement – Sec. 34(A)(1)(b), NIRC:
No deduction from gross income shall be allowed
unless the taxpayer shall substantiate with sufficient
evidence, such as official receipts or other adequate
records: (1) the AMOUNT of the expense being
deducted, and (2) the DIRECT CONNECTION or relation
of the expense being deducted to the development,
management, operation and/or conduct of the trade,
business or profession of the taxpayer.
When to ACCRUE expenses: ―all–events test‖ states
that under the accrual method of accounting, expenses
are deductible in the taxable year in which: (1) all
events have occurred which determine the liability; and
(2) the amount of liability can be determined with
reasonable accuracy.
Kinds of business expenses
These are:
(a) Salaries, wages and other forms of
compensation for personal services actually
rendered, including the grossed-up monetary
value of the fringe benefit subjected to fringe
benefit tax which tax should have been paid
(Compensation for
(b) Travelling expenses
(c) Cost of materials
(d) Rentals and/or other payments for use or
possession of property
(e) Repairs and maintenance
(f) Expenses under lease agreements
(g) Expenses for professionals
(h) Entertainment expenses
(i) Political campaign expenses
PAGE 64 OF 275
TAXATION LAW
(j) Training expenses
(k) Others
(2) Salaries, wages and other forms of compensation
for personal services actually rendered, including the
grossed-up monetary value of the fringe benefit
subjected to fringe benefit tax which tax should have
been paid
Given for personal services must be actually rendered
and reasonable.
For income payment to be allowed as deduction, the
withholding tax must have been paid [RR No. 12-2013].
Bonuses are deductible when:
(1) made in good faith
(2) given as additional compensation for personal
services actually rendered
(3) such payments, when added to the stipulated
salaries, do not exceed a reasonable
compensation for the services rendered
(3) Traveling expenses
This include transportation expenses and meals and
lodging [Sections 65 and 66, Rev. Reg. No. 2]
(1) Expenses must be reasonable and necessary.
(2) Must be incurred or paid ―while away from
home‖
(3) Tax home is the principal place of business,
when referring to ―away from home‖
(4) Incurred or paid in the conduct of trade or
business.
Note: However, necessary transportation expenses of
the taxpayer (which are different from the
transportation expenses included in the term ―travel
expenses‖) in its ―tax home‖ are deductible. Thus, a
taxpayer operating its business in Manila is allowed
transportation expenses from its office to its customers‘
place of business and back. But the transportation
expenses of an employee from his residence to its office
and back are not deductible as they are considered
personal expenses.
(4) Cost of materials
UP LAW BOC TAXATION 1
Deductible only to the amount that they are actually
consumed and used in operation during the year for
which the return is made, provided that their cost has
not been deducted in determining the net income for
any previous year.
(5) Rentals and/or other payments for use or
possession of property
Required as a condition for continued use or
possession of property.
For purposes of trade business or profession.
Taxpayer has not taken or is not taking title to the
property or has no equity other than that of lessee, user,
or possessor.
On the accrual basis, rent is deductible as expense
when liability is incurred during the period of use. On
cash basis, rent is deductible when it is incurred and
paid.
If the advance payment is a prepaid rental, such
payment is taxable income to the lessor in the year
when it was received. However, an advance payment is
not deductible expense of the lessee until the period is
used. [Valencia and Roxas]
(6) Repairs and maintenance
Incidental or ordinary repairs are deductible. Repairs
which neither materially add to the value of the property
nor appreciably prolong its life, but keep it in an
ordinarily efficient working condition, may be deducted
as expenses, provided the plant or property account is
not increased by the amount of such expenditure. The
life of the asset referred to is the probable, normal,
useful life for the purpose of the allowance for the
return of the capital investment – not what the life that
would have been if no repairs had been made after the
property was damaged by a casualty. Since the repairs
prolonged the lives of the said vessels of petitioners,
the disallowance must be sustained. [Visayan
Transportation Co. v. CTA, CTA Case No. 1119, (1964)]
Extraordinary repairs are not deductible – they are
capital expenditures
Repairs which add material value to the property or
appreciably prolong its life
Repairs in the nature of replacement, to the extent that
they arrest deterioration and appreciably prolong the
life of the property, should be charged against the
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TAXATION LAW
depreciation reserves if such account is kept. [Sec. 68,
Rev. Regs. 2]
All maintenance expenses on account of non-
depreciable vehicles for taxation purposes are
disallowed in its entirely. [RR No. 12-2012]
(7) Expenses under lease agreements
Requisites for deductibility:
(1) Required as a condition for continued use or
possession;
(2) For purposes of the trade, business or
possession;
(3) Taxpayer has not taken or is not taking title to
the property or has no equity other than that of
lessee, user, or possessor.
(8) Expenses for professionals
Deductible in the year the professional services are
rendered, not in the year they are billed, provided that
the ―all events‖ is present.
―All events test‖ requires:
Fixing a right to income or liability to pay; and
The availability of reasonably accurate determination of
such income or liability.
The ―all-events test‖ does not demand that the amount
of income or liability be known absolutely; it only
requires that a taxpayer has at its disposal the
information necessary to compute the amount with
reasonable accuracy, which implies something less
than an exact or completely accurate amount.
[Commissioner v. Isabela Cultural Corporation, GR.
172231, Feb. 12, 2007]
A professional may claim as deductions the cost of
supplies used by him in the practice of his profession,
expenses paid in the operation and repair of
transportation equipment used in making professional
calls, dues to professional societies and subscriptions
to professional journals. [Mamalateo]
(9) Entertainment/Representation expenses
These are entertainment, amusement and recreation
(EAR) expenses incurred or paid during the year that are
directly connected to the development, management
and operation of the trade, business or profession of
the taxpayer.
UP LAW BOC TAXATION 1
Requisites for deductibility:
(1) Reasonable in amount.
(2) Paid or incurred during the taxable period.
(3) Directly connected to the development,
management, and operation of the trade,
business or profession of the taxpayer, or that
are directly related to or in furtherance of the
conduct thereof.
(4) Not to exceed such ceiling as the Secretary of
Finance prescribe (under RR 10-02, in no case
to exceed 0.50% of net sales for sellers of
goods or properties or 1% of net revenues for
sellers of services, including taxpayers
engaged in the exercise of profession and use
or lease of properties)
(5) Not incurred for purposes contrary to law,
morals, public policy or public order.
(6) Must be substantiated with sufficient evidence
such as receipts and/or adequate records.
Exclusions from EAR expenses:
(a) Expenses which are treated as compensation
or fringe benefits for services rendered under
an employer-employee relationship
(b) Expenses for charitable or fund raising events
(c) Expenses for bona fide business meeting of
stockholders, partners or directors
(d) Expenses for attending or sponsoring an
employee to a business league or professional
organization meeting
(e) Expenses for events organized for promotion
marketing and advertising, including concerts,
conferences, seminars, workshops,
conventions and other similar events; and
(f) Other expenses of a similar nature.
(10) Political campaign expenses
Amount expended for political campaign purposes or
payments to campaign funds are NOT deductible either
as business expenses or as contribution [CTA Case No.
695, April 30, 1969, citing Mertens]
(11) Training expenses
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TAXATION LAW
Under Section 30 of the Tax Code, as implemented by
Sec. 20 of the Revenue Regulations No. 2, organization
and pre-operating expenses of a corporation (including
training expenses) are considered as capital
expenditures and are therefore, not deductible in the
year they are paid or incurred. But taxpayers who incur
these expenses and subsequently enter the trade or
business to which the expenditures relate can elect to
amortize these expenditures over a period not less than
sixty (60) months. [BIR Ruling 102-97, Sept. 29, 1997]
This rule, however, does not apply to a situation where
an existing corporation incurs these same expenditures
for the purpose of expanding its business in a new line
of trade, venture or activity.
(12) Others
Expenses Allowable to Private Educational Institutions:
In addition to the expenses allowable as deductions
under the NIRC, a private proprietary educational
institution may at its OPTION, elect either:
To deduct expenditures otherwise considered as capital
outlays or depreciable assets incurred during the
taxable year for the expansion of school facilities, OR
To deduct allowances for depreciation thereof.
Thus, where the expansion expense has been claimed
as a deduction, no further claims for yearly depreciation
of the school facilities are allowed.
Advertising Expenses
The media advertising expenses which were found to be
inordinately large and thus, not ordinary, and which
were incurred in order to protect the taxpayer‘s brand
franchise which is analogous to the maintenance of
goodwill or title to one‘s property, are not ordinary and
necessary expenses but are capital expenditures, which
should be spread out over a reasonable period of time.
[CIR v. General Foods Phils. Inc, GR No. 143672, April
24, 2003]
(b) Interest
(1) Requisites for deductibility.—
(1) There is a valid and existing indebtedness.
(2) The indebtedness is that of the taxpayer
UP LAW BOC TAXATION 1
(3) The indebtedness is connected with the
taxpayer‗s trade, profession, or business.
(4) The interest must be legally due.
(5) The interest must be stipulated in writing.
(6) The taxpayer is LIABLE to pay interest on the
indebtedness.
(7) The indebtedness must have been paid or
accrued during the taxable year.
(8) The interest payment arrangement must not be
between related taxpayers
(9) The interest must not be incurred to finance
petroleum operations.
(10) In case of interest incurred to acquire property
used in trade, business or exercise of
profession, the same was not treated as a
capital expenditure,
Limitation: The taxpayer's allowable deduction for
interest expense shall be reduced by an amount equal
to 33% of the interest income subjected to final tax (see
chapter on taxation of passive income for interest
income); effective January 1, 2009.
(2) Non-deductible interest expense.—
(a) Interest paid in advance by the taxpayer who reports
income on cash basis shall only be allowed as
deduction in the year the indebtedness is paid.
(b) If the indebtedness is payable in periodic
amortizations, only the amount of interest which
corresponds to the amount of the principal amortized or
paid during the year shall be allowed as deduction in
such taxable year.
(c)Interest payments made between related taxpayers.
(d) Interest on indebtedness incurred to finance
petroleum exploration.
Related Taxpayers
(a) Between members of the family, i.e. brothers
and sisters (whether by the whole or half-
blood), spouse, ancestor, and lineal
descendants; or
(b) Except in case of distributions in liquidation,
between an individual and a corporation,
where the individual owns directly or indirectly
PAGE 67 OF 275
TAXATION LAW
more than 50% of the outstanding stock of the
corporation
(c) Except in the case of distributions in
liquidation, between two corporations where:
(i) Either one is a personal holding
company of a foreign personal
holding company with respect to the
taxable year preceding the date of the
sale of exchange; and
(ii) More than 50% of the outstanding
stock of each is owned, directly or
indirectly, by or for the same
individual; or
(d) Between parties to a trust – Grantor and
Fiduciary; or
(e) Fiduciary of a trust and fiduciary of another
trust if the same person is a grantor with
respect to each trust; or
(f) Fiduciary and Beneficiary
(3) Interest subject to special rules.
(a) Interest paid in advance
No deduction shall be allowed if within the taxable year
an individual taxpayer reporting income on cash basis
incurs an indebtedness on which an interest is paid in
advance through discount or otherwise.
But the deduction shall be allowed in the year the
indebtedness is paid
(b) Interest periodically amortized
If the indebtedness is payable in periodic amortizations,
the amount of interest which corresponds to the
amount of the principal amortized or paid during the
year shall be allowed as deduction in such taxable year
(c)Interest expense incurred to acquire property for use
in trade/business/profession
At the option of the taxpayer, interest expense on a
capital expenditure may be allowed as:
A deduction in full in the year when incurred;
A capital expenditure for which the taxpayer may claim
only as a deduction the periodic amortization of such
expenditure.
UP LAW BOC TAXATION 1
Should the taxpayer elect to deduct the interest
payments against its gross income, the taxpayer cannot
at the same time capitalize the interest payments. In
other words, the taxpayer is not entitled to both the
deduction from gross income and the adjusted
(increased) basis for determining gain or loss and the
allowable depreciation charge. [Paper Industries Corp.
v. Commissioner, 250 SCRA 434]
(d) Reduction of interest expense/interest arbitrage
The taxpayer's allowable deduction for interest expense
shall be reduced by an amount equal to 33% of the
interest income subjected to final tax; effective January
1, 2009. [RA 9337]
This limitation is apparently intended to counter the tax
arbitrage scheme where a taxpayer obtains an interest-
bearing loan and places the proceeds of such loan in
investments that yield interest income subject to
preferential tax rate of 20% final withholding tax.
[Valencia and Roxas]
(c) Taxes
Taxes Proper: Refers to national and local taxes;
(1) Requisites for deductibility
Such tax must be:
(1) Paid or incurred within the taxable year;
(2) Paid or incurred in connection with the
taxpayer‗s trade, profession or business;
(3) Imposed directly on the taxpayer;
(4) Not specifically excluded by law from being
deducted from the taxpayer‗s gross income.
The following taxes are deductible:
a) Import duties;
b) Business tax;
c) Professional/occupation tax;
d) Privilege and excise tax;
e) DST;
f) Motor vehicle registration fees;
g) Real property tax;
h) Electric energy consumption tax; and
PAGE 68 OF 275
TAXATION LAW
i) Interest on delinquent taxes.
(2) Non-deductible taxes
General Rule: All taxes, national or local, paid or
incurred during the taxable year in connection with the
taxpayer's profession, trade or business, are deductible
from gross income
Exceptions:
a) Philippine income tax, except Fringe Benefit
Taxes;
b) Income tax imposed by authority of any foreign
country, if taxpayer avails of the Foreign Tax
Credit (FTC)
Exception to exception: When the taxpayer does NOT
signify his desire to avail of the tax credit for taxes of
foreign countries, the amount may be allowed as a
deduction from gross income of citizens and domestic
corporations subject to the limitations set forth by law.
(3) Treatments of surcharges/interests/fines for
delinquency
The amount of deductible taxes is limited to the basic
tax and shall not include the amount for any surcharge
or penalty on delinquent taxes. However, interest on
delinquent taxes, although not deductible as tax, can
be deducted as interest expense at its full amount. [CIR
v Palanca, 18 SCRA 496]
Although interest payment for delinquent taxes is not
deductible as tax, the taxpayer is not precluded thereby
from claiming said interest payment as deduction as
such. [CIR v. Vda. de Prieto, 1960]
(4) Treatment of special assessment.
Special assessments and other taxes assessed against
local benefits of a kind tending to increase the value of
the property assessed are non-deductible from gross
income.
(5) Tax credit vis-à-vis deduction.—
Tax credit – amount allowed by law to reduce the
Philippine income tax due, subject to limitations, on
account of taxes paid or accrued to a foreign country
Tax Credit Tax Deduction
UP LAW BOC TAXATION 1 TAXATION LAW

Taxes are deductible from Taxes are deductible from taxpayer's taxable income from sources within
the Phil. Income tax itself gross income in such country bears to his entire taxable
computing the taxable income for the same taxable year; and
income (b) [Worldwide Limit] The total amount of the
Effect: Reduces Philippine Effect: Reduces taxable credit shall not exceed the same proportion of
income tax liability income upon which the tax the tax against which such credit is taken,
liability is calculated which the taxpayer's taxable income from
sources without the Philippines taxable bears
Sources: Only foreign Sources: Deductible taxes to his entire taxable income for the same
income taxes may be (e.g. business tax, excise taxable year.
claimed as credits against tax)
Philippine income tax.
Formula:
An amount subtracted from an individual's or entity's Limit #1
tax liability to arrive at the total tax liability. A tax credit Taxable
reduces the taxpayer's liability, compared to a Income Per Limit on
deduction which reduces taxable income upon which Foreign amount of
the tax liability is calculated. A credit differs from Phil. Income tax credit
deduction to the extent that the former is subtracted Country x =
Tax (Per
from the tax while the latter is subtracted from income Worldwide
before the tax is computed. [CIR v. Bicolandia Drug Country
Taxable Limit)
Corp. G.R. No. 148083, (2006)] Income

The following may claim tax credits: Limit #2

(a) Resident citizens Taxable
(b) Domestic corporations, which include all Income For all Limit on
partnerships except general professional Foreign amount of
partnerships Phil. Income
Countries x = tax credit
Tax
(c) Members of general professional partnerships (World
Worldwide
(d) Beneficiaries of estates or trusts Taxable Wide Limit)
Income

The following may NOT claim tax credits:

(a) Non-resident citizens
(b) Aliens, whether resident or non-resident
(c) Foreign corporations, whether resident on non-
resident
Note: Computation of FTC: Limit #2 applies where
taxes are paid to two or more foreign countries.
Allowable tax credit is the lower between the tax credit
computed under Limit #1 and that computed under
Limit#2.

Note: Tax credits for foreign taxes are allowed only for FTC Limitations – lowest of the 3:
income derived from sources outside the Philippines. (a) Actual FTC
The above taxpayers are not entitled to tax credit; they
are taxable only on income derived from Philippine (b) For taxes paid to one foreign country
sources. (c) For taxes paid to 2 or more foreign countries
Limitations on Tax Credit.
(a) [Per Country Limit] The amount of tax credit (d) Losses
shall not exceed the same proportion of the tax
against which such credit is taken, which the (1) Requisites for deductibility.—
PAGE 69 OF 275
UP LAW BOC TAXATION 1
(1) Loss must be that of the taxpayer (e.g., losses
of the parent corp. cannot be deducted by its
subsidiary);
(2) Actually sustained and charged off within the
taxable year;
(3) Incurred in trade, business or profession;
(4) Of property connected with the trade, business,
or profession, if the loss arises from fires,
storms, shipwreck or other casualties, or from
robbery, theft, or embezzlement;
(5) Sustained in a closed and completed
transaction;
(6) Not compensated for by insurance or other
form of indemnity;
(7) Not claimed as a deduction for estate tax
purposes;
(8) In case of casualty loss, filing of notice of loss
with the BIR within 45 days from the date of
the event that gave rise to the casualty; and
(9) The taxpayer must prove the elements of the
loss claimed, such as the actual nature and
occurrence of the event and amount of the loss.
In case a non-depreciable vehicle is sold at a loss, the
loss incurred from the sale of non- depreciable vehicle
is not allowed as a deduction. [RR No. 2-2013]
No loss is recognized in the following.—
(a) Merger, consolidation, or control securities
(where no gains are recognized either);
(b) Exchanges not solely in kind;
(c) Related taxpayers (see above – (c) Interest
expense incurred to acquire property for use in
trade/business/profession)
(d) Wash sales;
(e) Illegal transactions
(2) Other types of losses.—
(a) Capital losses
Incurred in the sale or exchange of capital assets
(allowable only to the extent of capital gains, except for
banks and trust companies under conditions in Sec. 39
of NIRC where loss from such sale is not subject to the
foregoing limitation);
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TAXATION LAW
Resulting from securities becoming worthless and
which are capital assets (considered loss from sale or
exchange) on last day of the taxable year;
Losses from short sales of property;
Losses due to failure to exercise privileges or options to
buy or sell property.
(b) Securities becoming worthless
Loss in shrinkage in value of stock through fluctuation
in the market is not deductible from gross income. (To
be deductible, the loss must be actually suffered when
the stock is disposed of.)
Exception: If the stock of the corporation becomes
worthless, the cost or other basis may be deducted by
its owner in the taxable year in which the stock became
worthless, provided a satisfactory showing of its
worthlessness be made, as in the case of bad debts.
(c) Losses on wash sales of stocks or securities
Wash Sale - a sale or other disposition of stock or
securities where substantially identical securities
(substantially the same as those disposed of) are
acquired or purchased (or there was an option to
acquire, and the acquisition or option should be by
purchase or exchange upon which gain or loss is
recognized under the income tax law) within a 61-day
period, beginning 30 days before the sale and ending
30 days after the sale
General rule: Not deductible from gross income
Exception: If by a dealer in securities in the course of
ordinary business, it is deductible.
(d) Wagering losses
Losses from wagering (gambling) are deductible only to
the extent of gains from such transactions. A wager is
made when the outcome depends upon CHANCE.
(e) Net Operating Loss Carry Over (NOLCO)
Net operating loss (NOL) is the excess of allowable
deductions over gross income for any taxable year
immediately preceding the current taxable year.
NOLCO: The NOL of the business or enterprise which
had not been previously offset as deduction from gross
income shall be carried over as a deduction from gross
income for the next three (3) consecutive taxable years
UP LAW BOC TAXATION 1
immediately following the year of such loss, provided
however, that any net loss incurred in a taxable year
during which the taxpayer was exempt from income tax
shall not be allowed as a deduction. [Sec. 34(3)(D),
NIRC]
Exception: Mines other than oil and gas wells, where a
net operating loss without the benefit of incentives
provided for under EO No. 226 (Omnibus Investments
Code) incurred in any of the first ten (10) years of
operation may be carried over as a deduction from
taxable income for the next five (5) years immediately
following the year of such loss.
Requisites for NOLCO:
(1) The taxpayer was not exempt from income tax
the year the loss was incurred;
(2) There has been no substantial change in the
ownership of the business or enterprise
wherein:
(3) AT LEAST 75% of nominal value of outstanding
issued shares is held by or on behalf of the
same persons; or
(4) AT LEAST 75% of the paid up capital of the
corporation is held by or on behalf of the same
persons.
Taxpayers Entitled to NOLCO
(a) Individuals engaged in trade or business or in
the exercise of his profession (including
estates and trusts);
Note: An individual who avails of 40% OSD
shall not simultaneously claim deduction of
NOLCO. However, the three-year reglementary
period shall continue to run during such period
notwithstanding the fact that the aforesaid
taxpayer availed of OSD during the said period.
(b) Domestic and resident foreign corporations
subject to the normal income tax (e.g.,
manufacturers and traders) or preferential tax
rates under the Code (e.g., private educational
institutions, hospitals, and regional operating
headquarters) or under special laws (e.g.,
PEZA-registered companies)
Note: Domestic and resident foreign
corporations taxed during the taxable year with
Minimum Corporate
Income Tax cannot enjoy the benefit of NOLCO. However,
the three-year period for the expiry of the NOLCO is not
PAGE 71 OF 275
TAXATION LAW
interrupted by the fact that the corporation is subject to
MCIT during such three-year period.
Other Losses:
(a) Abandonment losses in petroleum operation
and producing well.
(b) Losses due to voluntary removal of building
incident to renewal or replacements are
deductible from gross income.
(c) Loss of useful value of capital assets due to
charges in business conditions is deductible
only to the extent of actual loss sustained
(after adjustment for improvement,
depreciation and salvage value)
(d) Losses from sales or exchanges of property
between related taxpayers are not recognized,
but the gains are taxable.
(e) Losses of farmers incurred in the operation of
farm business are deductible.
(e) Bad debts
Debts resulting from the worthlessness or
uncollectibility, in whole or in part, of amounts due the
taxpayer actually ascertained to be worthless and the
corresponding receivable should have been written off
or charged off within the taxable year.
(1) Requisites for deductibility.—
(1) Valid and legally demandable debt due to the
taxpayer
(2) Debt is connected with the taxpayer's trade,
business or practice of profession;
(3) Debt was not sustained in a transaction
entered into between related parties;
(4) Actually ascertained to be worthless and
uncollectible as of the end of the taxable year
(taxpayer had determined with reasonably
degree of certainty that the claim could not be
collected despite the fact that the creditor
took reasonable steps to collect); and
(5) Actually charged off the books of accounts of
the taxpayer as of the end of the taxable year
General rule: Taxpayer must ascertain and demonstrate
with reasonable certainty the uncollectibility of debt
UP LAW BOC TAXATION 1
Exceptions:
(a) Banks as creditors – BSP Monetary Board
shall ascertain the worthlessness and
uncollectibility of the debt and shall approve
the writing off
(b) Receivables from an insurance or surety
company (as debtor) may be written off as bad
debts only when such company is declared
closed due to insolvency or similar reason
The taxpayer must show that the debt is indeed
uncollectible even in the future. He must prove that he
exerted diligent efforts to collect:
(1) Sending of statement of accounts
(2) Collection letters
(3) Giving the account to a lawyer for collection
(4) Filing the case in court [Phil. Refining Corp. v.
CA, G.R. No. 118794, May 8, 1996]
In ascertaining the debt to be worthless, it is not
enough that the taxpayer acted in good faith. He must
show that he had reasonably investigated the relevant
facts from which it became evident, in the exercise of
sound, objective business judgment, that there
remained no practical, but only a vague prospect that
the debt would be paid [Collector v. Goodrich, G.R. No.
L-22265 (1967)]
Rev. Reg. No. 5-1999:
―Actually ascertained to be worthless‖ –
Determination of worthlessness must depend upon the
particular facts and circumstances of the case. A
taxpayer may not postpone a bad debt deduction on the
basis of a mere hope of ultimate collection or because
of a continuance of attempts to collect, where there is
no showing that the surrounding circumstances differ
from those relating to other notes which were charged
off in a prior year.
Accounts receivable may be written off as bad debts
even without conclusive evidence that they had
definitely become worthless when:
(a) the amount is insignificant; and
(b) collection through court action may be more
costly to the taxpayer.
―Actually charged off from the taxpayer‘s book of
accounts‖
Receivable which has actually become worthless at the
end of the taxable year has been cancelled and written
PAGE 72 OF 275
TAXATION LAW
off. Mere recording in the books of account of
estimated uncollectible accounts does not constitute a
write-off.
(2) Effect of recovery of bad debts.—
Tax Benefit Rule on Bad Debts
Bad debts claimed as deduction in the preceding
year(s) but subsequently recovered shall be included as
part of the taxpayer‗s gross income in the year of such
recovery the extent of the income tax benefit of said
deduction. Also called the equitable doctrine of tax
benefit.
Requisites:
(1) Allowance must be reasonable
(2) Charged off during the taxable year from the
taxpayer‗s books of accounts.
(3) Does not exceed the acquisition cost of the
property.
(f) Depreciation
An annual reasonable allowance to reduce the wasteful
value of the tangible fixed assets resulting from wear
and tear and normal obsolescence
For intangible assets, the annual allowance to rduce
their useful value is called amortization.
(1) Requisites for Deductibility. –
(1) It must be reasonable.
(2) It must be charged off during the year.
(3) The asset must be used in profession, trade or
business.
(4) The asset must have a limited useful life.
The depreciable asset must be located in the
Philippines if the taxpayer is a nonresident alien or a
foreign corporation. [Valencia and Roxas]
No depreciation shall be allowed for yachts, helicopters,
airplanes and/or aircrafts, and land vehicles which
exceed the threshold amount of P2,400,000, unless
the taxpayer‘s main line of business is transport
operations or lease of transportation equipment and
the vehicles purchased are used in the operations. [RR
No. 12-2012]
Methods of computing depreciation allowance.—
UP LAW BOC TAXATION 1 TAXATION LAW

(a) Straight-line cost- salvage value (e) Youth and sports development
estimated life (f) Human settlements
(b) Declining balance (cost – depreciation) x (g) Science and culture, and
Rate (h) Economic development
estimated life (i) in accordance with a National Priority Plan
(c)Sum-of-the-year-digit nth period x cost- determined by NEDA (otherwise, subject to
(SYD) salvage statutory limit)
SYD (j) Donations to Certain Foreign Institutions or
International Organizations which are fully
Any other method which deductible in compliance with agreements,
may be prescribed by the treaties or commitments entered into by the
Secretary of Finance upon Government of the Philippines and the foreign
the recommendation of the institutions or international organizations or in
CIR pursuance of special laws
(k) Donations to Accredited Non-government
(g) Charitable and other contributions Organizations subject to conditions set forth in
RR No. 13-98 – NGO means a non-stock non-
(1) Requisites for deductibility.— profit domestic corporation or organization:
Actually PAID or made to the ENTITIES or institutions (l) Organized and operated exclusively for:
specified by law; (i) scientific,
Made within the TAXABLE year. (ii) research,
It must be EVIDENCED by adequate receipts or records. (iii) educational,
For Contributions Other than Money: The amount shall (iv) character-building and youth and sports
be BASED on the acquisition cost of the property (i.e., development,
not the fair market value at the time of the contribution).
(v) health,
For Contributions subject to the statutory limitation: It
must NOT EXCEED 10% (individual) or 5% (corporation) (vi) social welfare,
of the taxpayer‗s taxable income before charitable (vii) cultural or
contributions
(viii) charitable purposes, or
(ix) a combination thereof,
(2) Amount that may be deducted.—
No part of the net income of which inures to the benefit
Kinds of Contributions: of any private individual
(a) Contributions deductible in full; Directly utilizes contributions for the active conduct of
(b) Contributions subject to the statutory limit. the activities constituting the purpose or function for
which it is organized, not later than 15th day of the
Contributions Deductible in Full: month following the close of its taxable year in which
(a) Donations to the Government of the contributions are received, unless an extended period is
Philippines, or to any of its agencies, or granted by the Secretary of Finance, upon
political subdivisions, including fully owned recommendation of the CIR
government corporations – Administrative expense ,on an annual basis, must not
(b) Exclusively to finance, provide for, or to be exceed 30% of total expenses for the taxable year
used in undertaking priority activities in Upon dissolution, its assets would be distributed to
(c) Education another accredited NGO organized for a similar purpose
or purposes, OR to the State for public purpose, OR
(d) Health would be distributed by a competent court of justice to

PAGE 73 OF 275
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another accredited NGO to be used in such manner as
in the judgment of said court shall best accomplish the
general purpose for which the dissolved organization
was organized.
Contributions subject to the Statutory Limit
These contributions are not deductible in full as
specified by the law or such deduction has not met the
requirements to be deducted in full.
Those made to:
(a) Government or any of its agencies or political
subdivisions exclusively for public purposes
(contributions for non-priority activities)
(b) Accredited domestic corporation
associations organized exclusively for
(c) Religious
(d) Charitable
(e) Scientific
(f) youth and sports development
(g) cultural
(h) educational purposes or
(i) rehabilitation of veterans
(j) Social welfare institutions
(k) Non-government organizations: No part of the
net income of which inures to the benefit of
any private stockholder or individual
Statutory Limit:
(a) 10% in the case of an individual (individual
donor), and
(b) 5% in the case of a corporation (corporate
donor), of the taxpayer's/donor‘s income
derived from trade, business or profession
computed before the deduction for
contributions and donations
The amount deductible is the actual contribution or the
statutory limit computed, whichever is lower
(h) Contributions to pension trusts
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Contribution to a pension trust may be claimed as
deduction as follows:
(a) Amount contributed for the present/normal
service cost – 100% deductible
(b) Amount contributed for the past service cost –
1/10 of the amount contributed is deductible
in year the contribution is made, the remaining
balance will be amortized equally over nine
consecutive years
General Rule: An employer establishing or maintaining
a pension trust to provide for the payment of
reasonable pensions to his employees shall be allowed
as a deduction, a reasonable amount transferred or
paid into such trust in excess of the contributions to
such trust made during the taxable year.
or
(1) Requisites for deductibility of payments to pension
trusts.—
There must be a pension or retirement plan established
to provide for the payment of reasonable pensions to
employees;
The pension plan is reasonable and actuarially sound;
It must be funded by the employer;
The amount contributed must no longer be subject to
the employer‘s control or disposition; and
The payment has not theretofore been allowed before
as a deduction.
(i) Deductions under special laws
Special deductions for productivity bonus and
manpower training under the Productivity Incentives Act
of 1990
Deductions for training expenses of qualified jewelry
enterprises (Jewelry Industry Development Act of 1998)
Deductions under the Adopt-a-School Act of 1998
Deductions under the Expanded Senior Citizens Act of
2003. [Domondon]
B.4.4. Optional Standard Deduction
(a) Individuals, except non-resident aliens
May be taken by an individual in lieu of itemized
deductions except those earning purely compensation
income.
UP LAW BOC TAXATION 1
If an individual opted to use OSD, he is no longer
allowed to deduct cost of sales or cost of services.
Amount: 40% of gross sales or gross receipts (under RA
9504, effective July 6, 2008)
Requisites:
(1) Taxpayer is a citizen or resident alien;
(2) Taxpayer‘s income is not entirely from
compensation;
(3) Taxpayer signifies in his return his intention to
elect this deduction; otherwise he is
considered as having availed of the itemized
deductions;
(4) Election is irrevocable for the year in which
made; however, he can change to itemized
deductions in succeeding years.
(b) Corporations, except non-resident foreign
corporations
The option to elect Optional Standard Deduction
granted is now granted to corporations (domestic and
resident foreign corporations) by virtue of RA 9504. The
OSD is 40% of its gross income.
The domestic and resident foreign corporation shall
keep such records pertaining to his gross income as
defined in Sec. 32 of the NIRC during the taxable year,
as may be required by the rules and regulations
promulgated by the Secretary of Finance upon
recommendation of the CIR.
Corporations availing of OSD are still required to submit
their financial statements when they file their annual
ITR and to keep such records pertaining to its gross
income. (RR 2-2010).
(c) Partnerships
General Co-Partnership
For purposes of taxation, the Code considers general
co-partnerships as corporations. Hence, rules on OSD
for corporations are applicable to general co-
partnerships.
General Professional Partnerships (GPP)
If the GPP availed of itemized deductions, the partners
are not allowed to claim the OSD from their share in the
net income because the OSD is a proxy for all the items
of deductions allowed in arriving at taxable income.
This means that the OSD is in lieu of the items of
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deductions claimed by the GPP and the items of
deduction claimed by the partners.
If the GPP avails of OSD in computing its net income,
the partners comprising it can no longer claim further
deduction from their share in the said net income for
the following reasons:
The partners‘ distributive share in the GPP is treated as
his gross income not his gross sales/receipts and the
40% OSD allowed to individuals is specifically
mandated to be deducted not from his gross income
but from his gross sales/receipts; and,
The OSD being in lieu of the itemized deductions
allowed in computing taxable income as defined under
Section 32 of the Tax Code, it will answer for both the
items of deduction allowed to the GPP and its partners.
Since one-layer of income tax is imposed on the income
of the GPP and the individual partners where the law
had placed the statutory incidence of the tax in the
hands of the latter, the type of deduction chosen by the
GPP must be the same type of deduction that can be
availed of by the partners. Accordingly, if the GPP
claims itemized deductions, all items of deduction
allowed under Sec. 34 can be claimed both at the level
of the GPP and at the level of the partner in order to
determine the taxable income. On the other hand,
should the GPP opt to claim the OSD, the individual
partners are deemed to have availed also of the OSD
because the OSD is in lieu of the itemized deductions
that can be claimed in computing taxable income.
If the partner also derives other gross income from
trade, business or practice of profession apart and
distinct from his share in the net income of the GPP, the
deduction that he can claim from his other gross
income would follow the same deduction availed of
from his partnership income as explained in the
foregoing rules. Provided, however, that if the GPP opts
for the OSD, the individual partner may still claim 40%
of its gross income from trade, business or practice of
profession but not to include his share from the net
income of the GPP. (RR 2-2010)
B.4.5. Personal and additional exemptions
(a) Basic personal exemptions
According to RA 9504 (Minimum Wage Earner Law,
effective July 6, 2008) basic personal exemption is Fifty
thousand pesos (P50,000) for each individual taxpayer,
regardless of status, i.e., whether single, married or
head of the family.
UP LAW BOC TAXATION 1
But note Sec 35(A) of NIRC – In the case of married
individuals where only one of the spouses is deriving
gross income, only such spouse shall be allowed the
personal exemption.
(b) Additional exemptions for taxpayer with dependents
An individual, whether single or married, shall be
allowed an additional exemption of P25,000 for each
qualified dependent child (QDC), provided that the total
number of dependents for which additional exemptions
may be claimed shall not exceed 4 dependents
(depends on the number of qualified dependent
children)
Married Individuals: Additional exemptions for QDC are
claimed by only one spouse.
Generally, the spouse who is the gross compensation
earner is the claimant of the additional exemptions.
Where the husband and wife are both compensation
income earners: the husband is the proper claimant of
the additional exemptions EXCEPT if there is an express
waiver by the husband in favor of his wife, as embodied
in the application for registration (BIR Form No. 1902)
or in the Certificate of Update of Exemption and of
Employer‘s and Employee‘s Information (BIR Form No.
2305), whichever is applicable.
When the spouses have business and/or professional
income only: either may claim the additional
exemptions at the end of the year.
The employed spouse shall be automatically entitled to
claim the additional exemptions for children in the
following instances:
(a) spouse is unemployed
(b) spouse is a non-resident citizen deriving
income from foreign sources
Legally separated spouses: Additional exemptions can
be claimed by the spouse with custody of the child or
children (but the total amount for the spouses shall not
exceed the maximum of four). [Sec 35(B), NIRC]
If the taxpayer should have additional dependents
during the taxable year, he may claim the
corresponding additional exemption, as the case may
be, in full for such year.
Who is a dependent for purposes of additional
exemptions?
(1) A taxpayer‘s child, whether legitimate,
illegitimate or legally adopted child
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(2) Chiefly dependent for support upon on the
taxpayer
(3) Living with the taxpayer
(4) Not more than 21 years old, unmarried and not
gainfully employed or
(5) Regardless of age, is incapable of self-support
because of mental or physical defect. [Sec
35(B), NIRC]
Note: Only children (not parents) may be considered
―dependent‖ for purposes of additional exemptions.
The definition of the term ―dependent‖ under Section
35(B) of the NIRC now includes a ―Foster Child‖ or a
child placed under planned temporary substitute
parental care by a Foster Parent or a Foster Family.
[RMC No. 41-20i3, Jan. 23, 2013]
Who may claim personal exemptions?
Citizens (whether resident or non-resident) and resident
aliens
Non-resident aliens engaged in trade or business are
entitled personal exemptions subject to reciprocity.
(See below)
(c) Status-at-the-end-of-the-year rule
Change of Status [Sec 35(C), NIRC]
(a) If taxpayer marries during taxable year,
taxpayer may claim the corresponding BPE in
full for such year (i.e., no need to pro-rate the
exemption).
(b) If taxpayer should have additional
dependent(s) during taxable year, taxpayer
may claim corresponding AE in full for such
year.
(c) If taxpayer dies during taxable year, his estate
may claim BPE and AE as if he died at the
close of such year.
(d) If during the taxable year spouse dies; or any
of the dependents dies or marries, turns 21
years old or becomes gainfully employed,
taxpayer may still claim same exemptions as if
the spouse or any of the dependents died, or
married, turned 21 years old or became
gainfully employed at the close of such year.
Note: When it comes to change of status, the status
beneficial to the taxpayer is used for purposes of
UP LAW BOC TAXATION 1 TAXATION LAW

claiming deductions as long as the taxpayer achieved (g) Non-deductible interest – should the taxpayer elect
such status at any time during the taxable period. to deduct interest payments against its gross income,
he cannot at the same time capitalize such interest and
claim depreciation on the undepreciated cost which
(d) Exemptions claimed by non-resident aliens includes the interest. [PICOP v. Commissioner, G.R. No.
106949-50, Dec. 1, 1995]
Non-resident aliens engaged in trade or business are
entitled personal exemptions subject to reciprocity. (h) Non –deductible taxes
It means that NRA-ETB shall be allowed a personal (i) Non-deductible losses
exemption only if the income tax law in his country
(j) Losses on Wash Sales (except if by dealer in
grants allowance for personal exemptions to the
securities in ordinary course of exempt corporations)
citizens and residents of the Philippines as stipulated in
These are:
the reciprocity tax treaty with the Philippine Government.
(1) Proprietary Educational Institutions and
Limit of PE Allowed to NRAETB: An amount equal to the
hospitals
exemptions allowed by the non-resident alien‘s country
to Filipino citizens not residing therein but deriving (2) Government owned and controlled
income therefrom, but not to exceed the amount fixed corporations
by NIRC.(In other words, whichever is lower)
(3) Others

B.4.6. Items Not Deductible

General rule: In determining deductions, one of the
general rules is that deductions must be paid or
incurred in connection with the taxpayer‘s trade,
business or profession. Capital expenditures (e.g.
acquisition cost of a building) are also not deductible,
because these are not expenses, but form part of assets.
Exceptions: In computing taxable net income, no
deduction shall be allowed with respect to:
(a) Personal, living or family expenses (note: they are
not deductible from compensation and
business/professional income
(b) Any amount paid out for new buildings or for
permanent improvements (capital expenditures), or
betterments made to increase the value of any property
or estate
(c) Any amount expended in restoring property (major
repairs) or in making good the exhaustion thereof for
which an allowance [for depreciation or depletion] is or
has been made
(d) Premiums paid on any life insurance policy covering
the life of any officer, employee, or any person
financially interested in the trade or business carried on
by the taxpayer, individual or corporate, when the
taxpayer is directly or indirectly a beneficiary under such
policy
(e) Interest expense and bad debts between related
parties [Sec. 36(B), NIRC)]
(f) Losses from sales or exchanges of property between
related taxpayers.
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Summary Table for Taxation of Individuals (all individual taxpayers, including non-resident aliens)

Basic Personal Additional Personal

Classification Taxable Income Tax Rates
Exemption Exemption

Income from sources

Resident Citizen within and outside the Allowed Allowed 5%-32%
Philippines

Income from sources

Non-Resident Citizen Allowed Allowed 5%-32%
within the Philippines

Income from sources

Resident Alien Allowed Allowed 5%-32%
within the Philippines

Lower amount between

Non-resident Alien PE allowed to Filipinos
Income from sources
Engaged in Trade or in the foreign country No specific provision 5%-32%
within the Philippines
Business where he resides v. PE
in the Philippines

Non-resident Alien Not

Income from sources
Engaged in Trade or Not allowed Not allowed 25%
within the Philippines
Business

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UP LAW BOC
C. INCOME TAX ON INDIVIDUALS
C.1. INCOME TAX ON RESIDENT CITIZENS,
NON-RESIDENT CITIZENS AND RESIDENT
ALIENS
C.1.1. Coverage – Income From All Sources Within
and Without the Philippines; exception
(i) Resident Citizens
A Filipino resident citizen is taxable on income from
all sources (within and without the Philippines)
(ii) Non-resident Citizens
A non-resident citizen is taxable only on income
derived from sources within the Philippines.
A non-resident citizen is a Filipino citizen who:
(a) Establishes to the satisfaction of the CIR
the fact of his physical presence abroad
with a definite intention to reside therein
(b) Leaves the Philippines during the taxable
year to reside abroad (as immigrant or for
employment on a permanent basis)
(c) Works and derives income from abroad and
whose employment requires him to be
present abroad most of the time during the
taxable year
(d) Has been previously considered as a non-
resident and arrives in the Philippines at
any time during the taxable year to reside
here permanently (only with respect to his
income from sources abroad until the date
of his arrival in the country)
Other considerations:
(a) A Filipino citizen working and deriving
abroad as an Overseas Contract Worker is
taxable only on income from sources
WITHIN the Philippines.
(b) OCW refers to Filipino citizens in foreign
countries, who are physically present in a
foreign country as a consequence of their
employment in that country. Their salaries
and wages are paid by an employer abroad
and is not borne by an entity or person in
the Philippines. They must be duly
registered with the Philippine Overseas
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TAXATION 1 TAXATION LAW
Employment Administration (POEA) with
valid Overseas Employment Certificate
(OEC).
(c) An OCW‘s income arising out of his
overseas employment is exempt from
income tax.
(iii) Resident Aliens
A resident alien is taxable only on income from
sources WITHIN the Philippines.
A resident alien is an individual whose residence is
in the Philippines and who is not a Filipino citizen.
An alien actually present in the Philippine who is not
a mere transient or sojourner is a resident of the
Philippines for purposes of the income tax. Whether
he is a transient or not is determined by his
intentions with regard to the length and nature of his
stay. A mere floating intention indefinite as to time,
to return to another country is not sufficient to
constitute him a transient. If he lives in the
Philippines and has no definite intention to stay, he
is a resident.
One who comes to the Philippines for a definite
purpose which, in its nature, may be promptly
accomplished is a transient. But if his purpose is of
such a nature that an extended stay may be
necessary for its accomplishment, and to that end
the alien makes his home temporarily in the
Philippines, he becomes a resident, though it may
be his intention at all times to return to his domicile
abroad when the purpose of which he came has
been consummated or abandoned. [Sec. 5, RR No.
2]
C.1.2. Coverage – Taxation on Compensation
Income
Income arising from an ER-EE relationship. It means
all remuneration for services performed by an EE for
his ER, including the cash value of all remuneration
paid in any medium other than cash. [Sec. 78(A)] It
includes, but is not limited to salaries and wages,
commissions, tips, allowances, bonuses, Fringe
Benefits of rank and file EEs and other forms of
compensation.
i. Inclusions
UP LAW BOC
(a) Monetary compensation – If compensation is
paid in cash, the full amount received is the
measure of the income subject to tax.
(1) Regular salary/wage
Salary – earnings received periodically for a regular
work other than manual labor, such as monthly
salary of an employee
Wages – all remuneration (other than fees paid to a
public official) for services performed by an
employee for his employer, including the cash value
of all remuneration paid in any medium other than
cash. [Sec. 78A, NIRC]
(2) Separation pay/retirement benefit not otherwise
exempt
Retirement pay – a lump sum payment received by
an employee who has served a company for a
considerable period of time and has decided to
withdraw from work into privacy. [RR 6-82, Sec. 2b]
General rule: Retirement pay is taxable
Exceptions:
(a) SSS or GSIS retirement pays.
(b) Retirement pay (R.A. 7641) due to old age
provided the following requirements are
met:
(1) The retirement program is approved by
the BIR Commissioner;
(2) It must be a reasonable benefit plan.
(fair and equitable)
(3) The retiree should have been
employed for 10 years in the said
company;
(4) The retiree should have been 50 years
old or above at the time of retirement;
and
(5) It should have been availed of for the
first time.
Separation pay – taxable if voluntarily availed of. It
shall not be taxable if involuntary i.e. Death,
sickness, disability, reorganization /merger of
company and company at the brink of bankruptcy or
for any cause beyond the control of the said official
or employee
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TAXATION 1 TAXATION LAW
(3) Bonuses, 13th month pay, and other benefits not
exempt
Tips and Gratuities – those paid directly to the
employee (usually by a customer of the employer)
which are not accounted for by the employee to the
employer. (taxable income but not subject to
withholding tax) [RR NO. 2-98, Sec. 2.78.1]
Thirteenth month pay and other benefits - Not
taxable if the total amount received is P82,000 or
less. Any amount exceeding P82,000 is taxable.
[Sec. 32(7)(e), NIRC]
Overtime Pay – premium payment received for
working beyond regular hours of work which is
included in the computation of gross salary of
employee. It constitutes compensation.
(4) Directors‘ fees
Fees – received by an employee for the services
rendered to the employer including a director‘s fee
of the company, fees paid to the public officials
such as clerks of court or sheriffs for services
rendered in the performance of their official duty
over and above their regular salaries.
(b) Nonmonetary compensation - If services are paid
for in a medium other than money, the fair market
value of the thing taken in payment is the measure
of the income subject to tax.
(1) Fringe benefit not subject to tax
(See Chapter on Gross Income for the discussion of
Taxable and Non-taxable fringe benefits)
If the recipient of the fringe benefits is a rank and
file employee, and the said fringe benefit is not tax-
exempt, then the value of such fringe benefit shall
be considered as part of the compensation income
of such employee subject to tax payable by the
employee. [Domondon]
ii. Exclusions
(a) Fringe benefit subject to tax
(See Chapter on Gross Income for the discussion of
Taxable and Non-taxable fringe benefits)
Where the recipient of the fringe benefit is not a rank
and file employee, and the said benefit is not tax-
exempt, then the same shall not be included in the
UP LAW BOC TAXATION 1 TAXATION LAW

compensation income of such employee subject to According to RA 9504 (effective July 6, 2008) basic
tax. The fringe benefit [tax] is instead levied upon personal exemption is Fifty thousand pesos
the employer, who is required to pay. [Domondon] (P50,000) for each individual taxpayer, regardless
whether single, married or head of the family.

Convenience of the ER Rule

Additional Exemptions
If meals, living quarters, and other facilities and
privileges are furnished to an employee for the Depends on the number of qualified dependent
convenience of the employer, and incidental to the children
requirement of the employee‘s work or position, the
Amount allowed as a deduction  P25,000 per
value of that privilege need not be included as
dependent child, but not to exceed four children
compensation [Henderson v. Collector (1961)]
[RA 9504]

(b) De minimis benefits

(b) Health and hospitalization insurance
Facilities or privileges of relatively small value
Premium Paid on Health or Hospitalization
furnished by an employer to his employees and are
Insurance [Sec.34 (M)]
as a means of promoting the health, goodwill,
contentment, or efficiency of his employees. Amount of premium paid on health and/or
hospitalization by an individual taxpayer (head of
These are exempt from fringe benefit tax and
family or married), for himself and members of his
compensation income tax.
family during the taxable year.

(c) 13th month pay and other benefits and payments

Requisites for Deductibility
specifically excluded from taxable compensation
income (1) Insurance must have actually been taken
Gross benefits received by employees of public and (2) The amount of premium deductible does
private entities provided that the total exclusion not exceed P2,400 per family or P200 per
shall not exceed P82,000 (amounts in excess are month whichever is lower during the
considered compensation income) taxable year.
Benefits include: (3) That said family has a gross income of not
more than P250,000 for the calendar year.
(a) Benefits received by government
employees under RA 6686 (4) In case of married individual, only the
spouse claiming additional exemption
(b) Benefits received by employees pursuant
shall be entitled to this deduction.
to PD 851 (13th Month Pay Decree)
Note: The spouse claiming the additional
(c) Benefits received by employees not
exemptions for qualified dependent children shall
covered by PD 851 as amended by
be the same spouse to claim the deductions for
Memorandum Order No. 28; and,
premium payments.
(d) Other benefits such as productivity
The following may avail of the deduction
incentives and Christmas bonus
(a) Individual taxpayers earning purely
compensation income during the year.
Iii. Deductions
(b) Individual taxpayer earning business
(a) Personal and additional exemptions (See the income or in practice of his profession.
Chapter on Deductions for the full discussion of
Personal and additional exemptions)
C.1.3. Taxation of Business Income/Income From
Practice of Profession
Basic Personal Exemptions

PAGE 81 OF 275
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All income obtained from doing business and/or
engaging in the practice of a profession shall be
included in the computation of taxable income. (5-
32% For citizens, resident aliens & NRA Engaged in
trade or business; 25% in case of NRANETB)
C.1.4. Taxation of Passive Income
Passive Income Subject to Final Tax
―Final tax‖ means tax withheld from source, and the
amount received by the income earner is net of the
tax already. The tax withheld by the income payor is
remitted by him to the BIR. The income having been
tax-paid already, it need not be included in the
income tax return at the end of the year. These
passive income items are as follows:
(a) Interest income
(b) Royalties
(c) Dividends from domestic corporations
(d) Prizes and other winnings
(a) Interest income
(a) on any currency bank deposit, yield or any
other monetary benefit from deposit
substitutes, trust funds and similar
arrangements - 20% final tax
(b) under the expanded foreign currency
deposit system (EFCDS) - 7.5% final tax for
residents, exempt if non-residents
Treatment of income from long-term deposits
On long-term deposit or investment certificates
(LTDIC) in banks (e.g., savings, common or
individual trust funds, deposit substitutes,
investment management accounts and other
investments, which have maturity of 5 years or more)
– exempt
Should LTDIC holder pre-terminate LTDIC before the
5th year, a final tax shall be imposed on the entire
income based on the remaining maturity:
4 years to less than 5 years 5%
3 years to less than 4 years 12%
less than 3 years 20%
(b) Royalties
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(See summary table)
(c) Dividends from domestic corporation
(a) cash and/or property dividends actually or
constructively received by an individual
from
(b) a domestic corporation
(c) a joint stock company
(d) insurance or mutual fund companies
(e) regional operating headquarters of
multinational companies
(f) share of an individual in the distributable
net income after tax of a partnership
(except a general professional partnership)
of which he is a partner
(g) share of an individual member or co-
venturer in the net income after tax of an
association, a joint account, or a joint
venture or consortium taxable as a
corporation
RATE:
(a) 10%for residents (RC, RA) and non resident
citizens (NRC);
(b) 20% for NRAETB(non-resident aliens
engaged in trade or business)
A stock dividend representing the transfer of surplus
to capital account shall not be subject to tax.
However, if a corporation cancels or redeems stock
issued as a dividend at such time and in such
manner as to make the distribution and cancellation
or redemption, in whole or in part, essentially
equivalent to the distribution of a taxable dividend,
the amount so distributed in redemption or
cancellation of the stock shall be considered as
taxable income to the extent that it represents a
distribution of earnings or profits. [Sec. 73B, NIRC]
In other words, stock dividends are generally not
subject to tax as long as there are no options in lieu
of the shares of stock.
On the other hand, a stock dividend constitutes
income if it gives the shareholder an interest
UP LAW BOC
different from that which his former stockholdings
represented.
(d) Prizes and other winnings
(a) Winnings, except Philippine Charity
sweepstakes / lotto winnings – 20%
(b) Prizes exceeding P10,000 – 20%
Prize, differentiated from winnings
A prize is the result of an effort made (e.g., prize in a
beauty contest), while winnings are the result of a
transaction where the outcome depends upon
chance (e.g., betting).
For interest from foreign currency loans granted by
FCDUs to residents other than Offshore Banking
Units (OBUs) or other depository banks under the
expanded system – tax rate is 10% if payors are
RESIDENTS, whether individuals or corporations.
For interest from foreign currency loans granted by
OBUs to residents other than OBUs or local
commercial banks, including branches of foreign
banks that may be authorized by the BSP to transact
business with OBUs - tax rate is 10% if payors are
RESIDENTS, whether individuals or corporations.
Gross income from all sources within the Philippines
derived by non-resident cinematographic film
owners, lessors or distributors – tax rate is 25% if
payee is: (a) non-resident alien individual, or (b)
non-resident foreign corporation. The term
―cinematographic films‖ includes motion picture
films, films, tapes, discs and other such similar or
related products.
Informer‘s reward given to persons who voluntarily
provide definite and sworn information that lead to
or was instrumental in the discovery of fraud or
violation of the provisions of the NIRC or special
laws being administered by the BIR and resulted in
the actual recovery or collection of revenues,
surcharges and fees and/or the conviction of the
guilty party or parties, and/or the imposition of any
fine or penalty or the actual collection of a
compromise amount, in case of amicable
settlement, shall be subject to income tax, collected
as a final withholding tax, at the rate of 10%,
pursuant to Sec. 282 of the NIRC [RR 16-2010]
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Passive income not subject to tax
Interest income from long-term deposit or
investment in the form of savings, common or
individual trust funds, deposit substitutes,
investment management accounts and other
investments evidenced by certificates in such form
prescribed by the BSP shall be exempt from tax
But should the holder of the certificate pre-
terminate the deposit or investment before the 5th
year, a final tax shall be imposed on the entire
income and shall be deducted and withheld by the
depository bank from the proceeds of the long-term
deposit or investment certificate based on the
remaining maturity thereof:
Four (4) years to less than five (5) years - 5%;
Three (3) years to less than four (4) years - 12%; and
Less than three (3) years - 20%.
Any income of nonresidents, whether individuals or
corporations, from transactions with depository
banks under the expanded system shall be exempt
from income tax.
C.1.5. Taxation of Captial Gains
(1) Income from sale of shares of stock of a
philippine corporation
(a) Shares traded and listed in the stock exchange –
exempt
The transaction is exempt from income tax
regardless of the nature of business of the seller or
transferor. However, it is subject to the one-half of
one percent (1/2 of 1%) stock transaction tax
imposed under Sec. 127(A) of the Tax Code based
on the gross selling price or gross value in money of
the shares of stock sold or transferred.
(b) Shares not listed and traded in the stock
exchange – subject to final tax
On sale, barter, exchange or other disposition of
shares of stockof a domestic corporation not listed
and traded through a local stock exchange, held as
a capital asset:
UP LAW BOC
On the net capital gain:
Not over P100,000 = Final Tax of 5%
On any amount in excess of P100,000 = plus Final
Tax of 10% on the excess
Key Definitions
Net capital gain: selling price less cost
Selling price: consideration on the sale OR fair
market value of the shares of stock at the time of the
sale, whichever is higher
Cost: original purchase price
(2) Income from the sale of real property situated in
the philippines
What property covered
Property located in the PH classified as capital
assets
What transactions covered
Sales, exchanges, or other disposition of real
property (classified as capital assets), including
pacto de retro sales and other forms of conditional
sales of the following: citizens, resident aliens,
NRAETB, NRANETB, domestic corporations.
Tax rate
General rule: 6% of —whichever is higher of:
(a) Gross selling price, or
(b) Fair market value (determined in accordance
with Sec. 6(E), NIRC).
Exception:
In case of sales made to the government, any of its
political subdivisions or agencies, or to GOCCs, it
can be taxed either:
Under Sec. 24(D)(1), NIRC – 6% CGT, or
Under Sec. 24(A), NIRC, at the option of the
taxpayer.
In case of the sale of or disposition of their principal
residence by natural persons
Requirements:
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Sale or disposition by a natural person of his
principal residence,
The proceeds of which is fully utilized in
acquiring/constructing a new principal residence,
Such acquisition/construction taking place within
18 calendar months from the date of sale or
disposition,
The taxpayer notifies the Commissioner within 30
days from the sale/disposition through a prescribed
return of his intention to avail of the exemption,
The tax exemption can only be availed of once every
10 years.
Tax treatment: Exempt from capital gains tax (CGT).
If there is no full utilization of the proceeds of sale or
disposition, the portion of the gain presumed to
have been realized from the sale or disposition shall
be subject to CGT.
How taxable portion and tax determined:
[ ]
The historical cost or adjusted basis of the real
property sold or disposed shall be carried over to the
new principal residence built or acquired.
Computation for the basis of new principal
residence:
XXX
Historical cost of old principal
residence
Add: Additional cost to acquire new XXX
principal residence*
Adjusted cost bases of the new XXX
principal residence
*Additional cost to acquire new
principal residence:
Cost to acquire new principal XXX
residence
Less: Gross selling price of old (XXX)
principal residence
Additional cost to acquire new XXX
principal residence
UP LAW BOC
(3) Income from the sale, exchange, or other
disposition of other capital assets
Other properties shall be subject to income tax
(a) At the graduated income tax rates, if the
seller is an individual;
(b) Long-term capital gains: only 50% is
recognized.
(c) Short-term capital asset transactions:
100% subject to tax. [Sec. 39(B), NIRC]
Determination of whether short- or long-term: Short-
term if held for 12 months or less; otherwise, it is a
long-term capital gain.
At 30% corporate income tax, if the seller is a
corporation.
Rule: Capital gain/loss is recognized in full.
Capital assets shall refer to all real properties held
by a taxpayer, whether or not connected with his
trade or business, and which are not included
among the real properties considered as ordinary
assets under Section 39(A)(1) of the NIRC.
Ordinary assets shall refer to all real properties
specifically excluded from the definition of capital
assets under Section 39(A)(1) of the NIRC, namely:
Stock in trade of a taxpayer or other real property of
a kind which would properly be included in the
inventory of the taxpayer if on hand at the close of
the taxable year; or
Real property held by the taxpayer primarily for sale
to customers in the ordinary course of his trade or
business; or
Real property used in trade or business (i.e.,
buildings and/or improvements) of a character
which is subject to the allowance for depreciation
provided for under Sec. 34(F) of the Code; or
Real property used in trade or business of the
taxpayer
C.2. INCOME TAX ON NON-RESIDENT
ALIENS ENGAGED IN TRADE OR BUSINESS
A non-resident alien is an individual whose
residence and citizenship is not in the Philippines.
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One who comes to the Philippines for a definite
purpose which, in its nature, may be promptly
accomplished is a transient. But if his purpose is of
such a nature that an extended stay may be
necessary for its accomplishment, and to that end
the alien makes his home temporarily in the
Philippines, he becomes a resident, though it may
be his intention at all times to return to his domicile
abroad when the purpose of which he came has
been consummated or abandoned. [Sec. 5, RR No.
2]
In general, a non-resident alien individual who shall
come to the Philippines and stay therein for an
aggregate period of more than 180 days during any
calendar year shall be deemed a non-resident alien
doing business in the Philippines.
Intended stay in the Philippines:
a) Up to 180 days – Non-resident alien not
engaged in trade or business
b) More than 180 days but less than 1 year –
Non-resident alien engaged in trade or
business
c) 1 year or more – Resident alien
General Rule: Subject to an income tax in the same
manner as an individual citizen and a resident alien
individual on taxable income from all sources within
the Philippines.
Cash and/or property dividends
The following shall be subject to an income tax of
twenty percent (20%) on the total amount thereof:

(a) Cash and/or property dividends from:
(1) A domestic corporation; 

(2) A joint stock company; 

(3) An insurance or mutual fund company; 

(4) A regional operating headquarter of

multinational company; 

(5) The share of a nonresident alien

individual in the distributable net income
after tax of a partnership (except a general
professional partnership) of which he is a
partner;
(6) The share of a nonresident alien individual
in the net income after tax of an association, a
joint account, or a joint venture taxable as a
corporation of which he is a member or a co-
venturer;
(b) Interests 

(c) Royalties (in any form); and 

UP LAW BOC
(d) Prizes (except prizes amounting to Ten

thousand pesos (P10,000) or less which shall be
subject to graduated tax) and other winnings (except
Philippine Charity Sweepstakes and Lotto winnings)
Except:
(1) The following Royalties shall be subject to a final
tax of ten percent (10%) on the total amount
thereof:
 affiliates or subsidiaries or branch offices in
(a) On books as well as other literary
works; and
(b) On musical compositions
(2) Cinematographic films and similar works shall
be subject to twenty-five percent (25%) of the gross
income 
 Philippines
(3) Interest income from long-term deposit or
investment in the form of savings, common or
individual trust funds, deposit substitutes,
investment management accounts and other
investments evidenced by certificates in such form
prescribed by the Bangko Sentral ng Pilipinas (BSP)
shall be exempt from the tax 

But should the holder of the certificate pre-
terminate the deposit or investment before the fifth
(5th) year, a final tax shall be imposed on the entire
income and shall be deducted and withheld by the
depository bank from the proceeds of the long-term
deposit or investment certificate based on the
remaining maturity thereof:
(i) Four (4) years to less than five (5) years - 5%; 
 those of aliens employed by these multinational
(ii) Three (3) years to less than four (4) years - 12%;
and 
 service contractors and subcontractors.
(iii) Less than three (3) years - 20%. 

Capital gains
Capital gains realized from sale, barter or exchange
of shares of stock in domestic corporations not
traded through the local stock exchange, and real
properties shall be subject to the similar tax
prescribed on citizens and resident aliens.
(a) Sale, barter or exchange of Shares of stock in
domestic corporation not traded –
(1) Net over P100,000 – 5% of net capital gains
realized
(2) On any amount in excess of P100,000 – 10%
of net capital gains realized
(b) Sale, barter or exchange of real properties – 6%
of gross selling price or current FMV whichever is
higher
C.3. INCOME TAX ON NON-RESIDENT
ALIENS NOT ENGAGED IN TRADE OR
BUSINESS
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TAXATION 1 TAXATION LAW
(1) Alien individuals employed by:
(a) Regional or Area Headquarters (RAHQ) and
Regional Operating Headquarters (ROHQ)
established in the Philippines by multinational
companies
Multinational company: a foreign firm or
entity
 engaged in international trade with
the Asia-Pacific Region and other foreign
markets.
(b) Offshore Banking Units established in the
(2) Alien individuals who are permanent residents
of a foreign country but who are employed and
assigned in the Philippines by a foreign service
contractor or by a foreign service subcontractor
engaged in petroleum operations in the Philippines.


Tax Rate and Base - 15% of gross income received
as salaries, wages, annuities, compensation,
remuneration and other emoluments, such as
honoraria and allowances.
The same tax treatment shall apply to Filipinos
employed and occupying the same positions as
companies, offshore banking units and petroleum
Note that the coverage of the special classification
(and the corresponding tax rate) is limited to income
received as wages. Hence, any income earned from
all other sources within the Philippines by the alien
employees shall be subject to the pertinent income
tax (example: sale of real property in the Philippines
is subject to 6% capital gain tax, imposed on the
gross selling price or fair market value of the
property at the time of the sale, whichever is higher)
C.4. INDIVIDUAL TAXPAYERS EXEMPT
FROM INCOME TAX
Individual Taxpayers exempt from income tax are:
(1) Senior Citizens 

(2) Minimum wage earners 

(3) Exemptions granted under international

agreements 

UP LAW BOC TAXATION 1 TAXATION LAW

All individuals and entities claiming exemption from
imposition of taxes on income and, consequently,
from withholding taxes are required to provide a
copy of a valid, current and subsisting tax exemption
certificate or ruling, as per existing administrative
issuances and any issuance that may be issued from
time to time, before payment of the related income.
The tax exemption certificate or ruling must explicitly
recognize the grant of tax exemption, as well as the
corresponding exemption from imposition of
withholding tax. Failure on the part of the taxpayer
to present the said tax exemption certificate or
ruling as herein required shall subject him to the
payment of appropriate withholding taxes due on
the transaction. [RMC No. 8-2014]
The minimum wage shall be exempt from the
payment of income tax on their taxable income:
Provided, further, That the holiday pay, overtime pay,
night shift differential pay and hazard pay received
by such minimum wage earners shall likewise be
exempt from income tax
(3) Income also subject to tax exemption: holiday
pay, overtime pay, night shift differential, and
hazard pay
Compensation income including overtime pay,
holiday pay and hazard pay, earned by minimum
wage earners who has no other returnable income
are NOT taxable and not subject to withholding tax
on wages [RA 9504]

C.4.1 Senior Citizens

Who are covered: any resident citizen— (a) At least
C.4.3. Exemptions Granted Under international
60 years old,and Agreements
(b) Who are considered minimum wage earners
See RMC No, 31-2013, April 12, 2013 – taxation of
under RA 9504 (Sec. 4 (b) RA 7432, as amended by compensation income of Philippine nationals and
RA 9994) and/or the aggregate amount of gross alien individuals employed by foreign
income earned by the senior citizen during the
governments/embassies/diplomatic missions and
taxable year does not exceed the amount of his
international organizations situated in the
personal exemptions (BPE and APE). Philippines.
C.4.2. Minimum Wage Earners

Rule: they shall be exempt from payment of income

tax on their taxable income.

Limit: However, if he receives ―other benefits‖ in
excess of the allowable statutory amount of
P82,000, then he shall be taxable on the exceeds
benefits as well as his salaries, wages, and
allowances, just like an employee receiving
compensation income beyond the statutory
minimum wage.

Taxation of compensation income of a minimum

wage earner
(1) Statutory minimum wage – earner shall refer to
rate fixed by the Regional Tripartite Wage and
Productivity Board, as defined by the Bureau of
Labor and Employment Statistics (BLES) of the
Department of Labor and Employment. [Sec.22 GG,
as amended by RA 9504]
(2) Minimum wage earner – shall refer to a worker in
the private sector paid the statutory minimum wage,
or to an employee in the public sector with
compensation income of not more than the statutory
minimum wage in the non-agricultural sector where
he/she is assigned. [Sec.22 HH, as amended by RA
9504]

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PAGE 88 OF 275
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PAGE 89 OF 275
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D. INCOME TAX ON CORPORATIONS
D.1. INCOME TAX ON DOMESTIC
CORPORATIONS AND RESIDENT FOREIGN
CORPORATIONS
Domestic Corporations
Taxes payable are:
(1) Regular Tax
(2) Minimum Corporate Income Tax
Resident Foreign Corporations
General rule: A resident foreign corporation is a
corporation organized under the laws of a foreign
country, which is engaged in trade or business in the
Philippines.
(a) A Philippine branch of a foreign corporation duly
licensed by the SEC is considered a resident foreign
corporation. Thus, only the income of the Philippine
branch from sources within the Philippines is
subject to Philippine income tax. 
 (3) Normal Tax [OR] Minimum Corporate 
Income
(b) Marubeni v. Commissioner: As general rule, the
head office of a foreign corporation is the same
juridical entity as its branch in the Philippines
following the single entity 
concept. Thus, the
income from sources within the Philippines of the
foreign head office shall thus be taxable to the
Philippine branch.
But, when the head office of a foreign corporation
independently and directly invested in a domestic
corporation without the funds passing through its
Philippine branch, the taxpayer, with respect to the
tax on dividend income, would be the non-resident
foreign corporation itself and the dividend income
shall be subject to the tax similarly imposed on non-
resident foreign corporations.
Definition of ―doing business‖ under the Foreign
Investment Act of 1991

The phrase "doing business" shall include soliciting
orders, service contracts, opening offices, whether
called "liaison" offices or branches; appointing
representatives or distributors domiciled in the
Philippines or who in any calendar year stay in the
country for a period or periods totaling one hundred
eighty [180] days or more; participating in the
management, supervision or control of any domestic
business, firm, entity or corporation in the
Philippines; and any other act or acts that imply a
continuity of commercial dealings or arrangements
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TAXATION 1 TAXATION LAW
and contemplate to that extent the performance of
acts or works, or the exercise of some of the
functions normally incident to, and in progressive
prosecution of commercial gain or of the purpose
and object of the business organization: Provided,
however, That the phrase "doing business" shall
not be deemed to include mere investment as a
shareholder by a foreign entity in domestic
corporations duly registered to do business, and/or
the exercise of rights as such investor; nor having a
nominee director or officer to represent its interests
in such corporation; nor appointing a representative
or distributor domiciled in the Philippines which
transacts business in its own name and for its own
account; [Sec. 3 (d)]
With respect to their income from sources within the
Philippines
Resident foreign corporations are subject to any or
some of the following:
(1) Capital Gains Tax 

(2) Final Tax on Passive Income 

Tax (MCIT) [OR] Gross Income Tax 
(GIT) 

(4) Branch Profit Remittance Tax 

D.1.1. Regular Tax
Normal Corporate Income Tax Rate: 30% of Taxable
Income (effective January 1, 2009)
Gross Income xxx
Less: Allowable Deductions xxx
Taxable Income xxx
D.1.2. Minimum Corporate Income Tax (MCIT)
Applies to domestic corporations and RFCs

whenever such corporations have zero or negative
taxable income or whenever the MCIT is greater than
the normal income tax due from such corporations.


Domestic Corporations
(1) Imposed upon any domestic corporation
beginning the fourth taxable year in which such
corporation commenced its business operations.
For purposes of the MCIT, the taxable year in which
business operations commenced shall be the year
when the corporation registers with the BIR (not in
which the corporation started commercial
operations). 

UP LAW BOC TAXATION 1 TAXATION LAW

(2) Tax rate: 2% of the Gross Income 
 relation to the revenue realized by the sellers of
services. These refer to costs which are considered
Imposition of MCIT indispensable to the earning of the revenue such
Gross Sales xxx that without such costs, no revenue can be
Less: Sales Returns xxx generated.
Sales Discounts xxx
Pointers
Allowances xxx MCIT is in the nature of a tax credit, not an allowable
Cost of Goods Sold xxx xxx deduction. Its purpose is to prevent corporations
MCIT GI xxx from escaping being taxed by including frivolous
expenses in their statement of income.
Computation of gross income
The term ―Gross Income‖ shall be equivalent to Is the Minimum Corporate Income Tax (MCIT) an
gross sales less sales returns, discounts and addition to the regular or normal income tax?
allowances and cost of goods sold. ―Cost of goods No, the MCIT is not an additional tax. The MCIT is
sold‖ shall include all business expenses directly compared with the regular income tax, which is due
incurred to produce the merchandise to bring them from a corporation. If the regular income is higher
to their present location and use. than the MCIT, then the corporation does not pay
the MCIT.
If apart from deriving income from core business
activities there are other items of gross income Who are covered by MCIT?
realized or earned by the taxpayer which are subject The MCIT covers domestic and resident foreign
to the normal corporate income tax, they must be corporations which are subject to the regular
included as part of gross income for computing income tax. The term ―regular income tax‖ refers to
MCIT. [Sec. 27 (E), NIRC; RR 12-2007] the regular income tax rates under the Tax Code.
Thus, corporations which are subject to a special
This means that the term ―gross income‖ will also corporate tax system do not fall within the coverage
include all items of gross income enumerated under of the MCIT.
Section 32(A) of the NIRC, except: (a) income
exempt from income tax, and (b) income subjected These special corporations are:
to FWT. (1) Corporations that are subject to ten percent

(10%) preferential tax rate: Proprietary educational
Computation by type of business institutions, nonprofit hospitals, Offshore Banking
(a) Merchandising/Manufacturing Concerns Units (OBUs) on their income from foreign currency
transactions which has been subjected to a final
Net Sales xxx income tax at 10% of such income, and depository
Less: Cost of Goods Sold xxx banks under the expanded foreign currency deposit
Gross Income xxx system on their income from foreign currency
transactions which has subjected to final income tax
(b) Service Concerns at 10%; RFCs engaged in business as Regional
Operating Headquarters 

Gross Receipts/Revenue xxx (2) Firms under special income tax regime such as
Less: Direct Cost of Services xxx those under the PEZA law [RA 7916], the Bases
Gross Income xxx Conversion Development Act [RA 7227] and forms
enjoying Income Tax Holiday (ITH) under EO No. 226;
Net Sales is gross sales less sales returns, discounts 

and allowances (3) International carriers subject to tax at 2 ½ % of
their gross Philippine billings; 

Direct cost of services includes salaries of personnel
rendering the services, expenses on the facilities Note: For domestic corporations whose operations
directly utilized, cost of supplies, and the like. or activities are partly covered by the regular income
―Direct costs and expenses‖ shall only pertain to tax and partly covered under a special income tax
those costs exclusively and directly incurred in
PAGE 91 OF 275
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system, the MCIT shall apply on operations covered
by the regular corporate income tax system.
MCIT gross income differentiated from the normal
tax gross income
 normal income tax due is higher than the computed
The latter would include other incidental income
items, such as rent income, interest, gain on sale of
assets, certain tax refunds, etc.
What amount of income tax is paid by the
corporation to the BIR?
 creditability), (d) CWTs in the current year, (d) excess
Whichever is higher between the normal tax and the
minimum corporate income tax
Illustration:
E Co., a domestic trading corporation, in its fourth
year of operations had a gross profit from sales of
P300,000 and net taxable income of P100,000.
How much was the income tax paid by the
corporation for the year?
MCIT (P300,000 x 2%) P6,000
Normal Income Tax (P100,000 x P30,000
30%)
Income Tax to be paid for the P30,000
year (whichever is higher)
Quarterly MCIT Computation
The computation and the payment of MCIT shall
likewise apply at the time of filing the quarterly
corporate income tax. In the computation of the tax
due for the taxable quarter, if the quarterly MCIT is
higher than the quarterly normal income tax, the tax
due to be paid for such taxable quarter at the time of
filing the quarterly corporate income tax return shall
be the MCIT.
Items allowed to be credited against quarterly MCIT
due: (a) CWT, (b) Quarterly income tax payments
under the normal income tax; and (c) MCIT paid in
the previous taxable quarter(s).
Excess MCIT from the previous taxable year/s shall
not be allowed to be credited against the quarterly
MCIT tax due.
Annual Income Tax Computation.
The final comparison between the normal income
tax payable and the MCIT shall be made at the end
of the taxable year. The payable or excess payment
in the Annual Income Tax Return shall be computed
taking into consideration corporate income tax
payment made at the time of filing of quarterly
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TAXATION 1 TAXATION LAW
corporate income tax returns whether this be MCIT
or normal income tax.
In the computation of annual income tax due, if the
annual MCIT, the following shall be allowed to be
credited against the annual income tax: (a) quarterly
MCIT payments, (b) quarterly normal income tax
payments, (c) excess MCIT in the prior year/s
(subject to the prescriptive period allowed for its
CWTs in the prior year.
If in the computation of annual income tax due, the
computed annual MCIT due is higher than the
annual normal income tax due, the following may be
credited against the annual income tax: (a) quarterly
MCIT payments of current taxable quarter, (b)
quarterly normal income tax payments in current
year, (c) CWTs in the current year, (d) excess CWTs in
the prior year.
Excess MCIT from the previous taxable year/s shall
not be allowed to be credited against the annual
MCIT due as the same can only be applied against
normal income tax.
Manner of Filing and Payment.
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.
Carry forward of excess minimum tax
Any excess of the minimum corporate income tax
over the normal income tax shall be carried forward
on an annual basis. The excess can be credited
against the normal income tax in the nextthree (3)
succeeding taxable years. [Sec. 27(E)(2)] In the year
to which carried forward, the normal tax should be
higher than the MCIT.
Illustration:
A domestic corporation had the following data on
computations of the normal tax (NT) and the
minimum corporate income tax (MCIT) for five years.
Yr 4 Yr 5 Yr 6 Yr 7 Yr 8
MCIT 80K 50K 30K 40K 35K
NT 20K 30K 40K 20K 70K
The excess MCIT over NT carry-forward is shown as
follows:
UP LAW BOC TAXATION 1 TAXATION LAW

months and caused the temporary shutdown of

operations), or
(2) Force majeure (acts of God and other calamity;
includes armed conflicts like war or insurgency), or
(3) Legitimate business reverses (substantial losses
due to fire, robbery, theft or other economic
reasons).

Optional gross income tax (OGIT)

Section 27 (A) of the NIRC provides for an optional
gross income tax of 15% based on gross income.

The President, upon the recommendation of the

Arrow pointing
downward means that the normal
tax is higher so that there can be an excess MCIT
carry-forward against it.
Secretary of Finance, may, effective January 1, 2000,
allow domestic corporations the option to be taxed
at fifteen percent (15%) of gross income as defined
therein, after the following conditions have been
satisfied:

*Cannot carry forward an amount higher than the NT, Tax effort ratio 20% of GNP
hence the excess of 60K from Year 4 was reduced to Ratio of income tax collection 40%
40K. The unused P20,000 cannot be used in Year 8 to total tax revenues
because Year 8 was beyond three years from Year 4. VAT tax effort 4% of GNP
Ratio of Consolidated Public 0.90%
Relief from the MCIT under certain conditions (Sec. Sector Financial Position
27 (E)(3), NIRC)
The Secretary of Finance, upon the (CPSFP) to GNP
recommendation of the Commissioner, may Ratio of the corporation‘s Cost Does not exceed
suspend the imposition of the MCIT upon of Sales to Gross Sales 55%
submission of proof by the applicant- corporation
that the corporation sustained substantial losses on
account of the following Gross Sales xxx
(LMB): Less: Sales Returns xxx
(1) Prolonged labor dispute (losses from a strike Sales Discounts xxx
staged by employees that lasts for more than 6
Allowances xxx

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Cost of Goods Sold xxx xxx subheading of domestic corporations is equally

GI xxx applicable to resident foreign corporations, both as
to concepts and computations, except that RFCs are
taxed only on income from sources within the
Philippines.
The election of the gross income tax option by the
corporation shall be irrevocable for three (3) (a) 
of
consecutive taxable years during which the net taxable income from sources within 
the
corporation is qualified under the scheme. Philippines [RA 9337] (b) Minimum Corporate
Income Tax 
(MCIT)  2% of MCIT Gross Income
For purposes of gross income tax, gross income from sources within the Philippines. The MCIT is
should be the same as gross income for purposes of imposed on RFCs under the same conditions as
MCIT in cases of trading, merchandising and domestic corporations. [Sec. 28(A)(2), NIRC] 

manufacturing concern business. However, for (c) Gross Income Tax (GIT)  The President, upon
service enterprises, gross income means gross the recommendation of the Secretary of Finance,
receipts less sales returns, discounts, allowances may allow resident foreign corporations the option
and cost of services. to be taxed at fifteen percent (15%) of gross income
within the Philippines, under the same conditions as
Note: At present, the OGIT has not been domestic corporations. [Sec. 28(A)(1), NIRC] 

implemented in the Philippines. D.1.3. Branch Profit Remittance Tax
Taxable transaction – any profit remitted by a
Corporations exempt from the MCIT: branch of a multinational corporation to its head
(1) Banks and other non-bank financial office

intermediaries; 

(2) Insurance companies; 
 Tax Rate and Base – 15% final tax based on the
(3) Publicly-held corporations; 
 total profits applied or earmarked for remittance
(4) Taxable partnerships; 
 without any deduction for the tax component. The
15% final tax should excluding: (a) profits on
(5) General professional partnerships; 

activities which are registered with the Philippine
(6) Non- taxable joint ventures; and 
 Economic Zone Authority (PEZA) and (b) passive
(7) Enterprises that are registered: income gains and profits received not directly
(a) with the Philippine Economic Zone connected with the conduct of its trade or business
Authority (PEZA) under R.A. 7916; 
 in the Philippines.
(b) pursuant to the Bases Conversion and
Development Act of 1992 under R.A. 7227; Income not treated as branch profits unless
and 
 effectively connected with the conduct of trade or
(c) under special economic zones declared by business in the Philippines:
law which enjoy payment of special tax rate on (1) Interests, dividends, rents, royalties
their registered operations or activities in lieu 
remuneration for technical services 

of other taxes, national or local. 
 (2) salaries, wages premiums, annuities,

emoluments 

Applicability of the MCIT where a corporation is (3) other fixed or determinable annual, 
periodic or
governed both under the regular tax system and a
casual gains, profits, income 
(4) capital gains
special income tax system
received during each taxable year from all sources
For corporations whose operations or activities are
partly covered by the regular income tax and partly within the Philippines 

covered under special income tax system, the MCIT
shall apply on operations by the regular income tax Notes:
system. (1) imposed whether the head office of the foreign
corporation is located in a tax treaty country, in a tax
Resident Foreign Corporations haven or other non- treaty country. 

(2) imposed only on the profits remitted by a
The discussion with respect to this topic (income Philippine branch to the head office of a foreign
subject to normal tax, MCIT, or GIT) under the corporation. 

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D.1.4. Allowable Deductions On the net capital gain:

i. Itemized Deductions (1) First P100,000: Final Tax of 5%

(1) Bad debts 
 (2) On any amount in excess of P100,000: plus 10%
(2) Expenses 
 Final tax on the excess
(3) Losses 

(4) Taxes 
 Income derived from depository bank under the
expanded foreign currency deposit system
(5) Depreciation 
 Under the expanded foreign currency deposit system
(6) Interest 
 (EFCDS) - 7.5%
(7) Depletion of oil and gas wells and mines 

(8) Charitable and other contributions 
 Inter-corporate dividends
(9) Research and development 
 Dividends received from another domestic
(10) Pension trusts 
 corporation - exempt

ii. Optional Standard Deductions (OSD) Capital gains realized from the sale, exchange, or
Before RA 9504, effective July 6, 2009, OSD only disposition of lands and/or buildings

applied to individuals except non-resident aliens.
 On the sale, exchange or disposition of lands and/or
But by virtue of RA 9504, it now also applies to buildings which are not actually used in the
corporations, except non-resident foreign business of a corporation and are treated as capital
corporation. assets  On the gross selling price, or the current
Moreover, the rate was increased from 10% to 40%. fair market value at the time of the sale, whichever is
higher, a final tax of 6%
D.1.5. Taxation of Passive Income
Note: Tax treatment is the same as that of
Domestic Corporations individuals.

Passive Income Subject to Tax The capital gains tax is applied on the gross selling
(1) Interest from deposits and yield or any 
other price, or the current fair market value at the time of
monetary benefit from deposit substitutes and from the sale, whichever is higher. Any gain or loss on the
sale is immaterial because there is a conclusive
trust funds and similar arrangements and royalties 
 presumption by law that the sale resulted in a gain.
(2) Capital gains from the sale of shares of stock
not traded in the stock exchange (3) Income derived Passive Income Not Subject to Tax
from depository bank under the expanded foreign (1) Income derived by a depository bank under the
currency deposit system 
 expanded foreign currency deposit system from
(4) Inter-corporate dividends 
 foreign currency transactions with nonresidents,
(5) Capital gains realized from the sale, 
exchange, offshore banking units in the Philippines, local
or of lands and/or buildings 
 commercial banks, including branches of foreign
banks that may be authorized by the Bangko Sentral
Interest from deposits and yield or any other ng Pilipinas (BSP) to transact business with foreign
monetary benefit from deposit substitutes and from currency depository system units and other
trust funds and similar arrangements and royalties depository banks under the expanded foreign
On any currency bank deposit, yield or any other currency deposit system shall be exempt from
monetary benefit from deposit substitutes, trust income exempt from income tax
funds and similar arrangements - 20%
Except: Net income from transactions specified by
Capital gains from the sale of shares of stock not the Secretary of Finance upon recommendation by
traded in the stock exchange
 the Monetary Board
On sale, barter, exchange or other disposition of
shares of stockof a domestic corporation not listed BUT: Interest income from foreign currency loans
and traded through a local stock exchange, held as granted by such depository banks under said
a capital asset: expanded foreign currency deposit system to
residents, other than offshore banking units in the
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Philippines, shall be subject to a final tax at the rate
of 10%.
(2) Any income of nonresidents, whether individuals
or corporations, from transactions with depository
banks under the expanded system shall be exempt
from exempt from income tax.
Resident Foreign Corporations
Interest from deposits and yield or any other
monetary benefit from deposit substitutes, trust
funds and similar arrangements and royalties
On any currency bank deposit, yield or any other
monetary benefit from deposit substitutes, trust
funds and similar arrangements – Final tax of 20%
On the sale, exchange or disposition of lands and/or
buildings which are not actually used in the
business of a corporation and are treated as capital
assets  On the gross selling price, or the current
fair market value at the time of the sale, whichever is
higher, a final tax of 6%
Note: Tax treatment is the same as that of
individuals.

The capital gains tax is applied on the gross selling
price, or the current fair market value at the time of
the sale, whichever is higher. Any gain or loss on the
sale is immaterial because there is a conclusive
presumption by law that the sale resulted in a gain.
Resident Foreign Corporations

Income derived from a depository bank under the Capital gain from sale of shares of stock not traded
expanded foreign currency deposit system
 in the stock exchange

Under the expanded foreign currency deposit system On sale, barter, exchange or other disposition of
(EFCDS) – Final tax of 7.5% shares of stock of a domestic corporation not listed
and traded through a local stock exchange, held as
Intercorporate dividends a capital asset:
Dividends received from a
corporation liable to tax
under the NIRC- exempt On the net capital gain:

(a) First P100,000: Final Tax of 5%

Exclude: (b) On any amount in excess of P100,000: plus 10%
(1) International carrier 
 Final tax on the excess
(2) Offshore banking units 

(3) Branch profits remittances 

(4) Regional or area headquarters and 
regional D.2. INCOME TAX ON NON-RESIDENT
operating headquarters of multination companies 
 FOREIGN CORPORATIONS

D.1.6. Taxation of Capital Gains General rule

Except as otherwise provided, the tax is 30% of the
Domestic Corporations gross income (except certain passive
Income from sale of shares of stock
 income)received during each taxable year from all
On sale, barter, exchange or other disposition of sources within the Philippines, such as interests
shares of stockof a domestic corporation not listed (except interests on foreign loans, dividends, rents,
and traded through a local stock exchange, held as royalties, salaries, premiums (except reinsurance
a capital asset: premiums), annuities, emoluments or other fixed or
determinable annual, periodic or casual gains,
profits and income, and capital gains EXCEPT
On the net capital gain:
 capital gains on the sale of shares of stock (not
(1) First P100,000: Final Tax of 5%
 listed and traded through a local stock exchange), of
(2) On any amount in excess of P100,000: plus 10% a domestic corporation which are subject to the tax
Final tax on the excess rates prescribed for individuals and resident foreign
corporations.
Income from the sale of real property situated in the
Philippines Tax on certain income
Income from the sale, exchange, or other
disposition of other capital assets
 Interest on foreign loans

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(1) on foreign loans contracted on or after August 1, Tax Rate and Base – 10% on net income (except on
1986 – 20% income subject to capital gains tax and passive
(2) under the expanded foreign currency deposit income subject to final tax) within and without the
system (EFCDS) - exempt Philippines

Intercorporate dividends Caveat: If gross income from unrelated trade or

(a) Intercorporate Dividend – 15%, as long as the business or other activity exceeds 50% of total gross
country in which the nonresident foreign corporation income derived from all sources, the tax rate of 30%
is domiciled allows a tax credit for taxes ―deemed shall be imposed on the entire taxable income.
paid‖ in the Philippines equivalent to at least 15%
(b) 15% represents the difference between the Unrelated trade, business or other activity – any
regular income tax of 30% on corporations and the trade, business or other activity, the conduct of
15% tax on dividends (―tax sparing credit‖) 
 which is not substantially related to the exercise or
(c) If the country within which the NRFC is domiciled performance by such educational institution or
does NOT allow a tax credit, a final withholding tax hospital of its primary purpose or function.
at the rate of30% is imposed on the dividends
received from a domestic corporation. 
 Proprietary educational institution – any private
school maintained and administered by private
Capital gains from sale of shares of stock not traded individuals or groups with an issued permit to
in the stock exchange
 operate from the DECS, CHED or TESDA. [Sec. 27(B),
On sale, barter, exchange or other disposition of real NIRC]
property or on shares of stock of a domestic
corporation not listed and traded through a local ii. Non-profit Hospitals
stock exchange, held as a capital asset: (See Proprietary Educational Institutions and
On the net capital gain: Hospitals, supra)
(a) First P100,000 Final Tax of 5%
(b) On any amount in excess of P100,000 plus Final iii. Government-owned or Controlled Corporations,
Tax of 10% on the excess Agencies or Instrumentalities

Exclude: For GOCCS

(1) Film rentals and other payments to non- resident General rule: GOCCs are taxable as any other
cinematographic film owner, lessor or corporation engaged in similar business, industry or
distributor
Final tax of 25% of gross income from all activity, except:

(1) Government Service Insurance System
sources within the Philippines 

(2) Rental, lease and charter fees payable to non- (GSIS)

resident owner or lessor of vessels chartered by (2) Social Security System (SSS)
(3) Philippine Health Insurance Corporation (PHIC)
Philippine nationals
Final tax of 4.5% of gross
rentals, lease or charter fees from leases or charters 

to Filipino citizens or corporations, as approved by (4) Local water districts (LWDs) 

the Maritime Authority 
 (5) Philippine Charity Sweepstakes Office 
(PCSO)
(3) Rentals, charter and other fees payable to non- 

resident owner or lessor of aircraft machineries and [Sec. 27(C), NIRC]
other equipment
Final tax of 7.5% of gross rentals
or fees 
 For instrumentalities and agencies of government
General rule: The government is exempt from tax.

Exception: When it chooses to tax itself. Nothing can

D.3. INCOME TAX ON SPECIAL
prevent Congress from decreeing that even
CORPORATIONS instrumentalities or agencies of the government
performing governmental functions may be subject
D.3.1. Domestic Corporations to tax. Where it is done precisely to fulfill a
i. Proprietary Educational Institutions and Hospitals constitutional mandate and national policy, no one

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can doubt its wisdom. [Mactan Cebu Airport v
Marcos, 1996]
If the taxing authority is the local gov‘t unit
RA 7160 expressly prohibits LGUs from levying tax
on the Nat‘l Gov‘t, its agencies and instrumentalities
and other LGUs.
iv. Depositary Banks (Foreign Currency Deposit
Units)
Income derived from a depository bank under the
expanded foreign currency deposit system
 Only income derived by offshore banking units from
Under the expanded foreign currency deposit system
(EFCDS) – Final tax of 7.5%
D.3.2. Resident Foreign Corporations
i. International Carrier Doing Business in the
Philippines
Tax Rate and Base – 2.5% on Gross Philippine
Billings (GPB)
What is GPB
In the case of International Air Carriers, GPB refers
to the amount of:
(a) gross revenue derived from carriage of 
persons,
excess baggage, cargo and mail originating from the
Philippines in a continuous and uninterrupted flight,
irrespective of the place of sale or issue and the
place of payment of the ticket or passage document


(b) gross revenue from tickets revalidated,
exchanged and/or indorsed to another international
airline if the passenger boards a plane in a port or
point in the Philippines 

(c) for flights which originate from the Philippines,
but transshipment of passenger takes place at any
port outside the Philippines on another airline, the
gross revenue consisting of only the aliquot portion
of the cost of the ticket corresponding to the leg
flown from the Philippines to the point of
transhipment transshipment [RR 15-2002] 

Air Canada vs. CIR (CTA Case No. 6572):
(a) A foreign airline company selling tickets in the
Philippines through their local agents shall be
considered as resident foreign corporation engaged
in trade or business 
in the country. 

(b) The absence of flight operations within the

Philippine territory cannot alter the fact that the
income received was derived from activities within
the Philippines. 
 derive income from the Philippines and which act as
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TAXATION 1 TAXATION LAW
(c) The test of taxability is the source, and the
source is that activity which produced the income. 

In the case of International Shipping, GPB means:

Gross revenue whether for passenger, cargo or mail
originating from the Philippines up to final
destination, regardless of the place of sale or
payments of the passage or freight documents.
ii. Off-shore Banking Units
Coverage of the Rule
foreign currency transactions with:
(1) non-residents, 

(2) other offshore banking units 

(3) local commercial banks including branches 
of
foreign banks that may be authorized by the Bangko
Sentral ng Pilipinas (BSP) to transact business with
offshore banking units. 

Tax Rate
Exempt from all taxes, except net income from such
transactions as may be specified by the Secretary of
Finance, upon recommendation by the Monetary
Board to be subject to the regular income tax
payable by banks.
Exception: Interest income derived from foreign
currency loans granted to residents other than
offshore banking units or local commercial banks,
including local branches of foreign banks that may
be authorized by the BSP to transact business with
offshore banking units, shall be subject only to a
final tax at the rate of 10%. [Sec. 28(A)(4), NIRC]
iii. Resident Depositary Banks (Foreign Currency
Deposit Units)
Income derived from a depository bank under the
expanded foreign currency deposit system

Under the expanded foreign currency deposit system
(EFCDS) – Final tax of 7.5%
iv. Regional or Area Headquarters and Regional
Operating Headquarters of Multinational
Companies
Regional or area headquarters: not subject to
income tax
Regional or area headquarters – a branch
established in the Philippines by multinational
companies and which headquarters do not earn or
supervisory, communications and coordinating
UP LAW BOC TAXATION 1 TAXATION LAW

center for their affiliates, subsidiaries, or branches

in the Asia-Pacific Region and other foreign markets.

Regional operating headquarters

(a) 10% of their taxable income 

(b) a branch established in the Philippines by

multinational companies which are engaged in any
of the following services: 

(1) general administration and planning
(2) business planning and coordination
(3) sourcing and procurement of raw materials
and components
(4) 
corporate finance advisory services
(5) marketing control and sales promotion
(6) training and personnel management
(7) logistic services

(8) research and development services and

product development

(9)
 technical support and maintenance
(10) data processing and communications, and

(11) business development.

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D.4. IMPROPERLY ACCUMULATED

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EARNINGS TAX (3) Earnings reserved for definite corporate

[Sec. 29, NIRC, as implemented by RR 2-2001] Expansion projects or programs requiring
considerable capital expenditure as approved by the
Rule: There is imposed for each taxable year, in Board of Directors or equivalent body; 

addition to other taxes, a tax equal to 10% of the (4) Earnings reserved for Building, Plant or
improperly accumulated taxable income of Equipment Acquisition as approved by the Board of
domestic and closely-held corporations formed or Directors or equivalent body; 

availed of for the purpose of avoiding the income tax (5) Earnings reserved for compliance with any Loan
with respect to its shareholders or the shareholders Covenant or pre-existing obligation established
of any other corporation, by permitting the earnings under a legitimate business agreement; 

and profits of the corporation to accumulate instead (6) Earnings required by Law or applicable
of dividing them among or distributing them to the regulations to be retained by the corporation or in
shareholders. respect of which there is legal prohibition against its
distribution; 

Rationale: It is a tax in the nature of a penalty to the
(7) In the case of subsidiaries of foreign
corporation for the improper accumulation of its
corporations in the Philippines, all undistributed
earnings, and a deterrent to the avoidance of tax
earnings intended or reserved for Investments within
upon shareholders who are supposed to pay
the Philippines as can be proven by corporate
dividends tax on the earnings distributed to them.
The touchstone of the liability is the purpose behind records and/or relevant documentary evidence. 

the accumulation of the income and not the
consequences of the accumulation. Covered Corporations
Only domestic corporations classified as closely-
Exception: The use of undistributed earnings and held corporations are liable for IAET.
profits for the reasonable needs of the business
would not generally make the accumulated or Closely-held corporations are those:
undistributed earnings subject to the tax. (1) at least 50% in value of the outstanding capital
stock; or 

What is meant by ―reasonable needs of the business‖ (2) at least 50% of the total combined voting power
is determined by the Immediacy Test of all classes of stock entitled to vote 

Immediacy Test (3) is owned directly or indirectly by or for not more
It states that the ―reasonable needs of the business‖ than 20 individuals. Domestic corporations not
are the
 falling under the aforesaid definition are, therefore,
(1) immediate needs of the business; and
 publicly- held corporations. 

(2) reasonably anticipated needs.
To determine whether the corporation is closely held
How to prove the ―reasonable needs of the corporation, insofar as such determination is based
business‖
 on stock ownership, the following rules shall be
The corporation should prove that there is applied:
(1) Stock Not Owned by Individuals. - Stock owned
(1) an immediate need for the accumulation of 
the
directly or indirectly by or for a corporation,
earnings and profits; or 
 partnership, estate or trust shall be considered as
(2) a direct correlation of anticipated needs to being owned proportionately by its shareholders,

such accumulation of profits. 
 partners or beneficiaries. 

(2) Family and Partnership Ownership. - An
Composition individual shall be considered as owning the stock
The following constitute accumulation of earnings owned, directly or indirectly, by or for his family, or
for the reasonable needs of the business:
by or for his partner. 

(1) Allowance for the increase in the 
accumulation
of earnings up to 100% of the paid-up capital of the For purposes of this paragraph, the ‗family of an
corporation as of Balance Sheet date, 
 individual‘ includes his brothers or sisters (whether
(2) inclusive of accumulations taken from other by whole or half-blood), spouse, ancestors and
years; 
 lineal descendants. 


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(3) Option to Acquire Stocks. - If any person has an
option to acquire stock, such stock shall be
considered as owned by such person. 

For purposes of this paragraph, an option to acquire
such an option and each one of a series of option
shall be considered as an option to acquire such
stock. 

(4) Constructive Ownership as Actual Ownership. -
Stock constructively owned by reason of the
application of (a) or (c) shall, for purposes of
applying (1) or (2), be treated as actually owned by
such person.
But stock constructively owned by the individual by
reason of the application of (b) shall NOT be treated
as owned by him for purposes of again applying
such paragraph in order to make another the
constructive owner of such stock.
BIR Ruling 025-02
The ownership of a domestic corporation for
purposes of determining whether it is a closely held
corporation or a publicly held corporation is
ultimately traced to the individual shareholders of
the parent company.
Where at least 50% of the outstanding capital stock
or at least 50% of the total combined voting power
of all classes of stock entitled to vote in a
corporation is owned directly or indirectly by at least
21 or more individuals, the corporation is
considered as a publicly-held corporation, thus,
exempt from IAET.
Determination of reasonable needs of the business
 meet operational expenses such as fire insurance
An accumulation of earnings or profits (including
undistributed earnings or profits of prior years) is
unreasonable if it is not necessary for the purpose of
the business, considering all the circumstances of
the case.
To determine the ―reasonable needs‖ of the
business in order to justify an accumulation of
earnings, the Regulations adhere to the so-called
―Immediacy Test‖ under American jurisprudence as
adopted in this jurisdiction. Accordingly, the term
―reasonable needs of the business‖ means the
immediate needs of the business, including
reasonably anticipated needs. In either case, the
corporation should be able to prove: (a) an
immediate need for the accumulation of the
earnings and profits, or (b) the direct correlation of
anticipated needs to such accumulation of profits.
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TAXATION 1 TAXATION LAW
Otherwise, such accumulation would be deemed to
be not for the reasonable needs of the business, and
the penalty tax would apply.
D.5 EXEMPTION FROM TAX ON
CORPORATIONS
Tax exempt corporations
(1) Nonprofit labor, agricultural or 
horticultural
organizations
(2) Non-stock/ non-profit mutual savings bank or
non-stock/ non-profit cooperative bank 

(3) 
 Associations, orders, beneficiary societies
operating for the exclusive benefits of their
members
(4) Cemetery company owned and operated
exclusively for the benefit of its members
(5) Non-stock corporation or association

organized and operated exclusively for religious,
charitable, scientific, athletic, or cultural purposes
or for the rehabilitation of veterans, provided that no
individual person owns its assets or no individual
person receives benefit on its earnings 

(6) Non-profit business league, chamber of
commerce, or board of trade
(7) Non-profit civic league or organization operating
exclusively for the promotion of social welfare 

(8) Non-stock and non-profit educational

institutions
(9) 
 Government educational institutions
(10) Organizations with a purely local operation
whose income is derived only from assessment,
duties and fees collected from their members to
company, farmers‘ or other mutual typhoon
associations, mutual ditch or irrigation company
and mutual or cooperative 
telephone company 

(11) Associations of farmers, fruit growers, and 
the
like whose primary function is to 
market the
product of their members 
[Sec. 30, NIRC]
NPC in general is subject to income tax; PAGCOR is
not subject to income tax [RA 9337]
Qualification for tax exemption under Sec. 30 of the
1997 NIRC:
(1) It must be a non-stock corporation or

association organized and operated exclusively for
religious, charitable, scientific, athletic or cultural
purposes, or for the rehabilitation of veterans. 

(2) It should meet the following tests:
UP LAW BOC
(a) Organizational Test–requires that he
corporation or association‘s constitutive
documents exclusively limit its purposes to one
or more of those described in paragraph (E) of

Section 30 of the 1997 NIRC. 

(b) Operational Test – mandates that the
regular activities of the corporation or
association be exclusively devoted to the
accomplishment of the purposes specified in
paragraph (E) of Section 30 of the 1997 NIRC,
as amended. A corporation or association fails
to meet this test if a substantial part of its
operations may be considered 
―activities
conducted for profit‖. 
 shall include in his individual tax return.
(3) All the net income or assets of the corporation or
association must be devoted to its purpose/s and
no part of its net income or asset accrues to or
benefits any 
member or specified person. (4) It
must not be a branch of a foreign non- 
stock, non-
profit corporation. 
 subject to the income tax. It is not a taxable entity
[RMO No. 20-2013]
D.6. TAX ON GENERAL PARTNERSHIPS,
GENERAL PROFESSIONAL PARTNERSHIPS,
CO-OWNERSHIPS, JOINT VENTURES AND
CONSORTIUMS
General Partnerships
Partnerships wherein all or part of their income is
derived from the conduct of trade or business. An
ordinary business partnership is considered as a
corporation and is thus subject to corporate tax of
30%.
Rules
(1) The partnership is subject to the same rules 
on
corporations (capital gains tax, final tax on passive
income, normal tax, minimum corporate income tax
[MCIT] and gross income tax [GIT]), but is not
subject to the improperly accumulated earnings tax
[IAET]. The partnership must file quarterly and year-
end income tax returns. 
 generation of income by, and the ultimate
(2) The taxable income of the partnership, less the
normal corporate income tax (30%) thereon, is the
distributable net income of the partnership. 
 1994)]
The share of a partner in the partnership‘s
distributable net income of a year shall be deemed
to have been actually or constructively received by
the partners in the same taxable year and shall be
taxed to them in their individual capacity, whether
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TAXATION 1 TAXATION LAW
actually distributed or not. [Sec. 73(D), NIRC] Such
share will be subjected to a final tax of 10% to be
withheld by the partnership. [Sec. 24(B)(2), NIRC]
General Professional Partnerships
Partnerships formed by persons for the sole purpose
of exercising their common profession, no part of
the income of which is derived from engaging in any
trade or business. A GPP is exempt from income tax.
It is, however, required to file a tax return for its
income for the purpose of furnishing information as
to the share in the gains or profits that each partner
Rules
(1) A GPP is a partnership formed by persons for the
purpose of exercising their common profession, no
part of the income of which is derived from engaging
in trade or business. A GPP as such shall not be
for income tax purposes. 

(2) The partners shall only be liable for income tax
only in their separate and individual capacities. 

(3) For purposes of computing the distributive share
of the partners, the net income of the GPP shall be
computed in the same manner as a corporation.
(4) Each partner shall report as gross income his
distributive share, actually or constructively received,
in the net income of the partnership.
(5) The distributive share of a partner (actual or
constructive) shall be subject to a creditable
withholding income tax of 10% if the amount share
is not more than P720,000 and 15% if the amount
of the share is more than P720,000. [RR 2- 1998]
(6) If the partnership sustains a net operating loss,
the partners shall be entitled to deduct their
respective shares in the net operating loss from their
individual gross income.
GPP is not a taxable entity
The GPP is deemed to be no more than a mere
mechanism or a flow-through entity in the
mechanism distribution of such income to the
individual partners. [Tan v. Commissioner (Oct. 3,
But the partnership itself is required to file income
tax returns for the purpose of furnishing information
as to the share in the gains or profits which each
partner shall include in his individual return. [RR 2-
1998]
UP LAW BOC
The share of an individual partner in the net profit of
a general professional partnership is deemed to
have been actually or constructively received by the
partner in the same taxable year in which such
partnership net income was earned, and shall be
taxed to them in their individual capacities, whether
actually distributed or not, at the graduated income
tax ranging from 5% to 32%.
Thus, the principle of constructive receipt of income
or profit is being applied to undistributed profits of
GPPs. The payment [to the partners] of such tax-paid
profits in another year should no longer be liable to
income tax. [Mamalateo]
Co-ownerships
There is co-ownership
 resident corporation. However, an unincorporated
(1) When two or more heirs inherit and
undivided property from a decedent.
(2) When a donor makes a gift of an undivided
property in favor of two or more donees.
When Co-ownership is not subject to tax
When the co-ownership‘s activities are limited
merely to the preservation of the co-owned property
and to the collection of the income from the property.
The income derived by a co- owner from the property
shall be reported in his individual tax return
regardless of whether such income is actually or
constructively received.
When Co-ownership is subject to tax
The following circumstances would render a co-
ownership subject to a corporate income tax: (a)
When a co-ownership is formed or established
voluntarily, or upon agreement of the parties; (b)
When the individual co-owner reinvested his share,
and (c) When the inherited property remained
undivided for more than ten years, and no attempt
was ever made to divide to same among the co-heirs,
nor was the property under administration
proceedings nor held in trust, the property should be
considered as owned by an unregistered partnership.
Automatically converted into an unregistered
partnership the moment the said common
properties and/or the incomes derived from them
are used as a common fund with intent to produce
profits for the heirs in proportion to their respective
shares in the inheritance as determined in a project
partition either duly executed in an extrajudicial
settlement or approved by the court in the
corresponding testate or intestate proceeding. [Ona
v. CIR, May, 25 1972]
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TAXATION 1 TAXATION LAW
Joint Ventures and Consortiums
To constitute a‖ joint venture,‖ certain factors are
essential. Each party to the venture must make a
contribution, not necessarily of capital, but by way
of services, skill, knowledge, material or money,;
profits must be shared among the parties; there
must be a joint proprietary interest and right of
mutual control over the subject matter of the
enterprise; and usually, there is single business
transaction.
An unincorporated joint venture is taxed likes a
corporation. The share of the joint venture partners
will no longer be taxable to them because they
partake of dividends if paid to a domestic or
joint venture formed for the purpose of undertaking
a construction project or engaging in petroleum
operations pursuant to the consortium agreement
with the Philippine Government is not subject to the
corporate income tax. Only the joint venture partners
will be taxed on their respective shares in the
income of the joint ventures.
Two elements necessary to exempt a joint venture or
consortium from tax
(1) The joint venture must be an 
unincorporated
entity formed by two or 
more persons 

(2) The joint venture was formed for the 
purpose of
undertaking a construction project, or engaging in
the petroleum and other energy operations with
operating contract with the government. 

E. FILING OF RETURNS AND PAYMENT
OF INCOME TAX
E.1. DEFINITION OF A TAX RETURN AND
INFORMATION RETURN
Tax Return
Tax return refers to a formal report prepared by the
taxpayer or his agent in a prescribed form showing
an enumeration of taxable amounts and description
of taxable transactions, allowable deductions,
amount of tax and tax payable to the government.
Examples of tax returns are:
(a) BIR Form Nos. 1700 and 1701 – Annual Income
Tax Returns for Individual
(b) BIR Form No. 1702 – Annual Income Tax Return
for Corporations and Partnerships
UP LAW BOC
(c) BIR Form No. 1800 – Donor‘s Tax Return
(d) BIR Form No. 1801 – Estate Tax Return
Information Return
Any individual not required to file an income tax
return may nevertheless be required to file an
information return pursuant to rules and regulations
prescribed by the Secretary of Finance, upon
recommendation of the Commissioner. [Sec.
51(A)(3), NIRC]
Every withholding agent required to deduct and
withhold taxes under Section 57 shall submit to the
Commissioner an annual information return
containing the list of payees and income payments,
amount of taxes withheld from each payee and such
other pertinent information as may be required by
the Commissioner. [Sec. 58(C), NIRC]
Every employer required to deduct and withhold the
taxes in respect of the wages of his employees shall,
on or before January thirty-first (31st) of the
succeeding year, submit to the Commissioner an
annual information return containing a list of
employees, the total amount of compensation
income of each employee, the total amount of taxes
withheld therefrom during the year, accompanied by
copies of the statement referred to in the preceding
paragraph, and such other information as may be
deemed necessary. [Sec. 83(B), NIRC]
E.2. PERIOD TO FILE INCOME TAX RETURN
OF INDIVIDUALS AND CORPORATIONS
(1) Individuals
Individuals deriving mixed income, or purely
business/professional income, or other income
must file quarterly income tax returns (BIR Form
1700 Q), and an annual income tax return (BIR Form
1700) as follows: (Sec. 74, NIRC)
Period Due Date for Filing Return
Q1 Return April 15 of the same year
Q2 Return August 15 of the same year
Q3 Return November 15 of the same
year
Annual Return April 15 of the following year
(2) Corporations
Domestic corporations and resident foreign
corporations shall file quarterly corporate income
tax returns (BIR Form 1702 Q) within 60 days after
the end of the calendar or fiscal quarter used, and
annual corporate income tax return (BIR Form 1702)
PAGE 105 OF 275
TAXATION 1 TAXATION LAW
on or before the 15th day of the fourth month
following the close of the calendar year or fiscal year,
as the case may be (Sec. 74, NIRC). The deadlines
for the filing of the tax returns by a corporation using
the calendar year are as follows:
Period Due Date for Filing Return
Q1 Return May 31 of the same year
Q2 Return August 31 of the same year
Q3 Return November 30 of the same
year
Annual Return April 15 of the following year
E.3. PERSONS LIABLE TO FILE INCOME TAX
RETURNS
E.3.1. Individual Taxpayers
i. General Rule and Exceptions (Sec. 51(A), NIRC)
General Rule: The following are required to file
income tax returns:
(a) Every Filipino citizen residing in the Philippines
(b) Every Filipino citizen residing outside the
Philippines on his income from sources within
the Philippines
(c) Every alien residing in the Philippines, on
income derived from sources within the
Philippines
(d) Every non-resident alien engaged in trade or
business or in the exercise of profession in the
Philippines.
Note: A grant of tax exemption is not necessariliy an
excuse from the requirement to file a tax return
[Garrison v. CA, 187 SCRA 525].
Exceptions:
(a) Individuals whose gross income (not
necessarily from compensation income)
does not exceed his total personal and
additional exemptions for dependents,
except citizens and alien individuals
engaged in business or practice of
profession within the Philippines who shall
file income tax returns regardless of the
amount of gross income.
(b) Individuals with respect to pure
compensation income derived from
sources within the Philippines, the income
tax on which has been withheld except
when such compensation has been derived
from more than one employer.
UP LAW BOC
(c) A minimum wage earner as defined in Sec.
22(HH) of the NIRC, as amended by R.A. No.
9504.
(d) Individuals whose sole income has been
subjected to final withholding tax pursuant
to Sec. 57(A) of the Tax Code.
(e) Individuals who are exempt from income
tax pursuant to the provisions of the Tax
Code and other laws, general or special
(Sec. 51, NIRC).
Special Provisions
Income of non-resident aliens not engaged in trade
or business in the Philippines is subject to
withholding income tax to be withheld by the payor
thereof.
In the case of married persons, whether citizens or
aliens, residents or not, who do not derive income
purely from compensation, only one consolidated
return to cover the income of both spouses for the
taxable year shall be filed by either spouse; where it
is impracticable for the spouses to file one
consolidated return, each may file a separate return
but the returns so filed shall be consolidated for the
purpose of verification. The husband shall be
deemed the head of family entitled to claim the
additional exemption in respect of dependent
children, unless he explicitly waives his right in favor
of the wife in the withholding exemption certificate
(Sec. 79 (F)(1), NIRC).
The income of unmarried minors is a tax liability of
the minor but where such income is derived from
property received from a living parent, the income
shall be included in the return of the parent except
(a) when the donor‘s tax has been paid on such
property, or (b) when the transfer of such property is
exempt form the donor‘s tax.
If the taxpayer is unable to make his return, such as
when he suffers from disability, the return may be
made by his duly authorized agent or representative
or by the guardian or other person charged with the
care of the taxpayer or his property, the principal
and his representative or guardian incurring the
penalties for erroneous, false or fraudulent returns.
ii. Substituted Filing
Substituted filing of tax returns is required where (i)
an employee receives purely compensation income
from a single or one employer who deducted and
remitted to the BIR the (ii) correct amount of
withholding tax form the employee‘s compensation
PAGE 106 OF 275
TAXATION 1 TAXATION LAW
income during the year, and said employee has (iii)
no taxable other income subject to income tax under
the global tax system. In lieu of the regular tax
returns to be filed by the employees, the employer
shall file BIR Form 2316 (Certificate of Income Tax
Withheld on Compensation) with the BIR on or
before January 31 of the following year. BIR Form
2316 shall contain a certification to the effect that
the employer‘s filing of BIR Form 1604-CF shall be
considered as a substituted filing of the employee‘s
income tax return to the extent that the amount of
compensation and tax withheld in BIR Form 1604-
CF as filed with BIR is consistent with the
corresponding amounts indicated in BIR Form 2316.
However, non-resident citizens who receive purely
income from foreign sources are no longer required
to file their Philippine income tax return, although
they must still file an income tax return covering
income from sources within the Philippines.
E.3.2. Corporate Taxpayers
All corporations subject to income tax, except
foreign corporations not engaged in trade or
business in the Philippines, shall render quarterly
income tax returns on a cumulative basis for the
preceding quarter or quarters upon which their
income tax is paid and a final or adjustment return
on or before the 15th day of April or fourth month
following the close of the fiscal year covering the
entire taxable income of the preceding calendar or
fiscal year, signed and sworn to by the President,
Vice-President or principal officer and by the
treasurer or assistant treasurer (Sec. 52(A), NIRC).
E.4. WHERE TO FILE INCOME TAX RETURNS
(1) Individuals
Except in cases where the Commissioner otherwise
permits, the return shall be filed with an authorized
agent bank, Revenue District Officer, Collection
Agent or duly authorized Treasurer of the city or
municipality in which such person has his legal
residence or principal place of business in the
Philippines, or if there be no legal residence or place
of business in the Philippines, with the Office of the
Commissioner (Sec. 51(B), NIRC)
(2) Corporations
The return shall be filed at the place where the
corporation‘s principal office is located and where
its books of accounts and other date are kept;
otherwise, the returns shall be filed and the tax paid
thereon with the Office of the Commissioner of
Internal Revenue.
UP LAW BOC
E.5. PENALTIES FOR NON-FILING OF
RETURNS
(a) For failure to file any return and pay the tax due:
a penalty equivalent to 25% of the amount due (Sec.
248(A)(1), NIRC).
(b) In case of willful neglect to file the return: a
penalty equivalent to 50% of the tax or of the
deficiency tax, in case, any payment has been made
on the basis of such return before the discovery of
the falsity or fraud (Sec. 248(B), NIRC).
F. WITHHOLDING OF TAXES
F.1. CONCEPT OF WITHHOLDING TAXES
Withholding tax is a method of collecting income tax
in advance from the taxable income of the recipient
of income. It is a systematic way of collecting taxes
at source, an indispensable method of collecting
taxes to ensure adequate revenue for the
government.
The withholding of income tax on compensation
income, on certain income payments made to
resident taxpayers, and on income payments made
to non-resident taxpayers is very important for all
taxpayers, because the obligation to withhold and
remit the tax is mandatory and prescribed by law.
In the operation of the withholding tax system, the
payee is the taxpayer, the person on whom the tax is
imposed, while the payor, a separate entity, acts no
more than an agent of the government for the
collection of the tax in order to ensure its payment.
The amount thereby used to settle the tax liability is
deemed sourced from the proceeds constitutive of
the tax base. In an ad valorem tax, the tax paid or
withheld is not deducted from the tax base, except
when the law clearly spells out in defining the tax
base.
The duty to withhold is different from the duty to pay
income tax. The revenue officers generally disallow
the expenses claimed as deduction from gross
income, if no withholding of tax as required by law or
the regulations was withheld and remitted to the BIR
within the prescribed dates.
In addition, the withholding tax that should have
been withheld and remitted to the BIR as well as the
penalties for non-, late or erroneous payment of the
PAGE 107 OF 275
TAXATION 1 TAXATION LAW
withholding tax such as surcharges and deficiency
interest are assessed by the BIR. [Mamalateo]
F.2. KINDS OF WITHHOLDING TAXES
Withholding of final tax of certain income

Subject to rules and regulations the Secretary of
Finance may promulgate, upon the recommendation
of the Commissioner, requiring the filing of income
tax return by certain income payees, the tax
imposed or prescribed by specific section of the
NIRC on specified items of income shall be withheld
by payor-corporation and/or person and paid in the
same manner and subject to the same conditions as
provided in Section 58 of the NIRC.
Withholding of creditable tax at source

The Secretary of Finance may, upon the
recommendation of the Commissioner, require the
withholding of a tax on the items of income payable
to natural or juridical persons, residing in the
Philippines, by payor- corporation/persons as
provided for by law, at the rate of not less than one
percent (1%) but not more than thirty-two percent
(32%), which shall be credited against the income
tax liability of the taxpayer for the taxable year.
Withholding of creditable tax (RR 2-98)
(a) Under the creditable withholding tax system,
taxes withheld on certain income payments are
intended to equal or at least approximate the tax
due of the payee on said income. 

(b) The income recipient is still required to file an
income tax return, to report the income and/or pay
the difference between the tax withheld and the tax
due on the income. 

(c) Taxes withheld on income payments covered by
the expanded withholding tax and compensation
income are creditable in nature. 

Withholding of VAT
(1) On gross payments for the purchase of goods 

(2) On gross payments for the purchase of services


(3) Payments made to government public works
contractors 

(4) Payments for lease or use of property or property
rights to non-resident owners 

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TAXATION LAW
TAXATION 2

PAGE 108 OF 275

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I. Estate Tax
A. BASIC PRINCIPLES
Death is the source of the taxing power. It is the power
to transmit or the transmission from the dead to the
living on which the tax is based. The tax accrues as of
the death of the decedent by operation of law. [Lorenzo
v. Posadas, (1937)]
(1) Estate tax accrues at the time of the decedent‘s
death, but the obligation to pay the same is
different and is fixed by law. The tax is measured by
the value of the property AT THE TIME OF DEATH.
(2) Estate tax is measured (i.e., tax base) by the value
at that time of such property as passes to him (i.e.,
death). Subsequent appreciation or depreciation is
immaterial;
(3) Estate taxation is governed by the statute in force
at the time of the death of the decedent. Tax laws
cannot be given retroactive effect unless they
explicitly provide for it.
Inheritance taxes, which were imposed on the right of
the heirs to receive property upon the death of the
decedent, were abolished. They are no longer imposed
under the current NIRC.
B. DEFINITION
Estate tax is an excise tax on the right of transmitting
property at the time of death and on the privilege that a
person is given in controlling to a certain extent the
disposition of his property to take effect upon death.
[VITUG and ACOSTA at 211]
C. NATURE
It is a transfer tax, i.e., an excise tax on the right of
transmitting property, not a property tax. Compared to
old inheritance, this was a tax on the right to transfer
and not the right to inherit property.
D. PURPOSE OR OBJECT
Purpose: To tax the shifting of economic benefits and
enjoyment of property from the dead to the living.
Taxable objects/subjects:
(1) Right/privilege of the deceased person to transmit
his/her estate to his/her lawful heirs and
beneficiaries at the time of death;
PAGE 109 OF 275
TAXATION LAW
(2) Certain transfers, during his lifetime, which are
made by law as equivalent to testamentary
disposition.
4 Justification Theories for the Imposition of Estate Tax
(1) Benefits-received theory– The State collects the tax
because of the services it renders in the
distribution of the estate of the decedent, either by
law or in accordance with his will.
(2) Privilege theory or state partnership theory –
Succession to the property of a deceased person is
not a right but a privilege granted by the State and
consequently, the legislature can constitutionally
burden such succession with a tax. The State
collects the tax because of the protection it
provides in the acquisition of large estates. Hence,
the State is a ―silent or passive partner‖ in the
accumulation of said large property.
(3) Ability-to-pay theory – Receipt of inheritance,
which is in the nature of unearned wealth or
windfall, places assets into the hands of the heirs
and beneficiaries. This creates an ability to pay the
tax and thus contributes to government income.
(4) Redistribution of wealth theory – The imposition of
estate tax reduces the property received by the
successor, which helps promote a more equitable
distribution of wealth in society. The taxes paid by
the rich are programmed for disbursement by
Congress for the benefit of the poor in terms on
social services, education, health, etc.
E. TIME AND TRANSFER OF PROPERTIES
Art. 777, Civil Code. The rights to the succession are
transmitted from the moment of the death of the
decedent.
The decedent‘s estate includes property to the extent of
the interest therein of the decedent at the time of his
death. (Sec. 85(A)) N.B. – It is the interest of the
decedent on the property, not the actual property itself.
In some cases, however, they may be the same.
Estate taxation is governed by the statute in force at the
time of death of the decedent. Estate tax accrues as of
the death of the decedent and the accrual of the tax is
distinct from the obligation to pay the same. Upon the
death of the decedent, succession takes place and the
right of the State to tax the privilege to transmit the
estate vests instantly upon death. (Sec. 3, RR 2-2003)
N.B. – Note that in transfers for insufficient
consideration, the value to be included in the estate is
UP COLLEGE OF LAW TAXATION 2
the excess of the FMV at time of death over the value of
the consideration received at the time of transfer.
Despite the transfer of properties and rights at the time
of death, the executor or administrator shall not deliver
a distributive share to any party interested in the estate,
unless there is a certification from CIR that estate tax
has been paid. (Sec.94)
Time of death governs:
(1) The determination of the extent of the decedent‘s
interest for computing his gross estate.
(2) The statute that governs estate taxation.
(3) The accrual of the estate tax.
Taxable Transfers
Taxable transfers are complete when the transferor
divests himself of all economic beneficial interest in
himself or his estate.
(1) Transfers Mortis Causa – These are gratuitous
transfers that take effect after death, either testate
or intestate. These transfers are subject to estate
tax.
A donation which purports to be one inter vivos but
withholds from the donee the right to dispose of the
donated property during the donor's lifetime is in truth
one mortis causa. In a donation mortis causa, the right
of disposition is not transferred to the donee while the
donor is still alive. The requisites of a testamentary
disposition should be fulfilled.
Characteristics: (Maglasang v Heirs of Cabatingan,
2002)
(i) It conveys no title or ownership to the transferee
before the death of the transferor; or what
amounts to the same thing, that the transferor
should retain the ownership (full or naked) and
control of the property while alive;
(ii) That before his death, the transfer should be
revocable by the transferor at will, ad nutum; but
revocability may be provided for indirectly by
means of a reserved power in the donor to dispose
of the properties conveyed;
(iii) That the transfer should be void if the transferor
should survive the transferee.
(2) Transfers Inter Vivos. Gratuitous transfers that take
effect during the lifetime of the donor. (See Donor‘s
Tax for requisites)
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TAXATION LAW
General Rule: Donation Inter Vivos are subject to
Donor‘s Tax.
Exceptions: Donation Inter Vivos are subject to Estate
Tax when it is treated by law as substitutes for
testamentary dispositions (i.e., transfers which are inter
vivos in form but mortis causa in substance)
(a) Transfers in Contemplation of Death [Sec. 85(B),
NIRC]
(b) Revocable transfers [Sec. 85(C), NIRC]
(c) Transfers of property arising under general power
of appointment [Sec. 85(D), NIRC]
(d) Transfers for insufficient consideration [Sec. 85(G),
NIRC]
Note: These transfers would be included in the
computation of the gross value of estate. See further
discussion in the valuation of Gross Estate.
F. CLASSIFICATION OF DECEDENT
Estate Tax applies only to individuals. The decedent
may be classified into:
(1) Citizen (RC/NRC)
(2) Resident alien (RA); or
(3) Non-resident alien (NRA).
F.1. CONCEPT OF RESIDENCE
For purposes of estate taxation, ―residence‖ refers to
domicile, the permanent home or the place to which
whenever absent, one intends to return (animus
revertendi), and depends on facts and circumstances,
in the sense that they disclose intent. It is therefore, not
necessarily the actual place of residence. (Corre v Tan
Corre, 1956)
Situs of Intangible Personal Properties
General Rule: Mobilia Sequuntur Personam Principle:
Taxation of intangible personal properties (such as
credits, bills, bank deposits promissory notes, and
corporate stocks) follows the residence/domicile of
owner thereof. Situs is the domicile or residence of the
owner. (Collector v Fisher)
Exceptions:
(1) Rule of Reciprocity
(2) When it is inconsistent with express provisions of
law
(3) When justice does not demand that it should be,
as where the property in fact has a situs elsewhere
Intangible Properties which are considered situated in
the Philippines (Sec 104)
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(1) Franchise which must be exercised in the

Philippines
(2) Shares, obligations or bonds issued by any
corporation or sociedad anonima organized or
constituted in the Philippines in accordance
with its laws
(3) Shares, obligations or bonds issued by any
foreign corporation 85% of the business of
which is located in the Philippines
(4) Shares, obligations or bonds issued by any
foreign corporation if such shares, obligations
or bonds have acquired a business situs in the
Philippines
(5) Shares or rights in any partnership, business or
industry established in the Philippines

F.2. RULE OF RECIPROCITY

There is reciprocity if the foreign country of which the
decedent was a citizen and resident at the time of his
death:
(a) Did not impose a transfer tax of any character, in
respect of intangible personal property of citizens
of the Philippines not residing in that foreign
country; OR
(b) Allowed a similar exemption from transfer tax in
respect of intangible personal property owned by
citizens of the Philippines not residing in that
country
If there is reciprocity, the intangible personal property
of an NRA shall not be included in his gross estate. If
there is no reciprocity, such intangible personal
property will be included. [Sec. 104]

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G. GROSS ESTATE VIS-À-VIS NET ESTATE

Gross Estate Net Estate

Value at the time of death of all the decedent‘s property
wherever situated
HOWEVER, in the case of a NRA at the time of his death,
only that part of the entire gross estate which is situated in
the Philippines shall be included in his taxable estate. [Sec
85, NIRC]
Value of the estate after all deductions have been made
against the gross estate; subject to the graduated tax rates.
[Sec. 6, RR 2-2003]
This is the TAX BASE.

Formula for Estate Tax (see Annex A for expanded formulae)

Gross Estate (Sec. 85)
Less: Deductions (Sec. 86)
-------------------------------------------------------
Net estate before share of surviving spouse (if married)
Less: Net share of the surviving spouse in the conjugal property (Sec. 86(C))
-------------------------------------------------------
= Net taxable estate
Multiply by: Tax rate (Sec. 84)
-------------------------------------------------------
= Estate Tax Due
Less: Tax Credit, if any (Sec. 86(E), or 110 (B))
-------------------------------------------------------
= Estate Tax Due, if any

H. DETERMINATION OF GROSS ESTATE AND NET ESTATE (AND COMPOSITION)

Summary of the Composition of the Gross Estate and Exclusions, Deductions therefrom
RC/NRC/RA NRA
Composition and Determination of GROSS Estate
The value at the time of his death of all the deceased‘s: The value at the time of his death of all the deceased‘s:
a. Real property wherever situated a. Real property located in the Phil.
b. Tangible personal property wherever situated b. Tangible personal property located in the Phil.
c. Intangible personal property wherever situated c. Intangible personal property with a situs in the Phil.
(subject to the rule of reciprocity)
Note: If there is reciprocity, intangible assets are
excluded from gross estate
Exclusions from Gross Estate(Sec 85(H) and Sec 87)
a. Separate property of the surviving spouse (Sec. 85 (H))
b. GSIS proceeds/ benefits
c. Accruals from SSS
d. Proceeds of life insurance where the beneficiary is irrevocably appointed
e. Proceeds of life insurance under a group insurance taken by employer
f. War damage payments and Benefits received from US Veterans Administration
g. Transfer by way of bona fide sales
h. Transfer of property to the National Government or to any of its political subdivisions
i. Merger of usufruct in the owner of the naked title (Sec. 87 (A))
j. Properties held in trust by the decedent. Transmission of inheritance or legacy by fiduciary heir or legatee to the
fideicommissay (Sec. 87 (B))
PAGE 112 OF 275
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RC/NRC/RA NRA
k. Transmission from the first heir, legatee, or done in favour of another beneficiary, in accordance with the desire
of their predecessor (Sec. 87 (C))
l. Acquisition and/or transfer expressly declared as not taxable
m. Bequests, devises, legacies or transfers to social welfare, cultural and charitable institutions, provided that not
more than 30% of said transfer shall be used for administration purposes (Sec. 87 (D))
Deductions from GROSS estate to arrive at the NET estate
Ordinary deductions Ordinary deductions1
(1) Expenses, losses, indebtedness, taxes. (ELIT) (1) Proportionate deductions for (ELIT)2
(a) Funeral expenses (a) Funeral expenses
(b) Judicial expenses (b) Judicial expenses
(c) Claims against the estate (c) Claims against the estate
(d) Claims against insolvent persons (d) Claims against insolvent persons
(e) Unpaid mortgage and debt (e) Unpaid mortgage and debt
(f) Taxes (f) Taxes
(g) Losses (g) Losses

(2) Vanishing deductions (2) Vanishing deductions

(3) Transfers for public use (3) Transfers for public use
(4) Amounts received under R.A. 4917

Special deductions No Amounts received under R.A. 4917

(a) Family home No special deductions
(b) Standard deduction
(c) Medical expenses

Share in conjugal property Share in conjugal property

1
No deduction shall be allowed for NRA, if the executor, administrator, or anyone of the heirs, DID NOT include in the
return required to be filed under Section 90 of the Code the value at the time of the decedent’s death of that part of his
gross estate NOT situated in the Philippines. [Sec. 86 (D), NIRC; Sec 7, RR 2-2003]
2
Formula for Proportionate Deductions of NRA: Allowable Deduction =

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VALUATION OF GROSS ESTATE (SEC 88)
General Rule: Gross Estate = FMV at the time of the
decedent‘s death
Real Property
(1) Appraised value, whichever is higher between:
(a) FMV, as determined by the Commissioner
of Internal Revenue (CIR) (zonal value) or
(b) FMV, as shown in the schedule of values
fixed by the Provincial or City Assessor.
If there is no zonal value, the taxable base
is the FMV that appears in the latest tax
declaration.
(2) If there is an improvement, the value of
improvement is the construction cost per
building permit or the fair market value per
latest tax declaration.
Personal Property
(1) FMV at the time of death.
(2) If none, acquisition cost for recently acquired
properties or the current market price for the
previously acquired properties. (Sec 40(B)
(3) Stocks, bonds, and other securities.
(a) If listed and traded stocks = value is the
mean between the highest and lowest
quoted selling prices at the date of death;
if none, nearest the date of death (Sec 5,
RR 02-2003)
(b) If unlisted stocks = book value at time of
death (ordinary common shares) or par
value (preferred shares)
N.B: Bonds, mortgages, and Certificates of
Stocks are taxable at the place where they are
physically located.
(4) Proceeds of Life Insurance with Revocable
Beneficiary: face value of policy (not cash
surrender value)
Right to Usufruct use or habitation, and annuity
(1) Probable life of the beneficiary in accordance
with the latest basic standard mortality table
shall be taken into account.
J. ITEMS TO BE INCLUDED IN GROSS
ESTATE
Items to be included in the Gross Estate
[Sec. 85, NIRC]
(1) Property owned by the decedent actually and
physically present in his estate at the time of his
death;
(2) Decedent‘s interest;
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TAXATION 2 TAXATION LAW
(3) Properties not physically in the estate, such as:
(a) Transfers in contemplation of death [Sec.
85(B), NIRC];
(b) Transfers with retention or reservation of
certain rights [Sec. 85(B), NIRC];
(c) Revocable transfers [Sec. 85(C), NIRC];
(d) Property passing under general power of
appointment [Sec. 85(D), NIRC];
(e) Transfers for insufficient consideration [Sec.
85(G), NIRC];
(f) Proceeds of life insurance [Sec. 85(E),
NIRC];
(g) Claims against insolvent persons [Sec.
86(A)(d)]; and
(h) Capital of the surviving spouse [Sec. 85(H),
NIRC].
DECEDENT‘S INTEREST (Sec. 85(A))
This includes any interest having value or capable of
being valued which is owned by the decedent
existing at the time of death, such as dividend
declared on or before death, but is received by the
estate after death, partnership profits which have
accrued before his death, but received after death.
This also includes those transferred by the decedent
at the time of his death.
Note: When decedent had relinquished his interest
BEFORE his death, he could not be deemed to have
transmitted interest in such property at his death.
TRANSFERS IN CONTEMPLATION OF DEATH (Sec.
85(B))
The term ―in contemplation of death‖, as used in
estate taxation, does not refer to the general
expectation of death. The words mean that it is the
thought of death, as a controlling motive, which
induces the disposition of the property for the
purpose of avoiding the tax. The decedent‘s motive
is a question of fact. Thus, the imminence of death
may afford convincing evidence of the impelling
cause of transfer. However, it is a contemplation of
death and not necessarily contemplation of
imminent death to which the statute refers. These
transfers should be without or with insufficient
considerations.
The law does not specify the number of years prior to
a decedent‘s death within which a transfer can be
considered in contemplation of death. (De leon)
TRANSFERS WITH RETENTION OR RESERVATION OF
CERTAIN RIGHTS
These are transfers with retention or reservation of
certain rights that result to the incapacity of
UP COLLEGE OF LAW TAXATION 2
transferee to freely enjoy and dispose of the
property until the transferor‘s death, and the
transfer may be regarded as having been intended
to take effect in possession or enjoyment at the
transferor‘s death. These do not include bona fide
sale for an adequate and full consideration.
REVOCABLE TRANSFERS (Sec. 85(C))
General Rule: A transfer is a revocable transfer
where:
(1) There is a transfer by trust or otherwise,
(2) The enjoyment thereof was subject at the date
of his death to any change through the exercise
of a power (in whatever capacity exercisable)
by:
(a) The decedent alone;
(b) The decedent in conjunction with any other
person without regard to when or from what
source the decedent acquired such power,
to alter, amend, revoke, or terminate; or
(c) Where any such power is relinquished in
contemplation of the decedent death.
Exception: Bona fide sale for an adequate and
full consideration in money or money‘s worth
Note: The power to alter, amend or revoke shall be
considered to exist on the date of the decedent‘s
death even though:
(a) The exercise of the power is subject to a
precedent giving of notice, or
(b) The alteration, amendment or revocation takes
effect only on the expiration of a stated period
after the exercise of the power, whether or not
on or before the date of the decedent‘s death
notice has been given or the power has been
exercised.
If notice has not been given or the power has not
been exercised before the date of his death, such
notice shall be considered to have been given, or the
power exercised, on the date of his death.
TRANSFER OF PROPERTY UNDER GENERAL POWER
OF APPOINTMENT (Sec. 85(D))
Power of Appointment – the right to designate the
person or property who shall enjoy and possess
certain property from the estate of a prior decedent.
(Domondon)
(i) General Power of Appointment: when it gives to
the decedent the power to appoint any person
he pleases including himself. He had a power
exercisable in favor of himself, his creditors or
creditors of his estate (AmJur)
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(ii) Special Power of Appointment: when the
decedent
a. can appoint only among a designated
class of persons other than himself,
his estate, the creditors of his estate,
or
b. if the power of appointment is
expressly not exercisable in favor of
the decedent, his estate, his creditors,
or creditors of his estate.
General Rule: Property over which the decedent held
a power of appointment is excluded in his gross
estate
Exception: Included in the gross estate if the
property arises under a general power of
appointment exercised by the decedent:
(1) By will; or
(2) By deed executed in contemplation of or
intended to take effect in possession or
enjoyment at or after his death; or
(3) By deed under which he has retained for his life
or any period not ascertainable without
reference to his death or for any period which
does not in fact end before his death –
(a) The possession or enjoyment of, or the right
to the income from the property; or
(b) The right either alone or in conjunction with
any person, to designate the persons who
shall enjoy or possess the property or the
income therefrom.
TRANSFERS FOR INSUFFICIENT CONSIDERATION
(Sec. 85(G))
Transfers, trusts, interests, rights, or powers
(denominated as transfer in contemplation of death,
revocable transfer and property passing under
general power of appointment) made, created,
exercised or relinquished for a consideration in
money or money‘s worth, but is NOT a bona fide sale
for an adequate and full consideration in money or
money‘s worth.
The value to be included in the gross estate is the
excess of the fair market value of the property at the
time of the decedent‘s death over the consideration
received.
Example:
Case A: If bona fide sale – no value shall be
included in the gross estate
Case B: If not a bona fide sale - the excess of the fair
market value at the time of death over the value of
UP COLLEGE OF LAW TAXATION 2 TAXATION LAW

the consideration received by the decedent shall

form part of his gross estate.
Case C: If inter vivos transfer is proven
fictitious/simulated – total value of the property at
the time of death included in the gross estate.

Case Case Case

Over
A B C
FMV, transfer 2,000 1,500 2,500
FMV, death 2,500 2,000 2,000
Consideration received 2,000 800 0
Value included in the Gross 0 1,200 2,000
Estate

The transfer for insufficient consideration must fall

under any of the following:
(1) Transfer in contemplation of death;
(2) Revocable transfer, or
(3) Property passing under a GPA.

Otherwise, the tax imposed is donor‘s tax.

PROCEEDS OF LIFE INSURANCE (Sec. 85(E))

Inclusion of proceeds of life insurance to the gross
estate depends on i) designated beneficiary; ii)
revocability of the insurance; iii) period and source
of funds used in premiums.

When included in the gross estate

Proceeds of life insurance taken out by the decedent
on his own life shall be included in the gross estate
in the following cases:
(1) Beneficiary is the estate of the deceased, his
executor or administrator, irrespective of
whether or not the insured retained the power of
revocation; or
(2) Beneficiary is other than the decedent‘s estate,
executor or administrator, when designation of
beneficiary is not expressly made irrevocable.

When not taxable

(1) Irrevocably designated; how done –
(i) By expressly stating it in the policy (the
designation of a beneficiary is PRESUMED
to be revocable);
(ii) By not changing the beneficiary during the
lifetime of the insured. This was added in
Sec. 11, RA 10607 (2013) which provides
that, ―The insured shall have the right to
change the

PAGE 116 OF 275

UP COLLEGE OF LAW TAXATION 2
beneficiary he designated in the policy (i.e.,
it‘s revocable), unless he has expressly
waived this right in said policy.
Notwithstanding the foregoing, in the event
the insured does not change the
beneficiary during his lifetime, the
designation shall be deemed irrevocable.‖
(2) Accident insurance proceeds as the Tax Code
specifically mentions only life insurance
policies
(3) Proceeds of a group insurance policy taken out
by a company for its employees.
(4) Amount receivable by any beneficiary
irrevocably designated in the policy of
insurance by the insured. The transfer is
absolute and the insured did not retain any
legal interest in the insurance
(5) Amount receivable by any beneficiary
irrevocably designated in the policy of
insurance by the insured. The transfer is
absolute and the insured did not retain any
legal interest in the insurance
(6) Proceeds of insurance policies issued by the
GSIS to government officials and employees,
which are exempt from all taxes; (PD 1146)
(i) Benefits accruing under the SSS law (RA
1161)
(7) Proceeds of life insurance payable to heirs of
deceased members of military personnel (RA
360)
CAPITAL OF THE SURVIVING SPOUSE [Sec.85(H),
NIRC]
It is NOT part of the gross estate of the deceased
spouse. (See Exclusions)
To determine the conjugal or separate character of
proceeds, the following factors are considered:
(1) Policy was taken before marriage – Source of
funds determines ownership of the proceeds of
life insurance
(2) Policy was taken during marriage
(a) Beneficiary is estate of the insured –
Proceeds are presumed conjugal; hence,
one-half share of the surviving spouse is
not taxable
(b) Beneficiary is third person – Proceeds are
payable to beneficiary even in premiums
were paid out of the conjugal
CLAIMS AGAINST INSOLVENT PERSONS
For estate tax purposes, an insolvent is a person
whose properties are not sufficient to satisfy,
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TAXATION LAW
whether fully or partially, his debts. A judicial
declaration of insolvency is not required but the
incapacity of the debtor should be proven. As a rule,
regardless of the amount the debtor is unable to pay,
the full amount of the claim against the insolvent
person should be included in the gross estate of the
decedent. The portion of the claim which is not
collectible should be allowed as a deduction from
the gross estate.
K. DEDUCTIONS FROM ESTATE
Deductions and/or losses already deducted from
gross income can no longer be deducted from gross
estate. Further, deductions should not be
compensated for by any insurance or extrajudicial
settlement. Otherwise, they are not valid deductions.
K.1. ORDINARY DEDUCTIONS
1.A. Expenses, Losses, Indebtedness and Taxes, Etc.
(ELIT)
i. FUNERAL EXPENSES (Sec. 86 (A)(1)(a))
Actual funeral expenses shall mean (i) those which
are actually incurred (ii) in connection with, and
before the interment or burial of the deceased and
(iii) must be paid out of the estate and not by
another person or out of contributions from friends
and relatives. These must be (iv) duly supported by
receipts or invoices or other evidence to show that
they were actually incurred. They include:
(a) The mourning apparel of the surviving spouse
and unmarried minor children of the deceased
bought and used on the occasion of the burial;
(b) Expenses for the deceased‘s wake, including
food and drinks;
(c) Publication charges for death notices;
(d) Telecommunication expenses incurred in
informing relatives of the deceased;
(e) Cost of burial plot, tombstones, monument or
mausoleum but not their upkeep. In case the
deceased owns a family estate or several burial
lots, only the value corresponding to the plot
where he is buried is deductible;
(f) Interment and/or cremation fees and charges;
and
(g) All other expenses incurred for the performance
of the rites and ceremonies incident to
interment.
Limitation: Allowable deduction is not to exceed
P200,000 and whichever is lower of:
UP COLLEGE OF LAW TAXATION 2
(a) Actual funeral expenses (whether paid or
not) up to the time of interment, or
(b) An amount equal to 5% of the gross estate.
The unpaid portion of the funeral expenses incurred
which is in excess of the P200,000 threshold is NOT
allowed to be claimed as a deduction under ―claims
against the estate‖. (Sec. 6(A)(1), RR 02-200)
N.B. – Compare (1) ACTUAL, (2) 5% GROSS, or (3)
200K and pick whichever is lower.
Not included are: (i) Expenses incurred after the
interment, such as for prayers, masses,
entertainment, or the like are not deductible. (ii) Any
portion of the funeral and burial expenses borne or
defrayed by relatives and friends of the deceased
are not deductible. (iii) Medical expenses as of the
last illness will not form part of funeral expenses but
should be claimed as medical expenses. (Sec. 6, RR
2-2003)
Illustrations
(a) If five percent (5%) of the gross estate is
P220,000 and the amount actually incurred is
P215,000, the maximum amount that may be
deducted is only P200,000;
(b) If five percent (5%) of the gross estate is P
100,000 and the total amount incurred is
P150,000 where P20,000 thereof is still
unpaid, the only amount that can be claimed as
deduction for funeral expenses is P100,000.
The entire P50,000 excess amount consisting
of P30,000 paid amount and P20,000 unpaid
amount can no longer be claimed as FUNERAL
EXPENSES. Neither can the P20,000 unpaid
portion be deducted from the gross estate as
CLAIMS AGAINST THE ESTATE.
ii. JUDICIAL EXPENSES OF TESTAMENTARY AND
INTESTATE PROCEEDINGS (Sec. 86 (A)(1)(b))
Expenses allowed as deduction under this category
are (i) those incurred in the inventory-taking of
assets comprising the gross estate, their
administration, the payment of debts of the estate,
as well as the distribution of the estate among the
heirs. They are (ii) incurred during the settlement of
the estate but not beyond the last day prescribed by
law, or the extension thereof, for the filing of the
estate tax return. (Sec. 86 (A)(2), RR 2-2003).
These expenses must be (iii) for the benefit of the
estate, and (iv) substantiated by recipts OR if
unpaid, should be supported by a sworn statement
of account issued and signed by the creditor.
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TAXATION LAW
Judicial expenses may include:
(1) Fees of executor or administrator
(2) Attorney‘s fees – These refer to the notarial fee
paid for the extrajudicial settlement is
deductible since such settlement effected a
distribution of the decedent‘s estate to his
lawful heirs. [CIR v. CA (2000)]
(3) Court fees
(4) Accountant‘s fees
(5) Appraiser‘s fees
(6) Clerk hire
(7) Costs of preserving and distributing the estate
(8) Costs of storing or maintaining property of the
estate
(9) Brokerage fees for selling property of the estate
Not deductible
(a) Compensation paid to a trustee of the
decedent‘s estate for his services rendered for
the purpose of managing the decedent‘s real
estate for the benefit of the testamentary heirs
(Lorenzo v. Posadas)
(b) Expenses incurred by the presumptive heir and
that of her witnesses for appearance at the trial
to oppose the probate of a will.
(c) Attorney‘s fees incident to litigation incurred by
the heirs in asserting their respective rights, or
claims as to who are entitled to the estate left
by the deceased.
(d) Premiums paid by the administrator on his
bond, being exclusively used for his account,
since the giving of the bond is in the nature of a
qualification for the office and not necessary in
the settlement of his estate.
iii. CLAIMS AGAINST THE ESTATE (Sec. 86 (A)(1)(c))
The word ―claims‖ is generally construed to mean (i)
debts or demands of a pecuniary nature (ii) which
could have been enforced against the deceased in
his lifetime and could have been reduced to simple
money judgements. These are liabilities of the
estate or indebtedness of such (iii) arising out of:
contract, tort, or operation of law. (Dizon v CTA,
2008)
Requisites for Deductibility of Claims Against the
Estate:
(a) The liability represents a personal obligation of
the deceased existing at the time of his death
except unpaid obligations incurred incident to
his death such as unpaid funeral expenses (i.e.,
expenses incurred up to the time of internment)
and unpaid medical expenses which are
classified under a different category of
deductions.
UP COLLEGE OF LAW TAXATION 2
(b) The liability was contracted in good faith and for
adequate and full consideration in money or
money‘s worth
(c) The claim must be a debt or claim which is valid
in law and enforceable in court;
(d) The indebtedness must not have been
condoned by the creditor or the action to collect
from the decedent must not have prescribed.
(e) They must be reasonably certain in amount, and
substantiated.
Substantiation Requirements
In case of simple loan (including advances):
(1) The debt instrument must be duly notarized at
the time the indebtedness was incurred, such
as promissory note or contract of loan, except
for loans granted by financial institutions where
notarization is not part of the business
practice/policy of the financial institution-
lender.
(2) Duly notarized Certification from the creditor as
to the unpaid balance of the debt, including
interest as of the time of death. If the creditor
is:
- CORPORATION: sworn certification should be
signed by the President, or Vice-President, or
other principal officer of the corporation.
- PARTNERSHIP: sworn certification should be
signed by any of the general partners.
- BANK/FINANCIAL INSTITUTIONS: Certification
shall be executed by the branch manager of the
bank/financial institution which monitors and
manages the loan of the decedent-debtor.
- INDIVIDUAL: sworn certification should be
signed by him.
In any of these cases, the one who should
certify must not be a relative of the borrower
within the 4th civil degree, either by
consanguinity or affinity, except when a copy of
the promissory note or other evidence of the
indebtedness must is filed with the RDO having
jurisdiction over the borrower within 15 days
from the execution thereof.
(3) Proof of financial capacity of the creditor to
lend the amount at the time the loan was
granted, as well as its latest audited balance
sheet with a detailed schedule of its receivable
showing the unpaid balance of the decedent-
debtor
PAGE 119 OF 275
TAXATION LAW
In case the creditor is an individual who is no
longer required to file ITRs with the Bureau, a
duly notarized declaration by the creditor of his
capacity to lend at the time when the loan was
granted without prejudice to verification that
may be made by the BIR to substantiate such
declaration of the creditor.
If the creditor is a non-resident, the executor/
administrator or any of the legal heirs must
submit a duly notarized declaration by the
creditor of his capacity to lend at the time when
the loan was granted, authenticated or certified
to as such by the tax authority of the country
where the non-resident creditor is a resident
(4) A statement under oath executed by the
administrator or executor of the estate
reflecting the disposition of the proceeds of the
loan if it was contracted within 3 years prior to
the death of the decedent.
If the unpaid obligation arose from purchase of
goods or services:
(1) Pertinent documents evidencing the purchase
of goods or service, such as sales
invoice/delivery receipt (for sale of goods), or
contract for the services agreed to be rendered
(for sale of services), as duly acknowledged,
executed and signed by decedent-debtor and
creditor, and statement of account given by the
creditor as duly received by the decedent-
debtor
(2) Duly notarized certification from the creditor as
to the unpaid balance of the debt, including
interest as of the time of death.
(3) Certified true copy of the latest audited balance
sheet of the creditor with a detailed schedule of
its receivable showing the unpaid balance of
the decedent-debtor. Moreover, a certified true
copy of the updated latest subsidiary
ledger/records of the debtor-decedent, should
likewise be submitted.
Where the settlement is made through the Court
in a testate or intestate proceeding, pertinent
documents filed with the Court evidencing the
claims against the estate, and the Court Order
approving the said claims, if already issued, in
addition to the documents mentioned in the
preceding paragraphs.
UP COLLEGE OF LAW TAXATION 2
iv. CLAIMS AGAINST INSOLVENT PERSONS (Sec. 86
(A)(1)(d))
These are claims of the estate (i) against insolvent
persons (ii) which are not collectible. To be
deductible from the gross estate:
Additional Requirements:
(a) The incapacity of the debtor to pay his
obligation should be proven, although a judicial
declaration of insolvency is not required;
(b) The full amount owed by the insolvent must first
be included in the decedent‘s gross estate; and
(c) If the insolvent could only pay a partial amount,
the full amount owed shall be included in the
gross estate, and the amount uncollectible
shall be allowed as a deduction.
N.B. – Unpaid claims on funeral expenses in excess
of 200K cannot be designated as claims against the
estate.
v. UNPAID MORTGAGES, LOSSES AND TAXES (Sec.
86(A)(1)(e))
Unpaid Mortgages
Requisites for Deductibility [Sec. 6-A5(a), RR 2-
2003]
(a) The value of the decedent‘s interest therein,
undiminished by such mortgage or
indebtedness, is included in the value of the
gross estates.
(b) The mortgages were contracted bona fide and
for an adequate and full consideration in money
or money‘s worth.
In case the loan of the decedent is only an
accommodation loan where the loan proceeds went
to another person, the value of the unpaid loan must
be included as a receivable of the estate. If there is
a legal impediment to recognize the same as a
receivable of the estate, the said unpaid obligation
shall not be allowed as a deduction. In all instances,
the mortgaged property, to the extent of the
decedent‘s interest therein, should always form part
of the taxable gross estate. (RR 2-2003)
Unpaid Taxes
Requisites for Deductibility
(a) Taxes which have accrued as of or before the
death of the decedent (if it was incurred after, it
is chargeable to the income of the estate), and
(b) Unpaid as of the time of his death, regardless of
whether or not it was incurred in connection
with trade or business
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TAXATION LAW
Not included:
(a) Income tax upon income received after death,
or
(b) Property taxes not accrued before his death, or
(c) The estate tax due from the transmission of his
estate
Casualty Losses
Requisites for Deductibility
(a) Incurred during the settlement of the estate
(b) Arising from fires, storms, shipwreck, or other
casualties from robbery, theft, or embezzlement
(c) Not compensated by insurance or otherwise
(d) At the filing of the estate tax return, such losses
have not been claimed as a deduction for
income tax purposes in an income tax return
(e) Incurred not later than the last day for the
payment of the estate tax as prescribed by law.
 6 MONTHS (or +30 days if an extension is
granted) after death. Therefore, all casualty
losses AFTER 6 months (or +30 days) are not
deductible.
Casualty loss can be allowed as deduction in one
instance only, either for income tax purposes or
estate tax purposes. (Sec. 6(A)(5)), Rev. Reg 2-
2003)
NOTE: See Formula for computing Ordinary
Deductions of NRA above.
1.B. Property Previously Taxed [Sec. 86(A)(2)]
a.k.a. VANISHING DEDUCTIONS
This is an amount allowed to reduce the taxable
estate of a decedent where property:
(1) Received by him from a prior decedent by gift,
bequest, device, or inheritance
(2) Transferred to him by gift, has been the object
of previous transfer transaction, subject to
transfer tax, either donor‘s tax or estate tax.
Conditions
(1) There must be 2 deceased persons and the first
one is the donor
(2) The second decedent dies within 5 years after
the death of a prior decedent, or in case of gift,
the decedent-donee dies within the same
period after the date of the gift.
Requisites
(1) Death – The present decedent died within 5
years from the date of the prior decedent OR
date of gift.
UP COLLEGE OF LAW
(2) Identity of the property– The property with
respect to which deduction is sought can be
identified as the one who received from prior
decedent, or from the donor, or as the property
acquired in exchange for the original property
so received.
(3) Inclusion of the property – The property must
have formed part of the gross estate situated in
the Philippines of the prior decedent, or have
been included in the total amount of the gifts of
the donor made within 5 years prior to the
present decedent‘s death.
(4) Previous taxation of property – The estate tax on
the prior succession, or the donor‘s tax on the
gift must have been finally determined and paid
by the prior decedent or by the donor, as the
case may be.
(5) No previous vanishing deduction on the
property – No such deduction on the property,
or the property given in exchange therefor, was
allowed in determining the value of the net
estate of the prior decedent. This is intended to
preclude the application of the vanishing
deduction on the same property more than once.
Limitations
(1) Value of property – The deduction is limited by
the value of property previously taxed or the
aggregate value of such property if more than
one item, as finally determined for the purpose
of the prior estate tax (or gift tax) or the value of
such property in present decedent‘s gross
estate, whichever is lower.
(2) Deduction for mortgage or lien – The initial
value (in number 1 above) shall be reduced by
the total amount paid, if any, by the present
decedent on any mortgage or other lien on the
property where a deduction was allowed, by
reason of the payment, of such mortgage or
other lien from the gross estate of the prior
decedent, or gift or donor, in determining the
estate tax of the prior decedent or the donor‘s
tax.
(3) Deductions for expenses, etc. – The value as
reduced in #2 shall be further reduced by an
amount which bears the same ratio to the
amounts allowed as deductions for:
(a) Expenses, losses, indebtedness, and taxes
(ordinary deductions), and
(b) Transfers for public use as the amount
otherwise deductible for property
previously taxed bears to the value of the
decedent‘s gross estate; and
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TAXATION 2 TAXATION LAW
(4) Percentage of deductions – The vanishing
deduction shall be the value (final basis) in #3
multiplied by the ff. percentages:
VD If received by inheritance or gift
Rate
100% Within 1 year prior to the death of the
present decedent
80% More than 1 year but not more than 2 years
prior to the death of the decedent
60% More than 2 years but not more than 3
years
40% More than 3 years but not more than 4
years prior to the death of the decedent
20% More than 4 years but not more than 5
years prior to the death of the decedent
FORMULA FOR VANISHING DEDUCTIONS:
(please take note of the limitations above)
Value Taken of Property
Less: Mortgage debt paid, if any
= Initial Basis
Less: Proportionate Deduction**
= Final Basis
Multiplied by Deduction Rate
VANISHING DEDUCTION
**Proportionate Deduction
)
Note: Amount of Vanishing Deductions is NOT
subtracted from the value of the CPG to determine
the share of surviving spouse. It is deducted from
the exclusive property of the decedent.
1.C. Transfers for Public Purpose (Sec. 86(A)(3))
These are (i) dispositions in a last will and testament
or transfers to take effect after death (ii) in favor of
the Government of the Republic of the Philippines,
or any political subdivision thereof, for exclusively
public purposes. The whole amount of all the
bequests, legacies, devises, or transfers to or for the
use of shall be deductible from gross estate, (iii)
provided such amount or value had been included in
the computation of the gross estate. Thus, there is
no limitation for the amount to be deducted.
UP COLLEGE OF LAW TAXATION 2
1.D. Amounts Received by Heirs Under RA 4917 (An
Act Providing that Retirement Benefits of Employees
of Private Firms shall not be subject to attachment,
levy, execution or any tax whatsoever) [Sec.
86(A)(7)]
Any amount received by the heirs from the
decedent‘s employer as a consequence of the death
of the decedent-employee in accordance with RA
4917, provided that such amount is included in the
gross estate of the decedent. These include:
(1) Retirement benefits from private firms with
private benefit plan, if the retiring employee is
50 years old or older. This can only be availed
once.
(2) Benefits granted in case of separation beyond
the control of the employee.
SPECIAL DEDUCTIONS
(A) Family Home (Sec. 86(A)(4))
It is the dwelling house, including the land on which
it is situated, where the husband and wife, or a head
of the family, and members of their family reside, as
certified to by the Barangay Captain of the locality. It
is deemed constituted on the house and lot from the
time it is actually occupied as the family residence
and considered as such for as long as any of its
beneficiaries actually resides therein. (Arts. 152 and
153, Family Code)
Temporary absence from the constituted family
home due to travel or studies or work abroad, etc.
does not interrupt actual occupancy. The family
home is generally characterized by permanency,
that is, the place to which, whenever absent for
business or pleasure, one still intends to return.
(Sec. 6(D), RR 2-2003)
It must be part of the ACP or CPG, or the exclusive
properties of either spouse. It may also be
constituted by an unmarried head of a family on his
or her own property. (Sec. 6(D), RR 2-2003 citing Art.
156, FC).
For purposes of availing this deduction, a person
may constitute only one family home. Sec. 6(D), RR
2-2003 citing Art. 161, FC.
Requisites for Deductibility (Sec. 6(D)(b), RR 2-
2003)
(1) The family home must be the actual residential
home of the decedent and his family at the time
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TAXATION LAW
of his death, as certified by the barangay
captain of the locality.
(2) The total value of the family home must be
included as part of the gross estate of the
decedent
(3) Allowable deduction must be in an amount
equivalent to the current FMV of the family
home as declared or included in the gross
estate, or the extent of the decedent‘s interest
(whether conjugal/community or exclusive
property), whichever is lower, but in no case
shall the deduction exceed P1,000,000.
(4) The decedent was married or if single, was a
head of the family.
(5) Along with the decedent, any of the
beneficiaries must be dwelling in the family
home.
(6) The family home as well as the land on which it
stands must be owned by the decedent.
Therefore, the FMV of the family home should
have been included in the computation of the
decedent‘s gross estate.
Beneficiaries of a Family Home
(1) The husband and wife, or an unmarried person
who is the head of a family; and
(2) Their parents, ascendants, descendants,
brothers and sisters, whether the relationship
be legitimate or illegitimate, who are living in
the family home and who depend upon the
head of the family for legal support.
Limitation: P1,000,000
(B) Standard Deduction (Sec. 86(A)(5), Sec. 6(E),
RR 2-2003)
An amount equivalent to one million pesos
(P1,000,000) shall be deducted from the gross
estate without need of substantiation.
(C) Medical Expenses (Sec. 86(A)(6); Sec. 6(F), RR
2-2003)
All medical expenses (cost of medicine, hospital
bills, doctors‘ fees, etc.) incurred (whether paid or
unpaid).
Requisites for Deductibility
1. The expenses were incurred by the decedent
within 1 year prior to his death
2. The expenses are duly substantiated with receipts
and other documents in support thereof
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Limitation Provided, that in no case shall the chance, and, upon

deductible medical expenses exceed Five Hundred (1) The following are
Thousand Pesos (P500,000). excluded from the
community property:
Not allowed as deduction: (i) Any amount of medical (a) Property acquired
expenses incurred within one year from death in by gratuitous title
excess of P500,000 shall no longer be allowed as a by either spouse,
deduction under this subsection. Neither can (ii) any and the fruits as
unpaid amount thereof in excess of the P500,000 well as the income
threshold nor (iii) any unpaid amount for medical thereof, if any,
expenses incurred prior to the one-year period from unless it is
date of death be allowed to be deducted from the expressly provided
gross estate under ―Claims against the estate‖. (RR by the donor,
2-2003, Sec. 6-F) testator, or
grantor that they
(D) Net Share of Surviving Spouse in CPG/ACP (Sec. shall form part of
86(C),; Sec. 6(H), RR 2-2003) the community
property.
(Compare with Capital of Suriving Spouse which is (b) Property for
excluded from the gross estate). personal and
exclusive use of
The amount deductible is the net share of the either spouse;
surviving spouse in the CPG. The net share is however, jewelry
equivalent to ½ of 50% of the conjugal property shall form part of
after deducting the obligations chargeable to such the community
property. Net share of the surviving spouse is neither property.
an ordinary nor a special deduction. (c) Property acquired
before the
N.B. – There are three deductions with ceilings: (1) marriage by either
Funeral expenses at P200,000; (2) Medical spouse who has
expenses at P500,000, and (3) Family home at 1M. legitimate
descendants from
L. EXCLUSIONS FROM ESTATE a former marriage,
and the fruits as
Capital of the Surviving Spouse (Sec. 85(H)) well as the
Capital: property of the spouses brought into income, if any, of
marriage. Strictly speaking, capital under the Civil such property.
Law refers to the property brought by the husband to (Art. 92 Family
the marriage while that brought into the marriage by Code)
the wife known is as paraphernal property. (2) Property acquired
(Domondon) during the marriage
is presumed to
Exclusive Property of Each Spouse belong to the
If ACP governs property If CPG governs property community, unless it
relations relations is proved that it is
one of those
The community of The husband and wife excluded therefrom.
property shall consist of place in a common fund
all the property owned by the proceeds, products,
the spouses at the time fruits, and income from
of the celebration of the their separate properties
marriage or acquired and those acquired by
thereafter. (Art. 91 either or both spouses
Family Code) through their efforts or by
PAGE 123 OF 275
dissolution of the
marriage or of the
partnership, the net
gains or benefits
obtained by either or
both spouses shall be
divided equally between
them, unless otherwise
agreed in marriage
settlements. (Art. 106,
Family Code)
(1) The following are
exclusive property of
each spouse:
(a) That which is
brought to the
marriage as his or
her own
(b) That which each
acquires DURING
the marriage by
gratuitous title
(c) That which is
acquired by right
of redemption, by
barter or by
exchange with
property
belonging to only
one of the
spouses
(d) That which is
purchased with
exclusive money
of the wife or the
husband (Art.
109, Family
Code)
(2) Property bought on
instalments paid
partly from exclusive
funds of either or
both spouses and
partly from conjugal
funds belong to the
buyer or buyers if full
ownership was
vested BEFORE the
marriage subject to
reimbursement
advanced by the
conjugal partnership
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or by either or both (1) Where net estate does not exceed P200,000.
spouses. (Art. 118, (Sec. 84)
Family Code) (2) The following transmissions shall not be taxed:
(3) Whenever an (a) Merger of the usufruct in the owner of the
amount or credit naked title
payable within a (b) Transmission or delivery of the inheritance
period of time or legacy by the fiduciary heir or legatee to
belongs to one of the the fideicomissary
spouses, the sums (c) The transmission from the first heir,
collated during the legatee, or done in favor of another
marriage in partial beneficiary in accordance with the desire
payments or by of the predecessor
instalments on the (d) All bequests, devises, legacies, or transfers
principal are to social welfare, cultural and charitable
considered the institutions, no part of the net income of
exclusive property of which inures to the benefit of any
the spouse. individual, and provided that not more
However, interest than 30% of the said bequests, etc shall
falling due during be used by such institution for
the marriage on the administration purposes.
principal belong to
the conjugal Note: Effectivity of Family Code (Aug 3, 1988)
partnership. Exemptions under special laws
(4) All property acquired (1) Benefits received by members from the GSIS
during the marriage and the SSS by reason of death
whether the (2) Amounts received from the Philippines and US
acquisition appears governments for damages suffered during the
to have been made, last war.
contracted or (3) Benefits received by beneficiaries residing in
registered in the the Philippines under laws administered by the
name of one or both US Veteran Administration
spouses,, is (4) Bequests, legacies, or donations mortis causa
presumed to belong to social welfare, cultural, or charitable
to the conjugal organizations. Bequests to be used actually,
partnership, unless directly and exclusively for educational
it is proved that it purposes are also exempt from tax.
pertains exclusively (5) Grants and donations to the Intramuros
to the husband or to Administration
the wife.
If separation of property governs property relations
Separation of property may refer to present or future M. TAX CREDIT FOR ESTATE TAXES
property or both. It may be total or partial. In the PAID IN A FOREIGN COUNTRY
latter case, the property not agreed upon as It is a remedy against international double taxation.
separate shall pertain to the absolute community. To minimize the onerous effect of taxing the same
(Art. 144, Family Code) property twice, tax credit against Philippine estate
tax is allowed for estate taxes paid to foreign
To each spouse shall belong all earnings from his or countries.
her profession, business or industry, and all fruits,
natural, industrial, or civil, due or received during Who may claim: RC/NRC/RA. Only the estate of a
the marriage from his or her separate property. (Art. decedent who was a citizen or a resident of the
145, Family Code) Philippines at the time of his death can claim tax
credit for any estate tax paid to a foreign country.
Exemptions:
PAGE 124 OF 275
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General Rule
The estate tax imposed by the NIRC shall be
credited with the amounts of any estate tax imposed
by the authority of a foreign country.

PAGE 125 OF 275

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Limitations on Credit
A. For Estate Taxes paid to one foreign country (Specific Country Limitation)
The amount of the credit in respect to the tax paid to any country shall not exceed the same proportion of the tax against
which such credit is taken, which the decedent's net estate situated within such country taxable under the tax code bears
to his entire net estate.

)
=

B. For estate taxes paid to 2 or more foreign countries (Global Limitation)

The total amount of the credit shall not exceed the same proportion of the tax against which such credit is taken, which
the decedent's net estate situated outside the Philippines taxable under the tax code bears to his entire net estate.

)
=

Compare the tax credit allowed under Limitation A and Limitation B. The lower of the two amounts is the final allowable
tax credit. In this case, the amount computed under Limitation A (4,400) is lower, thus it becomes the final allowable tax
credit.

If there is only one foreign country involved, both limitations will yield the same answer.

The resulting amount will be compared to the actual tax paid to the foreign country. The lower amount will be the final
allowable tax credit.

Illustration:

Net Estate – Philippines (reduced by all allowable P1,050,000

deductions, except standard deduction)
Country G Net Estate 300,000
Country H Net Estate 150,000
Tax paid/incurred:
Philippines 15,000
Country G 5,000
Country H 1,400
Net Estate – Philippines (reduced by all allowable P1,050,000
deductions, except standard deduction)

Net taxable estate is P500,000 (1,050,000 + 300,000 + 150,000 – 1,000,000 standard deduction). The Philippine
estate tax on P500,000 is P15,000

Solution – Limitation A
(1) Apply Formula A. The result after applying the formula above is compared to the tax actually paid for each foreign
country.

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(2) The lower of the two amounts for each foreign country will be added to get the total tax credit allowed under
Limitation A.

Amount Allowed (whichever is lower)

Country G
3,000
(300/1500 x 15,000) 3,000
Actually paid to Country G 5,000
Country H
1,500
(150/1500 x 15,000) 1,400
Actually paid to Country H 1,400
Tax credit allowed under Limitation A P 4,400

Solution – Limitation B:
(1) Apply Formula B. The result after applying the formula above is compared to the tax actually paid in total to foreign
countries.
(2) The lower of the two amounts will be added to get the total tax credit allowed under Limitation B.

Amount Allowed (Lower)

450/1500 x 15,000 4,500

Total foreign income taxes paid 6,400

Tax credit allowed under Limitation A P 4,400

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UP COLLEGE OF LAW
N. FILING OF NOTICE OF DEATH
(Section 89)
Notice of Death
When needed:
(i) in all cases of transfers subject to tax; or
(ii) where, though exempt from tax, the value of the
gross estate exceeds P20,000.
Period of sending notice: A written Notice of Death
must be given to the BIR.
(a) Within 2 months after the death of the decedent
or
(b) Within 2 months after the executor or
administrator or executor qualifies as such.
Who will file: executor, administrator, or any of the
legal heirs, as the case may be.
O. ESTATE TAX RETURN
(Section 90 – 91)
When Required (Copies in duplicate)
(1) When the estate is subject to estate tax, OR
(2) When, though exempt from tax, the gross value
of the estate exceeds Two hundred thousand
pesos (P200,000), OR
(3) Regardless of the gross value of the estate,
when the said estate consists of registered or
registrable property such as real property,
motor vehicle, shares of stock or other similar
property for which a clearance from the Bureau
of Internal Revenue is required as a condition
precedent for the transfer of ownership thereof
in the name of the transferee.
Contents
The executor, or the administrator, or any of the
legal heirs, as the case may be, shall file a return
under oath in duplicate, setting forth:
(1) The value of the gross estate of the decedent at
the time of his death, or in case of a
nonresident, not a citizen of the Philippines, of
that part of his gross estate situated in the
Philippines;
(2) The deductions allowed from gross estate in
determining the net taxable estate; and
(3) Such part of such information as may at the
time be ascertainable and such supplemental
data as may be necessary to establish the
correct taxes.
(4) For estate tax returns showing a gross value
exceeding P2,000,000 - there must be a
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TAXATION 2 TAXATION LAW
statement duly certified to by a Certified Public
Accountant containing the following:
(a) Itemized assets of the decedent with their
corresponding gross value at the time of
his death, or in the case of a non-resident,
not a citizen of the Philippines, of that part
of his gross estate situated in the
Philippines;
(b) Itemized deductions from gross estate
allowed in Section 86; and
(c) The amount of tax due whether paid or still
due and outstanding.
Remember:
P20,000 – File Notice of Death
P200,000 – File Estate Tax Return
P2,000,000 – Statement duly certified by CPA
Period for Filing
General Rule: Filed within 6 months from the
decedent's death.
Exception: The CIR shall have authority to grant, in
meritorious cases, a reasonable extension not
exceeding 30 days for filing the return.
Who will file: executor, administrator, or any of the
legal heirs, as the case may be, under oath. If there
is no executor or administrator appointed, qualified,
and acting within the Philippines, any person in
actual or constructive possession of any property of
the decedent may file this return.
Where to file the estate tax return and pay the tax
due (Sec. 9, RR 2-2003)
Resident Citizen (RC and RA)
The executor or administrator shall register the
estate of the decedent and secure a new TIN from
the RDO where the decedent was domiciled at the
time of his death and shall file the estate tax return
and pay the corresponding estate tax with:
(1) An authorized agent bank (AAB), or
(2) Revenue District Officer (RDO), or
(3) Collection Officer,
(4) Duly authorized Treasurer of the city or
municipality in which the decedent was
domiciled at the time of his death, or
Non-resident decedent (NRA/NRC) with executor or
administrator in the Philippines
The estate tax return shall be filed with and the TIN
for the estate shall be secured from the RDO where
such executor or administrator is registered.
UP COLLEGE OF LAW
If the executor or administrator is not registered, the
estate tax return shall be filed with and the TIN for
the estate shall be secured from the RDO having
jurisdiction over the executor or administrator‘s
legal residence.
Non-resident decedent does not have an executor or
administrator in the Philippines
The estate tax return shall be filed with and the TIN
for the estate shall be secured from the Office of the
Commissioner through RDO 39 QC.
The foregoing provisions notwithstanding, the CIR
may continue to exercise his power to allow a
different venue/place in the filing of tax returns.
Payment: Pay as you file
At the time the return is filed by the executor,
administrator or the heirs.
The executor or administrator, or if there is none
appointed, qualified, and acting within the
Philippines, then any person in actual or
constructive possession of any property of the
decedent. The estate tax shall be paid by the
executor or administrator before the delivery of the
distributive share in the inheritance to any heir or
beneficiary.
Exception: In meritorious cases, the CIR may grant a
reasonable extension not exceeding 30 days from
filing.
Extension of Payment (Sec. 9(E), RR 2-2003)
The CIR may allow an extension of payment, if he
finds that the payment on the due date of the estate
tax or of any part thereof would impose undue
hardship upon the estate or any of the heirs:
(1) Extension not to exceed 5 years, in case the
estate is settled judicially, or
(2) 2 years in case the estate is settled
extrajudicially.
Where the taxes are assessed by reason of
negligence, intentional disregard of rules and
regulations, or fraud on the part of the taxpayer, no
extension will be granted by the CIR.
If extension granted, the CIR may require the
executor, or administrator, or beneficiary, as the
case may be, to furnish a bond in such amount, not
exceeding double the amount of the tax and with
such sureties as the CIR deems necessary,
conditioned upon the payment of the said tax in
accordance with the terms of the extension.
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TAXATION 2 TAXATION LAW
Effects of granting an extension
(1) Payment of the amount in respect of which the
extension is granted on or before the date of the
expiration of the period of the extension
(2) Suspension of the running of statute of
limitations for deficiency assessment for the
period of any extension
(3) Any amount paid after the statutory due date of
the tax, but within the extension period, shall be
subject to interest but not to surcharge.
Can estate tax be paid in installments? Yes!
In case the available cash of the estate is not
sufficient to pay its total estate tax liability, the
estate may be allowed to pay the tax by installment
and a clearance shall be released only with respect
to the property the corresponding/computed tax on
which has been paid. (Sec. 9(F), RR 2-2003)
Who are liable for the payment of estate taxes
Primarily, the estate, through the executor or
administrator.
(1) Payment shall be made before the delivery of
the distributive share in the inheritance to any
heir or beneficiary.
(2) If there are two or more executors or
administrators, all of them are severally liable
for the payment of the tax.
(3) The estate tax clearance issued by the CIR or
the RDO having jurisdiction over the estate, will
serve as the authority to distribute the
remaining properties/share in the inheritance
to the heir or beneficiary.
Subsidiarily, heirs or beneficiaries, for the payment
of that portion of the estate which his distributive
share bears to the value of the total net estate.
The extent of his liability, however, shall in no case
exceed the value of his share in the inheritance.
Claims for taxes, whether assessed before or after
the death of the deceased, can be collected from
the heirs even after the distribution of the properties
of the decedent, xxx. The heirs shall be liable
therefor, in proportion to their share in the
inheritance. Marcos v. CA (1997)
Tax deficiency after distribution of properties
(1) Sue all the heirs and collect from each of them
the amount of tax proportionate to the
inheritance received
(2) By virtue of a lien created under Sec 219, sue
only one heir and subject the property he
UP COLLEGE OF LAW TAXATION 2 TAXATION LAW

received from the estate to the payment of

estate tax. Such heir may go against the other
heirs.
Tax Rates:
If the Net Estate is
Over But not Over The Tax Shall be
P 200,000.00 Exempt
P 200,000.00 500,000.00 0 5%
500,000.00 2,000,000.00 P 15,000.00 8%
2,000,000.00 5,000,000.00 135,000.00 11 %
5,000,000.00 10,000,000.00 465,000.00 15 %
10,000,000.00 1,215,000.00 20 %

Exempt: If net taxable estate ≤ 200,000

PAGE 130 OF 275

UP COLLEGE OF LAW TAXATION 2
II. Donor’s Tax
A. BASIC PRINCIPLES
The donor‘s tax is imposed on donations inter vivos or
those made between living persons to take effect during
the lifetime of the donor. It supplements the estate tax
by preventing the avoidance of the latter through the
device of donating the property during the lifetime of
the deceased.
It shall not apply unless and until there is a completed
gift. The transfer of property by gift is perfected from the
moment the donor knows of the acceptance by the
donee; it is completed by delivery, either actually or
constructively, of the donated property, to the donee.
Thus, the law in force at the time of the
perfection/completion of the donation shall govern the
imposition of the donor‘s tax. (Sec. 11, RR 2-2003)
B. DEFINITION
A donor‘s tax is levied, assessed, collected and paid
upon the transfer by any person, resident or nonresident,
of the property by gift. (Sec. 98(A), NIRC). It shall apply
whether the transfer is in trust or otherwise, whether the
gift is direct or indirect, and whether the property is real
or personal, tangible or intangible. [Sec. 98(B), NIRC]
It is the tax on donations. Thus, it is a tax on (i) an act of
the donor disposing gratuitously of a thing/right in
favour of a done located within the Philippines, and on
(ii) sales/exchanges of properties, other than real
property (defined in Sec 24D) classified as capital asset
within the Philippines, for less than adequate and full
consideration in money or money‘s worth.
C. NATURE
Donor‘s tax is not a property tax but a tax imposed on
the transfer of property by way of gift inter vivos. [Sec 11,
RR 2-2003 citing Lladoc v. CIR (1965)]
D. PURPOSE OR OBJECT
(1) To supplement estate tax;
(2) To prevent avoidance of income tax through the
device of splitting income among numerous
donees, who are usually members of a family or
into many trusts, with the donor thereby escaping
the effect of the progressive rates of income tax.
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TAXATION LAW
If donor is:
RC/NRC/RA = liable for donor‘s tax REGARDLESS of
where the gift was made or where property is located
NRA = liable for donor‘s tax only if the property donated
is within the Philippines.
E. REQUISITES OF VALID DONATION
(Art 725, NCC)
Requisites of a VALID and COMPLETE donation
(1) Donative intent of the donor3
(2) Capacity of the donor
(3) Delivery of the donated property
(4) Acceptance of the donee
(5) Donation must be in the proper form
(a) Movable: orally or in writing if value is equal to
or less than P5,000. Otherwise, it shall be in
writing.
(b) Immovable: must be made in a public
document.
Re: acceptance (Sec. 11, RR 2-2003)
(1) For movables exceeding 5K – Acceptance shall be
in writing (Art. 748, Civil Code)
(2) For immovable (Art. 749, Civil Code) –
(a) Must be in the same deed of donation; or
(b) In a separate public document – the donor
shall be notified thereof in an authentic form,
and this step shall be noted in both
instruments
(c) But it shall not take effect unless it is done
during the lifetime of the donor.
A gift that is incomplete because of reserved powers
becomes complete when either:
(a) the donor renounces the power OR
(b) his right to exercise the reserved power ceases
because of the happening of some event or
contingency or the fulfillment of some
condition, other than because of the donor‘s
death. [Sec. 11, RR 2-2003]
F. TRANSFERS WHICH MAY BE
CONSTITUTED AS DONATION
(1) Sale, exchange or transfer of property for
insufficient consideration
(2) Condonation or remission of debt where the debtor
did not render service in favor of the creditor
3
Note: The transfers which may be constituted as
donation is exempt from the donative intent requirement.
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Condonation or remission of debt is defined as an
act of liberality, by virtue of which, without
receiving any equivalent, the creditor renounces
the enforcement of the obligation, which is
extinguished in its entirety or in that part or aspect
of the same to which the remission refers. It is an
essential characteristic of remission that it be
gratuitous, that there is no equivalent received for
the benefit given; once such equivalent exists, the
nature of the act changes. It may become dation in
payment when the creditor receives a thing
different from that stipulated; or novation, when
the object or principal conditions of the obligation
should be changed; or compromise, when the
matter renounced is in litigation or dispute and in
exchange of some concession which the creditor
receives. (Dizon v CTA, 2008)
(3) Renunciation in favor of other heirs (Sec 11, RR 2-
2003)
(a) Renunciation by the surviving spouse of their
share in the ACP/CPG after the dissolution of
the marriage in favor of heirs of the deceased
spouse or any other person/s
(b) Renunciation by an heir, specifically and
categorically in favor of identified heir/s to the
exclusion or disadvantage of the other co-heirs
in the hereditary estate
However, general renunciation by an heir,
including the surviving spouse, of their share in
the hereditary estate left by the decedent is
NOT subject to DT
In this case, the amount by which the fair market value
of the property exceed the value of the consideration
shall be considered a gift.
H. CLASSIFICATION OF DONOR
Donor‘s Tax applies to individuals and corporations (in
their secondary purpose). They may be classified into:
(a) Residents (RC/RA/DC/RFC)
(b) Non-Residents (NRC/NRA/NRFC)
Such classification is important in determining the
deductions from the gross gift of the donor, and in filing
the return.
Situs of Intangible Personal Properties
General Rule: Mobilia Sequuntur Personam Principle:
Taxation of intangible personal properties (such as
credits, bills, bank deposits promissory notes, and
corporate stocks) follows the residence/domicile of
owner thereof. Situs is the domicile or residence of the
owner. (Collector v Fisher)
Exceptions:
(1) When it is inconsistent with express provisions of
law
(2) When justice does not demand that it should be, as
where the property in fact has a situs elsewhere
Rule of Reciprocity
Same as in Estate Tax. See discussion above.

(4) Sale of shares not listed and traded in a local stock

exchange below FMV. Sec. 7.c.1.4, RR 6-2008
provides: ―In case the fair market value of the shares of
stock sold, bartered, or exchanged is greater than the
amount of money and/or fair market value of the
property received, the excess of the fair market value of
the shares of stock sold, bartered or exchanged over the
amount of money and the fair market value of the
property, if any, received as consideration shall be
deemed a gift subject to the donor‘s tax under Sec. 100
of the Tax Code, as amended.‖

G. TRANSFER FOR LESS THAN ADEQUATE

AND FULL CONSIDERATION

In order for the rule to apply, there must be 1) a transfer

of property, other than real property classified as a
capital asset and subject to capital gains tax under Sec.
24 (D) and 2) the transfer was for less than an adequate
and full consideration in money or money‘s worth.

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I. DETERMINATION OF GROSS GIFT (INCLUDING COMPOSITION OF GROSS GIFT)

RC/NRC/RA NRA
Composition and Determination of Gross Gift
(a) Real property wherever situated (a) Real property located in the Phil.
(b) Tangible personal property wherever situated (b) Tangible personal property located in the Phil.,
(c) Intangible personal property wherever situated (c) Intangible personal property with a situs in the Phil.
(subject to the rule of reciprocity)

Note: If there is reciprocity, intangible assets are excluded

from gross gifts

Deductions and Exemptions from GROSS gift to arrive at NET Gifts

Deductions (These are exempt donations but are Deductions (These are exempt donations but are
deductible from, and not treated as exclusions from the deductible from, and not treated as exclusions from the
gross gift) gross gift)

(1) Dowries or donations made: (1) NONE

(a) On account of marriage
(b) Before its celebration or within one year thereafter
(c) By parents to each of their legitimate, recognized
natural, or adopted children
(d) To the extent of the first P10,000

(2) Gifts made to or for the use of the National Government or any entity created by any of its agencies which is not
conducted for profit, or to any political subdivision of the said Government.

(3) Gifts in favor of an educational and/or charitable, religious, cultural or social welfare corporation, institution,
accredited nongovernment organization, trust or philanthropic organization or research institution or organization,
Provided not more than 30% of said gifts will be used by such donee for administration purposes.

Common Exemptions
(1) Encumbrances on the property donated if assumed by the donee in the deed of donation.
(2) Donations made to entities exempted under special laws

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NOT SUBJECT TO DONOR‘S TAX the amount by which the FMV of the property at the time
(1) Contributions to candidate or political party for of the execution of the Contract to Sell or execution of
campaign purposes duly reported to COMELEC the Deed of Sale which is not preceded by a Contract to
(2) Gift to Parish Priest or Church (applies only to real Sell exceeded the value of the agreed or actual
property tax) consideration or selling price shall be deemed a gift,
(3) Onerous Donations or Donations in exchange for and shall be included in computing the amount of gifts
goods/services (since they are subject to income made during the calendar year. [Sec. 11, RR 2-2003]
tax) N.B. – Applies also to sale, barter, or exchange of
shares of stock not listed and traded in a local stock
SUBJECT TO DONOR‘S TAX exchange at prices below the FMV. (Sec. 7, RR 6-2008)
Gratuitous Donations to Homeowners‘ Association
However, where the consideration is fictitious, the
J. VALUATION OF GIFTS MADE IN entire value of the property shall be subject to donor‘s
PROPERTY tax.

Taxable Base: Donation to a Political Candidate

Net gifts i.e., net economic benefit from the transfer
that accrues to the donee AT THE TIME OF DONATION
(1) If gift is personal property = FMV at the time of
donation
(2) If gift is real property = whichever is HIGHER
(a) FMV as determined by the CIR (Zonal Value) or
(b) FMV in the latest schedule of values fixed by
the provincial and city assessor (MV per Tax
Declaration)
NOTE: Real property considered as capital assets under
the Tax Code are exempted from this rule because the
taxable value taken into account in the computation of
tax is the higher of either the zonal value or the
assessor‘s value; not the consideration. Therefore, the
insufficiency and inadequacy of the consideration paid
would not affect the computation of the tax due and
payable [Sec. 100 in relation to Sec. 24(d), NIRC]
Prior to RA 7166, a donation for a political candidate
was subject to donor‘s tax. (ACCRA v CIR)
Under RA 7166, contributions duly reported to the BIR
are not subject to donor‘s tax, as long as it is utilized in
his campaign.
Unutilized/excess campaign funds, that is, campaign
contributions net of the candidate‘s campaign
exepnditures, shall be considered as subject to income
tax and as such, must be included in the candidate‘s
taxable income as stated in his/her ITR filed for the
subject taxable year (Sec. 2, RR 7-2011)

Under Section 24(d), the fair market value itself, if

higher than the gross selling price, is the basis for
computing the capital gains tax imposed upon the sale
of such capital assets.

(3) If there is an improvement = construction cost

(based on the building permit and/or occupancy
permit) + 10% per year after the year of
construction; or the FMV based on the latest tax
declaration.
(4) If unlisted stocks = Adjusted Net Asset Method
shall be used whereby all assets and liabilities are
adjusted to fair market values. The net of
adjusted asset minus the adjusted liability value is
the indicated value of the equity.

Note:
Where property is transferred for less than an adequate
and full consideration in money or money‘s worth, then
PAGE 134 OF 275
UP COLLEGE OF LAW TAXATION 2 TAXATION LAW

K. TAX CREDIT FOR DONOR’S TAXES PAID IN A FOREIGN COUNTRY

Who may claim the tax credit

(1) Resident citizen
(2) Non-resident citizen
(3) Resident alien

1. Per Country Limit

2. Worldwide Limit

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UP COLLEGE OF LAW TAXATION 2
L. EXEMPTIONS OF GIFTS FROM DONOR’S
TAX
(See table above)
(1) Encumbrances on the property donated if assumed
by the donee in the deed of donation.
(2) Donations made to entities exempted under
special laws.
(a) Aquaculture Department of the Southeast
Asian Fisheries Development Center of the
Philippines
(b) Development Academy of the Philippines
(c) Integrated Bar of the Philippines
(d) International Rice Research Institute
(e) National Museum
(f) National Library
(g) National Social Action Council
(h) Ramon Magsaysay Foundation
(i) Philippine Inventor‘s Commission
(j) Philippine American Cultural Foundation
(k) Task Force on Human Settlement on the
donation of equipment, materials and services
M. PERSON LIABLE
(see Classification of Donor)
Every person, whether natural or juridical, resident or
non-resident, who transfers or causes to transfer
property by gift, whether in trust or otherwise, whether
the gift is direct or indirect and whether the property is
real or personal, tangible or intangible. (Sec. 98, NIRC)
DONOR‘S TAX RETURN
Separate return is filed for each gift made on different
dates during the year reflecting therein any previous net
gifts made in the same calendar year. In case of
donation to relatives, only one return shall be filed for
several gifts by the donor to the different donees on the
same date. If the gift involves CPG, each spouse shall
file separate return with respect to his/her respective
share in the CPG.
Contents
(1) Each gift made during the calendar year which is to
be included in computing net gifts;
(2) The deductions claimed and allowable;
(3) Any previous net gifts made during the same
calendar year;
(4) The name of the donee;
(5) Relationship of the donor to the donee;
(6) Such further information as the CIR may require.
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TAXATION LAW
Period for Filing
General Rule: The return must be filed within 30 days
after the date when the gift was made or completed.
The tax due thereon shall be paid at the same time that
the return is filed.
Who will file: Any person who made a gift, such must be
filed under oath.
Where to file the donor‘s tax return and pay the tax due
(Sec. 9, RR 2-2003)
Resident
Unless the CIR permits otherwise, the return shall be
filed and tax paid to:
(1) To Authorized Agent Bank (AAB) or the Revenue
District Officer having jurisdiction over the place of
the domicile of the donor at the time of the transfer.
(2) If no AAB = to the Revenue Collection Officer or
duly Authorized City or Municipal Treasurer where
the donor was domiciled at the time of the transfer,
(3) if no legal residence in Phil or NRA = with Revenue
District No. 39 - South Quezon City or with the
Philippine Embassy or Consulate in the country
where donor is domiciled at the time of the transfer.
Non-residents
(1) The Philippine Embassy or Consulate in the country
where he is domiciled at the time of the transfer, or
(2) Directly with the Office of the Commissioner.
Payment: Pay as you file.
N. TAX BASIS
The tax for each calendar year shall be computed on the
basis of the total net gifts made during the calendar.
(Sec. 99, NIRC)
―Net Gifts‖
(a) The net economic benefit from the transfer that
accrues to the donee.
(b) Accordingly, if a mortgaged property is transferred
as a gift, but imposing upon the donee the
obligation to pay the mortgage liability, then the
net gift is measured by deducting from the fair
market value of the property the amount of the
mortgage assumed. (Sec. 11, RR 2-2003)
General Formula
Gross Gifts
Less: Deductions from gross gifts
-----------------------------------------------------
Net gifts
UP COLLEGE OF LAW TAXATION 2 TAXATION LAW

Multiply by: Tax rate

-----------------------------------------------------
= Estate Tax Due
Less: Tax Credit, if any
-----------------------------------------------------
= Donor‘s Tax Due, if any

If there are several gifts during the year

Gross Gifts made on a certain date
Less: Deductions from gross gifts
-----------------------------------------------------
Net gifts made on a certain date
Add: Prior Net gifts during the year
-----------------------------------------------------
=Aggregate Net Gifts
Multiply by: Tax rate
-----------------------------------------------------
= Donor‘s Tax on Aggregate Net Gifts
Less: Donor‘s Tax Paid on Prior Net Gifts
-----------------------------------------------------
Donor‘s Tax Due on the Net Gifts to Date
Less: Tax Credit, if any
-----------------------------------------------------
= Donor‘s Tax Due, if any

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 UP COLLEGE OF LAW TAXATION 2 TAXATION LAW

Tax Rate
(1) IF NOT A STRANGER

Net Gift Over But not Over The Tax Shall be Plus Of the Excess Over
100,000.00 Exempt
100,000.00 200,000.00 0 2% 100,000.00
200,000.00 500,000.00 P 2,000.00 4% 200,000.00
500,000.00 1,000,000.00 14,000.00 6% 500,000.00
1,000,000.00 3,000,000.00 44,000.00 8% 1,000,000.00
3,000,000.00 5,000,000.00 204,000.00 10% 3,000,000.00
5,000,000.00 10,000,000.00 404,000.00 12% 5,000,000.00
10,000,000.00 and over 1,004,000.00 15% 10,000,000.00

(2) IF A STRANGER: 30%

(1) Rate applicable shall be based on the law prevailing at the time of donation.
(2) When the gifts are made during the same calendar year but on different dates, the donor's tax shall be computed
based on the total net gifts during the year.

Donation made to a stranger is subject to 30% of the net gift. A stranger is a person who is not a:
 Brother, sister (whether by whole or half blood), spouse, ancestor and lineal descendants; or
 Relative by consanguinity in the collateral line within the fourth degree of relationship.

SUMMARY OF TRANSFER TAXES

TRANSFER TAXES
Estate Tax Donor‘s Tax
Time for filing a return and payment of tax
FILED: within six (6) months from the decedent's death. NOTE: separate return is filed for each gift made on different dates
E: not exceeding 30 days (in meritorious cases) during the year reflecting therein any previous net gifts made in the
same calendar year.
NB: Written notice of death to CIR w/in 2 mos. After death
FILED: within thirty (30) days after the gift (donation) is made
PAID: before the delivery of the distributive share in the
inheritance to any heir or beneficiary; upon filing of return. In case of donation to relatives, only one return shall be filed for
E: extension (when payment on the due date would impose undue several gifts by the donor to the different donees on the same date.
hardship) not to exceed
1. 5 years, in case the estate is settled through the courts; or If the gift involves CPG, each spouse shall file separate return wrt
2. 2 years in case the estate is settled extra-judicially. his/her respective share in the CPG.

NB: when extension is granted, a bond may be required by CIR ≤

2x amount of tax
Where to file and to whom paid
General Rule: to the Authorized Agent Bank (AAB), Revenue Resident
Collection Officer (RCO) or duly authorized Treasurer of the city or GR: to AAB of the RDO having jurisdiction over the place of the
municipality in the Revenue District Office having jurisdiction over domicile of the donor at the time of the transfer.
the place of domicile of the decedent at the time of his death
Exception:
Exception: If NRA/NRC, (1) If no AAB = to the RCO or duly Authorized City or Municipal
PAGE 138 OF 275
 UP COLLEGE OF LAW TAXATION 2 TAXATION LAW

If w/ Aor, Eor in Phil = to the AAB of the RDO where such Aor,Eor is
registered/domiciled, if not yet registered with the BIR.
If w/o Aor,Eor in Phil = to AAB under the jurisdiction of RDO No.
39
Treasurer where the donor was domiciled at the time of the
transfer,
(2) If no legal residence in Phil or NRA = with Revenue District No.
39 - South Quezon City or with the Philippine Embassy or
Consulate in the country where donor is domiciled at the time
of the transfer.

Non-resident
(1) The Philippine Embassy or Consulate in the country where he is
domiciled at the time of the transfer, or
(2) Directly with the Office of the Commissioner.

Who should file

(1) The Eor/Aor or any of the legal heirs of the decedent, whether Any person, natural or juridical, resident or non-resident, who
resident or non-resident of the Philippines, under any of the transfers or causes to transfer property by gift, whether in trust or
following situations: otherwise, whether the gift is direct or indirect and whether the
(a) In all cases of transfers subject to estate tax; property is real or personal, tangible or intangible.
(b) Where though exempt from estate tax, the gross value of
the estate exceeds two hundred thousand (P200,000)
pesos; or
(c) Regardless of the gross value of the estate, where the
said estate consists of registered or registrable property
such as real property, motor vehicle, shares of stock or
other similar property for which a clearance from the BIR
is required as a condition precedent for the transfer of
ownership therof in the name of the transferee; or
(2) If there is no executor or administrator appointed, qualified,
and acting within the Philippines, then any person in actual or
constructive possession of any property of the decedent.

NB: Eor/Aor has the primary obligation to pay the estate tax but
the heir or beneficiary has subsidiary liability for the payment of
that portion of the estate which his distributive share bears to the
value of the total net estate. The extent of his liability, however,
shall in no case exceed the value of his share in the inheritance.

PAGE 139 OF 275

UP COLLEGE OF LAW TAXATION 2 TAXATION LAW

ESTATE TAX

EXCLUSIVE COMMUNITY TOTAL

Gross Estate4
Add:
Taxable Transfers & Others
Revocable Transfers/Donation Mortis Causa
Transfers in contemplation of death
Property passing under GPoA Value Taken of Property
Transfers for insufficient consideration5 Less: Mortgage debt paid, if any
Decedent‘s Interest Accrued6
Proceeds of Life Insurance w/ Initial Basis
Less: Proportionate Deduction
revocable beneficiary7
Family Home Final Basis
Claims against an Insolvent Person8 Multiplied by Deduction Rate
Amount received by heirs
VANISHING DEDUCTION
Less: (Ordinary Deductions) **Proportionate Deduction
7 ELIT9
Vanishing Deductions = )
Transfers for Public Use
Retirement Benefits received by heirs

Net Estate
Less: (Special Deductions10)
Standard Deduction
Family Home If only 1 country is involved: (whichever is lower)
Medical Expenses
Amounts received by heirs Estate Tax Credit =

Net Taxable Estate (before share of surviving OR actual estate tax paid to foreign country
spouse)
If two or more countries are involved: (whichever is lower)
Less: Share of Surviving Spouse
Estate Tax Credit =
Net Taxable Estate
Multiply by Tax Rate
OR
Estate Tax Due
Less: Tax Credit11, if any OR actual estate tax paid to foreign country
ESTATE TAX DUE
DONOR‘S TAX

ON FIRST DONATION

4
DO NOT INCLUDE: Exemptions
5
Amount included in the GE = FMV at the time of death – consideration amount
6
Accrued before his death but only received after his death, e.g., dividends declared on/before, and received after death;
partnership’s profit earned on/before and received after, accrued interest and rents on/before and collected after death
7
Beneficiary must be the estate of the decedent, E/Aor or a third person. If premiums are paid using conjugal funds, part
of conjugal funds.
8
Full amount of the receivable. However, the uncollectible amount may be deducted from GE under ELIT.
9
If NRA, Allowable Deduction wrt ELIT =
10
These are not allowable deductions when TP is NRA.
11
Applies only to RC/NRC/RA
PAGE 140 OF 275
UP COLLEGE OF LAW TAXATION 2 TAXATION LAW

Gross Gift xxx

Less: Deductions (those not beneficial
to the done e.g., mortgage) xxx

Net Gift xxx

Less: Exemptions, if applicable xxx

Net Taxable Gift xxx

Multiply by Tax Rate xx%

Donor‘s Tax Due xxx

Less: Tax Credit12, if any xxx
DONOR‘S TAX DUE xxx

ON SUBSEQUENT DONATIONS w/in the same calendar year

Gross Gift xxx

Less: Deductions (those not beneficial
to the done e.g., mortgage) xxx

Net Gift xxx

Less: Exemptions, if applicable xxx

Net Taxable Gift xxx

Add: All previous net gifts during the year xxx
Aggregate Net Gifts xxx
Multiply by Tax Rate xx%

Donor‘s Tax on Aggregate Net Gifts xxx

Less: Donor‘s tax on previous net gifts during the year xxx

Donor‘s Tax Due xxx

Less: Tax Credit13, if any xxx
DONOR‘S TAX DUE xxx

If only 1 country is involved: (whichever is lower)

Tax Credit =
w/ w/

If two or more countries are involved: (whichever is lower)

Tax Credit =

w/ w/

OR
w/
w/ w/

OR actual donor’s tax paid to foreign country

12
Applies only to RC/NRC/RA
13
Applies only to RC/NRC/RA
PAGE 141 OF 275
 UP COLLEGE OF LAW TAXATION 2 TAXATION LAW

ESTATE TAX

GR: w/in 6m after death

DEATH
E: extension of 30d ESTATE TAX
RETURN + CANCEL TIN
PAYMENT
(NB: Date of
payment may be Transfer
Prepare the LIST of assets and extended, 5yrs or
properties to
NOTICE OF DEATH to RDO by liabilities and their supporting 2yrs), if estate
Get TIN for ESTATE exceeds
the heirs
Eor/Aor documents
200,000php

DONOR‘S TAX

Full Exemption NO TAX RETURN

NECESSARY
COMPLETION/ Exempt
PERFECTION OF
DONATION Partial Exemption
w/in 30d after gift
was made DONOR‘S TAX RETURN + No Notice of Donation
PAYMENT Necessary
(NB: Date of payment may
be extended ≤ 6 months)

Liable

PAGE 142 OF 275

UP COLLEGE OF LAW TAXATION 2
III. Value-Added Tax
(VAT)
A. CONCEPT
VAT is a consumption tax imposed at every stage of
distribution process on (i) the sale, barter, exchange,
or lease of goods or properties and (ii) rendition of
services in the course of trade or business, or the (iii)
importation of goods, whether such imported goods
are for use in business or non-business purposes.
(Sec. 4.105-2, RR 16-2005)
The taxpayer (seller) determines his tax liability by
computing the tax on the gross selling price or gross
receipt (output tax), and subtracting or crediting the
earlier VAT on the purchase or importation of goods
or on the purchase of service (input tax) against the
tax due on his own sale
B. CONSTITUTIONALITY OF VAT
ABAKADA Guro Party List, et. al. v. Ermita (2005):
(a) The validity of raising the VAT rate from 10% to
12% by the President was upheld by SC.
(b) With respect to Sec. 8, amending Sec. 110 (A),
which provides for 60-month amortization of
the input tax on capital goods purchased: It is
not oppressive, arbitrary, and confiscatory. The
taxpayer is not permanently deprived of his
privilege to credit the input tax. For whatever is
the purpose, it involves executive economic
policy and legislative wisdom in which the Court
cannot intervene.
(c) The tax law is uniform: it provides a standard
rate of 0% or 10% (or 12% now) on all goods or
services. The law does not make any distinction
as to the type of industry or trade that will bear
the 70% limitation on the creditable input tax,
5-year amortization of input tax on purchase of
capital goods, or the 5% final withholding tax by
the government.
(d) It is equitable: The law is equipped with a
threshold margin (P1.5M). Also, basic marine
and agricultural products in their original state
are still not subject to tax. Congress also
provided for mitigating measures to cushion the
impact of the imposition of the tax on those
previously exempt. Excise taxes on petroleum
products and natural gas were reduced.
Percentage tax on domestic carriers was
PAGE 143 OF 275
TAXATION LAW
removed. Power producers are now exempt
from paying franchise tax.
(e) VAT, by its very nature, is regressive. BUT the
Constitution does not really prohibit the
imposition of indirect taxes (which is essentially
regressive).
(f) What it simply provides is that Congress shall
―evolve a progressive system of taxation‖.
Tolentino v. Secretary of Finance (1995):
(a) Regressivity is not a negative standard for
courts to enforce. What Congress is required
by the Constitution to do is to ―evolve a
progressive system of taxation.‖
This provision is placed in the Constitution as
moral incentives to legislation, not as judicially
enforceable rights.
(b) Direct taxes are to be preferred, and as much
as possible, indirect taxes should be
minimized but not avoided entirely because it
is difficult, if not impossible, to avoid them.
(c) The regressive effects are corrected by the zero
rating of certain transactions and through the
exemptions.
C. CHARACTERISTICS/ELEMENTS OF A
VAT-TAXABLE TRANSACTION
General Characteristics/Nature:
(1) Privilege/Percentage Tax – imposed by law
directly not on the thing or service but on the
ACT (sale, barter, exchange, lease, importation,
or performance of service)
(2) Ad Valorem Tax – the amount is based on the
gross selling price or gross value in money of
the goods or service, including the use or lease
or properties.
(3) Indirect Tax – The seller is the one statutorily
liable for the payment of the tax but the amount
of the tax may be shifted or passed on to the
buyer, transferee or lessee of the goods,
properties or services.
(4) Excise Tax - a tax on the privilege of engaging in
the business of selling goods or services, or in
the importation of goods
Nature – VAT is a tax on consumption levied on the
sale, barter, exchange or lease of goods or
properties and services in the Philippines and on
importation of goods into the Philippines.
This rule shall likewise apply to existing contracts of
sale or lease of goods, properties or services at the
time of the effectivity of RA No. 9337. However, in
UP COLLEGE OF LAW TAXATION 2
the case of importation, the importer is the one
liable for the VAT. (Sec. 4.105.2, RR 16-2005)
General Features:
(1) VAT uses the Tax Credit Method
(2) All goods, properties and services (except
exempt transactions) including goods subject
to excise taxes, and use or lease of properties,
whether real or 144ersonal, are subject to tax
at all levels of distribution.
(3) Although tax is levied at all stages, the
cumulative effect is that the final value of the
goods sold to the ultimate consumers is taxed
only once.
(4) VAT, as a general rule, follow the destination
principle (goods and services are taxed only in
the country where they are consumed).
Therefore, no VAT shall be imposed to form part
of the cost of goods destined for consumption
outside the territorial border of the taxing
authority.
Elements of a VAT-taxable transaction in general
1. There must be a sale, barter, exchange, or
lease in the Philippines
2. The subject matter must be taxable goods or
properties or services
GR: The sale must be made by a taxable
person in the course of trade or business or in
the furtherance of their profession.
Exception: In the case of importation of goods,
the transaction is taxable whether or not done
in the course of business.
Meaning of ―in the course of trade or business‖
Means the regular conduct of pursuit of a
commercial or an economic activity, including
transactions incidental thereto, by any person
regardless of whether or not the person engaged
therein is a nonstock, nonprofit private organization
(irrespective of the disposition of its net income and
whether or not it sells exclusively to members or
their guests), or government entity.
N.B. – Services rendered by non-resident foreign
persons shall be considered as being rendered in
the course of trade or business, even if the
performance of services is not regular (Section
4.105-3, RR No. 16-2005)
D. IMPACT OF TAX V. INCIDENT OF TAX
Impact Incidence
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TAXATION LAW
The statutory taxpayer, One who bears the
the one from whom the burden of taxation
government collects.
Seller/Importer – Buyer/Final Consumer –
Seller/Importer is the the buyer is the one who
one who collects the tax bears the burden of the
and pays to the taxation.
government
E. TAX CREDIT METHOD
A taxpayer‘s tax payable is the excess of output tax
over input tax:
OUTPUT VAT – INPUT VAT = VAT PAYABLE
Under the VAT method of taxation, which is invoice-
based, an entity can subtract from the VAT charged
on its sales or outputs the VAT it paid on its
purchases, inputs and imports. [CIR v. Seagate
(2005)].
Input tax – the VAT due on or paid by a VAT-
registered person on importation of goods or local
purchases of goods, properties, or services,
including lease or use of properties, in the course of
his trade or business.
(1) It includes the transitional input tax and the
presumptive input tax as determined in
accordance with Section 111 of the Code.
(2) It includes input taxes which can be directly
attributed to transactions subject to the VAT
plus a ratable portion of any input tax which
cannot be directly attributed to either the
taxable or exempt activity.
(3) Input tax must be evidenced by a VAT invoice or
official receipt issued by a VAT-registered
person in accordance with Secs. 113 and 237
of the Code. [RR 16-2005]
Output tax – the VAT due on the sale or lease of
taxable goods or properties or services by any
person registered or required to register under
Section 236 of the Code.
If at the end of any taxable month or quarter:
(a) The output tax exceeds the input tax, the excess
shall be paid by the VAT-registered person
(b) The input tax exceeds the output tax, the excess
shall be carried over to the succeeding quarter
or quarters [Sec. 110(B), NIRC]
F. DESTINATION PRINCIPLE
UP COLLEGE OF LAW TAXATION 2
As a general rule, the VAT system uses the
destination principle as a basis for the jurisdictional
reach of the tax. Goods and services are taxed only
in the country where they are consumed. Thus,
exports are zero-rated, while imports are taxed. [CIR
v. American Express International (2005)]
N.B. – Cross Border Doctrine mandates that no VAT
shall be imposed to form part of the cost of the
goods destined for consumption outside the
territorial border of the taxing authority.
Atlas Consolidated Mining & Dev. Corp. v. CIR
(2007): Actual export of goods and services from the
Philippines to a foreign country must be free of VAT,
while those destined for use or consumption within
the Philippines shall be imposed with 12% VAT.
[Deoferio Jr. and Mamalateo, p. 422]
Exception to destination principle – Sec.
108(b)(2)14
Sec. 108(b)(2), which subjects certain services
rendered in the Philippines to a zero-rated VAT, is an
exception under the destination principle. The Court
in CIR v. AMEX (2005) enumerated the requisites to
fall under that provision.
1. The service is performed in the Philippines;
2. the service falls under any of the categories
provided in Section 102(b) of the Tax Code;
and
3. it is paid for in acceptable foreign currency
that is accounted for in accordance with
the regulations of the BSP.
In that case, the Court held that a ruling providing
that the service must be ―destined for consumption
outside of the Philippines‖ in order to qualify for
zero rating contravenes both the law and the
regulations issued pursuant to it. The Court held that
such ruling was ultra vires and therefore void.
The law neither makes a qualification nor adds a
condition in determining the tax situs of a zero-rated
service. Under this criterion, the place where the
service is rendered determines the jurisdiction to
14
Services other than those mentioned in the
preceding paragraph rendered to a person engaged
in business conducted outside the Philippines or a
nonresident person not engaged in business who is
outside the Philippines when the services were
performed, the consideration for which is paid for in
acceptable foreign currency and accounted for in
accordance with the rules and regulations of the
BSP.
PAGE 145 OF 275
TAXATION LAW
impose the VAT. Performed in the Philippines, such
service is necessarily subject to its jurisdiction, for
the State necessarily has to have ―a substantial
connection‖ to it, in order to enforce a zero rate. The
place of payment is immaterial; much less is the
place where the output of the service will be further
or ultimately used. [CIR v. American Express
International (2005)]
G. PERSONS LIABLE
Transactions subject to VAT:
1. Sale, Barter or Exchange of Goods or Properties
2. Sale of Services, including Lease or use of
Properties
3. Importation of Goods.
Persons Liable:
1. Any person who sells, barters, exchanges, or
leases goods or properties, or who renders
services, in the course of trade or business
a. Exception – A non-VAT- registered
person whose annual gross sales or
receipts does not exceed P1,919,500.
2. Any person who imports goods, whether or not
in the course of business
The term ―person‖ refers to any individual, trust,
estate, partnership, corporation, joint venture,
cooperative or association (Sec. 4.105-1, RR 16-
2005).
General Rule: VAT and Percentage Tax cannot be
charged together. It‘s either the transaction is under
VAT or Other Percentage Tax.
Exception: When one erroneously declares himself
to VAT registered.
H. VAT ON SALE OF GOODS OR
PROPERTIES
Sale of goods or properties in general
Rate: 12% VAT beginning 1 February 2006 [RMC
No. 7-06]
Transactions:
1. Every sale, barter or exchange (actual sale)
2. Transactions ―deemed sale‖ of taxable goods or
properties (RR 16-2005) (See also Sec. J, infra)
Basis: Gross selling price or gross value in money of
the goods or properties sold, bartered or exchanged.
Who Pays: Paid by SELLER/TRANSFEROR.
UP COLLEGE OF LAW TAXATION 2 TAXATION LAW

(Sec. 106, NIRC); N.B. – the end-user is the one who exempt
is actually burdened with the tax since the tax is
passed on to him. Residential If SP > 3,199,200.00 = subject
House and to VAT
Lot IF SP ≤ 3,199,200.00 = VAT-
Meaning of goods or properties exempt
Goods or properties – all tangible and intangible
objects which are capable of pecuniary estimation, Sales of real properties subject to VAT – Sale of real
including: properties held primarily for sale to customers or
(1) Real properties held primarily for sale to held for lease in the ordinary course of trade or
customers or held for lease in the ordinary business of the seller shall be subject to VAT. (Sec.
course of trade or business; 4.106-3, RR 16-2005)
(2) The right or the privilege to use patent,
copyright, design, or model, plan, secret Types of sales of real estate; Effects
formula or process, goodwill, trademark, trade 1. Cash sale – entire selling price taxable in the
brand or other like property or right; month of the sale.
(3) The right or the privilege to use in the 2. Installment sales
Philippines of any industrial, commercial or a. Meaning of installment sale – initial
scientific equipment; payments of which in the year of sale ≤
(4) The right or the privilege to use motion picture 25% GSP
films, films tapes and discs; b. Effect – the real estate dealer shall be
(5) Radio, television, satellite transmission and subject to VAT on the installment
cable television time. payments, including interest and
penalties, actually and/or
Goods/Personal Properties constructively received by the seller.
(i) Actual/deemed sale for a valuable 3. Deferred sales
consideration a. Meaning – initial payments exceed
(ii) For use or consumption in the Phil (regardless 25% of the GSP
of the payment arrangements) b. Effect – Treated as a cash sale which
(iii) Not exempt from VAT (NIRC, special law, special makes the entire selling price taxable
agreement) in month of sale
4. Tax free exchanges under Sec. 40[C][2] are not
Special rules subject to VAT.
Sale of Real Properties (RP)
Casual Sale Subject to CGT (6%) Reference: Sec. 4.106-3, RR 16-2005
(Capital Assets)
Meaning of GSP – total amount of money or its
Regular Sales
equivalent which the purchaser pays or is obligated
(Ordinary
to pay to the seller in consideration of the sale,
Assets)
barter or exchange of the goods or properties,
Commercial Subject to 12% VAT
excluding VAT. The excise tax, if any, on such goods
Property
or properties shall form part of the gross selling
(Sale/Lease)
price.
Residential If monthly rental ≤ 12,800 = VAT
Units (Lease) and OPT-exempt
In the case of sale, barter or exchange of real
If monthly rental > 12,800 but
property subject to VAT, GSP shall mean:
aggregate annual rentals
1. The consideration stated in the sales document
≤1,919,500 = subject to OPT or
If monthly rental > 12,800 and 2. The fair market value (FMV) whichever is higher.
aggregate annual rentals >
1,919,500 = subject to VAT Meaning of FMV – Whichever is higher of the
Residential If SP > 1,919,500.00 = subject following:
Lot to VAT 1. The fair market value as determined by the CIR
IF SP ≤ 1,919,500.00 = VAT- (zonal value) or
PAGE 146 OF 275
UP COLLEGE OF LAW TAXATION 2
2. The fair market value as shown in schedule of
values of the Provincial and City Assessors (real
property tax declaration).
General Rule: GSP is the total amount of money
paid in consideration of sale, barter, exchange, or
lease.
Excludes: VAT, sales discounts and, allowances
and returns (See Section on Allowable Discounts)
Includes: Excise tax paid, initial payments 15 ,
interests and penalties (if instalment), commission
income (if exported), purchase price, charges for
packing, delivery and insurance
If goods/personal properties,
GSP = amount paid in consideration
IF DEEMED SALE: FMV at the time of the transaction
NB: in retirement/cessation, inventory (raw
materials, finished goods, machinery, equipment,
furniture, fixture), tax base = whichever is lower,
i. acquisition cost
ii. current market price of goods
N.B.: CIR has the power to determine the
appropriate tax base in 1) SBE in deemed sales and
2) when GSP is unreasonably lower than AMV16
Not taxable: [Sec. 109 (P)(Q)]
(1) Not primarily held for sale or lease in the course
of trade or business
(2) Low cost or socialized housing
(3) Residential lot when value does not exceed
P1,919,500
(4) House and lot/other residential dwelling <
P3,199,200
(5) Lease (rental per unit < 12,800/month and
total rental from all units < P1,919,500/ year)
(6) Transmission to a trustee (Except: transmission
is deemed sale transaction)
General Rule: Transmission of property to a
trustee shall NOT be subject to VAT if the
property is to be merely held in trust for the
trustor and/or beneficiary.
15
Initial payments does not include the amount of
mortgage on RP sold (except excess when
mortgage exceeds the cost of the property), notes
and other evidence on=f indebtedness issued by the
purchaser at the time of the sale
16
GSP is unreasonably lower than the actual market
value if it is lower than 30% of AMV of the same
goods of the same quantity or quality sold in the
immediate locality or the nearest date of sale.
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TAXATION LAW
Exception: However, if the property
transferred is originally intended for sale, lease
or use in the ordinary course of trade or
business AND the transfer constitutes a
completed gift, the transfer is subject to VAT as
a deemed sale transaction. The transfer is a
completed gift if the transferor divests himself
absolutely of control over the property, i.e.,
irrevocable transfer of corpus and/or
irrevocable designation of beneficiary.
(7) Transfer to corporation in exchange of shares of
stocks (see Sec. 40, NIRC for Tax-free
exchange)
(8) Advance payment by the lessee
(9) Security deposits for lease agreements.17
Allowable Deductions from GSP
The following are deductible from the gross selling
price:
(1) Sales returns and allowances – the selling price
of the goods or properties returned and not sold
necessarily reduces the gross sales on which
the rate is applied.
(a) Sales returns and allowances for which a
proper credit/refund was made during the
month or quarter to the buyer for sales
previously recorded as table sales are
allowed as a deduction in the period when
they are made. Excess may be carried over
to the succeeding period.
(b) The value of goods or properties sold and
subsequently returned or for which
allowances were granted by a VAT-
registered person may be deducted from
the gross sales or receipts for the quarter in
which a refund is made or a credit
memorandum is issued.
(2) Sales Discounts – bona fide or regular
discounts given to purchasers, which are
ascertainable and definitely agreed upon
between the vendor and the vendee at the time
of sale are deductible from the GSP.
(a) If given after the sale or are in the nature of
a rebate or partial remission of
indebtedness, they will not be allowed as a
deduction from the GSP.
(b) Furthermore the discount must be
expressly indicated in the sales invoice and
17 Please take note of the difference between
security deposits and those applied to rent.
UP COLLEGE OF LAW TAXATION 2
the amount forming part of the gross sales
duly recorded in the books of accounts.
(c) Credits for allowances to cover roll back in
prices and other adjustments are not
deductible.
I. ZERO-RATED SALES OF GOODS OR
PROPERTIES, AND EFFECTIVELY ZERO-
RATED SALES OF GOODS OR
PROPERTIES
Rate: 0% Output VAT; 12% Input VAT
Transactions: Every sale, barter or exchange, or
transactions ―deemed sale‖ of taxable goods or
properties (RR 16-2005)
Concept – A zero-rated sale of goods or properties
by a VAT-registered person is a taxable transaction
for VAT purposes, but shall not result in any output
tax. However, the input tax on purchases of goods,
properties or services, related to such zero-rated
sale, shall be available as tax credit or refund.
Transaction is subject to VAT but at 0% instead of
12%.
(1) Export Sales
(2) Foreign Currency Denominated Sales
(3) Sales of Goods or Property to persons or
entities who are tax-exempt/Effectively Zero-
Rated Sales
Export Sales [Sec. 106(A)(2)(a), NIRC]
(1) The (i) sale and actual shipment of goods from
the Philippines to a foreign country AND (ii) paid
for in acceptable foreign currency or its
equivalent in goods or services, AND (iii)
accounted for in accordance with the rules and
regulations of the BSP
(2) (i) Sale of raw materials or packaging materials
to a nonresident buyer (ii) for delivery to a
resident local export-oriented enterprise (iii) to
be used in manufacturing, processing, packing
or repacking in the Philippines of the said
buyer's goods AND (iv) paid for in acceptable
foreign currency AND (v) accounted for in
accordance with the rules and regulations of
the BSP.
(3) (i) Sale of raw materials or packaging materials
(ii) to export-oriented enterprise (iii) whose
export sales exceed seventy percent (70%) of
total annual production.
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TAXATION LAW
(a) Any enterprise whose export sales exceed
70% of the total annual production of the
preceding taxable year shall be considered
an export-oriented enterprise upon
accreditation under the rules & regulations
of Export Development Act, RA 7844 (RR 7-
95)
(4) Sale of gold to the Bangko Sentral ng Pilipinas
(BSP)
(5) The sale of goods, supplies, equipment and fuel
to persons engaged in international shipping or
international air transport operations (RA 9337)
(a) Limited to goods, supplies, equipment and
fuel pertaining to or attributable to the
transport of goods and passengers from a
port in the Phil. directly to a foreign port
without docking or stopping at any other
port in the Phil.
(b) If any portion of such fuel, goods, or
supplies is used for purposes other than
that mentioned, such portion of fuel, goods,
and supplies shall be subject to 12% VAT.
(RR 16-2005)
(6) Those considered export sales under the
Omnibus Investment Code of 1987, and other
special laws (ex. Bases Conversion &
Development Act of 1992)
Under Omnibus Investment Code (EO 226):
Considered Export Sales
(1) Phil. port FOB value of export products
exported directly by a registered export
producer; OR
(2) Net selling price of export products sold by a
registered export producer to another export
producer, or to an export trader that
subsequently exports the same (only when
actually exported by the latter) evidenced by
landing certificates.
Constructive Exports (without actual exportation):
(1) Sales to bonded manufacturing warehouses of
export-oriented manufacturers;
(2) Sales to export processing zones (RA 7916);
(3) Sales to registered export traders operating
bonded trading warehouses supplying raw
materials in the manufacture of export
products (RA 7227)
(4) Sales to diplomatic missions and other
agencies and/or instrumentalities granted tax
immunities, of locally manufactured,
assembled or repacked products, whether paid
for in foreign currency or not.
UP COLLEGE OF LAW TAXATION 2
(5) Sales by a VAT-registered supplier to a
manufacturer/producer whose products are
100% exported are considered export sales. A
certification to this effect must be issued by
the Board of Investment which shall be good
for 1 year unless subsequently re-issued. (RR
16-2005)
Export sales of registered export traders shall
include commission income, and that
exportation of goods on consignment shall not
be deemed export sales until the export
products consigned are in fact sold by the
consignee.
Foreign Currency Denominated Sale (FCDS)
(1) (i) Sale to a nonresident of goods (except those
mentioned in Sections 149 and 150 i.e.,
automobiles and non-essential goods like
jewelry, perfume, and yachts), (ii) assembled or
manufactured in the Philippines (iii) for delivery
to a resident in the Philippines (iv) paid for in
acceptable foreign currency AND (v) accounted
for in accordance with the rules and regulations
of the BSP.
(2) (i) Sales of locally manufactured or assembled
goods (ii) for household and personal use (iii) to
Filipinos abroad and other non-residents of the
Philippines as well as returning Overseas
Filipinos under the Internal Export Program of
the government (iv) paid for in convertible
foreign currency AND (v) accounted for in
accordance with the rules and regulations of
the BSP shall also be considered export sales.
(RR 16-2005)
Effectively Zero-Rated Sales
(1) Sales to persons or entities whose exemption
under special laws or international agreements
to which the Philippines is a signatory
effectively subjects such sales to zero rate.
(2) (i) The local sale of goods and properties (ii) by
a VAT-registered person (iii) to a person or entity
who was granted indirect tax exemption under
special laws or international agreement. (RR
16-2005)
ECOZONES
The ECOZONES shall be managed and operated by
the PEZA as separate customs territory. (Sec. 8, RA
7916 ―Special Economic Zone Act of 1995‖).
Consequently, sales made by a person in the
customs territory to a PEZA-registered entity are
considered exports to a foreign country and thus,
PAGE 149 OF 275
TAXATION LAW
zero-rated. Conversely, sales by a PEZA-registered
entity to a person in the customs territory are
deemed imports from a foreign country.
Tax treatment of sales to & by PEZA-registered
enterprise within & without the ecozone [RMC 74-
99]:
(1) Any sale of goods, property or services made by
a VAT registered supplier from the Customs
Territory** to any registered enterprise
operating in the ecozone, REGARDLESS of the
class or type of the latter‘s PEZA registration, is
actually qualified and thus LEGALLY ENTITLED
TO THE 0% VAT.
―Customs Territory‖ shall mean the national territory
of the Philippines outside of the proclaimed
boundaries of the ECOZONES except those areas
specifically declared by other laws and/or
presidential proclamations to have the status of
special economic zones and/or free ports. [Sec. 2(g),
Rule 1, Part I, RA 7916-IRR]
(2) By a VAT-Exempt Supplier from the Customs
Territory to a PEZA registered enterprise
Sale of goods, property and services by VAT-Exempt
supplier from the Customs Territory to a PEZA
registered enterprise shall be treated EXEMPT FROM
VAT, regardless of whether or not the PEZA
registered buyer is subject to taxes under the NIRC
or enjoying the 5% special tax regime.
(3) By a PEZA Registered Enterprise
(a) Sale of Goods by a PEZA registered
enterprise to a buyer from the Customs
Territory (i.e., domestic sales) -- this case
shall be treated as a technical
IMPORTATION made by the buyer. Such
buyer shall be treated as an IMPORTER
thereof and shall be imposed with the
corresponding VAT.
(b) Sale of Services by a PEZA registered
enterprise to a buyer from the Customs
Territory – this is NOT embraced by the 5%
special tax regime, hence, such seller shall
be SUBJECT TO 12% VAT.
(c) Sale of Goods by a PEZA registered
enterprise to Another PEZA registered
enterprise (ie Intra-ECOZONE Sales of
Goods) – this shall be EXEMPT from VAT.
UP COLLEGE OF LAW TAXATION 2 TAXATION LAW

(4) Sale of Services by ECOZONE enterprise, to Example: when a VAT-registered person

Another ECOZONE enterprise (Intra-ECOZONE withdraws goods from his business for his
enterprise Sale of Service) personal use. (RR 16-2005)
(a) if PEZA registered seller is subject to 5% (2) Distribution or transfer to shareholders,
special tax regime - EXEMPT from VAT investors or creditors
(b) if PEZA registered seller is subject to taxes (a) Shareholders or investors as share in the
under NIRC (ie not subject to 5% special profits of the VAT-registered persons;
tax regime) – subject to 0% VAT pursuant (b) Creditors in payment of debt;
to ―cross border doctrine‖ (3) Consignment of goods if actual sale is not
made within 60 days following the date such
Difference between Zero-rated and VAT-exempt goods were consigned
Zero-rated VAT-exempt (4) Retirement from or cessation of business, with
It is a taxable transaction Not subject to output tax respect to inventories of taxable goods existing
but does not result in an as of such retirement or cessation
output tax
The input VAT on the The seller in an exempt Distribution or transfer to shareholders, investors or
purchases of a VAT- transaction is not entitled creditors
registered person with to any input tax on his As regards distribution to shareholders or investors
zero-rated sales may be purchases despite the as share in the profits of the VAT-registered persons,
allowed as tax credits or issuance of a VAT invoice property dividends which constitute stocks in trade
refunded or receipt; or properties primarily held for sale or lease
Persons engaged in Registration is optional declared out of retained earnings on or after Jan. 1,
transactions which are for VAT-exempt persons. 1996 and distributed by the company to its
zero-rated, being subject shareholders shall be subject to VAT based on the
to VAT, are required to zonal value or FMV at the time of the distribution,
register whichever is applicable. (RR 16-2005)

J. TRANSACTIONS DEEMED SALE (SEC. Consignment of goods

106 (B)
Rate: 12% VAT
Basis: Market value of the goods deemed sold as of
the time of the occurrence of the transactions or as
the CIR shall prescribe. In the case of
retirement/cessation of business, the tax base shall
be the acquisition cost or the current market price of
the goods or properties, whichever is lower. In the
case of a sale where the gross selling price is
unreasonably lower than the fair market value, the
actual market value shall be the tax base. The gross
selling price is unreasonably lower than the actual
market value if it is lower by more than 30% of the
actual market value of the same goods of the same
quantity and quality sold in the immediate locality
on or nearest the date of sale. (RR 16-2005)
Transactions Deemed Sale
(1) Transfer, use or consumption not in the course
of business of goods or properties originally
intended for sale or for use in the course of
business.
PAGE 150 OF 275
Consigned goods returned by the consignee within
the 60-day period are not deemed sold. (RR 16-
2005)
Retirement from or cessation of business
With respect to ALL goods on hand, whether capital
goods, stock-in-trade, supplies or materials, as of
the date of such retirement or cessation, whether or
not the business is continued by the new owner or
successor ARE CONSIDERED DEEMED SALES
Examples: change of ownership of the business (e.g.,
when a sole proprietorship incorporates, or the
proprietor sells his entire business) and dissolution
of a partnership and creation of a new partnership
which takes over the business. (RR 16-2005)
K. CHANGE OR CESSATION OF STATUS
AS VAT-REGISTERED PERSON (SEC
106[C])
Rate: 12% VAT
Basis: the acquisition cost or the current market
price of the goods or properties, whichever is
LOWER.
UP COLLEGE OF LAW TAXATION 2
VAT shall apply to goods disposed of or existing as
of a certain date if under the circumstances to be
prescribed in rules and regulations to be
promulgated by the Secretary of Finance, upon
recommendation of the CIR, the status of a person
as a VAT-registered person changes or is terminated.
Subject to output VAT (RR 16-2005, Sec. 4.106 (b))
12% VAT is applicable to goods/properties
originally intended for sale or use in business and
capital goods which are existing as of the
occurrence of the following:
(1) Change of business activity from VAT taxable
status to VAT-exempt status
Example: A VAT-registered person engaged
in a taxable activity like wholesaler or retailer
who decides to discontinue such activity and
engages instead in life insurance business or in
any other business not subject to VAT.
(2) Approval of request for cancellation of a
registration due to reversion to exempt status
(3) Approval of request for cancellation of
registration due to desire to revert to exempt
status after lapse of 3 consecutive years from
the time of registration by a person who
voluntarily registered despite being exempt
under Sec. 109 (2)
(4) Approval of request for cancellation of
registration of one who commenced business
with the expectation of gross sales/receipts
exceeding P1,919,500 (per RR 16-2011) but
who failed to exceed this amount during the
first 12 months of operation
Not Subject to Output Vat – goods or properties
existing as of the occurrence of the following:
(1) Change of control of a corporation by the
acquisition of the controlling interest of such
corporation by another stockholder (individual
or corporate) or group of stockholders.
Note: Exchange of goods or properties
including the real estate properties used in
business or held for sale or for lease by the
transferor, for shares of stocks, whether
resulting in corporate control or not, is SUBJECT
TO VAT (RR 10-11)
(2) Change in the trade or corporate name of the
business
(3) Merger or consolidation of corporations. The
unused input tax of the dissolved corporation,
as of the date of merger or consolidation, shall
be absorbed the surviving or new corporation.
PAGE 151 OF 275
TAXATION LAW
Note: The INPUT VAT of the dissolved
corporation will be absorbed by the surviving
corporation
(4) Inventory used for promotions and Office
Supplies
L. VAT ON IMPORTATION OF GOODS
Rate: 12% VAT
Basis: total value used by the Bureau of Customs in
determining tariff and customs duties, plus customs
duties, excise taxes, if any, and other charges (such
as postage, commission).
Where the customs duties are determined on the
basis of the quantity or volume of the goods, VAT
shall be based on the landed cost plus excise taxes,
if any.
Who Pays: IMPORTER prior to the release of such
goods from customs custody (Sec. 107 (A), NIRC)
Importer: any person who brings goods into the
Philippines, whether or not made in the course of his
trade or business, including non-exempt persons or
entities who acquire tax-free imported goods from
exempt persons, entities or agencies (RR 16-2005)
Importation of Goods
Importation of goods BEGINS when the carrying
vessel/aircraft enters the Philippine jurisdiction with
an intention to unload its cargoes. It ENDS when
there is already payment of duties/taxes/other
charges and issuance of permit to withdraw.
Note: Importation of goods to bonded
warehouse for processing is not importation.
Importation connotes permanency and gain. Thus, if
goods are only for exhibit, such goods are VAT-
exempt.
Customs duty – amount of customs duty legally due
and paid by the importer. Therefore, if importer is
entitled to 90% customs duty exemption, the 10%
duty paid should be the base in computation of the
VAT.
Other similar chargers – specific charges which an
importer has to pay.
(a) Other taxes (special import tax)
(b) Bank charges
(c) Arrastre charges
(d) Wharfage dues
(e) Brokerage fees
(f) All other charges or expenses
UP COLLEGE OF LAW
Landed Cost - invoice amount including costs of
loading, shipping and unloading, customs duties,
freight, insurance, other charges, excise tax (if any)
Expenses incurred after the release of the goods
such as those incurred in delivering goods do not
form part of the landed cost.
Transfer of goods by tax exempt persons:
(1) If importer is tax-exempt, the subsequent
purchasers, transferees or recipients of such
imported goods shall be considered as
importers who shall be liable for the tax on
importation.
(2) The tax due on such importation shall constitute
a lien on the goods superior to all charges or
liens on the goods, irrespective of the possessor
thereof. (As amended by RA 9337)
M. VAT ON SALE OF SERVICE AND USE
OR LEASE OF PROPERTIES
[Sec 108]
Rate: 12%
Basis: Gross receipts derived from the sale or
exchange of services, including the use or lease of
properties.
Gross Receipts - the total amount of money or its
equivalent representing the contract price,
compensation, service fee, rental or royalty,
including the amount charged for materials supplied
with the services and deposits and advanced
payments actually or constructively received during
the taxable quarter for the services performed or to
be performed for another person, excluding VAT.
(Sec. 108 (A), NIRC)
―Constructive receipt‖ occurs when the money
consideration or its equivalent is placed at the
control of the person who rendered the service
without restrictions by the payor.
(a) Deposit in banks which are made available to
the seller of services without restrictions
(b) Issuance by the debtor of a notice to offset any
debt or obligation and acceptance thereof by
the seller as payment for services rendered
(c) Transfer of the amounts retained by the
contractee to the account of the contractor. (RR
16-2005)
Requisites for taxability
PAGE 152 OF 275
TAXATION 2 TAXATION LAW
(1) The service must be performed or is to be
performed (which may be performed by a
subcontractor) in the course of trade or
business in the Philippines;
(2) For a valuable consideration actually or
constructively received; and
(3) The service is not exempt under the Tax Code,
special law or international agreement
(4) Person selling or rendering service is liable to
VAT
―Sale/Exchange of Services‖: means the
performance of all kinds of services in the
Philippines for others for a fee, remuneration or
consideration.‖ (Sec 108, Diaz v Secretary of
Finance, 2011). It includes:
(1) Construction and service contractors
(2) Stock, real estate, commercial, customs and
immigration brokers
(3) Lessors of property, whether personal or real18
(4) Persons engaged in warehousing service.
(5) Lessors or distributors of cinematographic films
(6) Persons engaged in milling, processing,
manufacturing or repacking goods for others
are subject to VAT,
EXCEPT palay into rice, corn into corn grits,
and sugarcane into raw sugar (not subject to
VAT)
(7) Proprietors, operators, or keepers of hotels,
motels, rest houses, pension houses, inns,
resorts, theaters, and movie houses
(8) Proprietors or operators of restaurants,
refreshment parlors, cafes and other eating
places, including clubs and caterers
(9) Dealers in securities including pre-need
companies
―Gross receipts‖ means gross selling price
less cost of the securities sold. RR 7-95:
(10) Lending investors: All persons OTHER than
banks, non-bank financial intermediaries,
finance companies and other financial
24
SUBJECT TO VAT NOT SUBJECT TO
VAT
Loan to the lessor
from the lessee
Pre-Paid Rental Option money for the
property
Security deposit Security deposit to
when applied to insure the faithful
the rental performance of
certain obligations of
the lessee to the
lessor
UP COLLEGE OF LAW TAXATION 2
intermediaries NOT performing quasi-banking
functions who make a practice of lending
money for themselves or others at interest.
(11) Transportation contractors on their transport of
goods or cargoes, including persons who
transport goods or cargoes for hire and other
domestic common carriers by land relative to
their transport of goods or cargoes
(12) Common carriers by air and sea relative to their
transport of passengers, goods or cargoes from
one place in the Philippines to another place in
the Philippines
(13) Sales of electricity by generation, transmission,
and/or distribution companies
EXCEPT sale of power or fuel generated
through renewable sources of energy, such as,
but not limited to, biomass, solar, wind
hydropower, geothermal, ocean energy, and
other emerging energy sources using
technologies such as fuel cells and hydrogen
fuels, which shall be subject to 0% rate of VAT
(zero-rated).
(14) Franchise grantees of electric utilities,
telephone and telegraph, radio and/or
television broadcasting and all other franchise
grantees (including PAGCOR and its
licensees/franchisees)
EXCEPT franchise grantees of radio and/or
television broadcasting whose annual gross
receipts of the preceding year do not exceed
Ten Million Pesos (P10,000,000.00) (which
shall be subject to 3% franchise tax under Sec.
119, subject to optional registration), and
franchise grantees of gas and water utilities
(under Sec. 109, subject to 2% franchise tax)
With respect to franchise grantees of
telephone and telegraph services, amounts
received for overseas dispatch, message, or
conversation originating from the Philippines
are subject to the percentage tax under Sec.
120 and hence exempt from VAT
(15) Non-life insurance companies including surety,
fidelity, indemnity and bonding companies;
EXCEPT crop insurance, life and disability
insurance, and health and accident insurance
Insurance and reinsurance commissions,
as opposed to premiums, whether life or non-
life, are subject to VAT while non-life insurance
premiums are subject to VAT.
(16) Similar services regardless of whether or not the
performance thereof calls for the exercise or
use of the physical or mental faculties
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TAXATION LAW
―Lease of Properties―: subject to the VAT imposed
irrespective of the place where the contract of lease
or licensing agreement was executed if the property
is leased or used in the Philippines.
(1) The lease or the use of or the right or privilege to
use any copyright, patent, design or model,
plan secret
(2) formula or process, goodwill, trademark, trade
brand or other like property or right
(3) The lease of the use of, or the right to use of any
industrial, commercial or scientific equipment
(4) The supply of scientific, technical, industrial or
commercial knowledge or information
(5) The supply of any assistance that is ancillary
and subsidiary to and is furnished as a means
of enabling the application or enjoyment of any
such property, or right as is mentioned in #2 or
any such knowledge or information as is
mentioned in #3
(6) The supply of services by a nonresident person
or his employee in connection with the use of
property or rights belonging to, or the
installation or operation of any brand,
machinery or other apparatus purchased from
such nonresident person
(7) The supply of technical advice, assistance or
services rendered in connection with technical
management or administration of any scientific,
industrial or commercial undertaking, venture,
project or scheme
(8) The lease of motion picture films, films, tapes
and discs
(9) The lease or the use of or the right to use radio,
television, satellite transmission and cable
television time
Additional services subject to VAT:
(1) Services performed in the exercise or practice of
profession or calling by individuals subject to
professional tax under the LGC, and
professional services rendered by general
professional partnerships (GPPs);
(2) Services performed by actors/actresses, talents,
singers, emcees, radio/television broadcasters,
choreographers,
musical/radio/movie/television/stage
directors, and professional athletes;
(3) Services rendered by customs, real estate,
stock, immigration and commercial brokers;
(4) Services rendered by doctors, and lawyers.
(5) Association dues or membership fees and other
assessment or charges for the beneficial
services of the homeowner‘s association (RMC
No. 9-2013)
UP COLLEGE OF LAW TAXATION 2
(6) Lease/use of sports facilities and equipment
(RA 6847)
The performance of the services should not be in
pursuit of an employer-employee relationship
between the service-provider and the service-
recipient.
N. ZERO-RATED SALE OF SERVICES
The following services performed in the Philippines
by VAT-registered persons are effectively 0% VAT
sales of services:
(1) Processing, manufacturing or repacking goods
for other persons doing business outside the
Philippines which goods are subsequently
exported, where the services are paid for in
acceptable foreign currency AND accounted for
in accordance with the rules and regulations of
the BSP
(2) Services other than those mentioned in the
preceding paragraph rendered to a person
engaged in business conducted outside the
Philippines or a nonresident person not
engaged in business who is outside the
Philippines when the services are performed,
the consideration for which is paid for in
acceptable foreign currency AND accounted for
in accordance with the rules and regulations of
the BSP
The services referring to ‗processing,
manufacturing, repacking‘ and ‗services other
than those in (1)‘ both require
(i) payment in foreign currency;
(ii) inward remittance;
(iii) accounted for by the BSP;
(iv) AND that the service recipient is doing
business outside the Philippines.
If this is not the case, taxpayers can
circumvent just by stipulating payment in
foreign currency. (CIR v. Burmeister, G.R. No.
153205 [2007[))
(3) Services rendered to persons or entities whose
exemption under special laws or international
agreements to which the Philippines is a
signatory effectively subjects the supply of such
services to zero percent (0%) rate (as amended
by RA 9337)
(4) Services rendered to persons engaged in
international shipping or international air
transport operations, including leases of
property for use thereof [as amended by RA
9337];
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TAXATION LAW
Provided, however, that the services
referred to herein shall not pertain to those
made to common carriers by air and sea relative
to their transport of passengers, goods or
cargoes from one place in the Phil. to another
place in the Phil. (the same being subject to
12% VAT under Sec. 108)
(5) Services performed by subcontractors and/or
contractors in processing, converting, or
manufacturing goods for an enterprise whose
export sales exceed seventy percent (70%) of
total annual production.
(6) Transport of passengers and cargo by air or sea
vessels from the Philippines to a foreign country
(as added by RA 9337) and;
(7) Sale of power or fuel generated through
renewable sources of energy such as, but not
limited to, biomass, solar, wind, hydropower,
geothermal, ocean energy, and other emerging
energy sources using technologies such as fuel
cells and hydrogen fuels. (as added by RA
9337)
Zero-rating shall apply strictly to the sale of
power or fuel generated through renewable
sources of energy, and shall not extend to the
sale of services related to the maintenance or
operation of plants generating said power.
Effectively zero-rated sale of service – a local sale of
services by a VAT-registered person to a person or
entity granted indirect tax exemption under special
laws or international agreement.
 The taxpayer must seek prior approval or prior
confirmation from the appropriate offices of the
BIR so that a transaction is qualified for
effective zero-rating except in export sales and
foreign denominated sales.
 RR 4-2007 removed the distinction between
automatic and effectively zero-rated
transactions found in prior Revenue
Regulations (inc. RR 16-2005) with respect to
prior application from the BIR.
O. VAT EXEMPT TRANSACTIONS
Vat Exempt Transactions, in general
(a) Sale of goods or properties and/or services and
the use or lease of properties that is NOT
subject to VAT (output tax) and the seller is not
allowed any tax credit of VAT (input tax) on
purchases.
(b) The person making the exempt sale of goods,
properties or services shall not bill any output
tax to his customers. (RR 16-2005)
UP COLLEGE OF LAW TAXATION 2
(c) But, the VAT-registered person may elect that
the exemption not apply to its sale of goods or
properties or services; provided that the
election made shall be irrevocable for a period
of three (3) years from the quarter the election
was made (Sec. 109(2), NIRC).
Exempt Transactions Enumerated
[4.109-1 of RR 16-2005]
(1) Sale/import of agricultural and marine food
products in their original state, livestock and
poultry of a kind generally used as or yielding or
producing foods for human consumption and
breeding stock and genetic materials therefor;
 Original state even if they have undergone
the simple processes of preparation or
preservation for the market, such as
freezing, drying, salting, broiling, roasting,
smoking or stripping. Also includes
preservation using advanced technological
means of packaging, such as shrink
wrapping in plastics, vacuum packing,
tetra-pack, and other similar packaging
methods (RR 16-2005)
 Polished and/or husked rice, corn grits,
raw cane sugar and molasses, ordinary salt,
AND COPRA shall be considered in their
original state
 Livestock or poultry do not include fighting
cocks, race horses, zoo animals and other
animals generally considered as pets.
(2) Sale/ importation of fertilizers, seeds,
seedlings and fingerlings, fish, prawn, livestock
and poultry feeds including ingredients,
whether locally produced or imported, used in
the manufacture of finished feeds (EXCEPT
specialty feeds for race horses, fighting cocks,
aquarium fish, zoo animals, and other animals
generally considered pets);
(3) Importation of personal and household effects
belonging to Philippine residents returning from
abroad and non-resident citizens coming to
resettle in the Philippines; provided, that such
goods are also exempt from customs duties
under the TCC (now CMTA)
(4) Importation of professional instruments and
implements, wearing apparel, domestic
animals, and personal household effects
belonging to persons coming to settle in the
Philippines, for their own use and not for sale,
barter or exchange, accompanying such
persons, or arriving within 90 days before or
after their arrival, upon production of evidence
satisfactory to the CIR that such persons are
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TAXATION LAW
actually coming to settle in the Philippines and
that the change of residence is bona fide;
 EXCEPT vehicles, vessels, aircrafts,
machineries, and other goods for use in
manufacturing and merchandise of any
kind in commercial quantity)
(5) Services subject to percentage tax under the
NIRC;
(6) Services by agricultural contract growers and
milling for others of palay into rice, corn into
grits, and sugar cane into raw sugar;
(7) Medical, dental, hospital and veterinary
services, except those rendered by
professionals:
 Laboratory services are exempted. If the
hospital or clinic operates a pharmacy or
drug store, the sale of drugs and medicine
is subject to VAT. [RR 16-2005]
 Note: RR-2004 granting VAT-exemption to
doctors registered with the PRC and
lawyers registered with the IBP was
superseded by RA 9337 and RR 16-2005.
(8) Educational services rendered by private
educational institutions, duly accredited by
DepED, CHED, TESDA, and those rendered by
government educational institutions;
 ―Educational services‖ does not include
seminars, in-service training, review
classes and other similar services rendered
by persons who are not accredited by the
DepED, CHED, and/or TESDA. [RR 16-
2005]
(9) Services rendered by individuals pursuant to an
employer-employee relationship;
(10) Services rendered by regional or area
headquarters established in the Philippines by
multinational corporations which act as
supervisory, communications and coordinating
centers for their affiliates, subsidiaries or
branches in the Asia-Pacific Region and do not
earn or derive income from the Philippines;
(11) Transactions which are exempt under
international agreements to which the
Philippines is a signatory or under special laws,
except those under PD No. 529 (Petroleum
Exploration Concessionaires under the
Petroleum Act of 1949);
(12) Sales by agricultural cooperatives duly
registered with the Cooperative Development
Authority (CDA) to their members, as well as
sale of their produce, whether it is original state
or processed form, to non-members; their
importation of direct farm inputs, machineries
and equipment, including spare parts thereof,
UP COLLEGE OF LAW TAXATION 2
to be used directly and exclusively in the
production and/or processing of their produce.
 Sale by agricultural cooperatives to non-
members can only be exempted from VAT if
the producer of the agricultural products
sold is the cooperative itself. If the
cooperative is not the producer (e.g.,
trader), then only those sales to its
members shall be exempted from VAT. [RR
16-2005]
(13) Gross receipts from lending activities by credit
or multi-purpose cooperatives duly registered
with the CDA
(14) Sales by non-agricultural, non- electric and
non-credit cooperatives duly registered and in
good standing with the CDA; Provided, that the
share capital contribution of each member does
not exceed P15,000 and regardless of the
agrgregate capital and net surplus ratably
distributed among the members. BUT their
importation of machineries and equipment,
including spare parts thereof, to be used by
them are SUBJECT to VAT.
(15) Export sales by persons who are not VAT-
registered;
(16) Sale of real properties as follows:
(a) Sale of real properties NOT primarily held
for sale to customers or held for lease in
the ordinary course of trade or business.
 However, even if the real property is
not primarily held for sale to
customers or held for lease in the
ordinary course of trade or business
but the same is used in the trade or
business of the seller, the sale thereof
shall be subject to VAT being a
transaction incidental to the
taxpayer‘s main business. [RR 4-
2007]
(b) Sale of real properties utilized for low-cost
housing as defined by RA 7279, ("Urban
Development and Housing Act of 1992")
and other related laws, such as RA 7835
and RA 8763;
 ―Low-cost housing" refers to housing
projects intended for homeless low-
income family beneficiaries,
undertaken by the Government or
private developers, which may either
be a subdivision or a condominium
registered and licensed by the Housing
and Land Use Regulatory
Board/Housing (HLURB) under BP
220, PD 957 or any other similar law,
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TAXATION LAW
wherein the unit selling price is within
the selling price ceiling per unit of
P750,000.00 under RA 7279, and
other laws, such as RA 7835 and RA
8763.
(c) Sale of real properties utilized for
socialized housing as defined under RA
7279, and other related laws, such as RA
7835 and RA 8763, wherein the price
ceiling per unit is P225,000 or as may from
time to time be determined by the HUDCC
and the NEDA and other related laws.
 "Socialized housing" refers to
housing programs and projects
covering houses and lots or home lots
only undertaken by the Government or
the private sector for the
underprivileged and homeless citizens
which shall include sites and services
development, long-term financing,
liberated terms on interest payments,
and such other benefits in accordance
with the provisions of RA 7279 and RA
7835 and RA 8763.
 "Socialized housing" shall also refer
to projects intended for the
underprivileged and homeless wherein
the housing package selling price is
within the lowest interest rates under
the Unified Home Lending Program
(UHLP) or any equivalent housing
program of the Government, the
private sector or non-government
organizations.
(d) Sale of residential lot valued at
P1,919,500 and below, or house & lot and
other residential dwellings valued at
P3,199,200 and below
 If two or more adjacent residential lots
are sold or disposed in favor of one
buyer, for the purpose of utilizing the
lots as one residential lot, the sale
shall be exempt from VAT only if the
aggregate value of the lots does not
exceed P1,919,500. [RR 13-2012]
 Adjacent residential lots, although
covered by separate titles and/or
separate tax declarations, when sold
or disposed to one and the same buyer,
whether covered by one or separate
Deed of Conveyance, shall be
presumed as a sale of one residential
lot. [RR 16-2005]
UP COLLEGE OF LAW TAXATION 2
 Sale, transfer or disposal within a 12-
month period of 2 or more adjacent
residential lots, house and lots or
other residential dwellings to one
buyer, whether from the same or from
different sellers shall be considered
one single transaction. Hence, the sale
of the adjacent lots shall be subject to
VAT if the aggregate value exceeds
P1,919,500 for residential lots and
P3,199,200 for residential house lots
or residential dwellings,
notwithstanding that the value of the
individual properties do not exceed the
VAT exemption thresholds.
 Sale/purchase of parking lots shall
not be considered a sale of residential
lot/dwelling. Hence, it shall be subject
to VAT regardless of its selling price.
[RR 13-2012]
(17) Lease of residential units with a monthly rental
per unit not exceeding P12,800, regardless of
the amount of aggregate rentals received by the
lessor during the year.
 Lease of residential units where the
monthly rental per unit exceeds P12,800
but the aggregate of such rentals of the
lessor during the year do not exceed
P1,919,500 shall likewise be exempt from
VAT, however, the same shall be subjected
to 3% percentage tax.
 In cases where a lessor has several
residential units for lease, some are leased
out for a monthly rental per unit of not
exceeding P12,800 while others are leased
out for more than P12,800 per unit, his tax
liability will be as follows:
(a) The gross receipts from rentals not
exceeding P12,800 per month per
unit shall be exempt from VAT
regardless of the aggregate annual
gross receipts.
(b) The gross receipts from rentals
exceeding P12,800 per month per
unit shall be subject to VAT IF the
aggregate annual gross receipts from
said units only (not including the
gross receipts from units leased for
not more than P12,800) exceeds
P1,919,500. Otherwise, the gross
receipts will be subject to the 3% tax
imposed under Sec. 116 of the Tax
Code.
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TAXATION LAW
 The term 'residential units' shall refer to
apartments and houses & lots used for
residential purposes, and buildings or
parts or units thereof used solely as
dwelling places (e.g., dormitories, rooms
and bed spaces) except motels, motel
rooms, hotels and hotel rooms.
 The term 'unit' shall mean an apartment
unit in the case of apartments, house in the
case of residential houses; per person in
the case of dormitories, boarding houses
and bed spaces; and per room in case of
rooms for rent. [RR 16-2005]
(18) Sale, importation, printing or publication of
books and any newspaper, magazine review or
bulletin which appears at regular intervals with
fixed prices for subscription and sale and which
is not devoted principally to the publication of
paid advertisements;
(19) Transport of passengers by international
carriers [Added by RA 10378 (2013)]
(20) Sale, importation or lease of passenger or
cargo vessels and aircraft, including engine,
equipment and spare parts thereof for
domestic or international transport operations
[added by RA 9337];
 The exemption from VAT on the importation
and local purchase of passenger and/or
cargo vessels shall be limited to those of
150 tons and above, including engine and
spare parts of said vessels;
 The vessels to be imported shall comply
with the age limit requirement, at the time
of acquisition counted from the date of the
vessel's original commissioning, as
follows:
o for passenger and/or cargo vessels,
the age limit is 15 years old,
o for tankers, the age limit is 10 years
old, and
o for high-speed passenger crafts, the
age limit is 5 years old [RR 16-2005]
(21) Importation of fuel, goods, and supplies by
persons engaged in international shipping or air
transport operations; [added by RA 9337]
 The said fuel, goods and supplies shall be
used exclusively or shall pertain to the
transport of goods and/or passenger from
a port in the Philippines directly to a
foreign port without stopping at any other
port in the Philippines;
 If any portion of such fuel, goods or
supplies is used for purposes other than
that mentioned in this paragraph, such
UP COLLEGE OF LAW TAXATION 2 TAXATION LAW

portion of fuel, goods and supplies shall be (8) Services rendered by proprietors, lessees or
subject to 12% VAT starting Feb. 1, 2006. operators of cockpits, cabarets, night or day
[RR 16-2005] clubs, boxing exhibitions, professional
(22) Services of banks, non-bank financial basketball games, jai-alai and race tracks; and
intermediaries performing quasi-banking (9) Receipts on sale, barter for exchange of shares
functions and other non-bank financial of stock listed and traded through the local
intermediaries subject to Percentage Tax; and stock exchange or through initial public offering.
(23) Sale or lease of goods or properties or the
performance of services other than the
transactions mentioned in the preceding
paragraphs, the gross annual sales and/or
receipts do not exceed the amount of
P1,919,500
 For purposes of the threshold of
P1,919,500, the husband and the wife
shall be considered separate 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 from other lines of business which
are otherwise subject to VAT, the same
shall be combined for purposes of
determining whether the threshold has
been exceeded.
 The VAT-exempt sales shall NOT be
included in determining the threshold. [RR
16-2005]

Other Services Exempt from VAT – such services are

those subject to percentage tax (infra)
(1) Services rendered by domestic common carriers
by land for the transport of passengers and
keepers of garages;
(2) Services rendered by international air/shipping
carriers;
(3) Services rendered by franchise grantees of
radio and/or television broadcasting whose
annual gross receipts of the preceding year do
not exceed P10,000,000 and by franchise
grantees of gas and water utilities; [N.B. –
Compare with other franchise grantees which
are subject to VAT]
(4) Services rendered for overseas dispatch,
message, by franchise grantees or conversation
originating from the Philippines;
(5) Services by any person, company or corporation
(except purely cooperative
(6) companies or associations) doing life insurance
business of any sort in the Philippines;
(7) Services rendered by fire, marine or
miscellaneous insurance agents of foreign
insurance companies;

PAGE 158 OF 275

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PAGE 159 OF 275

UP COLLEGE OF LAW TAXATION 2 TAXATION LAW

Summary table of VAT-exemptions (Sec. 109)

A Of agricultural and marine products in their original state

Sale or Of fertilizers; seeds, seedlings and fingerlings; prawn, livestock and poultry feeds. XPN  specialty
B importation feeds for race horses, fighting cocks, aquarium fish, zoo animals, and other animals generally
considered pets.
Of personal and household effects belonging to the residents of the Philippines returning from
C
abroad
Importation Of professional instruments and implements, wearing apparel, domestic animals and personal
D household effects, belong to persons coming to settle for the first time in the Philippines for their own
use and not for sale, barter or exchange.
E Subject to percentage tax
By agricultural contract growers and milling for others of palay into rice, corn into grits and sugarcane
F
into raw sugar
G Medical, dental, hospital and veterinary services XPN  those rendered by professionals
Services
Educational services rendered by private educational institutions duly accredited by DepEd, CHED,
H
and TESDA, and those by governmental educational institutions
I Rendered pursuant to an employer-employee relationship
J Rendered by a RAHQ established in the Philippines
Transactions which are exempt under international agreements to which the Philippines is a signatory
K
or under special laws, except those under PD 529 (Petroleum concessionaires)
L Sales By agricultural cooperatives duly registered with the CDA
Gross receipts from lending activities by credit or multi-purpose cooperatives duly registered with the
M Services
CDA whose lending is limited to members
By non-agricultural, non-electric, and non-credit cooperatives duly registered and in good standing
N Sales
with the CDA. Provided, the share capital contribution of each member does not exceed 15K
By persons who are not VAT-registered
O Export sales
Of real property not primarily held for sale to customers or held for lease in the ordinary course of
P Sales business or sales within the low-cost cap of below P1,919,500 for a residential lot and P3,199,200
for a house and lot and other residential building
Q Lease Of a residential unit with a monthly rental not exceeding P12,800
Sale,
importation, Books and any newspaper, magazine, review or bulletin which appears at regular intervals with fixed
R
printing, or prices for subscription and sale and is not devoted principally to publication of paid advertisements .
publication
S Transport of passengers by international carriers (RA 10378)
Sale,
Of passenger or cargo vessels and aircraft, including engine, equipment and spare parts thereof for
T importation, or
domestic or international transport operations
lease
U Importation Fuel, goods, and supplies by persons engaged in international shipping or air transport operations
Of banks, non-bank financial intermediaries performing quasi-banking functions and other non-bank
V Services
financial intermediaries
Sale or lease Of goods or properties
W Performance of services other than the transactions mentioned in the preceding paragraphs, the
Services
gross annual sales and/or receipts do not exceed the amount of 1,919,500

PAGE 160 OF 275

UP COLLEGE OF LAW TAXATION 2
Q. SOURCES OF INPUT TAX
(1) Purchase or importation of goods (evidenced by
VAT invoice/receipt)
(a) For sale; or
(b) For conversion into or intended to form part of
a finished product for sale including packaging
materials; or
(c) For use as supplies in the course of business;
or
(d) For use as materials supplied in the sale of
service; or
(e) For use in trade or business for which
deduction for depreciation or amortization is
allowed under the Code.
(2) Purchase of real properties for which VAT has
actually been paid
(3) Purchase of services in which VAT has actually been
paid
(4) Transactions deemed sale
(5) Presumptive Input Tax
(6) Transitional Input Tax
Presumptive Input Tax (Sec. 111(B))
Persons or firms engaged in the processing of sardines,
mackerel and milk, and in manufacturing refined sugar
and cooking oil and packed noodle based instant meals,
shall be allowed a presumptive input tax, creditable
against the output tax, equivalent to FOUR PERCENT
(4%) of the gross value in money of their purchases of
primary agricultural products which are used as inputs
to their production.
―Processing‖ means pasteurization, canning and
activities which through physical or chemical process
alter the exterior texture or form or inner substance of a
product in such manner as to prepare it for special use
to which it could not have been put in its original form
or condition.
Transitional Input Tax (Sec 111)
Who may avail: (i) By a person who becomes VAT-liable
for the 1st time, or (ii) any person who elects to be a VAT-
registered person
Rate: 2% Input VAT of the value of the beginning
inventory on hand or actual VAT paid on such, goods,
materials and supplies, whichever is HIGHER, which
amount shall be creditable against the output tax of
VAT-registered person.
Tax base: The value allowed for income tax purposes on
inventories shall be the basis for the computation of the
2% transitional input tax, EXCLUDING goods that are
PAGE 161 OF 275
TAXATION LAW
exempt from VAT under Sec. 109 of the Tax Code. (RR
16-2005)
Note: A real estate dealer is entitled to claim
transitional input VAT based on the value of the entire
(including the value of the land and the improvements
thereon) real property sold regardless of whether there
was in fact actual payment of VAT on the purchase of
the real property. At the time the purchase was made,
there was still no VAT imposed. (Fort Bonifacio
Development Corp. v. CIR)
R. PERSONS WHO CAN AVAIL OF INPUT
TAX CREDIT
Input tax on domestic purchase or importation of goods
or properties shall be creditable:
(1) To the purchaser upon consummation of sale and
on importation of goods or properties; and
(2) To the importer upon payment of the VAT prior to
the release of the goods from the custody of the
Bureau of Customs.
(a) The input tax on goods purchased or imported
in a calendar month for use in trade or
business for which deduction for depreciation
is allowed under the Code, shall be spread
evenly over the month of acquisition and the
fifty-nine (59) succeeding months if the
aggregate acquisition cost for such goods,
excluding the VAT component thereof, exceeds
One million pesos (P1,000,000). If the
aggregate acquisition cost does not exceed
P1,000,000, the total input taxes will be
allowable as credit against output tax in the
month of acquisition.19
(b) However, if the estimated useful life of the
capital good is less than five (5) years, as used
for depreciation purposes, then the input VAT
shall be spread over such a shorter period
(3) To the purchaser of services or the lessee or
licensee upon payment of the compensation, rental,
royalty or fee.
Input tax on purchase of services, lease or use of
properties shall be creditable:
(1) To the purchaser upon payment of the
compensation, royalty or fee
(2) To lessee or licensee upon payment of the
compensation, royalty or fee
Claiming of input Tax on motor vehicles subject to the
following conditions:
19
Please refer below for the example.
UP COLLEGE OF LAW TAXATION 2
(1) Purchase of vehicle must be substantiated with
official receipts and other records;
(2) Taxpayer has to prove the direct connection of the
motor vehicle to the business;
(3) Only one vehicle for land transport is allowed for
the use of an official/employee with value not
exceeding P2.4 million;
(4) No depreciation shall be allowed for yachts,
helicopters, airplanes
S. DETERMINATION OF OUTPUT/INPUT
TAX; VAT PAYABLE; EXCESS INPUT TAX
CREDITS
Output VAT – Input VAT = VAT Payable
S.1. DETERMINATION OF OUTPUT TAX
(RR 16-2005)
Output VAT in a sale of goods/properties shall be
computed by multiplying the total amount indicated in
the invoice or receipt by 12%.
) portion pertaining to transactions subject to VAT
Output VAT in a sale of services shall be computed by
multiplying the total amount indicated in the invoice or
receipt by 12%.
) by the following documents, and must be reported
S.2. DETERMINATION OF INPUT TAX
CREDITABLE
(1) The sum of the excess input tax carried over from
the preceding month or quarter and the input tax
creditable to a VAT-registered person during the
taxable month or quarter shall be reduced by the
amount of claim for refund or tax credit for value-
added tax and other adjustments, such as
purchase returns or allowances and input tax
attributable to exempt sale.
(2) The claim for tax credit referred to includes not only
those filed with the BIR but also those filed with
other government agencies, such as the Board of
Investments the Bureau of Customs.
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TAXATION LAW
S.3. ALLOCATION OF INPUT TAX ON MIXED
TRANSACTIONS20
There are four possible transactions a VAT-registered
person may enter into:
(i) VAT taxable,
(ii) VAT-exempt,
(iii) zero-rated VAT and
(iv) sale to governments.
A VAT-registered person who is also engaged in
transactions not subject to VAT shall be allowed to
recognize input tax credit on transactions subject to VAT
as follows:
(1) All the input taxes that can be directly attributed to
transactions subject to VAT may be recognized for
input tax credit. Input taxes that can be directly
attributable to VAT taxable sales of goods and
services to the Government or any of its political
subdivisions, instrumentalities or agencies,
including GOCCs shall not be credited against
output taxes arising from sales to non-Government
entities
(2) If any input tax cannot be directly attributed to
either a VAT taxable or VAT-exempt transaction, the
input tax shall be pro-rated to the VAT taxable and
VAT-exempt transactions and ONLY the ratable
may be recognized for input tax credit.
T. SUBSTANTIATION OF INPUT TAX
CREDITS
(1) INPUT TAXES must be substantiated and supported
in the information returns required to be submitted
to the Bureau:
(a) For the importation of goods = Import entry or
other equivalent document showing actual
payment of VAT on the imported goods.
(b) For the domestic purchase of goods and
properties = Invoice showing the information
required under Secs. 113 (Invoicing and
Accounting Requirements for VAT-Registered
Persons) and 237 (Issuance of Receipts or
Sales or Commercial Invoices) of the Tax Code.
(c) For the purchase of real property = public
instrument i.e., deed of absolute sale, deed of
conditional sale, contract/agreement to sell,
etc., together with VAT invoice issued by the
seller.
20
Please refer below for the example
UP COLLEGE OF LAW TAXATION 2 TAXATION LAW

(d) For the purchase of services = official receipt

showing the information required under Secs.
113 and 237 of the Tax Code.
A cash register machine tape issued to a
registered buyer shall constitute valid proof of
substantiation of tax credit only if it shows the
information required under Secs. 113 and 237
of the Tax Code.

(2) TRANSITIONAL INPUT TAX shall be supported by an

inventory of goods as shown in a detailed list to be
submitted to the BIR.

(3) Input tax on "deemed sale" transactions shall be

substantiated with the invoice required.

(4) Input tax from payments made to non-residents

(such as for services, rentals and royalties) shall be
supported by a copy of the Monthly Remittance
Return of Value Added Tax Withheld (BIR Form
1600) filed by the resident payor in behalf of the
non-resident evidencing remittance of VAT due
which was withheld by the payor.

(5) Advance VAT on sugar shall be supported by the

Payment Order showing payment of the advance
VAT.

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Example regarding the input tax on goods where deduction for depreciation is allowed from RR 16-2005

Illustration: LBH Corporation sold capital goods on installment on October 1, 2005. It is agreed that the selling
price, including the VAT, shall be payable in five (5) equal monthly installments. The data pertinent to the sold assets are
as follows:

Selling Price - P 5,000,000.00 (exclusive of VAT)

Passed-on VAT - 500,000.00
Original Cost of Asset - 3,000,000.00
Accumulated Depreciation - 1,000,000.00
Unitilized Input Tax (Sold Asset) - 100,000.00

Accounting:
SELLER BUYER
Oct. 1, 2005 Oct. 1, 2005
Cash P 1,100,000.00 Asset P 5,000,000.00 Input
Installment Receivable 4,400,000.00 Tax 500,000.00
AccumulatedDepreciation 1,000,000.00
Output Tax 500,000.00 Cash 1,100,000.00
Asset 3,000,000.00 Installment Payable 4,400,000.00
Gain on sale of asset 3,000,000.00

To Record VAT Liability:

Output Tax 500,000.00 ------------
Input Tax 100,000.00
VAT Payable 400,000.00

Periodic Receipt of Installment:

Cash 1,100,000.00 Periodic Subsequent Payment:
Installment Receivable 1,100,000.00 Installment Payable 1,100,000.00
Cash 1,100,000.00

* The input tax of P 500,000.00 on the bought capital goods worth P 5,000,000.00 shall be spread evenly over a
period of 60 months starting the month of purchase.

If the depreciable capital good is sold/transferred within a period of five (5) years or prior to the exhaustion of the
amortizable input tax thereon, the entire unamortized input tax on the capital goods sold/transferred can be claimed
as input tax credit during the month/quarter when the sale or transfer was made but subject to the limitation
prescribed under Sec. 4.110-7 of these Regulations.

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Example regarding the allocation of input tax on mixed transactions from RR 16-2005
Illustration: ERA Corporation has the following sales during the month:

Sale to private entities subject to 12% - P100,000.00

Sale to private entities subject to 0% - 100,000.00
Sale of exempt goods - 100,000.00
Sale to gov‘t. subjected to 5% final VAT WH - 100,000.00
Total sales for the month - P400,000.00

The following input taxes were passed on by its VAT suppliers:

Input tax on taxable goods (12%) - P5,000.00

Input tax on zero-rated sales - 3,000.00
Input tax on sale of exempt goods - 2,000.00
Input tax on sale to government - 4,000.00
Input tax on depreciable capital good
not attributable to any specific activity (monthly
amortization for 60 months) - P20,000.00

A. The creditable input tax for the month shall be computed as follows:

Input tax on sale subject to 12% - P 5,000.00

Input tax on zero-rated sale 3,000.00
Ratable portion of the input tax not directly attributable to any activity:

Taxable sales (0% and 12%) X Amount of input tax not directly attributable
Total Sales

P100,000.00 X P20,000.00 - P5,000.00

400,000.00

Total input tax attributable to sales - P9,000.00

to government

B. The input tax attributable to sales to government for the month shall be computed as follows:

Input tax on sale to gov‘t. - P 4,000.00

Ratable portion of the input tax not directly attributable to any activity:

Taxable sales to the government X Amount of input tax not directly attributable
Total Sales

P100,000.00 X P20,000.00 - P5,000.00

400,000.00

Total input tax attributable to sales - P 9,000.00

to government

C. The input tax attributable to VAT-exempt sales for the month shall be computed as follows:

Input tax on VAT-exempt sales - P 2,000.00

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Ratable portion of the input tax not directly attributable to any activity:

VAT-exempt sales X Amount of input tax not directly attributable

Total Sales

P100,000.00 X P20,000.00 - P 5,000.00

400,000.00

Total input tax attributable to - P 7,000.00

VAT-exempt sales

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U. REFUND OR TAX CREDIT OF EXCESS (iii) The claimed input tax must not have been
INPUT TAX (CF REFUND OF applied to any output tax during the period
covered and subsequent periods covered by
ERRONEOUSLY PAID TAXES) the claim.
(iv) The claimed input tax must have been declared
Who may claim for refund/apply for issuance of tax
from the VAT quarterly return.
credit certificate
(v) The claimed input tax are directly attributable
(1) Zero-Rated Sales (Sec. 112(A), NIRC)
to 0%-rated transactions.
(a) Any VAT-registered person, whose sales are
(vi) Acceptable foreign currency exchange
zero-rated or effectively zero-rated may apply
proceeds must have been duly accounted for
for the issuance of a tax credit
(vii) Claimed input tax must be duly supported by
certificate/refund of creditable input tax due
VAT invoices/receipts.
or paid attributable to such sales, EXCEPT
(viii) VAT returns for the succeeding quarters must
transitional input tax, to the extent that such
have been submitted.
input tax has not been applied against output
tax, within two (2) years after the close of the
(2) Cancellation of VAT Registration.
taxable quarter when the sales were made. The
(a) A person whose registration has been
input tax that may be subject of the claim shall
cancelled due to (i) retirement from or
exclude the portion of input tax that has been
cessation of business, or due to changes in or
applied against the output tax.
(ii) cessation of status under Section 106(C) of
(b) The acceptable foreign currency exchange
the Code may, within two (2) years from the
proceeds must have been duly accounted for in
date of cancellation, apply for the issuance of
accordance with the rules and regulations of
a tax credit certificate for any unused input tax
the Bangko Sentral ng Pilipinas (BSP) in the
which may be used in payment of his other
case of zero-rated transactions paid for in
internal revenue taxes.
acceptable foreign currency and requiring that
(b) He shall be entitled to a refund if he has no
such be accounted for in accordance with BSP
internal revenue tax liabilities against which
rules & regulations (Secs. 106(A)(2)(a)(1) and
the tax credit certificate may be utilized.
(2), and Sec. 106(A)(2)(b) and Sec. 108(B)(1)
and (2), NIRC).
Period to file claim/apply for issuance of tax credit
(c) Where the taxpayer is engaged in zero-rated or
certificate
effectively zero-rated sale and also in taxable
This period must be distinguished from normal tax
or exempt sale of goods of properties or
refunds for erroneous payments where an
services, and the amount of creditable input
administrative claim and judicial claim may be
tax due or paid cannot be directly and entirely
made together, and the reckoning point of the 2
attributed to any one of the transactions, it
years is from the date of the erroneous payment.
shall be allocated proportionately on the basis
(1) Application for issuance of tax credit certificate
of the volume of sales.
or refund of creditable input tax (except
(d) In the case of a person engaged in the
transitional input tax)
transport of passenger and cargo by air or sea
 WITHIN 2 YEARS after the close of the
vessels from the Philippines to a foreign
taxable quarter when the sale was made,
country, the input taxes shall be allocated
not from the payment of the VAT. Sec. 229
ratably between his zero-rated sales and non-
is not applicable in claiming refunds for
zero-rated sales (sales subject to regular rate,
subject to final VAT withholding and VAT- VAT.
exempt sales). (RR 16-2005)  If the VAT registration has been cancelled
due to retirement or cessation of business,
Requirements: (Summary) or change of status, the 2 year period shall
(i) The claimant should be a VAT-registered be after the date of cancellation
person (2) Administrative Claim
(ii) There should be an application filed with the  The CIR shall grant the tax credit/refund
BIR or DOF center, as the case may be, within within 120 days from the date of
2yrs after close of taxable quarter. submission of complete documents in
support of the application

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 ―Complete Documents‖ is determined by
taxpayer himself.
 Taxpayer may only resort to a Judicial Claim
within 30 days either after the end of the
120 day period or after a decision is made
by the Commission, whichever comes first.
(3) Judicial Claim
 In case of denial of the application or the
expiry of the 120 days, the taxpayer may
appeal to the CTA within 30 days from the
receipt of said denial or inaction.
Manner of refund
Revenue Memorandum Circular no. 57-2013
(August 23, 2013): Unutilized creditable input taxes
attributed to zero-rated sales can only be recovered
through the application for refund or tax credit.
There is no other mode of recovering unapplied
input taxes aside from an application for refund or
tax credit. The Memorandum Circular also instructed
the disallowance of unutilized creditable input taxes
attributable to VAT zero-rated sales that is claimed
as a deduction for income tax purposes.
Refunds shall be made upon warrants drawn by the
CIR or by his duly authorized representative without
the necessity of being countersigned by the
Chairman, Commission on Audit, the provisions of
the Administrative Code of 1987 notwithstanding:
provided that refunds shall be subject to post audit
by the Commission on Audit. (Sec. 112(D), NIRC)
V. INVOICING REQUIREMENTS
(Sec 113)
Invoicing requirements in general
A VAT-registered person shall issue:
(1) A VAT invoice for every sale, barter or exchange
of goods or properties; and
(2) A VAT official receipt for every lease of goods or
properties, and for every sale, barter or
exchange of services
Only VAT-registered persons are required to print
their TIN followed by the word ―VAT‖ in their invoice
or ORs. Said documents shall be considered as a
―VAT Invoice‖ or VAT official receipt. All purchases
covered by invoices/receipts other than VAT
Invoice/VAT OR shall not give rise to any input tax.
[RR 16-05]
Note: VAT component of all transactions shall be
separately indicated in the VAT invoice or receipt.
(RR 18-2011)
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TAXATION LAW
Information Contained in the VAT Invoice or VAT
Official Receipt:
(1) A statement that the seller is a VAT-registered
person, followed by his taxpayer's identification
number (TIN);
(2) The total amount which the purchaser pays or is
obligated to pay to the seller with the indication
that such amount includes the VAT:
(a) The amount of the tax shall be shown as a
separate item in the invoice/receipt;
(b) If the sale is exempt from VAT, the term
"VAT-exempt sale" shall be written or
printed prominently on the invoice or
receipt;
(c) 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;
(d) If the sale involves goods, properties or
services some of which are subject to and
some of which are VAT zero-rated or VAT-
exempt, the invoice or receipt shall clearly
indicate the breakdown of the sale price
between its taxable, exempt and zero-rated
components, and the calculation of the
value-added tax on each portion of the sale
shall be shown on the invoice or receipt.
The seller has the option to issue separate
invoices or receipts for the taxable, exempt,
and zero-rated components of the sale.
(3) The date of transaction, quantity, unit cost and
description of the goods or properties or nature
of the service; and
(4) In the case of sales in the amount of one
thousand pesos (P1,000) or more where the
sale or transfer is made to a VAT-registered
person, the name, business style, if any,
address and taxpayer identification number
(TIN) of the purchaser, customer or client.
(5) Name of buyer and seller
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Invoicing Requirements and Recording in Deemed Sale Transactions

Transaction Invoicing Requirement

Transfer, use or consumption not in the course of Memorandum entry in the subsidiary sales journal to record
business of goods or properties originally withdrawal of goods for personal use
intended for sale or for use in the course of
business
Distribution or transfer to shareholders/investors
Invoice, at the time of the transaction, which should include all
or creditors the info prescribed above; data in the invoice shall be duly
recorded in the subsidiary sales journal
Consignment of goods if actual sale is not made Invoice, at the time of the transaction, which should include all
within 60 days the info prescribed above; data in the invoice shall be duly
recorded in the subsidiary sales journal
Retirement from or cessation of business with An inventory shall be prepared and submitted to the RDO who
respect to all goods on hand has jurisdiction over the taxpayer‘s principal place of business
not later than 30 days after retirement or cessation from
business. An invoice shall be prepared for the entire inventory,
which shall be the basis of the entry into the subsidiary sales
journal. The invoice need not
enumerate the specific items appearing in the inventory
regarding the description of the goods. If the business is to be
continued by the new owners or successors, the entire amount
of output tax on the amount deemed sold shall be allowed as
input taxes.

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Consequences of issuing erroneous VAT invoice or
VAT official receipt
Issuance of a VAT Invoice or VAT Receipt by a non-
VAT person
If a person who is not a VAT-registered person issues
an invoice or receipt showing his Taxpayer
Identification Number (TIN), followed by the word
"VAT", the erroneous issuance shall result to the ff:
(1) The non-VAT person shall be liable to:
 Percentage taxes applicable to his
transactions;
 VAT due on transactions under Section 106
or 108 of the Code, without the benefit of
any input tax credit; and
 A 50% surcharge under Section 248 (B) of
the code;
(2) The VAT shall, if the other requisite information
required is shown on the invoice/receipt, be
recognized as an input tax credit to the
purchaser.
Issuance of a VAT Invoice or VAT Receipt on an
Exempt Transaction by a VAT-registered Person
If a VAT-registered person issues a VAT invoice or
VAT official receipt for a VAT-exempt transaction, but
fails to display prominently on the invoice or receipt
the term "VAT-exempt Sale:
(1) the transaction shall become taxable and the
(2) issuer shall be liable to pay VAT thereon.
(3) The purchaser shall be entitled to claim an
input tax credit on his purchase. [RR 16-05]
W. FILING OF RETURN AND PAYMENT
(Sec 114)
VAT returns - VAT paid on a monthly basis. Payments
in the monthly VAT declarations shall be credited in
the quarterly VAT return to arrive at the net VAT
payable or excess input tax/over-payment as of the
end of a quarter.
(1) Filed by person liable to pay the VAT
(2) Quarterly return of the amount of his gross sales
or receipts within twenty-five (25) days after the
close of each taxable quarter prescribed for
each taxpayer.
(3) The monthly VAT Declarations of taxpayers
whether large or non-large shall be filed and the
taxes paid not later than the 20th day following
the end of each month.
Note: VAT paid on a monthly basis. Payments in the
monthly VAT declarations shall be credited in the
quarterly VAT return to arrive at the net VAT payable
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TAXATION LAW
or excess input tax/over-payment as of the end of a
quarter.
Administrative and Penal Provisions (Sec 115)
(1) Suspension of business operations. In addition
to other administrative and penal sanctions
provided for in the Tax Code and implementing
regulations, the CIR or his duly authorized
representative may order suspension or closure
of a business establishment for a period of not
less than five (5) days for any of the following
violations:
(a) Failure to issue receipts and invoices.
(b) Failure to file VAT return as required under
the provisions of Sec. 114 of the Tax Code.
(c) Understatement of taxable sales or
receipts by 30% or more of his correct
taxable sales or receipt for the taxable
quarter.
(d) Failure of any person to register as required
under the provisions of Sec. 236 of the Tax
Code.
(2) Surcharge, interest and other penalties. The
interest on unpaid amount of tax, civil penalties
and criminal penalties imposed in Title XI of the
Tax Code shall also apply to violations of the
provisions of Title IV of the Tax Code (VAT).
X. WITHHOLDING OF FINAL VAT ON
SALES TO GOVERNMENT
(RR 16-2005)
General Rule: Withholding tax does not apply on
transactions subject to VAT.
Exceptions:
(1) Gross payments by the government shall be
subject to the 5% final withholding tax;
(2) Gross payments by resident VAT-taxpayers to
non-resident foreign persons of rentals,
royalties, reinsurance premiums, and services
done in the Philippines—12% (Sec. 114(c),
NIRC)
* Beginning Nov. 1, 2005, when R.A. 9337 became
effective, all sales of goods, properties, or services
to the government shall be subject to the 5% final
withholding tax. The government shall, before
making payment on account of each purchase of
goods and/or services taxed at 12% VAT (Sec. 106
and 108) deduct and withhold a final VAT due at the
rate of 5% of the gross payment thereof.
(Mamalateo, Reviewer on Taxation, 2008)
Sales to Government
UP COLLEGE OF LAW TAXATION 2 TAXATION LAW

(1) The Government or any of its political

subdivisions, instrumentalities or agencies,
including GOCCs shall, before making payment
on account of each purchase of goods and
services which are subject to the VAT (Secs. 106
and 108, NIRC), deduct and withhold a final
VAT due at the rate of five percent (5%) of the
gross payment thereof.
The payment for lease or use of properties or
property rights to nonresident owners shall be
subject to 12% withholding tax at the time of
payment.
(a) The payor or person in control of the payment
is considered as the withholding agent.
(b) The VAT withheld shall be remitted within ten
(10) days following the end of the month the
withholding was made.
The 5% final VAT shall represent the net VAT payable
of the seller. The remaining 7% effectively accounts
for the standard input VAT, in lieu of the actual input
VAT directly attributable or ratably apportioned to
such sales. (This means that where the 5% final VAT
applies, the basic formula of output tax less input
tax does not apply.)

Should actual input VAT exceed 7% of the gross

payments, the excess may form part of the sellers‘
expense or cost. On the other hand, if actual input
VAT is less than 7% of gross payment, the difference
must be closed to expense or cost, in effect reducing
it.

However, 12% final VAT shall be withheld with

respect to the following:
(1) Lease or use of properties or property rights
owned by non-residents;
(2) Services rendered to local insurance companies,
with respect to reinsurance premiums payable
to non-residents; and;
(3) Other services rendered in the Philippines by
non-residents

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VAT FORMULA (IN GENERAL)

Actual Sales/Receipts xxx
Add: Excise Tax xxx
Remaining Merchandise (Cessation of VAT-registered Status) xxx
Transactions Deemed Sale xxx xxx

Less: Sales Returns and Allowances xxx

Sales Discounts xxx xxx

Total Sales (Taxable Base) xxx

Multiplied by 12% 12%
Output VAT on sales or gross recipts xxx
Less: Input VAT on purchases and services xxx
Transitional Input VAT, if applicable xxx
Presumptive Input VAT, if applicable xxx
Input VAT Carry-over from previous period xxx
Creditable VAT withheld xxx xxx
Net VAT payable (refundable) xxx

MONTHLY RETURN
Gross Sales/Receipts for the Month xxx
Multiplied by VAT rate 12%
Output VAT xxx
Less Input Taxes:
Transitional/Presumptive Input Tax xxx
On taxable goods/services xxx xxx
Net VAT Payable xxx
Add Penalties:
Surcharge xxx
Interest xxx
Compromise xxx xxx
Total Amount Payable xxx

INVOLVING GOVERNMENT
When Actual Input VAT > Standard Input VAT: excess forms part of seller‘s expense/cost
When Actual Input VAT < Standard Input VAT: difference is treated as taxable other income

Sales xxx
Output VAT (Sales x 12%) xxx
Purchases xxx
Input VAT (Purchases x 12%) xxx

OUTPUT VAT Payable:

Output VAT xxx
Less: Actual Input VAT xxx
Standard Input VAT (Sales x 7%) xxx xxx
Cost of sale/Expense (Income and expense summary) xxx
Net VAT Payable xxx
Less: Creditable Withholding Tax (Sales x 5%) xxx
Output VAT Payable xxx

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Quick Notes on VAT

Transactions subject to VAT

General Requirements
(1) Done in the course of trade or business (w/n profit-oriented): rule of regularity + incidental thereto (inc isolated)
EXCEPTION:
(a) NRC/NRA who perform services in Phil, even if no regularity
(b) Importation of Goods may be for business or non-business use
(2) Gross sales or receipts for the past 12 months or the next 12 months > 1,919,500php
OR there are reasonable grounds to believe

Taxable Transactions and Specific Requirements

(1) SBEL of Goods or Properties21
Goods/Personal Properties
(i) Actual/deemed sale (4) for a valuable consideration
(ii) for use or consumption in the Phil (regardless of the payment arrangements)
(iii) not exempt from VAT (NIRC, special law, special agreement)
Real Properties22:
(i) Seller (w/n natural) executes contract to SBE of RP
(ii) RP is in the Phil
(iii) Seller is engaged in sale or exchange of RP or real estate (dealer, developer, lessor)
(iv) RP is held primarily for sale/lease ICT/B or an ordinary asset used in T/B as an incident to his vatable
activity (NOT a capital asset)
not exempt from VAT (NIRC, special law, special agreement
(2) Sale of Services23
(i) for a valuable consideration (actually/constructively received)
(ii) performed ICTB in the Phil.
(iii) not exempt from VAT (NIRC, special law, special agreement)
(iv) person rendering service is VAT-liable
(v) no ee-er relationship
(3) Importation of Goods

Persons Liable to pay VAT

(1) Any person who Sells, Barters, Exchanges or Leases (SBEL) goods or properties
if real property: persons engaged in real estate business:
(i) Any person who SBE real properties in the course of trade or business (ICT/B)
(ii) Real estate lessors/ sub-lessors
(iii) NRA/NRC lessors when Real Property is in the Phil

21
Sec 106
22

Casual Sale (Capital Assets) Subject to CGT (6%)

Regular Sales (Ordinary
Assets)
Commercial Property Subject to 12% VAT
(Sale/Lease)
Residential Units (Lease) If monthly rental ≤ 12,800 = VAT and OPT-exempt
If monthly rental > 12,800 but aggregate annual rentals ≤1,919,500 = subject to OPT
If monthly rental > 12,800 and aggregate annual rentals > 1,919,500 = subject to VAT
Residential Lot If SP > 1,919,500.00 = subject to VAT
IF SP ≤ 1,919,500.00 = VAT-exempt
Residential House and If SP > 3,199,200.00 = subject to VAT
Lot IF SP ≤ 3,199,200.00 = VAT-exempt
23
Sec 108
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(iv) Non-stock, non-profit corporations engaged in SBE of real properties ICT/B, regardless of disposition of
income
(v) Gov‘t inc GOCCs in SBEL of RP ICT/B
(2) Renders services
(3) Imports goods
 if importer is tax-exempt/VAT-exempt AND goods are subsequently SBE to non-exempt persons,
purchasers/recipients = importer
 if the Philippine branch of an NRFC ―imported‖, first local buyer = importer

Tax Bases of VAT

(1) Gross (Sales) Selling Price: total amount of money paid in consideration of SBEL
 excludes: VAT, sales discounts24 and, allowances and returns (2)
 includes: Excise tax paid, initial payments25, interests and penalties (if instalment), commission income (if
exported), purchase price, charges for packing, delivery and insurance
o If goods/personal properties,
 GSP = amount paid in consideration
 IF DEEMED SALE: FMV at the time of the transaction
 NB: in retirement/cessation, inventory (raw materials, finished goods, machinery, equipment,
furniture, fixture), tax base = whichever is lower,
(i) acquisition cost
(ii) current market price of goods
o If real property,
 GSP = amount higher:
i. consideration stated in the sales document
ii. FMV, whichever is higher of
 Zonal value: FMV as determined by CIR
 Real Property Tax Value: FMV as determined by provincial & city assessors

o IF ON INSTALLMENT:
GSP = down payments received + interests + penalties + other charges – amount of mortgage (paid)
NB: If zonal/FMV, tax base =
)
)

Upon full collection, if a difference is uncovered because the zonal value or market value at the date of
sale is higher than the total receipts or collections based on the agreed consideration, the additional VAT
shall be paid accordingly (RMC 03-96)
NB:
o IF DEFERRED Deferred Payments (initial > 25% GSP)
Instalment Plan (initial ≤ 25% GSP)
GSP = entire selling price or zonal/FMV, whichever is higher
NB: CIR has the power to determine the appropriate tax base in 1) SBE in deemed sales and 2) when
GSP is unreasonably lower than AMV26

(2) Gross Value in money of goods

(3) Gross Receipts derived from transaction: total amount of money/equivalent = contract price + compensation +
service fee + rental fee + royalties + amount charged for materials supplied with the services + deposits and

24
It should be determined at the time of the sale, indicated in the invoice and granting does not depend on the happening
of a future event
25
Initial payments does not include the amount of mortgage on RP sold (except excess when mortgage exceeds the cost
of the property), notes and other evidence on=f indebtedness issued by the purchaser at the time of the sale
26
GSP is unreasonably lower than the actual market value if it is lower than 30% of AMV of the same goods of the same
quantity or quality sold in the immediate locality or the nearest date of sale.
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advanced payments actually or constructively received + costs items of construction projects – (VAT + amounts
earmarked for payments to unrelated 3rd party + amounts received as reimbursement + monies/receipts held in
trust w/c do not redound to the benefit of taxpayer + universal charge passed on and collected by distribution
companies and electric coop (if sale of electricity) + receivables + local taxes)

IF DEALER IN SECURITIES: gross selling price – cost of securities sold

(4) Total Value/Landed Cost (determined on the basis of quantity/volume of goods)

Total Value used by Customs: tariff and customs duties + custom duties +excise tax + charges
Landed Cost: invoice amount inc. cost of loading, shipping, unloading, + custom duties + freight + insurance +
other charges +excise tax – expenses incurred after release of goods (e.g., cost of delivery)
 Customs duty: amount of customs duty legally due and paid by the importer
 Charges: special import tax,foreign marginal fees, bank and arrastre charges, wharfage dues, broker fees,
other charges paid to complete importation

Rates of VAT
(A) Output Tax (Sale/Barter/Exchange/Lease)
(1) 12% standard rate: applied directly to TB
(2) 0%: applied directly to TB
(B) Input Tax (Purchase from VAT-registered businesses/Importation of goods)
(1) 12% standard rate: applied directly to TB
(2) 0%: applied directly to TB
(3) 2% transitional VAT (: applied to the (inventory on hand) value of goods (exc. VAT-exempt good) existing at the
date a person commences business and/or becomes liable to VAT) or 12% actual input tax rate, higher
(4) 4% presumptive input tax rate: applies to purchases of VAT-exempt goods used as inputs by a VAT-registered
person in manufacturing or processing certain food products
(5) 7% FWT (standard input VAT, when government), 5% withholding

Creditable Input VAT Requirements

(1) Proper documentation
(2) No double input tax credit is allowed.
 Input VAT on a particular purchase transaction can be claimed once only upon consummation of the sale of
goods and based on the entire GSP (whether paid on cash, credit or instalment)
(3) Ignore erroneous VAT rate. The correct rate of input VAT can still be claimed.
(4) Transactions should have been made with VAT-registered persons.
(5) IF MIXED TRANSACTIONS and input VAT cannot be directly attributable::

Formula Input Tax Treatment

)
Untraceable Input VAT x Creditable Input VAT

- )
Untraceable Input VAT x Input VAT Credit, eligible for tax refund or TCC

- )
Untraceable Input VAT x Cost of Sales or Operating Expense
) Compare to Standard Input VAT (Creditable against
Untraceable Input VAT x Standard input VAT)

NB: Creditable Input VAT is

(1) increased by any input VAT carried over from the preceding month or quarter
(2) decreased by
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UP COLLEGE OF LAW TAXATION 2 TAXATION LAW

(i) amount of the claim for refund or tax credit for VAT filed during the same period
(ii) input tax attributable to exempt sales and unauthorized input tax attributable of depreciable capital goods
(iii) amount of input VAT wrt uncollected portion of instalment receivable in instalment sales

VAT-EXEMPT and 0% VAT

VAT-Exempt 0% VAT
 Non-VAT taxable transaction  Taxable transaction
 Taxpayer is relieved from payment of VAT for w/c he is
directly liable
 NO output and input VAT  No output VAT, but input VAT is available as tax credit or
 Optional VAT Registration refund
 Partial relief  Total relief
 Only removes VAT at the exempt stage  All VAT is removed at whatever stage

SALE OF SERVICES
VAT-Exempt 0% VAT
NB: There are 31 VAT-exempt sales of services (Sec 109 (1) Processing, manufacturing, repacking goods to non-
and special laws) resident (5)
(2) Processing, manufacturing, repacking goods to
(1) For lease of property =exempt export-oriented (3)
 if advance payment = loan, option money, (3) Services other than processing, manufacturing,
security deposit repacking (4)
 NB: if security deposit is applied to rental = VAT (4) Services to exempted persons (3): effectively 0-rate
(2) For persons engaged in milling, processing, (5) Sale of power/fuel-generated through renewable
manufacturing or repacking goods = exempt resources (3)
 if palay  rice; corn  corn grits; sugar cane  (6) Services rendered to int‘l shipping/air transport (2)
raw sugar (7) Transport of passengers and cargo by air from Phil to
(3) For franchise grantees of electric utilities, telephone Foreign (3)
and telegraph, radio and/or television broadcasting = (8) Transactions of VAT-reg person to foreign embassies
exempt (2)
 if annual gross receipts <= 10M;
franchise grantees of gas and water utilities;
of telephone & telegraph services, amounts
received for overseas dispatch from Phil.
(4) For PREMIUMS of insurance companies = exempt IF
 life and disability insurance;
crop insurance; health and accident insurance

(included are only those with exceptions)
1. Sale/import of agricultural & marine food products in
their original state; livestock and poultry (used/yield
for human consumption); breeding stock and genetic
materials
2. Import of professional instruments, implements,
wearing apparel, domestic animals, and personal
household effects
3. Transactions exempt pursuant to special laws
4. Cooperatives
5. Residential lots ≥ 1,919,500 & lot & dwellings ≥
3,199,200
6. lease of residential units,
 if ≤ 12,800/unit/month (regardless of aggregate
amount);
PAGE 177 OF 275
Exceptions to the Exemptions (Subject to VAT)
(1) Livestock and poultry DOES NOT INCLUDE fighting
cocks, race horses, zoo animals and pets
(2) DOES NOT INCLUDE vehicles, vessels, aircrafts,
machineries, and other goods for use in
manufacturing in commercial quantities
(3) DOES NOT INCLUDE those under Petroleum
Exploration Concessionaires under Petroleum Act of
1949
(4) For sales by agricultural coops to non-members, if
seller is the member = VAT
For sales by non-agri, non-electric and non-credit,
importation of machineries and equipment = VAT
(5) DOES NOT INCLUDE parking lot
(6) If any portion of such goods are used for purposes
 UP COLLEGE OF LAW TAXATION 2 TAXATION LAW

 if ≥ 12,800/unit/month (AND aggregate amount other than those stated = VAT

is ≥ 1,919,500)
(5) importation of fuels, goods, supplies by international
shipping or air transport

SALE OF GOODS
VAT-Exempt 0% VAT
Real Property Actual Export Sales (3)
(i) Not primarily held ICT/B
(ii) Low-cost or socialized housing Deemed Export Sales
(iii) Residential lot <= 1,919,500 (i) Internal or constructive export sales
(iv) House and/or other residential dwellings <= (a) Raw/Packaging materials to non-resident buyer (5)
3,199,200 (b) Raw/Packaging materials to export-oriented (3)
(v) Lease (12,800/unit/year or total 1,919,500/year) (c) Phil. Port FOB value of export products (2)27
(vi) Transmission to a trustee (d) Net selling price of export products (4)28
Except: if transmission is deemed sale (e) sales to bonded manufacturing warehouses (2)29
(vii) Transfer to corporation in exchange of SoS (f) sales to export processing zones30
(viii) Advance payments/Security Deposits in lease (g) sales to enterprises duly accredited by Subic Bay
E: if applied to the rent Metropolitan Authority (2)
(h) sales to registered export traders (3)
As regards ecozones and PEZA-registered entities (i) sales to diplomatic missions etc. (2)
(i) Made by VAT-exempt supplier from customs (j) sale by VAT-supplier to manufacturer/producer whose
territory to any registered enterprise inside ecozone products are 100% exported (3)
(ii) Intra-ecozone enterprise sale of service, if PEZA (ii) Sale of gold to BSP
registered seller is subject to 5% special tax regime (iii) Sale of goods/supplies/equipment/fuel to persons engaged
(iii) Intra-ecozone sales of goods in int‘l shipping/air transport (4)
(iv) Docking/Undocking services to foreign vessels

Foreign currency denominated goods

(i) To a NRC/NRA of goods (5)
(ii) To a NRC/NRA of goods locally manufactured for household
and personal use (2)
E: automobiles and non-essential goods

Effectively-zero rated sales (3)

(i) Made by VAT registered supplier from customs territory to any
registered enterprise inside ecozone
(ii) Intra-ecozone enterprise sale of service, if PEZA registered
seller is subject to NIRC taxes

27
Under Omnibus Investment Code (EO226)
28
Ibid
29
RA7227
30
RA 7916
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Taxable Activity/Property TR Tax Base Tax Payable

Actual SBE of Goods or Properties
Goods/ Personal Properties
Real Properties
IF sale is on instalment
plan AND ZV/FMV > SP
(excluding VAT)
Deemed Sale Transactions
Not ICB/T, but originally
intended for sale/use ICB/T
Transfer to SH in share of profit
or Cr in payment of debt
Consignment after 60d
Retirement/Cessation
business
Sale of Services
Importation of Goods
In general
When custom duties are based
on quantity or volume
Gross Selling Price
= amt. paid to the seller
12% = consideration/FMV, higher
= )
VAT Payable paid
by
seller/transferor
FMV (at the time of transaction)
E: if FMV is unreasonably lower (by more than 30% of AMV) = AMV or
12% determined by CIR
of
Acquisition Cost or current market price, lower
VAT Payable paid
12% Gross receipts derived
by performer
Total Value used by BOC VAT paid by
=tariff & custom duties + custom duties + excise tax + charges importer PRIOR
12% to the release of
= landed cost + excise tax goods in
Customs custody

(1) Once registered as a VAT person, the taxpayer shall be liable to output tax and be entitled to input tax credit beginning on the
first day of the month following registration.
(2) The cancellation for registration will be effective from the first day of the following month the cancellation was approved.
(3) What is the treatment for Withholding of VAT on Government Money Payments?
 The government or any of its political subdivisions, instrumentalities or agencies, including government-owned or
controlled corporations (GOCCs) shall, before making payment on account of each purchase of goods and/or services
taxed at twelve percent (12%) VAT pursuant to Sections 106 and 108 of the Tax Code, deduct and withhold a Final VAT due
at the rate of five percent (5%) of the gross payment.
 The five percent (5%) final VAT withholding rate shall represent the net VAT payable of the seller. The remaining seven
percent (7%) effectively accounts for the standard input VAT for sales of goods or services to government or any of its
political subdivisions, instrumentalities or agencies including GOCCs in lieu of the actual input VAT directly attributable or
ratably apportioned to such sales. Should actual input VAT attributable to sales to government exceeds seven percent (7%)
of gross payments, the excess may form part of the sellers' expense or cost. On the other hand, if actual input VAT
attributable to sale to government is less than seven percent (7%) of gross payment, the difference must be closed to
expense or cost.
 The government or any of its political subdivisions, instrumentalities or agencies including GOCCs, as well as private
corporation, individuals, estates and trusts, whether large or non-large taxpayers, shall withhold twelve percent (12%) VAT
with respect to the following payments:
(i) Lease or use of properties or property rights owned by non-residents; and
(ii) Other services rendered in the Philippines by non-residents.

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 UP COLLEGE OF LAW TAXATION 2 TAXATION LAW
Before start of business or within VAT-registered Person
VAT-Exempt Person 10d before the beginning of
(w/ TIN)
(cannot be cancelled w/in taxable quarter
3years; franchise of radios/tv VAT AND NON-VAT REGISTRATION
broadcasting, irrevocable)
Compliance activities after registration:
Optional Registration Registration Fee (500php) to
1. Registration of books of accounts (3) of the
authorized bank agent, Certificate of business/occupation/calling including practice of
RDOfficer, Rev Collection Officer,
Registration profession, before using the same.
Before start of business authorized city/municipal
Register to RDO 2. Registration of sales invoices and official receipts (If
and every year thereafter treasurer
(on/before Jan 31)
for every there are transactions not subject to VAT, registration
separate and of non-VAT invoices or non-VAT official receipts)
EXEMPT from 500php
distinct 3. Annual Registration: Pay registration fee for every place
1. if aggregate gross
establishment APPROVE of business that generates sales after updating the
Person Liable sales/receipts ≤ 100,000;
registration records.
for VAT 2. cooperative;
4. Filing of the Monthly VAT Declaration and Quarterly VAT
3. individuals earning pure
compensation income; Return to be submitted to RTO/LTDO
4. overseas workers
Did not register:
 Still liable for VAT DENY
 No input credit
CANCELLATION/UPDATE OF VAT REGISTRATION (registration of
a taxpayer of a franchise grantee of radio and/or tv broadcasting whose gross
annual receipts≤ 10,000,000 = irrevocable)

Before start of business or within Certificate of Non-VAT Cancellation/Update Minor change in original
10d before the beginning of registration
taxable quarter necessitating cancellation
APPROVE w/in 15d
w/in 25d from
Registration Fee (500php) to cancellation
from change
Register to RDO authorized bank agent,
for every RDOfficer, Rev Collection Officer, Filing of Short Period Return (for
separate and authorized city/municipal the remaining period that he was Notice of Change (f
distinct treasurer VAT-reg) change of address)
establishment DENY
EXEMPT from 500php
if aggregate gross sales/receipts Instances when a taxpayer may
≤ 100,000; cooperative; CANCEL his registration:
individuals earning pure 1. When TP‘s gross sales/receipts for the following 12 months ≤ 1,919,500
compensation income; overseas 2. When TP has ceased to carry on his T/B and does not expect to recommence within 12m
workers 3. In case of a single proprietorship, a change of ownership
4. Dissolution of a partnership or corporation
5. Merger/consolidation wrt dissolved corporations
6. Person who registered prior to planned business commencement but failed to actually start business

UPDATE his registration:

1. When TP‘s business has become exempt
2. When there is a change of the nature of business (from vatable to exempt)
3. When TP a tax-exempt individual who applied for optional registration and cancelled his registration after 3yrs.
RE applications for VAT zero-rating: Taxpayers shall file their application directly with the Audit 4. When TP is a VAT-registered person whose gross sales/receipts for 3 consecutive years ≤ 1,919,500
Information, Tax Exemption and Incentives Division (AITEID) under the Assessment Service, or with the
LTAID I and II, BIR National Office, as the case may be. PAGE 180 OF 275
 UP COLLEGE OF LAW TAXATION 2 TAXATION LAW

VAT REFUND OR VAT CREDIT CERTIFICATE

VAT- registered cancelling

their registration (regardless
of the source of input tax)
w/in 2 years after close of
the taxable quarter when
sales are made
Input Tax wrt Zero-rated and Application for w/in 2 years after
Effectively zero-rated Sales refund or TCC to close of the taxable
Direct Tax CIR + supporting quarter when sales
docs are made
Credit
VAT-registered
Taxpayer Presumptive Input Tax
w/in 120 days
Transitional Input Tax w/in 120 days
Carry-over Tax from
If VAT-exempt Actual Input Tax not related to from submission
changes his zero-rated sales Credit submission
status to VAT-
registered = GRANTED
transitional input
tax VAT-exempt Transactions DENIED INACTION

w/in 30 days w/in 30 days from

Non-VAT Apply against OUTPUT from receipt of expiration of 120-
Taxpayer VAT denial days

Appeal to CTA ISSUANCE

Related INPUT VAT shall be

NO INPUT TAX treated as a cost of sale or
operating expense

DENIED GRANTED

Related INPUT VAT shall Related OUTPUT VAT

be treated as cost of shall be treated as an
purchases operating expense Tax Credit Tax Refund
Certificate

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UP COLLEGE OF LAW TAXATION 2
IV. Tax Remedies under
the NIRC
A. TAXPAYER’S REMEDIES
(1) ADMINISTRATIVE (BIR)
(a) Before payment
(i) Filing a petition or reconsideration or
reinvestigation; and
(ii) Entering into a compromise
(b) After payment
(i) Filing a claim for refund; and
(ii) Filing a claim for tax credit
(2) JUDICIAL (CTA/RTC)
(a) Civil action
(i) Appeal to the CTA
(ii) Action to contest forfeiture of chattel; and
(iii) Action for damages
(b) Criminal action
(i) Filing a criminal complaint against erring
BIR officials and employees
Periods:
 Assessment (3 or 10 years)
o Return was filed
(i) Not false or fraudulent – 3 years from
date of filing of the return OR date
legally due or actual date of filing
after it wad due, whichever is LATER
(ii) False or fraudulent – 10 years from
date the fraud or falsity was
discovered
o No return filed – 10 years from the
discovery of omission
 Collection (3 or 5 years)
o Collections with assessments – 5 years
from date of finality of assessment (FAN if
unprotested or the Final Decision on
Disputed Assessment [FDDA] if protested)
o Collections without assessments –must
be made within the period of making an
assessment.
(i) With a REGULAR return filed, i.e., one
which is not false or fraudulent – 3
years from date of filing of the return
OR date or actual date of filing after it
was due, whichever is LATER
(ii) Return filed was false or fraudulent –
10 years from date of discovery of
fraud or falsity
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TAXATION LAW
No return filed – 10 years from date of discovery of
omission
 Criminal offense
o 5 years from date of commission, and if
not known then, from discovery and the
institution of judicial proceedings for its
investigation and punishment.
Assessment
(i) Concept of assessment
Assess means to impose a tax; to charge with
a tax; to declare a tax to be payable; to apportion a tax
to be paid or contributed, to fix a rate; to fix or settle a
sum to be paid by way of tax; to set, fix or charge a
certain sum to each taxpayer; to settle determine or fix
the amount of tax to be paid (84 C.J.S 74-750)
An assessment is the notice to the effect that
the amount therein stated is due from a taxpayer as a
tax with a demand for payment of the same within a
stated period of time. (CIR v. CTA, 27 SCRA 1159)
Forms of assessment
1. Self-assessment – Assessments made by
taxpayers who then file returns.
2. Deficiency assessment – Assessments made
by the BIR after the conduct of an investigation
or audit when it finds that the tax return filed
by the taxpayer contains an under-declaration
of income or when the taxpayer does not at all
file a tax return.
3. Jeopardy assessment (Section D, infra)
A. Requisites for valid assessment
(a) The taxpayer shall be informed in writing of the law
and the facts on which the assessment is made
(Sec. 228, NIRC)
(b) An assessment contains not only a computation of
tax liabilities, but also a demand for payment
within a prescribed period (CIR v. PASCOR)
(c) An assessment must be served on and received by
the taxpayer (CIR v. PASCOR)
Note: The presumption of the correctedness of
assessment CANNOT be made to rest on another
presumption, e.g., presumption of regularity of
performance of official functions.
B. Constructive methods of income determination
(a) Rely upon circumstantial evidence of determining
the correct income or transaction of a taxpayer
(Indirect Method)
(b) Expenditure Method: It proceeds on the theory that
where the amount of money which a taxpayer
UP COLLEGE OF LAW TAXATION 2 TAXATION LAW

spends during a given year exceeds his reported books of accounts and/or pertinent records, or to
income, and the source of such money is otherwise substantiate all or any of the deductions, exemptions,
unexplained, it may be inferred that such or credits claimed in his return. (As defined in Sec.
expenditures represent unreported income. 3(1)(a), RR 30-2002 for the purposes of entering into a
(c) Percentage Method: This method is a computation compromise)
whereby determinations are made by the use of
percentages or ratios considered typical of the E. Tax delinquency and tax deficiency
business under investigation. By reference to
similar business or situations, percentage Deficiency is defined as the amount still due and
computations are secured to determine sales, collectible from a taxpayer upon audit or investigation;
gross profit or even net profit. whereas delinquency is defined as the failure of the
(d) Unit and Value Method: The determination of gross taxpayer to pay the tax due on the date fixed by law or
receipts may be computed by applying price and indicated in the assessment notice or letter of demand.
profit figures to the known ascertainable quality of Deficiency interest is imposed for the shortage of taxes
business done by taxpayer paid, while delinquency interest is imposed for the
delay in payment of taxes. [Takenaka Corporation
C. Inventory method for income determination (Net Philippine Branch v. CIR (2012); First Lepanto Taisho
Worth Method) Insurance Corporation v. CIR, (2013)]
Holland v. US: In a typical net worth prosecution, the
Government, having concluded that the taxpayer's Deficiency Delinquency
records are inadequate as a basis for determining Basic tax +
income tax liability, attempts to establish an "opening Base Basic tax deficiency interest
net worth" or total net value of the taxpayer's assets at and surcharge
the beginning of a given year. It then proves increases in From the due date
From the date
the taxpayer's net worth for each succeeding year appearing in the
Reckoning prescribed for its
during the period under examination, and calculates notice and demand
payment until the
the difference between the adjusted net values of the date of the CIR until the
full payment thereof
taxpayer's assets at the beginning and end of each of amount is fully paid
the years involved. The taxpayer's nondeductible
Rate
expenditures, including living expenses, are added to 20% p.a.
these increases, and if the resulting figure for any year
is substantially greater than the taxable income Tax Delinquency v. Tax Deficiency
reported by the taxpayer for that year, the Government Tax Delinquency Tax Deficiency
claims the excess represents unreported taxable It is when: It is when:
income. Self-assessed taxpayer filed The amount of tax imposed
his tax return but did not by law is greater than the
Formula pay or only partially paid the amount shown in the tax
Increase in Net worth tax return
Add: Non-deductible Item
Deficiency Tax assessed by If no amount is shown in the
Less: Non-taxable income or receipts subjected to the BIR became final and return, or if there is no
final tax transfer taxes executory return, amount by which the
Taxable Net Income tax as determined by the
Less: Personal and additional exemptions CIR exceeds the amount
NET INCOME SUBJECT TO TAX previously assessed as a
deficiency
D. Jeopardy assessment CAN be collected CANNOT be immediately
IMMEDIATELY through collected. CAN be collected
Under BIR Regulations, a jeopardy assessment is a tax 1. Administrative Actions only AFTER the process of
assessment which was assessed without the benefit of (warrant of distraint or levy) protest
2. Judicial Actions
complete or partial audit by an authorized revenue Thus, a civil action for
officer, who has reason to believe that the assessment Thus, civil action for collection to ordinary courts
and collection of a deficiency tax will be jeopardized by collection to ordinary courts pending protest may be
delay because of the taxpayer‘s failure to comply with is the proper remedy. subject to Motion to
the audit and investigation requirements to present his Dissmiss
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SUBJECT to administrative SUBJECT to administrative lapse if the period previously agreed upon in a
penalties of: penalties of: prior agreement;
1. 25% surcharge 1. interest iii. Indicate the definite agreed date;
2. interest 2. compromise penalty iv. Indicate the date of acceptance, which must
3. compromise penalty be before the expiration of the period to
Mamalateo: Reviewer on Taxation (2014) assess or to collect taxes, or before the lapse
(ii) Power of the CIR to make assessments and of the period agreed upon in a prior
prescribe additional requirements for tax agreement; and
administration and enforcement v. Taxpayer must be furnished with a copy of the
waiver.
Powers of the CIR –
1. Examination of returns and determination of tax due Suspension of running of statute of limitations
2. Use of the best evidence obtainable

3. Authority to conduct inventory-taking, (1) Period during which the CIR is prohibited from
surveillance, and to prescribe presumptive gross sales making the assessment or beginning distraint or
and receipts
 levy or a proceeding in court, and for sixty (60) days
4. Authority to terminate the taxable period
 thereafter
5. Authority to prescribe real estate values
 (2) When the taxpayer requests for a reinvestigation
6. Authority to inquire into bank deposits
 which is granted by the CIR
7. Authority to accredit and register tax agents
 (3) When the taxpayer cannot be located in the
8. Authority to prescribe additional procedural or address given by him in the return filed upon which
documentary requirements a tax is being assessed or collected, BUT if the
9. Obtain information, and to summon/examine, and taxpayer informs the CIR of any change in address,
take testimony of persons the running of the statute of limitations shall not be
suspended
(iii) When assessment is made (4) When the warrant of distraint or levy is duly served
Prescriptive period for assessment (Sec. 203, NIRC) upon the taxpayer, his authorized representative, or
General Rule: 3 years a member of his household with sufficient
 If the taxpayer filed a return: internal revenue taxes discretion, and No Property is located
shall be assessed within 3 years after the last day (5) When the taxpayer is out of the Philippines
prescribed by law for the filing of the return.
 If a return is filed beyond the period prescribed by (iv) General provisions on additions to the tax
law: the 3-year period shall be counted from the (a) Civil penalties (Sec. 248, NIRC)
day the return was filed. 1. 25% surcharge
a. Failure to file a return and pay tax due
Exception: (i) False return, (ii) Fraudulent return with thereon
intent to evade tax, (iii) Failure to file a return (Sec. 222, b. Filing with unauthorized revenue office
NIRC) c. Failure to pay deficiency tax within time
prescribed in assessment notice
NB: Waiver d. Failure to pay full or part of the amount
The taxpayer and the CIR may agree in writing, before shown in ITR required to be filed or the full
the expiration of the time prescribed in Sec. 203, to amount of tax due for which no return is
extend the period of assessment (Sec. 222(b), NIRC) required to be filed on or before the date
(1) The waiver of prescription must be executed prescribed for its payment
properly, otherwise, invalid and results to 2. 50% surcharge
prescription of the right to assess/collect. a. Willful neglect to file the return within the
(Philippine Journalists Inc. vs. CIR, December 16, period prescribed
2004) b. False or fraudulent return is willfully made
(2) Requirements for a valid waiver under RMO 20-90 (b) Interest (Sec. 249)
and RMO 14-2016: 1. General – there shall be assessed and
i. In writing (may be but need not be notarized); collected any unpaid amount of tax, interest at
ii. Indicate the date of execution by the taxpayer, the rate of 20% per annum or such higher rate
which must be before the expiration of the as may be prescribed from the date prescribed
period to assess or collect taxes, or before the for payment until fully paid
PAGE 184 OF 275
UP COLLEGE OF LAW TAXATION 2
2. Deficiency interest – 20% p.a. on the tax due
3. Delinquency interest – 20% p.a. on the unpaid
amount of
a. Failure to pay the amount of tax due on
any return required to be filed
b. Failure to pay the amount of tax due for
which no return is required
c. Failure to pay a deficiency tax or
surcharge or interest thereon on the due
date appearing on the notice and
demand of the CIR
4. Interest on extended payments – if any person
is qualified and elects to pay installments but
fails to pay the tax or any installment on or
before the date prescribed, there shall be
assessed and collected interest at the rate of
20% per annum on the tax or deficiency tax or
part thereof unpaid
(c) Compromise penalties
ADMINISTRATIVE REMEDIES
Assessment process [Sec. 228, NIRC; RR 12-99; RR
18-13]
(a) Tax audit – In a tax audit, revenue officers examine
the books of account and other accounting records of
taxpayers to determine the correct tax liability. This is
through the issuance of a Letter of Authority.
Letter of Authority: An official document that empowers
a Revenue Officer to examine and scrutinize a
taxpayer‘s books of accounts and other accounting
records, in order to determine the taxpayer‘s correct
internal revenue tax liabilities.
Cases which need not be covered by a valid LA: Cases
involving civil/criminal tax fraud which fall under the
jurisdiction of the tax fraud division of the Enforcement
Services, and Policy cases under audit by the special
teams in national offices
(b) Notice of informal conference
N.B. – RR 18-2013 amended RR 1812-99 and deleted
the service of notice of informal conference.
(c) Issuance of preliminary assessment notice (PAN) –
The Assessment Division issues PAN if it determines
that there exists sufficient basis to assess the taxpayer
for any deficiency tax. It shall show in detail the facts
and the law on which the proposed assessment is
based.
(d) Exceptions to issuance of preliminary assessment
notice (PAN)
PAGE 185 OF 275
TAXATION LAW
The notice for informal conference and the PAN shall
not be required in any of the ff cases, in which case,
issuance of the Formal Assessment Notice (FAN) shall
be sufficient:
1. The finding for any deficiency tax is the result
of mathematical error in the computation of
the tax as appearing on the face of the return;
or
2. A discrepancy has been determined between
the tax withheld and the amount actually
remitted by the withholding agent; or
3. A taxpayer who opted to claim a refund or tax
credit of excess creditable withholding tax for
a taxable period was determined to have
carried over and automatically applied the
same amount claimed against the estimated
tax liabilities for the taxable quarter or
quarters of the succeeding taxable year; or
4. The excise tax due on excisable articles has
not been paid; or
5. An article locally purchased or imported by an
exempt person, such as, but not limited to,
vehicles, capital equipment, machineries and
spare parts, has been sold, traded or
transferred to a non-exempt person.
(e) Reply to preliminary assessment notice (PAN)
Taxpayer is given 15 days from date of receipt of PAN to
respond
 If he/she fails to respond: taxpayer is considered in
default; a formal letter of demand and assessment
notice shall be issued to the taxpayer
 N.B. – In Oakwood Management Services, Inc. v.
CIR (2013), the CTA held that the issuance of the
FAN before the lapse of the 15-day period to reply
to PAN does not violate due process. A protest
against the PAN, unlike the protest against the FAN,
is not indispensable. A PAN may or may not be
protested by the taxpayer, and the non-filing of
such protest does not render the PAN final and
unappealable. Therefore, the issuance of the FAN
before the lapse of the 15-day period for the
taxpayer to file its protest to the PAN does not
inflict prejudice on the taxpayer, for as long as the
BIR properly served a FAN and the taxpayer was
able to intelligently contest the FAN by filing a
protest letter within the period provided by law.
If he/she responds: a FAN/FLD shall be issued within
15 days from filing/submission of the taxpayer‘s
response, calling for payment of the taxpayer‘s
UP COLLEGE OF LAW TAXATION 2
deficiency tax liability, inclusive of the applicable
penalties.
(f) Issuance of formal letter of demand and assessment
notice/final assessment notice (FAN/FLD)
A Final Assessment Notice (FAN) is a declaration of
deficiency taxes issued to a taxpayer who:
 fails to respond to a pre-assessment notice within
the prescribed period of time, or
 whose reply to the PAN was found to be without
merit.
 Sec 228: The taxpayer shall be informed in writing
of the law and the facts on which the assessment is
made; otherwise the assessment shall be void
An assessment contains not only a computation of tax
liabilities, but also a demand for payment within a
prescribed period.
(g) Disputed assessment
The taxpayer or his duly authorized representative may
protest administratively against the formal letter of
demand and assessment notice within thirty days (30)
from date of receipt. The taxpayer protesting an
assessment may file a written request for
reconsideration or reinvestigation
 RECONSIDERATION – refers to a plea of re-
evaluation of the assessment on the basis of
existing records without need of additional
evidence. It may involve both question of fact or of
law or both
 REINVESTIGATION – refers to a plea of re-
evaluation of an assessment on the basis of newly-
discovered evidence that a taxpayer intends to
present in the reinvestigation. It may also involve a
question of fact or law or both.
Failure to file a protest against FLD/FAN within 30 days,
the assessment shall become final, executory and
demandable
(h) Administrative decision on a disputed assessment
(FDDA)
(vi) Protesting the assessment
(a) Protest of assessment by taxpayer
(1) Protested assessment – After issuance of FAN,
taxpayer may protest the assessment either by a
request for reconsideration or reinvestigation.
(2) When to file a protest – 30 days after receipt of
FAN/FLD.
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(3) Forms of protest – for the general concept of a
request for reconsideration and reinvestiation, see (g),
supra.
(3.1) – Request for RECONSIDERATION
Effect on prescriptive period to COLLECT – A request for
reconsideration does not toll the running of the
prescriptive period for the collection of an assessed tax.
(CIR vs. Philippine Global Communication Inc., G.R. No.
167146, October 31, 2006)
(3.2) – Request for REINVESTIGATION
Effect on prescriptive period to COLLECT – A Request
for Reinvestigation will only toll the prescriptive period
to COLLECT if the request for reinvestigation is granted
by the BIR.
(b) If request for REINVESTIGATION and GRANTED –
Submission of documents within 60 days from filing of
protest
 Within sixty (60) days from filing of the protest, all
relevant supporting documents must be submitted,
otherwise the assessment shall become final.
 ―Relevant supporting documents‖ – documents
necessary to support the legal and factual bases in
disputing a tax assessment as determined by the
taxpayer
 ―Assessment shall become final‖ – taxpayer is
barred from disputing the correctness of the issue
assessment by introduction of newly discovered or
additional evidence, and the FDDA shall
consequently be denied.
 Only applies to request for reinvestigation
(4) Content and validity of protest
The protest shall state: (Failure to state shall render
protest null and void)
 Nature of protest, whether Reconsideration or
reinvestigation, specifying new or additional
evidence if request for reinvestigation
 Date of the assessment notice
 Applicable law, rules and regulations, or
jurisprudence on which his protest is based.
(c) Effect of failure to protest – FAN/FLD becomes final
and demandable.
(d) Period provided for the protest to be acted upon –
180 DAYS from
a. Submission of documents if request for
REINVESTIGATION; or
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b. Filing of protests if request for
RECONSIDERATION
(vii) Rendition of decision by CIR
N.B. – An administrative appeal to the CIR may only be
availed of upon the denial of the protest to the FAN by
the CIR representative. Under RR 18-2013, there is no
administrative appeal to the CIR for inaction by the CIR
representative. The remedy is to await the decision or
file a petition for review to the CTA 30 days after the
lapse of 180-day waiting period.
Denial of protest – Issuance of a Final Decision on a
disputed assessment (FDDA): The decision of the CIR or
his duly authorized representatives shall state the facts,
the applicable law, rules and regulations or
jurisprudence on which such decision is based, and
that the same is his final decision.
(1) CIR‘s actions equivalent to denial of protest:
 Filing of collection suit against taxpayer (CIR v.
Union Shipping)
 Issuing a warrant of distraint and levy (CIR v. Algue)
 Where there is a request for reconsideration, final
demand letter from BIR (CIR v. Isabela Cultural
Corp.)
 Notice of delinquency (CIR v. Ayala Securities)
 Inaction by CIR - If the protest is not acted upon
within one hundred eighty (180) days from
submission of documents, the inaction by the CIR
is considered as a denial of protest.
 Filing of criminal action against taxpayer
 Issuing a warrant of distraint and levy
(2) Inaction by CIR
(viii) Remedies of taxpayer to action by CIR
(a) In case of denial of protest
If the protest is denied, in whole or in part, by the CIR‘s
duly authorized representative, the taxpayer may either:
(a) Appeal to the CTA within 30 days from the date
of receipt of the decision
(b) Elevate his protest through request for
reconsideration to the CIR (the only case where
an administrative appeal is possible)
If the CIR denies the protest filed by the taxpayer, the
latter may appeal to the CTA within 30 days from
receipt of the decision denying the protest. A motion for
reconsideration of the CIR‘s denial of the protests shall
not toll the 30 day period to appeal to the CTA.
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TAXATION LAW
(b) In case of inaction by CIR within 180 days from
submission of documents
If the protest is not acted upon by the CIR‘s duly
authorized representative within 180 days from filing of
the protest or from submission of required documents,
the taxpayer may either:
(a) Appeal to the CTA within 30 days after the
expiration of the 180 days,
(b) Await the final decision of the CIR‘s duly
authorized representative.
If the CIR did not act upon the petition within 180 days
from the time the documents were submitted, the
taxpayer may either:
(a) Appeal to the CTA within thirty days from the lapse
of the 180-day period OR
(b) Wait until the CIR decides before he elevates the
case to the CTA.
These options are mutually exclusive, and resort to one
bars the application of the other. [Rizal Commercial
Banking Corporation vs. CIR 
 (2007)]
N.B. – if the protest is a request for RECONSIDERATION,
count the 180 days from the filing of the protest. The
submission of documents is only for a request for
reinvestigation.
(c) Effect of failure to appeal – Assessment becomes
final and demandable.
JUDICIAL REMEDIES
Petition for Review at the CTA
Remedy if the taxpayer is not satisfied with the CTA
Division‘s ruling:
 FIRST, he may file a motion for reconsideration
before the same Division of the CTA within fifteen
(15) days from notice thereof. (Sec. 11, RA 1125
as amended by RA 9282 [2004])
 THEN, a party adversely affected by a resolution of
a Division of the CTA on a motion for
reconsideration may file a petition for review with
the CTA en banc. (Sec. 18, RA 1125 as amended
by RA 9282 [2004])
Remedy of injunction; generally unavailable
No court may grant injunction to restrain the collection
of any national internal revenue tax, fee or charge. (Sec.
218, NIRC)
Exception:
When the all of the following conditions concur:
UP COLLEGE OF LAW TAXATION 2
(1) It is an appeal to the CTA from a decision of the CIR,
or Commissioner of Customs or the RTC, provincial,
city or municipal treasurer or the Secretary of
Finance, the case may be, AND
(2) In the opinion of the Court of Tax Appeals, the
collection may jeopardize the interest of the
Government and/or the taxpayer. (Sec. 11, R.A.
1125 as amended by R.A. 9282)
Requisite before availing of injunction
(1) Taxpayer has to deposit the amount claimed; OR
File an injunction bond with the Court for not more
double the amount (R.A. 1125)
Petition for Review with the SC
Remedy if the taxpayer is not satisfied with the decision
of the CTA en banc:
 A party adversely affected by a decision or ruling of
the CTA en banc may file with the Supreme Court a
verified petition for review on certiorari pursuant to
Rule 45 of the 1997 Rules of Court. (Sec. 19, RA
1125 as amended by RA 9282 [2004])
Modes of Service - The notices to the taxpayer required
may be served by the CIR or his duly authorized
representative through the following modes:
(1) PERSONAL SERVICE – the notice shall be served
through personal service by delivering personally a
copy thereof to the party at his registered or known
address or wherever he may be found. A known
address shall mean a place other than the
registered address where business activities of the
party are conducted or his place of residence.
In case personal service is not practicable, the
notice shall be served by substituted service or by
mail.
(2) SUBSTITUTED SERVICE – substituted service can
be resorted to when the party is not present at the
registered or known address under the following
circumstances:
 May be left at the party‘s registered address,
with his clerk or with a person having charge
thereof.
 May be left in place where business activities
of the party are conducted with his clerk or
person having charge thereof.
 May be left in the place of residence with a
person of legal age residing therein.
 If no person is found, the revenue officers
concerned shall bring a barangay official and
2 disinterested witnesses to the address so
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that they may personally observe and attest to
such absence. The notice shall then be given
to said barangay official.
 Should party be present but refuses to receive
the notice, the revenue officers shall bring a
barangay official and 2 disinterested
witnesses in the presence of the party so that
they may personally observe and attest such
act of refusal. The notice shall then be left with
the barangay official.
 Service to the tax practitioner, who is
appointed by the taxpayer under
circumstances prescribed in the pertinent
regulations on accreditation of tax agents,
shall be deemed service to the taxpayer (RR
18-2013)
(3) SERVICE BY MAIL – Service by mail is done by
sending a copy of the notice by registered mail to
the registered or known address of the party with
instruction to the Postmaster to return the mail to
the sender after 10 days if undelivered. A copy of
the notice may also be sent through reputable
professional courier service. If no registry or
reputable professional courier service is available,
service may be done by ordinary mail
Refund
Nature of a claim for refund: It partakes of the nature of
an exemption and is strictly construed against the
claimant. The burden of proof is on the taxpayer
claiming the refund that he is entitled to the same. (CIR
v. Tokyo Shipping, 1995)
(i) Grounds and requisites for refund
1. There is a tax collected erroneously or illegally, or
a penalty collected without authority, or a sum
excessively or wrongfully collected (see Section
229, Tax Code)
2. There must be a written claim for refund filed by
the taxpayer to the CIR (see Vda. De Aguinaldo v.
CIR [February 26, 1965])
Exceptions
a. When on the face of the return upon which
payment was made, such payment appears
clearly to have been erroneously paid, the
CIR may refund or credit the tax even
without a written claim (Section 229, Tax
Code)
b. A return filed showing an overpayment
shall be considered as a written claim for
credit or refund. (Sec. 204(C), Tax Code)
UP COLLEGE OF LAW TAXATION 2
3. The
claim must be a categorical claim for
reimbursement (see Bernejo v. CIR [July 25,
1950])
4. The claim for refund must be filed within 2 years
from the date of the payment of the tax regardless
of any supervening cause (Section 229, Tax Code)
5. Taxpayer must show proof of the tax (Sec. 229)
(ii) Requirements for refund as laid down by cases
(1) Necessity of written claim for refund
(2) Claim containing a categorical demand for
reimbursement
(3) Filing of administrative claim for refund and the
suit/proceeding before the CTA within 2 years from
date of payment regardless of any supervening
cause
 The claim for refund must be filed within 2
years from the date of payment of the tax
regardless of any supervening cause (Section
229, Tax Code)
Judicial remedy for refund – File with suit with the CTA
1. Within 30 days from receipt of denial by the
CIR; and
2. Before the expiration of the 2-year period
Simultaneous filing allowed
If the 2 year period is about to lapse, the taxpayer may
already appeal to the CTA even if the CIR has not yet
made any decision on the claim for refund. In GIBBS V.
COLLECTOR OF INTERNAL REVENUE [FEBRUARY 29,
1960], the Supreme Court noted that if the CIR takes
time in deciding the claim and the period of two years is
about to end, the suit or proceeding must be started in
the CTA before the end of the 2 year period without
awaiting the decision of the CIR.
N.B. – Compare with the rule on refunds of input VAT.
The awaiting of the decision of CIR or the lapse of the
180-day period is mandatory.
Legal basis of tax refunds – solutio indebitii and the
rules on quasi-contracts (prevention of unjust
enrichment)
Statutory basis for tax refund under the tax code (Sec.
204[c] and Sec. 229)
(a) Scope of claims for refund
The CIR may:
 Credit or refund taxes erroneously or illegally
received or penalties imposed without authority;
 Refund the value of internal revenue stamps when
they are returned in good condition by the
purchaser; and
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TAXATION LAW
 In the CIR‘s discretion, redeem or change unused
stamps that have been rendered unfit for use and
refund their value upon proof of destruction
(b) Necessity of proof for claim or refund -
No credit or refund of taxes or penalties shall be
allowed unless the taxpayer files in writing with the CIR
a claim for credit or refund within two (2) years after the
payment of the tax or penalty. (Sec. 204, NIRC)
A return filed showing an overpayment shall be
considered as a written claim for credit or refund.(Sec.
204, NIRC)
(c) Burden of proof for claim of refund
Tax refunds, like tax exemptions, are construed strictly
against the taxpayer and liberally in favor of the taxing
authority. (United Airlines, Inc. v. CIR, G.R. No. 178788,
Sept. 29, 2010)
(d) Nature of erroneously-paid tax/illegally assessed
collected
A claim for tax refund is in the nature of a claim for
exemption and should be construed strictissimi juris
against the taxpayer. (see CIR V. TOKYO SHIPPING [MAY
26, 1995])
Taxes are erroneously paid when a taxpayer pays under
a mistake of fact, such as, he is not aware of an existing
exemption in his favor at the time that payment is made.
Taxes are illegally collected when payments are made
under duress.
(e) Tax refund vis-à-vis tax credit
REFUND takes place when there is actual
reimbursement while TAX CREDIT takes place upon the
issuance of a tax certificate or tax credit memo, which
can be applied against any sum that may be due and
collected from the taxpayer.
(f) Essential requisites for claim of refund
(Comm. v. CA and Citytrust, cited in United Airlines Inc.
v. CIR, 2010): The grant of a refund is founded on the
assumption that the tax return is valid, that is, the facts
stated therein are true and correct. The deficiency
assessment, although not yet final, created a doubt as
to and constitutes a challenge against the truth and
accuracy of the facts stated in said return which, by
itself and without unquestionable evidence, cannot be
the basis for the grant of the refund. To grant the refund
without determination of the proper assessment and
the tax due would inevitably result in multiplicity of
proceedings or suits. If the deficiency assessment
should subsequently be upheld, the Government will be
forced to institute anew a proceeding for the recovery of
UP COLLEGE OF LAW TAXATION 2
erroneously refunded taxes which recourse must be
filed within the prescriptive period of ten years after
discovery of the falsity, fraud or omission in the false or
fraudulent return involved.
Who may claim/apply for tax refund/tax credit
Taxpayer/withholding agents of non-resident foreign
corporation – the withholding agent is directly and
independently liable for the correct amount of tax that
should be withheld and for deficiency assessments,
surcharges and penalties.
General Rule: The taxpayer must file a written claim for
refund stating a categorical demand for reimbursement
before the CIR within two years from the date of
payment. (Sec. 229, NIRC)
When it comes to recovery of unutilized input VAT,
Section 112, and not Section 229 of the 1997 Tax
Code, is the governing law. Second, prior to 8 June
2007, the applicable rule is neither Atlas nor Mirant,
but Section 112(A). The Atlas doctrine, which held that
claims for refund or credit of input VAT must comply
with the two-year prescriptive period under Section 229,
should be effective only from its promulgation on 8 June
2007 until its abandonment on 12 September 2008 in
Mirant. (CIR v. San Roque)
Exceptions to requirement of a written claim:
When on the face of the return upon which payment was
made, such payment appears clearly to have been
erroneously paid (e.g., mathematical errors), the CIR
may refund or credit the tax even without a written claim
therefore. (Sec. 229, NIRC)
A return filed showing an overpayment shall be
considered as a written claim for credit or refund. (Sec.
204(C), NIRC)
Prescriptive period for recovery of tax erroneously or
illegally collected
Note: Under Sec. 229, there is no exception to the 2-
year prescriptive period.
Two-year period when counted:
From the date that tax was paid.
How date of payment determined:
PAGE 190 OF 275
TAXATION LAW
If the income tax is withheld at source – payment is at
the end of the taxable year.
If the income is paid on a quarterly basis – payment is
from the time of filing the final adjustment return.
CIR vs. TMX Sales (January 16, 1992): When a tax is
paid in installments, the prescriptive period should be
counted from the date of final payment or the last
installment. This rule proceeds from the theory that
there is no payment until the entire tax liability is
completely paid. Installments should be treated as
advances or portions of the annual tax due.
Other consideration affecting tax refunds
Remedy of the taxpayer upon denial or inaction on the
claim for refund:
(a) CIR denies claim - appeal to the CTA within thirty
(30) days from the receipt of the CIR‘s decision and
within two years from the date of payment.
(b) CIR does not act on the claim and the 2-year period
is about to lapse - file a claim before the CTA
before the 2-year period lapses. Otherwise, he may
no longer file a claim before the CTA in case the
CIRrenders an adverse decision beyond the 2-year
period. (Revised Rules of the CTA, as amended)
Period for claiming refund once granted:
Within five years from the date such warrant or check
was mailed or delivered, otherwise it shall be forfeited
in favor of the government and the amount thereof shall
revert to the general fund. (Sec. 230, NIRC)
Period for using the Tax Credit Certificate (TCC):
Tax credit certificates (TCCs) can be applied against all
internal revenue taxes, excluding withholding tax. TCCs
which remain unutilized after five years from the date of
issue shall be considered as invalid, unless revalidated.
If not revalidated, the amount covered by the TCC shall
revert to the general fund. (Sec. 230, NIRC)
B. GOVERNMENT’S REMEDIES
Collection
Remedies of the Government in Collection
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Administrative
Distraint of Personal Property including
garnishment deposit
Summary remedy of levy on real property
Forfeiture to the government for want of bidder
Further Distraint or Levy
Tax Lien
Compromise and Abatement
Penalties and Fines
Judicial
Civil
Criminal
(i) Requisites
Delinquency tax – can be immediately collected
administratively through issuance of a warrant of
distraint or levy and/or through judicial action (see
Section 205, Tax Code)
Deficiency tax – can be collected also through
administrative and/or judicial remedies but has to go
through the process of filing the protest by the taxpayer
against the assessment and the denial of such protest
by the CIR.
(ii) Prescriptive periods
Collections with assessments
FIVE YEARS after the assessment becomes final,
executory, and demandable.
Collections without assessments
 In case of false or fraudulent return with intent to
evade tax or of failure to file a return, collection
without assessment (or assessment) may be made
within 10 years from discovery of falsity, fraud or
omission. (Sec. 222(a), NIRC)
o An assessment may also be made which
carries its own 5-year prescriptive period
to collect.
 Collections without assessment may be made
within the period for making an assessment (3
years from the required date of filing or actual filing,
whichever is later) (See Sec. 203, NIRC)
Waiver of prescriptive period
If tax was assessed within the different period agreed
upon by the CIR and the taxpayer, it may be collected by
distraint or levy or by a proceeding in court within the
period agreed upon in writing before the expiration of
the 5-yr period.(Sec. 222d, NIRC)
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(iii) Distraint of Personal Property
Distraint – remedy enforced on the goods, chattels, or
effects, and other personal property of whatever
character including stocks and other securities, debts,
credits, bank accounts, and interest in and rights to
personal property (Sec. 205(a), NIRC)
Kinds of Distraint:
(1) Constructive Distraint
(2) Actual Distraint
Constructive Distraint – may be placed by the CIR or
any taxpayer to safeguard the interest of the
Government (Sec. 206, NIRC). Delinquency of the
taxpayer is not necessary.
Grounds for Constructive Distraint:
When in the opinion of the CIR,
(1) the taxpayer is retiring from any business subject to
tax; or
(2) the taxpayer is intending to leave the Philippines;
or
(3) the taxpayer is intending to remove his property
from the Philippines or to hide or conceal his
property; or
(4) the taxpayer is planning to perform any act tending
to obstruct the proceedings for collecting the tax
due or which may be due from him (Sec. 206,
NIRC)
How constructive distraint is effected:
(1) Signing of receipt by the taxpayer
By requiring the taxpayer or any person having
possession or control of such property to sign a
receipt covering the property distrained and
obligate himself to preserve the same intact and
unaltered and not to dispose of the same in any
manner whatever, without the express authority of
the CIR
(2) If the taxpayer refuses to sign the receipt: signing
of receipt by revenue officer in the presence of two
witnesses
In case the taxpayer or the person having the
possession and control of the property refuses or
fails to sign the receipt, the revenue officer
effecting the constructive distraint shall proceed to
prepare a list of such property and, in the presence
of two (2) witnesses, leave a copy thereof in the
premises where the property distrained is located
(Sec. 206, NIRC)
Note: In constructive distraint, the property is not
actually confiscated or seized by the revenue
officer.
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Actual distraint - placed on a person who owes any
delinquent tax or delinquent revenue (see Sec. 207,
NIRC); involves actual seizure of the property
Garnishment – taking of personal properties, usually
cash or sums of money, owned by a delinquent taxpayer
which is in the possession of a third party
Distraint of intangible properties (Sec. 208, NIRC)
(1) Stocks and other securities: by serving a copy of
the warrants of distraint on the taxpayer, AND upon
the president, manager, treasurer or other
responsible officer of the corporation, company or
association which issued the stocks or securities.
(2) Debts and credits: by leaving with the person owing
the debts or having in his possession or under his
control such credits, or with his agent, a copy of the
warrant of distraint. The person owing the debts
shall then pay the CIR instead of his creditor
(taxpayer) on the strength of such warrant.
(3) Bank accounts: by serving a warrant of
garnishment upon the taxpayer AND upon the
president, manager, treasurer or other responsible
officer of the bank. The bank shall then turn over to
the CIR so much of the bank accounts as may be
sufficient to satisfy the claim of the Government.
(NOTE: distraint of bank accounts is called
GARNISHMENT)
Summary remedy of distraint of personal property
(1) Purchase by the government at sale upon distraint
(2) Report of sale to the Bureau of Internal Revenue
(BIR)
(3) Constructive distraint to protect the interest of the
government
Procedure for Actual Distraint
(1) Commencement of Distraint Proceedings
Who issues the warrant of distraint:
(a) CIR or his duly authorized representative –
where the amount involved is more than P1M
(b) Revenue District Officer – where the amount
involved is P1M or less (Sec. 207(A), NIRC)
(2) Service of Warrant of Distraint
How actual distraint is effected:
The proper officer shall seize and distraint any
goods, chattels, or effects, and the personal
property, including stocks and other securities,
debts, credits, bank accounts and interests in and
rights to personal property of the taxpayer in
sufficient quantity to satisfy the tax, expenses of
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TAXATION LAW
distraint and the cost of the subsequent sale. (Sec.
207(A), NIRC)
(3) Report on the Distraint
A report shall be submitted by the distraining
officer to the Revenue District Officer, and to the
Revenue Regional Director.
(4) Power of the CIR or proper officer to lift the order of
distraint
The taxpayer may request that the warrant be lifted.
The CIR may, in his discretion, allow the lifting of
the order of distraint. He may ask for a bond as a
condition for the cancellation of the warrant. (Sec.
207(A), NIRC)
(5) Notice of Sale of Distrained Properties
 The Revenue District Officer or his duly
authorized representative (not the officer who
served the warrant), shall cause a notification
of the public sale to be posted in not less than
two (2) public places in the municipality or city
(one of which is the Office of the Mayor) where
the distraint was made.
 The notice shall specify the time and place of
the sale. The time of sale shall not be less than
twenty (20) days after notice to the owner and
the publication or posting of such notice. (Sec.
209, NIRC)
(6) Sale at Public Auction
(a) At the time of the public sale, the revenue
officer shall sell the goods, chattels, or effects,
or other personal property, including stocks
and other securities so distrained at a PUBLIC
AUCTION, to the HIGHEST BIDDER for CASH or
with the approval of the CIR, through a DULY
LICENSED COMMODITY or STOCK EXCHANGES.
(b) Any residue over and above what is required to
pay the entire claim, including expenses of
sale and distraint, shall be RETURNED to the
owner of the property sold. Expenses shall be
limited to actual expenses of SEIZURE and
PRESERVATION of the property pending the
sale, no charge shall be imposed for the
services of the local internal revenue officer or
his deputy. (Sec. 209, NIRC)
(c) If the proceeds from the sale of the distrained
properties are not sufficient to satisfy the tax
delinquency, the CIR or his duly authorized
representative shall within thirty (30) days
after execution of the distraint, proceed with
the levy on the taxpayer‘s real property. (Sec.
207(B), NIRC)
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(7) Release of the Properties from Distraint
If at any time prior to the consummation of the sale
all proper charges are paid to the officer
conducting the sale, the goods or effects distrained
shall be restored to the owner. (Sec. 210, NIRC)
(8) Purchase by the government at sale upon distraint
If the amount offered by the highest bidder is not
equal to the amount of the tax or is very much less
than the actual market value of the articles offered
for sale, the CIR or his deputy may purchase the
same in behalf of the National Government for the
amount of taxes, penalties and costs due. The
property so purchased may be resold by the CIR or
his deputy. (Sec. 212, NIRC)
(9) Report of sale to BIR
Within two (2) days after the sale, the officer
making the same shall make a report of his
proceedings in writing to the CIR and shall himself
preserve a copy of such report as an official record.
(Sec. 211, NIRC)
(iv) Summary remedy of levy on real property
(1) Release of the Properties from Distraint
If at any time prior to the consummation of the sale
all proper charges are paid to the officer
conducting the sale, the goods or effects distrained
shall be restored to the owner. (Sec. 210, NIRC)
(2) Purchase by the government at sale upon distraint
If the amount offered by the highest bidder is not
equal to the amount of the tax or is very much less
than the actual market value of the articles offered
for sale, the CIR or his deputy may purchase the
same in behalf of the National Government for the
amount of taxes, penalties and costs due. The
property so purchased may be resold by the CIR or
his deputy. (Sec. 212, NIRC)
(3) Report of sale to BIR
Within two (2) days after the sale, the officer
making the same shall make a report of his
proceedings in writing to the CIR and shall himself
preserve a copy of such report as an official record.
(Sec. 211, NIRC)
(4) Forfeiture in Favor of the Government
If there is no bidder for the real property OR if the
highest bid is not sufficient to pay the taxes,
penalties and costs, the IR Officer conducting the
sale shall declare the property FORFEITED to the
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TAXATION LAW
GOVERNMENT in satisfaction of the claim. (Sec.
215, NIRC)
(5) Redemption of Property Sold
 At any time before the day fixed for the sale,
the taxpayer may discontinue all proceeding
by paying the taxes, penalties and interest.
(Sec. 213, NIRC)
 Within one (1) year from the date of sale, the
taxpayer or anyone for him, may pay to the
Revenue District Officer the total amount of
the following: public taxes + penalties +
interest from the date of delinquency to the
date of sale + interest on said purchase price
at the rate of fifteen percent (15%) per annum
from the date of sale to the date of redemption.
(Sec. 214, NIRC)
Note: If the property was forfeited in favor of the
government, the redemption price shall include only the
taxes, penalties and interest plus costs of sale (no
interest on purchase price since the Government did not
―purchase‖ the property anyway, it was forfeited)
Note: The taxpayer-owner shall not be deprived of
possession of the said property and shall be entitled to
rents and other income until the expiration of the period
for redemption (Sec. 214, NIRC)
(6) Final Deed of Purchaser
After the period of redemption, a final deed of sale is
issued in favor of the purchaser.
(v) Forfeiture to government for want of bidder
Forfeiture implies a divestiture of property without
compensation in consequence of a default or offense.
The effect of forfeiture is to transfer the title of the
specific thing from the owner to the government. (De
Leon, NIRC Annotated, p. 412)
Instances when forfeiture is appropriate
(1) All chattels, machinery, and removable fixtures of
any sort used in the unlicensed production of
articles (Sec. 268, NIRC)
(2) Dies and other equipment used for the printing or
making of any internal revenue stamp, label or tag
which is in imitation of or purports to be a lawful
stamp, label or tag. (Sec. 268, NIRC)
(3) Liquor or tobacco shipped under a false name or
brand (Sec. 262, NIRC)
Remedy of enforcement of forfeitures
UP COLLEGE OF LAW TAXATION 2
(1) Forfeiture of chattels and removable fixtures:
enforced by the seizure, sale or destruction of the
specific forfeited property.
(2) Forfeiture of real property: enforced by a judgment
of condemnation and sale in a legal action or
proceeding civil or criminal as the case may require
(Sec. 224, NIRC)
Resale of real estate taken for taxes (RR No. 22-2002)
(1) All acquired/forfeited properties transferred in the
name of the Republic of the Philippines, having
passed the one-year redemption period, shall be
converted into cash from the date of acquisition or
forfeiture.
(2) The sale of acquired/forfeited real properties shall
be by sealed bids in a public auction to be
witnessed by a representative of the COA.
(3) The Notice of Sale of the acquired real properties
shall be published once a week for two (2)
consecutive weeks in a newspaper of general
circulation in the Philippines which must be
completed at least 20 days prior to the date of
such public auction.
(4) Unless the CIR provides otherwise, the Minimum
Bid Price/Floor Price shall be the latest fair market
value as determined by the CIR or the fair market
value shown in the latest tax declaration issued by
the provincial, city or municipal assessor,
whichever is higher, pursuant to Sec. 6(E) of the Tax
Code.
(5) Anyone could bid except foreign nationals,
corporate or otherwise, and those qualified under
existing laws, rules and regulations, including
employees of the Bureau of Internal Revenue.
(6) Bidders shall be required to post a bond in cash or
manager‘s check in an amount representing 10%
of the minimum bid price at least one day before
the scheduled public auction.
(7) Unless the CIR allows extension of time to pay, in
meritorious cases, the winning bidder shall pay the
full amount of his bid cash or manager‘s check
within two days after receipt of notice of award.
(8) All taxes and expenses relative to the issuance of
title shall be borne by the winning bidder.
(9) The winning bidder shall be responsible at his own
expense for the ejectment of squatters and/or
occupants, if any, of the auctioned property.
(10) Negotiated or private sale shall be resorted to as a
consequence of failed public bidding for two
consecutive times.
(11) Negotiated or private sale shall in all cases be
approved by the Secretary of Finance.
(12) Public auction sale shall be approved by the CIR or
his authorized representative.
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TAXATION LAW
(13) The Government reserves the right to reject or
cancel any or all bids.
When property to be sold or destroyed
(1) Forfeited chattels and removable fixtures: sold in
the same manner and under the same conditions
as the public notice and the time and manner of
sale as are prescribed for sales of personal
property distrained for the non-payment of taxes
(2) Distilled spirits, liquors, cigars, cigarettes, other
manufactured products of tobacco and all
apparatus used in or about the illicit production of
such articles: destroyed by the order of the CIR
when the sale or use would be injurious to public
health pr prejudicial to the enforcement of the law
(3) All other articles subject to excise tax
manufactured or removed in violation of the Code,
dies for the printing or making of internal revenue
stamps and labels: sold or destroyed in the
discretion of the CIR
(4) Forfeited property shall not be destroyed until at
least 20 days after seizure. (Sec. 225, NIRC)
Disposition of funds recovered in legal proceedings or
obtained from forfeiture
All judgments and monies recovered and received for
taxes, costs, forfeitures, fines and penalties shall be
paid to the CIR or his authorized deputies as the taxes
themselves are required to be paid, and except as
specially provided, shall be accounted for and dealt
within the same way. (Sec. 226, NIRC)
(vi) Further distraint or levy
The remedy by distraint of personal property and levy on
realty may be repeated if necessary until the full
amount due, including all expenses, is collected. (Sec.
217, NIRC)
(vii) Tax lien
Tax liens
(1) When a taxpayer neglects or refuses to pay his
internal revenue tax liability after demand, the
amount so demanded shall be a lien in favor of the
government from the time the assessment was
made by the CIR until paid with interest, penalties,
and costs that may accrue in addition thereto upon
ALL PROPERTY AND RIGHTS TO PROPERTY
BELONGING to the taxpayer.
(2) HOWEVER, the lien shall not be valid against any
mortgagee, purchaser or judgment creditor until
NOTICE of such lien shall be filed by the CIR in the
Office of the Register of Deeds of the province or
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city where the property of the taxpayer is situated
or located. (Sec. 219, NIRC)
Seizure under forfeiture vs. Seizure to enforce a tax lien
In the former all the proceeds derived from the sale of
the thing forfeited are turned over to the Collector of
Internal Revenue; in the latter, the residue of such
proceeds over and above what is required to pay the tax
sought to be realized, including expenses, is returned to
the owner of the property. (BPI v. Trinidad)
(viii) Compromise
Authority of the CIR to compromise and abate taxes
Compromise – to reduce the amount of tax payable
Grounds for a compromise
The CIR may compromise the payment of any internal
revenue tax in the following cases:
(1) A REASONABLE DOUBT as to the validity of the
claim against the taxpayer exists; or
(2) The financial position of the taxpayer demonstrates
a clear inability to pay the assessed tax.
(FINANCIAL INCAPACITY)
Limits of the CIR‘s power to compromise:
(1) For cases of financial incapacity: a minimum
compromise rate equivalent to ten percent (10%)
of the basic assessed tax
(2) For other cases: a minimum compromise rate
equivalent to forty percent (40%) of the basic
assessed tax
Note: When the basic tax involved exceeds One Million
Pesos (P1,000,000), or where the settlement offered is
less than the prescribed minimum rates, the
compromise must be approved by the National
Evaluation Board (composed of the CIR and 4 Deputy
Commissioners)
Abatement - to cancel the entire amount of tax payable
When the CIR may abate or cancel a tax liability:
(1) The tax or any portion thereof appears to be
UNJUSTLY or EXCESSIVELY ASSESSED; or
(2) The ADMINISTRATION and COLLECTION COSTS do
not justify the collection of the amount due. (e.g.,
when the costs of collection are greater than the
amount of tax due)
(ix) Civil and criminal action
Civil Action
Two ways by which civil liability is enforced:
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TAXATION LAW
(1) By filing a civil case for the collection of sum of
money with the proper regular court; and
(2) By filing an answer to the petition for review filed by
the taxpayer with the Court of Tax Appeals.
(Mamalateo, 2008)
Criminal Action
Any person convicted of a crime under the Code shall:
(1) Be liable for the payment of the tax, and
(2) Be subject to the penalties imposed under the
Code. (Sec. 253(A), NIRC)
Form and Mode of Proceeding:
Civil and criminal action and proceedings instituted in
behalf of the Government under the authority of this
Code or other law enforced by the BIR:
(1) Shall be BROUGHT IN THE NAME OF THE
GOVERNMENT of the Philippines; and
(2) Shall be CONDUCTED BY LEGAL OFFICERS OF THE
BIR
(3) Shall be filed in court with the approval of the CIR.
(Sec. 220, NIRC)
Criminal action as a collection remedy
The judgment in the criminal case shall impose the
penalty; and order payment of the taxes subject of the
criminal case as finally decided by the CIR. (Sec. 205,
NIRC)
Assessment not necessary before filing a criminal
charge for tax evasion
An assessment is not necessary before a criminal
charge can be filed. The criminal charge need only be
proved by a prima facie showing of a wilful attempt to
file taxes, such as failure to file a required tax return.
[CIR v. Pascor Realty, (1999)]
Suit to recover tax based on false or fraudulent returns
A proceeding in court for the collection of the tax
assessed may be filed without assessment at any time
within ten (10) years after the discovery of the falsity,
fraud or omission. Provided, that in a fraud assessment
which has become final and executor, the fact of fraud
shall be judicially taken cognizance of in the civil or
criminal action for the collection thereof. (Sec. 222,
NIRC)
False Return v. Fraudulent Return
A false returns is due to mistakes, carelessness or
ignorance and a fraudulent return is filed with intent to
evade taxes.
The fraud contemplated by law is actual and not
constructive, and must amount to intentional
UP COLLEGE OF LAW TAXATION 2 TAXATION LAW

wrongdoing with the sole object of avoiding the tax.

(Aznar v. CTA, 1974)
Payment of tax not defense
Payment of the tax due after a case has been filed shall
not constitute a valid defense in any prosecution for
violation of the provisions under the Code. (Sec. 253(A),
NIRC)
Liability of person who aids or abets:
Any person who wilfully aids or abets in the commission
of a crime penalized under the Code or who causes the
commission of any such offense by another shall be
liable in the same manner as the principal. (Sec.
253(B), NIRC)
Rates of Surcharge (25% or 50%)
25% of the amount due in the following cases:
(1) Failure to file any return and pay the tax due on
the date prescribed; or
(2) Filing a return with an internal revenue officer
other than those with whom the return is
required to be filed unless the CIR authorizes
otherwise; or
(3) Failure to pay the deficiency tax within the time
prescribed for its payment in the notice of
assessment; or
(4) Failure to pay the full or part of the amount of
tax due on or before the date prescribed for its
payment (Sec. 246 (A), NIRC)

50% of the tax or of the deficiency tax in the following

Offender Penalty cases:
(1) Willful neglect to file the return within the
Not a citizen of the he shall be deported period prescribed; or
Philippines immediately after serving the (2) A false or fraudulent return is willfully made
sentence
(Sec. 248(B), NIRC)
A public officer or the maximum penalty
employee prescribed for the offense shall
be imposed on him Prima facie evidence of a false or fraudulent return:
shall be dismissed from public Substantial underdeclaration of taxable sales, receipts
office, and perpetually or income, or a substantial overstatement of deductions.
disqualified from holding any Failure to report sales, receipts or income in an amount
public office, to vote, and to exceeding thirty percent (30%) of that declared per
participate in any election return, and a claim ofdeductions in an amount
CPA his license shall be exceeding (30%) of actual deductions, shall render the
automatically revoked or taxpayer liable for substantial underdeclaration or for
cancelled once he is convicted overstatement. (Sec. 248(B), NIRC)
Corporations, imposed on the partner,
associations, president, general manager,
partnerships etc. branch manager, treasurer,
(ii) Interest
officer-in-charge and
employees responsible for the In General
violation (Sec. 253, NIRC) 20% per annum on the unpaid amount of tax, interest
at the rate of twenty percent (20%) per annum from the
Minimum amount of fine: date prescribed for payment until the amount is fully
The fines imposed for any violation of the Code shall not paid. (Sec. 249(A), NIRC)
be lower than the fines imposed herein or twice the
amount of taxes, interests and surcharges due from the Deficiency Interest
taxpayer, whichever is higher. (Sec. 253, NIRC) 20% per annum on any deficiency in the tax due from
the date prescribed for its payment until the full
Prescriptive period for criminal action: payment thereof. (Sec. 249(B), NIRC)
All violations of any provision of the Code shall
prescribe after five (5) years. (Sec. 281, NIRC) Delinquency interest
20% per annum on the unpaid amount in case of failure
to pay:
3. Statutory offenses and penalties (a) The amount of the tax due on any return required to
a. Civil Penalties be filed; or
(b) The amount of the tax due for which no return is
(i) Surcharge – penalty imposed in addition to the tax required; or
required to be paid (Sec. 248(A), NIRC)
PAGE 196 OF 275
UP COLLEGE OF LAW TAXATION 2
(c) A deficiency tax, or any surcharge or interest
thereon on the due date appearing in the letter of
demand and assessment notice (Sec. 249(C),
NIRC)
Interest on extended payment
20% per annum on the tax or deficiency tax or any part
thereof unpaid from the date of notice and demand
until it is paid if any person required to pay the tax is:
(a) Qualified and elects to pay the tax on installment
but fails to pay the tax or any installment or any
part of such amount or installment or before the
date prescribed for its payment; or
(b) Where the CIR has authorized an extension of time
within which to pay a tax or a deficiency tax or any
part thereof (249(D), NIRC)
Penalties Imposed on Public Officers(Sec. 269, NIRC)
The law imposes a fine of not less than P50,000 nor
more than P100,000 or imprisonment for not less than
10 years nor more than fifteen years on every official,
agent or employee of the BIR or of any agency or
employee of the Government charged with the
enforcement of the Tax Code, who shall: (CONED- FRAP)
(a) Extort or willfully oppress under color of law;
(b) knowingly Demand other or greater sums than are
authorized by law or receive any fee, compensation
or reward, except as by law prescribed, for the
performance of any duty;
(c) willfully Neglect to give receipts, as by law required,
for any sums collected in the performance of duty,
or who willfully
neglect to perform any of the duties enjoined by
law;
(d) Conspire or collude with another or others to
defraud the revenues or otherwise violate the law;
(e) willfully make Opportunity for any person to
defraud the revenues, or who do or omit to do any
act with intent to enable any other person to
defraud the revenues;
(f) negligently or by design Permit the violation of the
law by any other person;
(g) make or sign any False certificate or return in any
case where the law requires the making by them of
such entry, certificate or return;
(h) having knowledge or information of a violation of
any provision of the Code or of any fraud
committed on the revenues collectible by the BIR,
fail to Report such knowledge or information to
their superior officer, or to report as otherwise
required by law; or
(i) without the authority of law, demand or Accept or
attempt to collect, directly or indirectly, as payment
PAGE 197 OF 275
TAXATION LAW
or otherwise, any sum of money or other thing of
value for the compromise, adjustment or
settlement of any charge or complaint for any
violation or alleged violation of law.
Informer‘s Reward[Sec. 282, NIRC]
To whom given:
Persons instrumental in the discovery of violations of
the NIRC and in discovery and seizure of smuggled
goods.
Amount of reward:
10% of the revenues, surcharges or fees recovered
and/or fine/penalty imposed, or P1,000,000,
whichever is LOWER.
The same amount shall be given if the offender offered
to compromise and such offer has been accepted and
collected by the CIR.
If no revenue, surcharge or fees be actually collected,
such person is not entitled to a reward.
For discovery and seizure of SMUGGLED GOODS: The
cash reward is 10% of the FMV of the smuggled and
confiscated goods, or P1,000,000, whichever is LOWER.
4. Compromise and Abatement of Taxes (See also notes
above regarding compromise)
Cases which may be compromised: (Sec. 2, R.R. 30-
2002)
(1) Delinquent accounts
(2) Cases under administrative protest after issuance
of the Final Assessment Notice to the taxpayer
which are still pending in the Regional Offices,
Revenue District Offices, Legal Service, Large
Taxpayer Service (LTS), Collection Service,
Enforcement Service and other offices in the
National Office
(3) Civil tax cases being disputed before the courts
(4) Collection cases filed in courts
(5) Criminal violations, other than those already filed
in court or those involving criminal tax fraud
Cases which cannot be compromised: (Sec. 2, R.R. 30-
2002)
(1) Withholding tax cases, unless the applicant-
taxpayer invokes provisions of law that cast doubt
on the taxpayer's obligation to withhold
(2) Criminal tax fraud cases confirmed as such by the
CIR or his duly authorized representative
(3) Criminal violations already filed in court
UP COLLEGE OF LAW TAXATION 2 TAXATION LAW

(4) Delinquent accounts with duly approved schedule

of installment payments
(5) Cases where final reports of reinvestigation ore
reconsideration have been issued resulting to
reduction in the original assessment and the
taxpayer is agreeable to such decision by signing
the required agreement form for the purpose. On
the other hand, other protested cases shall be
handled by the Regional Evaluation Board (REB) or
the National Evaluation Board (NEB) on a case to
case basis
(6) Cases which become final and executory after final
judgment of a court, where compromise is
requested on the ground of doubtful validity of the
assessment; and
(7) Estate tax cases where compromise is requested
on the ground of financial incapacity of the
taxpayer

Compromise penalty v. Compromise

Compromise penalty – an amount of money paid by a
taxpayer to compromise a tax violation that he has
committed, which may be the subject of criminal
prosecution. The basis of the amount paid is the gross
sales or receipts during the year or the tax due.

Compromise – an amount of money paid by the

taxpayer to settle his civil liability for tax assessed by
the government. The basis of the amount paid is the
basic tax assessed. (Mamalateo, 2008)

PAGE 198 OF 275

UP COLLEGE OF LAW TAXATION 2
V. Organization and
Function of the Bureau of
Internal Revenue
A. POWERS OF THE CIR
(A) To make assessments and prescribe additional
requirements for tax administration and
enforcement (Sec. 6, NIRC)
(1) Examination of Returns and Determination of
Tax Due
(a) After a return has been filed, the CIR may
authorize the examination of any taxpayer
and the assessment of the correct amount
of tax.
(b) Failure to file a return shall not prevent the
CIR from authorizing the examination.
(2) Best evidence obtainable
The CIR shall assess the proper tax on the best
evidence obtainable when:
 The taxpayer fails to submit the required
returns, statements reports and other
documents
 There is a reason to believe that any such
report is false, incomplete or erroneous
(3) Conduct inventory-taking, survaillance and to
prescribe presumptive gross sales and
receipts
 Inventory-taking – at any time during the
taxable year, for the purpose of
determining the correct tax liabilities.
 Surveillance – done if there is reason to
believe that the taxpayer is not declaring
his correct income, sales or receipts for
tax purposes.
 Prescribe presumptive gross sales and
receipts if:
o It is found that the taxpayer has
failed to issue receipts and
invoices, or
o When there is reason to believe
that the books of accounts or
other records do not correctly
reflect the declarations made by
the taxpayer
(4) Terminate Taxable Period
Terminating taxable period and ordering the
immediate payment of the tax for the
terminated period and any remaining tax that
is unpaid, when the taxpayer is:
PAGE 199 OF 275
TAXATION LAW
 Retiring from business subject to tax, or
 Intending to leave the Philippines or to
remove his property therefrom or to hide
or conceal his property;
 Performing any act tending to obstruct the
proceedings for the collection of the tax
for the past or current quarter or year or to
render the same totally or partially
ineffective unless such proceedings are
begun immediately
(5) Prescribe Real Property Values
 Dividing the Philippines into different
zones or areas, and determining the FMV
of real properties in each zone or area,
upon consultation with competent
appraisers from private and public sectors.
 For the purpose of computing any internal
revenue tax, the value of the property shall
be WHICHEVER IS HIGHER OF:
o The FMV as determined by the
CIR, or
o The FMV as shown in the
schedule of values of the
provincial and city assessors
(6) Inquire into Bank Deposit Accounts
Notwithstanding any contrary provision of R.A.
1405 (Bank Secrecy Law) and other general or
special laws, the CIR is authorized to inquire
into bank deposits of:
 A decedent to determine his gross estate,
and
 Any taxpayer who has filed an application
for compromise of tax liability by reason of
financial incapacity: the taxpayer must
waive in writing his privilege under R.A.
1405 and other relevant laws, before the
CIR may inquire into his bank accounts.
(7) Accredit and register Tax Agents
Accrediting and registering tax agents (may be
individuals or general professional
partnerships) based on the following criteria:
 Professional competence
 Integrity
 Moral fitness
(8) Prescribe additional procedural or
documentary requirements
In relation to the manner of compliance of any
requirement in connection with the submission
or preparation of financial statements
accompanying the tax returns.
(B) To obtain information and to summon, examine,
and take testimony of persons (Sec. 5, NIRC)
UP COLLEGE OF LAW TAXATION 2
(1) Examine Returns and Determine Tax due
Authorizing the examination of any taxpayer
and the assessment of the correct amount of
tax, WON a return has been filed by such
taxpayer.
(2) Access Letter
 Obtaining on a regular basis, from any
person other than the person whose tax
liability is subject to audit or
investigation, or from any office or officer
of the national and local governments,
government agencies or
instrumentalities, including BSP and
GOCCs;
 Any information such as, but not limited
to, costs and volumes of production,
receipts or sales and gross incomes of
taxpayers, and the names addresses,
and financial statements of corporations,
mutual fund companies, insurance
companies etc.
(C) Interpret Tax Laws and to Decide Tax cases
(1) Shall be under the exclusive and original
jurisdiction of the CIR, subject to review by the
Secretary of Finance.
(2) A ruling by the BIR Commissioner shall be
presumed valid unless modified, reversed or
superseded by the Secretary of Finance.
(3) A taxpayer who receives an adverse ruling from
the CIR may, within thirty (30) days from the
date of receipt of such ruling, seek its review
by the Secretary of Finance, either by
himself/itself or though his/its duly authorized
representative.
(4) A reversal or modification of the BIR ruling
shall terminate its effectivity upon
(9) The receipt by the taxpayer or the BIR of
written notice of reversal or modification,
whichever came earlier.
**The Secretary of Finance may now also review the
rulings MOTU PROPRIO. (DOF ORDER 7-02)
B. ORGANIZATION AND FUNCTION OF THE
BIR
RULE-MAKING AUTHORITY OF THE SECRETARY OF
FINANCE
AUTHORITY OF SECRETARY OF FINANCE TO
PROMULGATE RULES AND REGULATIONS (Sec. 244,
NIRC)
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TAXATION LAW
The Secretary of Finance, upon recommendation of the
CIR, shall promulgate all needful rules and regulations
for effective enforcement of the provisions of the Code.
SPECIFIC PROVISIONS TO BE CONTAINED IN RULES
AND REGULATIONS (Sec. 245, NIRC)
(a) The time and manner in which Revenue Regional
Director shall canvass their respective Revenue
Regions for the purpose of discovering persons and
property liable to national internal revenue taxes,
and the manner in which their lists and records of
taxable persons and taxable objects shall be made
and kept;
(b) The forms of labels, brands or marks to be required
on goods subject to an excise tax, and the manner
in which the labelling, branding or marking shall be
effected;
(c) The conditions under which and the manner in
which goods intended for export, which if not
exported would be subject to an excise tax, shall be
labelled, branded or marked;
(d) The conditions to be observed by revenue officers
respecting the institutions and conduct of legal
actions and proceedings;
(e) The conditions under which goods intended for
storage in bonded warehouses shall be conveyed
thither, their manner of storage and the method of
keeping the entries and records in connection
therewith, also the books to be kept by Revenue
Inspectors and the reports to be made by them in
connection with their supervision of such houses;
(f) The conditions under which denatured alcohol may
be removed and dealt in, the character and
quantity of the denaturing material to be used, the
manner in which the process of denaturing shall be
effected, so as to render the alcohol suitably
denatured and unfit for oral intake, the bonds to be
given, the books and records to be kept, the entries
to be made therein, the reports to be made to the
CIR, and the signs to be displayed in the business
ort by the person for whom such denaturing is done
or by whom, such alcohol is dealt in;
(g) 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 of the same, the manner in which the
proper books, records, invoices and other papers
shall be kept and entries therein made by the
person subject to the tax, as well as the manner in
which licenses and stamps shall be gathered up
and returned after serving their purposes;
(h) The conditions to be observed by revenue officers
respecting the enforcement of Title III imposing a
tax on estate of a decedent, and other transfers
UP COLLEGE OF LAW TAXATION 2
mortis causa, as well as on gifts and such other
rules and regulations which the CIR may consider
suitable for the enforcement of the said Title III;
(i) The manner in which tax returns, information and
reports shall be prepared and reported and the tax
collected and paid, as well as the conditions under
which evidence of payment shall be furnished the
taxpayer, and the preparation and publication of
tax statistics;
(j) The manner in which internal revenue taxes, such
as income tax, including withholding tax, estate
and donor's taxes, value-added tax, other
percentage taxes, excise taxes and documentary
stamp taxes shall be paid through the collection
officers of the Bureau of Internal Revenue or
through duly authorized agent banks which are
hereby deputized to receive payments of such taxes
and the returns, papers and statements that may
be filed by the taxpayers in connection with the
payment of the tax:
Provided, however, That notwithstanding the other
provisions of this Code prescribing the place of
filing of returns and payment of taxes, the CIR may,
by rules and regulations, require that the tax
returns, papers and statements that may be filed
by the taxpayers in connection with the payment of
the tax.
Provided, however, That notwithstanding the other
provisions of this Code prescribing the place of
filing of returns and payment of taxes, the CIR may,
by rules and regulations require that the tax returns,
papers and statements and taxes of large
taxpayers be filed and paid, respectively, through
collection officers or through duly authorized agent
banks:
Provided, further, That the CIR can exercise this
power within six (6) years from the approval of
Republic Act No. 7646 or the completion of its
comprehensive computerization program,
whichever comes earlier:
Provided, finally, That separate venues for the
Luzon, Visayas and Mindanao areas may be
designated for the filing of tax returns and payment
of taxes by said large taxpayers.
For the purpose of this Section, 'large taxpayer' means
a taxpayer who satisfies any of the following criteria:
(1) Value-Added Tax (VAT) - Business establishment
with VAT paid or payable of at least P100,000 for
any quarter of the preceding taxable year;
PAGE 201 OF 275
TAXATION LAW
(2) Excise tax - Business establishment with excise tax
paid or payable of at least P1,000,000 for the
preceding taxable year;
(3) Corporate Income Tax - Business establishment
with annual income tax paid or payable of at least
P1,000,000 for the preceding taxable year; and
(4) Withholding tax - Business establishment with
withholding tax payment or remittance of at least
P1,000,000 for the preceding taxable year.
Provided, however, That the Secretary of Finance, upon
recommendation of the CIR, may modify or add to the
above criteria for determining a large taxpayer after
considering such factors as inflation, volume of
business, wage and employment levels, and similar
economic factors.
The penalties prescribed under Section 248 shall be
imposed on any violation of the rules and regulations
issued by the Secretary of Finance, upon
recommendation of the CIR, prescribing the place of
filing of returns and payments of taxes by large
taxpayers.
NON-RETROACTIVITY OF RULINGS (Sec. 246, NIRC)
General Rule: No retroactive application if the
revocation, modification or reversal of rules and
regulations, rulings or circulars will be prejudicial to the
taxpayers Exceptions:
(a) Where the taxpayer deliberately misstates or
omits material facts from his return or any
document required of him by the BIR;
(b) Where the facts subsequently gathered by the BIR
are materially different from the facts on which
the ruling is based; or
(c) Where the taxpayer acted in bad faith.
POWER OF THE CIR TO SUSPEND THE BUSINESS
OPERATION OF A TAXPAYER (Sec 115, NIRC)
The CIR or his authorized representative is empowered
to suspend the business operations and temporarily
close the business establishment of any person for any
of the following violations:
(a) IN THE CASE OF A VAT-REGISTERED PERSON. -
(i) Failure to issue receipts or invoices;
(ii) Failure to file a value-added tax return as
required under Section 114; or
(iii) Understatement of taxable sales or receipts by
thirty percent (30%) or more of his correct
taxable sales or receipts for the taxable
quarter.
(b) FAILURE OF ANY PERSON TO REGISTER AS
REQUIRED UNDER SECTION 236. -
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The temporary closure of the establishment shall be for

the duration of not less than five (5) days and shall be
lifted only upon compliance with whatever requirements
prescribed by the CIR in the closure order.

PAGE 202 OF 275

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Offense
Willful attempt to evade or defeat tax.
(Sec. 254)
Failure to File Return, Supply Correct and
Accurate Information, Pay Tax, Withhold
and Remit Tax and Refund Excess Taxes
Withheld on Compensation (Sec. 255)
Making false entries, records, or reports,
or using falsified or fake accountable
forms (Sec. 257)
Unlawful pursuit of business (Sec. 258)
Illegal Collection of Foreign Payments
(Sec. 259)
Unlawful Possession of Cigarette Paper
in Bobbins or Rolls, Etc. (Sec. 260)
Unlawful Use of Denatured Alcohol (Sec.
261)
Shipment or Removal of Liquor/Tobacco
Products under False Name or Brand or
as an Imitation of any Existing or Known
Product Name or Brand (Sec. 262)
TAXATION 2
Who is liable
Any person who willfully attempts in any
manner to evade or defeat any tax or the
payment thereof.
Any person required to pay any tax, make
a return, keep any record, or supply
correct and accurate information
Any person who attempts to make it
appear for any reason that he or another
has in fact filed a return or statement, or
actually files a return or statement and
subsequently withdraws the same return
or statement
Any financial officer or Independent CPA
engaged to examine and audit books of
accounts of taxpayers under Sec.232 (A)
and any person under his direction.
Any person who carries on any business
for which in annual registration fee is
imposed without paying the tax as
required by law.
A person engaged in the business of
distilling, rectifying, repacking,
compounding or manufacturing any
article subject to excise tax.
Any person who knowingly undertakes the
collection of foreign payments under Sec.
67 without a license or without complying
with the implementing rules and
regulations.
Any person, manufacturer or importer of
cigar or cigarettes
Any person who for the purpose of
manufacturing any beverage, uses
denatured alcohol or alcohol specially
denatured to be used for motive power or
withdrawn under bond for industrial uses
or alcohol knowingly misrepresented to
be denatured to be unfit for oral intake or
who knowingly sells or offers for sale such
preparations containing as an ingredient
such alcohol.
Any person who unlawfully recovers or
attempt to recover by distillation or other
process any denatured alcohol or who
knowingly sells or offers for sale,
conceals or otherwise disposes of alcohol
as recovered or redistilled
Any person who ships, transports or
removes
PAGE 203 OF 275
TAXATION LAW
Penalty
Fine: P30,000 - P100,000
AND
Imprisonment: 2-4 years
Plus other penalties
Fine: P10,000 or more
AND
Imprisonment:1-10 years
Plus other penalties
Fine - P10,000 - P20,000
AND
Imprisonment: 1-3 years
Plus other penalties
Fine - P50,000 - P100,000
AND
Imprisonment: 2-6 years
Fine: P5,000 - P20,000
AND
Imprisonment: 6 months-2 years
Fine: P30,000 - P50,000 AND
Imprisonment: 1-2 years
Fine: P20,000 - P50,000;
AND
Imprisonment: 1-2 years
Fine: P20,000 - P100,000; AND
Imprisonment - 6 years 1 day - 12
years
Fine: P20,000 - P100,000; AND
Imprisonment - 6 years 1 day - 12
years
Fine: P20,000 – P 100,000; AND
Imprisonment: 6 years 1 day - 12
years
UP COLLEGE OF LAW
Offense
Unlawful Possession or Removal of
Articles Subject to Excise Tax W/o
Payment of the Tax (Sec. 263)
Failure or Refusal to Issue Receipts or
Sales or Commercial Invoices, Violations
Related to the Printing of Such Receipts
or Invoices and Other Violations (Sec.
264)
Offenses Relating to Stamps (Sec. 265)
Failure to Obey Summons (Sec. 266)
Declaration under Penalties of Perjury
(Sec. 267)
Misdeclaration or Misrepresentation of
Manufacturers Subject to Excise Tax
(Sec. 268)
Use of Property in Unlicensed Business
or Use of Dies for Printing False Stamps,
Etc. (Sec. 268)
Illegal Storage or Removal of Goods
(Sec. 268)
Penalty for Second and Subsequent
Offenses (Sec. 274)
Violation of Other Provisions of the Tax
Code or Rules or Regulations in General
(Sec. 275)
Penalty for Selling, Transferring,
Encumbering or in any way disposing of
property Placed under Constructive
Distraint (Sec. 276)
TAXATION 2
Who is liable
Any person who owns or is found in
possession of these articles
Where:
Value of goods < P1,000
Value of goods < P50,000 but >P1000
Value of goods < P150,000, but
>P50,000
Value of goods > P150,000
Any person who, being required under
Section 237 to issue receipts or sales or
commercial invoices
Any person who being duly summoned to
appear to testify, or to appear and
produce books of accounts, records,
memoranda or other papers, or to furnish
information as required under the
pertinent provisions of this Code.
Any person who willfully files a
declaration, return or statement
containing information which is not true
and correct as to every material matter
Any manufacturer subject to excise tax
Any person who conducts an unlicensed
business or uses dies for printing false
stamps
Any person subject to excise tax who fails
to store the goods in proper place, or
removes goods without payment of excise
tax
Any person who violates any provision of
this Code or any rule or regulation
promulgated by the Department of
Finance for which no specific penalty is
provided by law
Any taxpayer, whose property has been
placed under constructive distraint
PAGE 204 OF 275
TAXATION LAW
Penalty
Fine: P1,000 - P2,000 AND
Imprisonment: 60-100 days
Fine: P10,000-P20,000 AND
Imprisonment: 2-4 years
Fine: P30,000 - P60,000 AND
Imprisonment: 4-6 years
Fine: P50,000 - P100,000 AND
Imprisonment: 10-12 years
Fine: P 1,000 - P50,000
AND
Imprisonment: 2- 4 years
Fine: P20,000 - P50,000 AND
Imprisonment: 4-8 years
Fine: P 5,000 - 10,000;
AND
Imprisonment:1-2 years
Penalty for Perjury under the
Revised Penal Code
Summary cancellation or
withdrawal of the permit to
engage in business as a
manufacturer of articles subject
to excise tax
Forfeiture of property used
Forfeiture of goods
Maximum of the penalty
prescribed for the offense
Fine: P1000 or less
OR
Imprisonment: 6 months or less
OR Both
Fine: at least P5,000 AND
at least twice the value of the
property
OR
UP COLLEGE OF LAW
Offense
Failure to Surrender Property Placed
under Distraint and Levy (Sec. 277)
Procuring Unlawful Divulgence of Trade
Secrets (Sec. 278)
TAXATION 2 TAXATION LAW
Who is liable Penalty
Imprisonment: 2 years 1 day - 4
years
OR Both
Any person having in his possession or Fine: P 5,000 or more
under his control any property or rights to OR
property, upon which a warrant of Imprisonment: 6 months 1 day - 2
constructive distraint or actual distraint years,
and levy has been issued OR Both
Any person procures an officer or Fine: not more than P 2,000
employee of the BIR to divulge any OR
confidential information regarding the Imprisonment: 6 months - 5 years
business, income or inheritance of any OR Both
taxpayer, knowledge of which was
acquired by him in the discharge of his
official duties, and which it is unlawful for
him to reveal, and any person who
publishes or prints in any manner
whatever, not provided by law, any
income, profit, loss or expenditure
appearing in any income tax return
PAGE 205 OF 275
UP COLLEGE OF LAW TAXATION 2 TAXATION LAW

Flowchart I: Taxpayer’s Remedies from Tax Assessment-NIRC

START

Commissioner or Revenue Officer (RO)

RO sends notice Taxpayer
Regional Director conducts Audit w/in 120
of informal responds w/in 15
Issues Letter of days. If 120 days lapse
conference days
Authority (LA) LA is revalidated,

Regional
Send Formal Letter Assessment
Is response w/n Taxpayer
of demand and Final NO to Division issues a
15 days? Is it responds w/in
Assessment Notice either Preliminary
meritorious? 15 days
(FAN) is issued Assessment Notice
(PAN)
Yes to ASSESSMENT
both ENDS

File protest w/n 30 Protest made w/in

days from receipt of 30 days?
YES to Commissioner decides on
assessment. Submit Supporting papers
both protest within 180 days
supporting papers wi/in submitted w/in 60
60 days from protest days?

Assessment becomes
NO to
Final, Warrant of Distraint
either
& Levy Issued

Decision Commissioner
YES favorable to YES decides w/n
taxpayer? 180 days?

ASSESSMENT
ENDS NO NO

Appeal to the Court of Tax Appeal to the Court of Tax

appeals within 30 days OR file Appeals w/in 30 days after
motion for reconsideration lapse of 180 days OR wait for
within 30 days. MR tolls 30 a decision by the BIR
day period to appeal to CTA (Lascona Land oil vs. CIR)

If MR is denied, appeal to
the CTA within remainder
of the 30 days

Assessment
CTA decides on Appeal made becomes Final,
YES NO
the appeal on time? Warrant of Distraint
& Levy Issued

If CTA decision is unfavorable to

taxpayer, file MR with CTA Appeal to
END
Division w/in 15 days. Appeal to Supreme Court
CTA en banc if MR denied.

PAGE 206 OF 275

UP COLLEGE OF LAW
Flowchart II: Procedures for Distraint and Levy-NIRC
START
Person owing any
delinquent tax to
fails to pay w/in
the time required
RDO posts notice in at least 2 public
places in the municipality/city where
the distraint is made. One place of
posting must be at the mayor’s office.
Time of sale shall not be less than 20
days after the notice (Sec. 209)
Goods shall be restored to owner,
if charges are paid (Sec. 210)
W/in 5 days after sale,
distraining officer shall enter
return of proceedings in the
records of RCO, RDO and
RRD (Sec. 213)
Real property may be levied
on before, simultaneously, or
after the distraint of personal
property (207 (B))
W/n 10 days after receipt of the
warrant, levying officer shall
report to the Commissioner who
shall have the authority to lift the
warrant of levy (Sec. 207 B)
W/n 1 year from forfeiture,
the taxpayer, may redeem
said property by paying full
amount of the taxes and
charges (Sec. 215)
The Commissioner may,
after 20 days notice, sell
property at public auction
or at private sale with
approval of the SoF.
Proceeds shall be
deposited with the National
Treasury (Sec. 216)
TAXATION 2 TAXATION LAW
RCO - Revenue Collection Officer RDO - Revenue District officer
RRD - Revenue Regional Director LGU- Local Government Unit
Commissioner seizes sufficient
Delinquent tax personal property to satisfy the
Yes
more than 1M? tax, charge & expenses of seizure
(Sec. 207 (A))
RDO seizes sufficient
personal property to satisfy
No
the tax, charges & expenses
Property may be resold and
of seizure (Sec. 207 (A))
the net proceeds shall be
remitted to the National
Treasury as internal revenue.
Distraining Officer accounts for (Sec. 212)
the goods distrained (Sec. 208)
Bid less than
Officer Commissioner may purchase
amount of tax/
conducts Yes property for the National
FMV of goods
public auction Government (Sec. 212)
distrained?
No, bid just right
W/in 2 days after Excess of proceeds over the Officer sells the goods to the
the sale, officer entire claim, shall be returned highest bidder for cash or
shall report to the to the owner. No charge shall with the Commissioner’s
Commissioner. be imposed for the services of approval, through commodity/
(Sec. 211) the officer (Sec. 209) stock exchanges. (Sec. 209)
Internal revenue officer,
Levy shall be affected by writing upon said certificate a
designated by the Commissioner,
description of the property. Notice of the levy shall be
shall prepare a certificate with the
served upon the Register of Deeds of LGU where the
force of a nationwide legal
property is located and upon the owner (Sec. 207 B)
execution (Sec. 207 B)
W/n 20 days after levy, officer shall post
notice at the main entrance of the Sale shall be held at the
municipal/city hall & in public place in the main entrance of the
barrio/district where the real estate lies for municipal/city hall, or on the
at least 30 days by AND publish it once a premises of the levied
week for 3 weeks. Owner may prevent property. (Sec. 213)
sale by paying all charges (Sec. 213)
W/n 2 days, he shall make a return
Officer conducting the
of the forfeiture. Register of Deeds, No bidder or
sale shall forfeit the
upon registration of forfeiture shall Yes highest bid
property to the
transfer title to the Government w/o insufficient?
Government (Sec. 215)
court order. (Sec. 215)
No, bid ok
W/n 1 year from sale, the W/n 5 days after the sale, Excess of proceeds
owner may redeem, by paying levying officer shall enter of the sale over claim
to the RDO the amount of the return of the proceedings and cost of sale shall
taxes, penalties, and interest upon the records of the RCO, be turned over to the
thereon from the date of RDO and RRD (Sec. 213) owner (Sec. 213)
delinquency to the date of sale,
and 15% per annum interest on
purchase price from the date
Owner shall not be
of purchase to the date of Levy and distraint
deprived of the
redemption. (Sec. 214) may be repeated until
possession and shall
the full amount due,
be entitled to the
and all expenses are
fruits until 1 year
collected. (Sec. 217)
expires (Sec. 214)
PAGE 207 OF 275
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PAGE 208 OF 275

UP COLLEGE OF LAW TAXATION 2
VI. Local Government
Code of 1991, As Amended
A. LOCAL GOVERNMENT TAXATION
1. Fundamental principles (UEPIP)
a. Taxation shall be Uniform in each local government
unit;
b. Taxes, fees, charges and other impositions shall:
(EPUC)
 be Equitable and based as far as
practicable on the taxpayer's ability to
pay;
 be levied and collected only for Public
purposes;
 not be Unjust, excessive, oppressive, or
confiscatory;
 not be Contrary to law, public policy,
national economic policy, or in the
restraint of trade;
c. The collection of local taxes, fees, charges and
other impositions shall not be let to any Private
person;
d. The revenue collected shall inure solely to the
benefit of, the local government unit levying the tax,
fee, charge or other Imposition unless otherwise
specifically provided herein; and,
e. Each local government unit shall, as far as
Practicable, evolve a Progressive system of
taxation. (SEC. 130, LGC)
2. Nature and Source of Taxing Power
a. Grant of local taxing power under the Local
Government Code
―Each local government unit shall have the power to
create its own sources of revenues and to levy taxes,
fees and charges subject to such guidelines and
limitations as the Congress may provide, consistent
with the basic policy of local autonomy. Such taxes,
fees, and charges shall accrue exclusively to the local
governments.‖ (Sec. 5, Art. X, 1987 Constitution)
Each local government unit shall exercise its power to
create its own sources of revenue and to levy taxes, fees,
and charges subject to the provisions herein, consistent
with the basic policy of local autonomy. Such taxes,
fees, and charges shall accrue exclusively to the local
government units. (Sec. 129, LGC)
b. Authority to prescribe penalties for tax violations
PAGE 209 OF 275
TAXATION LAW
Vested in the sanggunian
The sanggunian of a local government unit is authorized
to prescribe fines or other penalties for violation of tax
ordinances but in no case shall such fines be less than
One thousand pesos (P1,000.00) nor more than Five
thousand pesos (P5,000.00), nor shall imprisonment
be less than one (1) month nor more than six (6) months.
Such fine or other penalty, or both, shall be imposed at
the discretion of the court. The sangguniang barangay
may prescribe a fine of not less than One hundred
pesos (P100.00) nor more than One thousand pesos
(P1,000.00). (Sec. 516, LGC)
c. Authority to grant local tax exemptions
LGUs may, through ordinances duly approved, grant tax
exemptions, incentives or reliefs under such terms and
conditions as they may deem necessary. (Sec. 192,
LGC)
d. Withdrawal of exemptions
General rule (Sec. 193, LGC): Unless otherwise
provided, tax exemptions or incentives granted to, or
presently enjoyed by all persons, whether natural or
judicial, including government-owned or controlled
corporations are withdrawn upon the effectivity of the
Code.
Exceptions: Tax exemptions not withdrawn
 Local water districts
 Cooperatives duly registered under R.A. No.
6938,
 Non-stock and non-profit hospitals and
education institutions
―[Sec. 193 is] an express and general repeal of all
statutes granting exemptions from local taxes, withdrew
the sweeping tax privileges previously enjoyed by the
National Power Corporation under its Charter.‖ (NPC v.
Cabanatuan, G.R. No. 149110)
e. Authority to adjust local tax rates
LGUs shall have the authority to adjust the tax rates as
prescribed not oftener than once every five (5) years,
but in no case shall the adjustment exceed ten percent
(10%) of the rates fixed by the Code. (Sec. 191, LGC)
f. Residual taxing power of local governments
LGU may exercise the power to levy taxes or charges on
ANY base or subject
Required:
 Not otherwise specifically enumerated in the LGC
or taxed under NIRC or other applicable laws
UP COLLEGE OF LAW TAXATION 2 TAXATION LAW

 Not unjust, excessive, oppressive, confiscatory or  It must not be unreasonable (Magtajas v. Pryce
contrary to declared national policy Properties [234 SCRA 225])
 Pursuant to an ordinance enacted with public
hearing conducted for the purpose. (Sec. 186, 4. Scope of Taxing Power
LGC)
LGU Scope of Taxing Power
g. Authority to issue local tax ordinances
The power to impose a tax, fee, or charge, or to Provinces May levy only:
(Sec. 134, Transfer of Real Property Ownership
generate revenue under this Code shall be exercised by LGC) Business of Printing and Publication
the sanggunian of the local government unit concerned Franchise Tax
through an appropriate ordinance. (Sec. 132, LGC) Tax on Sand, Gravel and Other Quarry
Resources
3. Local Taxing Authority Professional Tax
Amusement Tax
a. Power to create revenues exercised thru LGUs Annual Fixed Tax for every delivery truck or
Each LGU shall exercise its power to create its power to van
create its own sources of revenue and to levy taxes, fees Municipalities May levy taxes, fees and charges not
and charges. (Sec. 128, LGC) otherwise levied by provinces (Sec. 142,
LGC)
Exercised by the Sanggunian concerned through an
Cities May levy taxes, fees and charges which the
appropriate ordinance. (Sec. 132, LGC) province or municipality may impose (Sec.
151, LGC)
Ordinances may be vetoed by local chief executives of Barangays May levy only:
the LGUs, except the Punong Barangay, on the ground Taxes on stores or retailers
that it is ultra vires or prejudicial to public welfare. His Service fees or charges
reasons shall be stated in writing. (Sec. 55 (a) and (b), Barangay clearance
LGC) Other fees and charges (Sec. 152, LGC)

b. Procedure for approval and effectivity of tax

ordinances But all LGUs may also impose reasonable service fees,
rates for operation of public utilities, andtoll fees and
A public hearing must be conducted prior to the charges. (See letter e below) (Sec. 153-155, LGC)
enactment of a tax ordinance. (Sec. 187, LGC)

Within ten (10) days after the approval of the ordinance, 5. Specific taxing power of local government unit (LGUs)
certified true copies of all tax ordinances or revenue
measures shall be published in full for three (3)
consecutive days in a newspaper of local circulation.

In provinces, cities and municipalities where there are

no newspapers of local circulation, it must be posted in
at least two (2) conspicuous and publicly accessible
places. (Sec. 188, LGC)

N.B. – Requisites for substantive validity of an

ordinance:
 It must not contravene the Constitution or any
statute
 It must not be unfair or oppressive
 It must not be partial or discriminatory
 It must not prohibit but may regulate trade
 It must be general and consistent with public
policy

PAGE 210 OF 275

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Power Province Municipality City Barangay

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

Tax on Business of Printing and Publication  (136) 
Franchise tax  (137) 
Tax on sand, gravel and other quarry resources  (138) 
Professional tax  (139) 
Amusement tax  (140) 
Annual Fixed Tax For Every Delivery Truck or Van
of Manufacturers or Producers, Wholesalers of,  (141) 
Dealers, or Retailers in, Certain Products
Tax on Business  (143) 
Fees and charges on regulation/licensing of
 (147) 
business and occupation
Fees for Sealing and Licensing of Weights and
 (148) 
Measures
Fishery Rentals, Fees and Charges  (149) 
Community Tax  
Tax on Gross Sales or Receipts of Small-Scale
 (152a)
Stores/Retailers
Service Fees on the use of Barangay-owned
 (152b)
properties
Barangay Clearance  (152c)
Other Fees and Charges (on commercial
breeding of fighting cocks, cockfights, cockpits;
 (152d)
places of recreation which charge admission
fees; outside ads)
Service Fees and Charges (153)    
Public Utility Charges (154)    
Toll Fees or Charges (155)    
  
Real Property Tax
(within Metro Manila)

a. Taxing powers of provinces

Tax Imposed Rate/Amount Base Exemptions Others

Tax on Transfer of Real Not more than Total acquisition Sale, transfer, or other Evidence of payment of tax is
Property. Imposed on the 50% of 1% price or fair market disposition of real to be required by Register of
sale, donation, barter, or value, whichever is property pursuant to Deeds as a requisite to
any other mode of transfer higher R.A. 6657 registration; and by the
of ownership or title to real (Comprehensive provincial assessor as a
property (Sec 135m LGC) Agrarian Reform Law) condition for cancellation of
old tax declaration.

Tax must be paid 60 days

from the date of execution of
deed or from the date of
decedent's death.

PAGE 211 OF 275

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Tax Imposed Rate/Amount Base Exemptions Others

Tax on Business of Printing Not exceeding Gross annual Receipts from printing
and Publication (Sec 136, 50% of 1% receipts for the and/or publishing of
LGC) preceding calendar books and other reading
Imposed on the business of year materials prescribed by
persons engaged in the DECS as school
printing, and/or publication texts or references
of books, cards, posters,
leaflets, handbills,
certificates, receipts,
pamphlets, and others of
similar nature

Newly started business Not exceeding Capital investment In the succeeding calendar
1/20 of 1% year, regardless of when
business started operating,
tax shall be based on gross
receipts for preceding
calendar year, or any fraction
thereof.

Franchise Tax (Sec 137,

LGC) Not exceeding Gross annual
Notwithstanding any 50% of 1% receipts for the
exemption granted by any preceding calendar
law or any other special law, year based on the
tax may be imposed on incoming receipt, or
business enjoying a realized, within its
franchise territorial
jurisdiction

Newly-started business Not more than
1/20 of 1%
Tax on Sand, Gravel and Not more than Fair market value in
Other Quarry Resources. 10%
Levied on ordinary stones,
gravel, earth and other
quarry resources as defined
in the NIRC, extracted from
public lands or from the
beds of seas, lakes, rivers,
streams, creeks, and other
public waters within its
territorial jurisdiction (Sec
138, LGC)
Capital investment
In the succeeding calendar
year, regardless of when
business started operating,
tax shall be based on gross
receipts for preceding
calendar year, or any fraction
thereof.
Permit to extract sand, gravel
the locality per cubic and other quarry resources to
meter of resources be issued exclusively by the
referred to in provincial governor pursuant
Column 1 to an Ordinance by the
Sangguniang Panlalawigan
Distribution of proceeds:
Province - 30%
Component City/ Municipality
where resources were
extracted - 30%
Barangay where resources
were extracted - 40%

Professional Tax. Provinces Such amount as Such reasonable Professionals To be paid to the province
may levy annual the Sangguniang classification by the exclusively employed by where the profession is
professional tax on each Panlalawigan Sangguniang the government practiced, or where a principal

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Tax Imposed Rate/Amount Base Exemptions Others

person engaged in the may determine, Panlalawigan office is maintained.

exercise of a profession in no case to
requiring government exceed P300.00 A person who pays for
examination (Sec 139, professional tax may practice
LGC) his profession anywhere in the
country without being
subjected to similar taxes.

Employers shall require

payment of professional tax
as a condition for
employment.

Payable annually, on or before

Jan 31.
Amusement Tax. Collected Not more than Gross receipts from Holding of operas, In case of theaters or
from proprietors, lessees, or10% (amended admission fees concerts, dramas, cinemas, tax shall first be
operators of theaters, by RA 9640, recitals, painting, and deducted and withheld by
cinemas, concert halls, 2009) art exhibitions, flower their proprietors, lessees and
circuses, boxing stadia, and shows, musical operators
other places of amusement programs, literary and
(Sec 140, LGC) oratorical presentations Proceeds to be shared equally
by the province and
Note: The case of Alta Vista Exception to exemption: municipality where
Golf and Country Club v. Pop, rock, or similar amusement places are
City of Cebu (20 Jan. 2016) concerts located.
states that golf courses are
not subject to amusement
tax because ―people do not
enter a golf course to see or
view a show or
performance.‖
Annual Fixed Tax For Every Amount not Every truck, van, Manufacturers, producers,
Delivery Truck or Van of exceeding P500 vehicle wholesalers, dealers and
Manufacturers or retailers referred to in column
Producers, Wholesalers of, 1 shall be exempt from tax on
Dealers, or Retailers in, peddlers
Certain Products. Imposed
on vehicles used for the
delivery of distilled spirits,
fermented liquors, soft
drinks, cigars and
cigarettes, and other
products as may be
determined by the
sanggunian, to sales
outlets, or consumers in the
province, whether directly
or indirectly (Sec 141, LGC)

b. Taxing powers of cities

The City may levy taxes, fees, charges which the province or municipality may impose.
Those levied and collected by highly urbanized and independent component cities shall accrue to them and distributed in
accordance with the provisions of LGC.

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Rates on levy made by the city may exceed the maximum rates allowed for the province or municipality by not more than
50%

Exception: Rates of professional and amusement taxes. (Sec. 151, LGC)

C. TAXING POWERS OF MUNICIPALITIES

C.1. TAX ON VARIOUS TYPES OF BUSINESSES
[Sec. 143, LGC]
Rate/Amount and Base Other Information
Manufacturers, assemblers, repackers, In accordance with the schedule in Section
processors, brewers, distillers, rectifiers, 143 [a], NIRC
and compounders of liquors, distilled
spirits, and wines or manufacturers of any
article of commerce of whatever kind or
nature
Wholesalers, distributors, or dealers in any Schedule in Article 143 [b], NIRC
article of commerce of whatever kind or
nature
Exporters and on manufacturers, millers, Not exceeding 1/2 of rates prescribed in
producers, wholesalers, distributor, the schedule in Sec 143, NIRC
dealers or retailers of essential
commodities enumerated below: [RWC-
CLAPS]
(1) Rice and corn
(2) Wheat and or cassava flour, meat,
dairy products, locally manufactured,
processed or preserved food, sugar,
salt, and other agricultural, marine,
and fresh water products, whether in
original state or not
(3) Cooking oil and cooking gas
(4) Cement
(5) Laundry soap, detergents, and
medicine
(6) Agricultural implements. equipment
and post-harvest facilities, fertilizers,
pesticides, insecticides, herbicides
and other farm inputs;
(7) Poultry feeds and other animal feeds;
(8) School supplies
Retailers Gross sales or receipts for the preceding Barangays have the exclusive power to tax
calendar year of: gross receipts amounting to:
400k or less: 2% per annum 50k or less: in cities
more than 400k: 1% per annum 30k or less: in municipalities [Sec. 143 [d],
Sec. 152, LGC]
Contractors and other independent In accordance with the schedule in Sec.
contractors 143 [e]
Banks and other financial institutions Not exceeding fifty percent 50% of 1% on
the gross receipts of the preceding
calendar year from interest, commissions
and discounts from lending activities,
income from financial leasing, dividends,
rentals on property and profit from
exchange or sale of property, insurance
premium.
Peddlers engaged in the sale of any Not exceeding P50.00 per peddler
merchandise or article of commerce annually.
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Rate/Amount and Base Other Information

Any business which the sanggunian Catch-all provision.

concerned may deem proper to tax
If on any business subject to excise, value-
added or percentage tax is subject to tax
not exceeding two percent [2%] of gross
sales or receipts of the preceding calendar
year

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C.2 CEILING ON BUSINESS TAX IMPOSSIBLE
ON MUNICIPALITIES WITHIN METRO
MANILA
Such municipalities may not 50% more than the
maximum rates prescribed in Sec 143. [Sec. 144,
LGC]
C.3. TAX ON RETIREMENT ON BUSINESS
Upon termination of a business subject to tax under
Sec.143 a sworn statement of its gross sales or
receipts for the current year shall be submitted. If
the tax paid is less than the tax due, the difference
shall be paid before the business is considered
officially retired. [Sec. 145, LGC]
C.4 RULES ON PAYMENT OF BUSINESS TAX
(1) Taxes in Sec. 143 shall be paid for every
separate or distinct establishment or place
where business subject to tax is conducted.
(2) One line of business is not exempted by being
conducted with some other businesses for
which such tax has been paid
(3) The tax on a business must be paid by the
person conducting it.
(4) If a person operates 2 or more businesses
mentioned in Sec 143 which are taxed;
computation shall be based on:
(a) combined total gross sales/receipts IF
subject to the same tax rate
(b) separate reports on gross sales/receipts if
subject to different tax rates
Yamane vs. Lepanto Condo Corp. (Oct. 23, 1995):
Condominium corporations are not business entities,
and are thus not subject to local business tax. Even
though the corporation is empowered to levy
assessments or dues from the unit owners, these
amounts are not intended for the incurrence of profit
by the corporation, but to shoulder the multitude of
necessary expenses for maintenance of the
condominium.
Ericsson Telecoms vs. City of Pasig. (Nov. 2007):
Business tax must be based on gross receipts, it
being different from gross revenue. The right to
receive income, and not the actual receipt
determines when to include the amount in gross
income.
C.5. FEES AND CHARGES FOR REGULATION
& LICENSING
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TAXATION LAW
General rule: As a condition to the conduct of
business or profession, the municipality may impose
reasonable fees and charges not yet imposed by the
province, commensurate with the cost of regulation,
inspection and licensing. [Sec.147, LGC]
Exception: Professional tax in Sec. 139
Specific rules:
(1) Municipality has power to impose reasonable
rates for sealing and licensing of weights and
measures [Sec. 148, LGC]
(2) The Municipality has exclusive authority to grant
fishery privileges in municipal waters. The
sangguniang bayan may:
(a) Grant fishery privileges to erect fish corrals,
oysters, mussels or other aquatic beds or
bangus fry areas, within a definite zone of
the municipal waters, as
(b) Grant marginal fishermen the privilege to
gather, take or catch bangus fry, prawn fry
or kawag-kawag or fry of other species and
fish from the municipal waters by nets,
traps or other fishing gears free of rental,
fee, charge or imposition.
(c) Issue licenses for the operation of fishing
vessels of three [3] tons or less
(3) The Sanggunian may penalize the use of
explosives, noxious or poisonous substances,
electricity, muro-ami, and other deleterious
methods of fishing and prescribe a criminal
penalty therefor [Sec. 149, LGC]
C.6. SITUS OF TAX COLLECTED
According to Sec. 150 of the LGC,situs shall be
determined by the ff. rules:
RULE 1: In case of persons maintaining/operating a
branch or sales outlet making the sale or
transaction, the tax shall be recorded in said branch
or sales outlet and paid to the municipality/city
where the branch or sales outlet is located.
RULE 2: Where there is NO branch or sales outlet in
the city/municipality where the sale is made, sale
shall be recorded in the principal office and the tax
shall be paid to such city/municipality.
RULE 3: In the case of manufacturers, contractors,
producers, and exporters having factories, project
offices, plants, and plantations, proceeds shall be
allocated as follows:
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(1) 30% of sales recorded in the principal office the situs of the contract for purposes of taxation,
shall be made taxable by the city/municipality and not merely the place of the perfection of the
where the principal office is located contract.
(2) 70% shall be taxable by the city/municipality
where the factory, project office, plant, or D. TAXING POWERS OF BARANGAYS
plantation is located The following shall exclusively accrue to the
Illustration of Rules 1 to 3: barangays:
A company has a principal office in Mandaluyong, (1) Taxes on Stores or Retailers with Fixed Business
while its sales office and factory are in Sta Rosa: Establishments.
(1) sales made in Sta Rosa, will be recorded in Sta (a) Rate: not greater than one percent (1%)
Rosa (b) Base:
(2) sales made in Los Baños, Calamba or Cabuyao (i) Cities: gross sales or receipts of the
[i.e., delivered to customers located in those preceding calendar year of
places], will be recorded in Mandaluyong P50,000.00 or less
(3) aside from sales made in Sta Rosa, Sta Rosa (ii) Municipalities: gross sales or receipts
also gets 70% of sales recorded in of P30,000.00 or less
Mandaluyong, pursuant to Rule 3 (2) Service Fees or Charges. For services rendered
in connection with the regulations or the use of
RULE 4: In case the plantation is located in a place barangay-owned properties or facilities such as
other than the place where the factory is located, the palay, copra, or tobacco dryers.
70% in Rule 3 will be divided as follows: (3) Barangay Clearance. A city or municipality
60% to the city/municipality where the factory is cannot issue a permit for business without a
located clearance from the barangay concerned. The
40% to the city/municipality where the plantation is sangguniang barangay may impose a
located reasonable fee on the clearance.
(4) Other Charges Allowed.
RULE 5: In case of 2 or more factories, plantations, (a) charges on commercial breeding of fighting
etc. in different localities, the 70% shall be prorated cocks, cockfights and cockpits;
among the localities where the factories, (b) charges on places of recreation which
plantations, etc. are located in proportion to their charge admission fees; and
respective volume of production. (c) charges on billboards, signboards, neon
signs, and outdoor advertisements. [Sec.
Illustration: 152, LGC]
A company has a principal office in Valenzuela and
has its factory in Bulacan. It also has branches E. COMMON REVENUE RAISING
selling merchandise in Muntinlupa, Bacolod, Cebu.
(1) sales made in Muntinlupa, Bacolod and Cebu
POWERS
(1) Service fees and charges
will go to the said cities
LGUs may impose and collect such reasonable
(2) sales in all other places which do not have a
fees and charges for services rendered. [Sec.
sales branch shall be distributed as follows:
153, LGC]
30% to Valenzuela and 70% to Bulacan
(2) Public utility charges
LGUs may fix the rates for the operation of
Excise Tax: Allied Thread Co., Inc. v. City Mayor of
public utilities owned, operated and
Manila [1984] Tax is imposed on the performance of
maintained by them within their jurisdiction.
an act or occupation, enjoyment of a privilege. The
[Sec. 154, LGC]
power to levy such tax depends on the place in
(3) Toll fees or charges
which the act is performed or the occupation is
(a) The sanggunian may prescribe the terms
engaged in; not upon the location of the office.
and conditions and fix the rates for the
imposition of toll fees or charges for the
Sales Tax: Shell Co., Inc. v. Municipality of Sipocot,
use of any public road, pier, or wharf,
Camarines Sur [1959]
waterway, bridge, ferry or
It is the place of the consummation of the sale,
telecommunication system funded and
associated with the delivery of the things which are
the subject matter of the contract that determines
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constructed by the local government unit

concerned.
(b) The sanggunian may also discontinue the
collection of the tolls when public safety
and welfare requires.
(c) No toll fees or charges shall be collected
from:
(i) Officers and enlisted men of the AFP
and members of the PNP on mission
(ii) Post office personnel delivering mail
(iii) Physically-handicapped
(iv) Disabled citizens who are sixty-five
(65) years or older. [Sec. 155, LGC]

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F. COMMUNITY TAX
Who may levy [Sec. Cities or municipalities
156, LGC]
(1) Individuals who are:
(a) Inhabitants of the Philippines
(b) Eighteen years of age or over
(c) Either:
(i) Regularly employed on a wage or salary basis for at least 30 consecutive working days
during any calendar year
(ii) Engaged in business or occupation
(iii) Owns real property with an aggregate assessed value of P1,000 or more
(iv) Is required by law to file an income tax return
Persons Liable [Sec. (2) Juridical Persons
157 &158, LGC] (a) Every corporation no matter how created or organized,
(b) Whether domestic or resident foreign,
(c) Engaged in or doing business in the Philippines
(1) Individuals
(a) Annual community tax of P5.00 PLUS annual additional tax of P1.00 per P1,000.00 of
income regardless whether from business, exercise of profession or property
(b) Never to exceed P5000
(c) Husband and wife shall pay a basic tax of P5.00 each PLUS additional tax based on total
property owned by them and the total gross receipts or earnings derived therefrom
(2) Juridical Persons
(a) Annual community tax of P500.00 PLUS annual additional tax of not more than P10,000.00
according to the ff. schedule:
(i) P2.00 for every P5,000 worth of real property in the Philippines owned during the
preceding year based
(ii) P2.00 for every P5,000.00 of gross receipts derived from business in the Philippines
during the preceding year.
Rates [Sec. 157 &158, (b) Dividends received by a corporation from another corporation shall be deemed part of the
LGC] gross receipts or earnings for purposes of computing additional tax.
Persons Exempt [Sec. (1) Diplomatic and consular representatives
159, LGC] (2) Transient visitors who stay in the Philippines for not more than 3 months
Place of Payment [Sec. Where individual resides, or where the principal office of the juridical entity is located.
160, LGC]
Time of Payment [Sec Accrues on the 1st day of January of each year to be paid not later than the last day of February of each
161, LGC] year
Penalty If unpaid within the prescribed period, an interest of 24% shall be added per annum from the due date
until payment. [Sec. 161, LGC]

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Presentation of Community Tax Certificate is
necessary when an individual subject to community
tax:
(1) Acknowledges any document before a notary
public
(2) takes the oath of office upon election or
appointment to any position in the government
service
(3) receives any license, certificate, or permit from
any public authority
(4) pays any tax or fee
(5) receives any money from any public fund
(6) transacts other official business
(7) receives any salary or wage from any person or
commission
Presentation of certificate is not needed in the
registration of a voter. [Sec. 163, LGC]
The city or municipal treasurer shall deputize the
barangay treasurers to collect, provided the latter be
bonded.
If: actually and directly collected by the city or
municipal treasurer, community tax accrues entirely
to the general fund. If: collected through the
barangay treasurers, apportioned equally. [Sec. 164,
LGC]
6. Common limitations on the taxing powers of LGUs
Unless otherwise provided, the following cannot be
levied by the local governments: [IDEC-GAPEP-GRR-
ECN]:
(1) Income tax, except when levied on banks and
other financial institutions;
(2) Documentary stamp tax;
(3) Estate tax, inheritance, gifts, legacies and other
acquisitions mortis causa, except as otherwise
provided;
(4) Customs duties, registration fees of vessel and
wharfage on wharves, tonnage dues, and all
other kinds of customs fees, charges and dues
except wharfage on wharves constructed and
maintained by the LGU concerned;
(5) Taxes, fees or charges on Goods carried into or
out of, or passing through, the territorial
jurisdictions of local government units in the
guise of charges for wharfage, tolls for bridges
or otherwise, or other taxes, fees, or otherwise
Sec.133(e) prohibits the imposition, in the
guise of wharfage, of fees, as well as all other
taxes or charges in any form whatsoever, on
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TAXATION LAW
goods or merchandise. It is therefore irrelevant
if the fees imposed are actually for police
surveillance on the goods, because any other
form of imposition on goods passing through
the territorial jurisdiction of the municipality is
clearly prohibited. (See Palma Development
Corp. v. Municipality of Managas [G.R. No.
152492. October 16, 2003])
(6) Taxes, fees or charges on Agricultural and
aquatic products when sold by marginal
farmers or fishermen;
(7) Taxes on business enterprises certified to by the
Board of Investments as Pioneer or non-pioneer
for a period of 6 and 4 years, respectively from
the date of registration;
(8) Excise taxes on articles enumerated under the
NIRC, as amended, and taxes, fees or charges
on petroleum products;
(9) Percentage or VAT on sales, barters or
exchanges or similar transactions on goods or
services except as otherwise provided herein;
(10) Taxes on the Gross receipts of transportation
contractors and persons engaged in the
transportation of passengers or freight by hire
and common carriers by air, land or water,
except as provided in the Code;
(11) Taxes on premiums paid by way or Reinsurance
or retrocession;
(12) Taxes, fees or charges for the Registration of
motor vehicles and for the issuance of all kinds
of licenses or permits for the driving thereof,
except tricycles;
(13) Taxes, fees, or other charges on Philippine
products actually Exported, except as otherwise
provided;
(14) Taxes, fees, or charges, on Countryside and
Barangay Business Enterprises and
cooperatives duly registered under the
Cooperative Code of the Philippines; and
(15) Taxes, fees or charges of any kind on the
National Government, its agencies and
instrumentalities, and local government units.
[Sec. 133, LGC]
7. Collection of business tax
F.1. TAX PERIOD AND MANNER OF
PAYMENT
Based on calendar year, unless otherwise provided.
May be paid annually or in quarterly instalments.
[Sec. 165, LGC]
F.2. ACCRUAL OF TAX
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General rule: Accrues on the first day of January of
each year
Except: New taxes, fees or charges, or changes in
the rates thereof which shall accrue on the first day
of the quarter next following the effectivity of the
ordinance imposing such new levies or rates. [Sec.
166, LGC]
F.3. TIME OF PAYMENT
Within the 20 days of January or of each subsequent
quarter. [i.e., Jan 20, Apr 20, July 20, and Oct 20]. It
may be extended by the sanggunian for justifiable
reasons, without surcharges or penalties. Extension
cannot exceed 6 months. [Sec. 167, LGC]
F.4. PENALTIES ON UNPAID TAXES, FEES
OR CHARGES
(1) Surcharge not exceeding 25% on taxes, fees or
charges NOT paid on time; and
(2) Interest not exceeding 2% per month of the
unpaid taxes, fees or charges including
surcharges, until the amount is fully paid
(3) In no case shall the total interest exceed 36
months. [Sec. 168, LGC]
F.5. AUTHORITY OF TREASURER IN
COLLECTION AND INSPECTION OF BOOKS
All local taxes, fees and charges shall be collected
by the local treasurer or their duly authorized
deputies [Sec. 170, LGC]
The local treasurer may, by himself or through his
deputies duly authorized in writing, examine the
books, accounts, and other pertinent records of any
person subject to local taxes, fees and charges in
order to ascertain, assess and collect the correct
amount of the tax, fee or charge.
Examination must be done during business hours,
only once for every tax period and shall be certified
to by the examining official. [Sec. 171, LGC]
G. TAXPAYER’S REMEDIES
G.1. PERIODS OF ASSESSMENT AND
COLLECTION OF LOCAL TAXES, FEES OR
CHARGES
Assessment: Within 5 years from the date they
become due
In case of Fraud or Intent to Evade Tax: Within 10
years from discovery of fraud or intent to evade
payment. [Sec. 194, LGC]
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TAXATION LAW
Collection: 5 years from the date of assessment by
administrative or judicial action.
Instances When Running of Prescription Periods is
Suspended
(1) When the treasurer is legally prevented from
making the assessment or collection
(2) When taxpayer requests for reinvestigation and
executes a waiver in writing before lapse of the
period for assessment or collection.
(3) When the taxpayer is out of the country or
otherwise cannot be located [Sec. 194 (d), LGC]
G.2. PROTEST OF ASSESSMENT
Within sixty (60) days from the receipt of the notice
of assessment, the taxpayer may file a written
protest with the local treasurer contesting the
assessment; otherwise it shall become final and
executory. [Sec. 195, LGC]
G.3. CLAIM FOR REFUND OF TAX CREDIT
FOR ERRONEOUSLY OR ILLEGALLY
COLLECTED TAX, FEE OR CHARGE
Requires a written claim for refund or credit to be
filed with local treasurer before protest is
entertained.
Must be brought within 2 years from payment of tax
or from the date the taxpayer became entitled to
refund or credit [Sec. 196, LGC]
H. CIVIL REMEDIES BY THE LGU FOR
COLLECTION OF REVENUES
H.1. LOCAL GOVERNMENT’S LIEN FOR
DELINQUENT TAXES, FEES OR CHARGES
Non-payment of a tax, fee or charge creates a lien
superior to all liens or encumbrances in favor of any
other person, enforceable by administrative or
judicial action.
The lien may only be extinguished upon full payment
of the delinquent local taxes, fees, and charges
including related surcharges and interests. [Sec.
173, LGC]
H.2. CIVIL REMEDIES, IN GENERAL
(1) Administrative action
(2) Judicial action
Procedure for administrative action
Distraint of personal property
Personal properties subject to distraint: goods,
chattels or effects and other personal property of
UP COLLEGE OF LAW
whatever character, including stocks and other
securities, debts, credits, bank accounts, and
interest in and rights to personal property
Procedure: [Sec. 175, LGC]
(1) Seizure of personal property
(2) Accounting of distrained goods
(3) Publication of time and place of sale and the
articles distrained
(4) Release of distrained property upon payment
prior to sale
(5) Procedure of sale
(6) Disposition of proceeds
Levy of real property
Levy upon real property and interest in or rights to
real property
Procedure [Sec. 176, LGC]
(1) Preparation of a duly authenticated certificate
by the LGU Treasurer effecting the levy on the
real property
(2) Service of written notice of levy to the assessor
and Register of Deeds
(3) Annotation of the levy on the tax declaration
and the certificate of title
(4) Advertisement and Sale [Sec. 178, LGC]
Further distraint or levy
The remedies by distraint or levy may be repeated if
necessary until the full amount due, including all
expenses, is collected [Sec. 184, LGC]
Exemption of personal property from distraint or levy
(ToB-CUPLA)
(1) Tools and implements necessarily used by the
taxpayer in his trade or employment
(2) One horse, cow, carabao, or other Beast of
burden, such as the delinquent taxpayer may
select and necessarily used by him in his
ordinary occupation
(3) his necessary Clothing, and that of all his family
(4) household furniture and Utensils necessary for
housekeeping and used for that purpose by the
delinquent taxpayer, such as he may select, of a
value not exceeding P10,000
(5) Provisions, including crops, actually provided
for individual or family use sufficient for 4
months
(6) the professional Libraries of doctors, engineers,
one fishing boat and net, not exceeding the
total value of P10,000 by the lawful use of
which a fisherman earns his livelihood
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TAXATION 2 TAXATION LAW
(7) any material or Article forming part of a house
or improvement of any real property
Appeal before the Secretary of Justice; Procedure
 Appeal to the Secretary of Justice within 30
days from effectivity
 The Secretary of Justice has 60 days to
decide but an appeal does not suspend the
effectivity of the ordinance
 Within 30 days from the Secretary of
Justice‘s decision or after 60 days inaction,
an appeal may be filed with the RTC. (See
Sec. 187, RA 7160)
Penalty on local treasurer for failure to issue and
execute warrant of distraint or levy
Automatically dismissed from the service after due
notice and hearing [Sec. 177, LGC]
Procedure for judicial action
The local government may institute an ordinary civil
action with regular courts of proper jurisdiction for
the collection of delinquent taxes, fees, charges or
other revenues.
The civil action shall be filed by the local treasurer.
[Sec. 183, LGC]
Valley Trading Co. vs. CFI of Isabela, (1989);
Angeles City v. Angeles City Electric Corporation,
(2010): LGC does not contain a provision
prohibiting courts from enjoining the collection of
local taxes. Such lapse may have allowed
preliminary injunction under Rule 58, ROC where
local taxes are involved.
I. REAL PROPERTY TAXATION
I.1. FUNDAMENTAL PRINCIPLES (CAPUE)
(1) Current fair market value is the basis for
assessment
All real property, whether taxable or exempt,
shall be appraised at the CURRENT AND FAIR
MARKET VALUE prevailing in the locality where
the property is situated. [Sec. 201, LGC]
(2) Actual use shall be the basis of classification
for assessment
(a) Real property shall be classified, valued
and assessed on the basis of its actual use
regardless of where located, whoever owns
it, and whoever uses it.
(b) Actual Use- refers to the purpose for which
the property is principally or predominantly
utilized by the person in possession thereof
[Sec. 199 (b), LGC]
UP COLLEGE OF LAW TAXATION 2
(c) MCIAA v. Marcos [G.R. No. 120082, Sept.
11, 1996]: ―Usage means direct,
immediate and actual application of the
property
(3) Private persons cannot be left to the appraisal,
assessment, levy and collection of real property
tax.
(4) uniform classification within each local
government unit shall be observed.
(5) equitable appraisal and assessment is required.
[Sec. 197, LGC]
I.2. NATURE OF REAL PROPERTY TAX
(1) It is a direct tax on the ownership or use of real
property
(2) It is an ad valorem tax. Value is the tax base.
(3) It is proportionate because the tax is calculated
on the basis of a certain percentage of the value
assessed.
(4) It creates a single, indivisible obligation
(5) It attaches on the property [i.e., a lien] and is
enforceable against it.
(6) With respect to LGUs, it is levied thru a
delegated power
I.3. IMPOSITION OF REAL PROPERTY TAX
N.B. Real property under the Art. 415, Civil Code;
The following are immovable property:
(1) Land, buildings, roads and constructions of all
kinds adhered to the soil;
(2) Trees, plants, and growing fruits, while they are
attached to the land or form an integral part of an
immovable;
(3) Everything attached to an immovable in a fixed
manner, in such a way that it cannot be separated
therefrom without breaking the material or
deterioration of the object;
(4) Statues, reliefs, paintings or other objects for
use or ornamentation, placed in buildings or on
lands by the owner of the immovable in such a
manner that it reveals the intention to attach them
permanently to the tenements;
(5) Machinery, receptacles, instruments or
implements intended by the owner of the tenement
for an industry or works which may be carried on in a
building or on a piece of land, and which tend
directly to meet the needs of the said industry or
works;
(6) Animal houses, pigeon-houses, beehives, fish
ponds or breeding places of similar nature, in case
PAGE 223 OF 275
TAXATION LAW
their owner has placed them or preserves them with
the intention to have them permanently attached to
the land, and forming a permanent part of it; the
animals in these places are included;
(7) Fertilizer actually used on a piece of land;
(8) Mines, quarries, and slag dumps, while the
matter thereof forms part of the bed, and waters
either running or stagnant;
(9) Docks and structures which, though floating, are
intended by their nature and object to remain at a
fixed place on a river, lake, or coast;
(10) Contracts for public works, and servitudes and
other real rights over immovable property. (334a)
Coverage; For a Province, or a City or Municipality
within Metro Manila
(1) Land
(2) Building
(3) Machinery
(4) Other improvements not specifically exempted
[Sec. 232, LGC]
The rate shall be as follows:
Province: not exceeding one percent (1%) of the
assessed value of real property; and
City or municipality within Metro Manila: not
exceeding two percent (2%) of the assessed value of
real property. [Sec. 233, LGC]
Special Levy on Idle Lands
A province, or city or municipality within Metro
Manila may levy an annual tax on idle lands at the
rate not exceeding five percent [5%] of the assessed
value of the property in addition to the basic tax
Lands covered
(1) Agricultural Lands
More than one hectare in area suitable for
cultivation, dairying, inland fishery, and other
agricultural uses, one-half of which remain
uncultivated or unimproved
(2) Other than Agricultural
More than one thousand square meters in area
one half of which remain unutilized or
unimproved [Sec. 236 and 237, LGC]
Exempt Idle Lands
Lands exempt by reason of
 Force majeure,
 Civil disturbance,
 Natural calamity or
 Any cause or circumstance which physically
or legally prevents improving, utilizing or
cultivating the same. [Sec. 238, LGC]
UP COLLEGE OF LAW TAXATION 2 TAXATION LAW

(3) Within 30 days from date of declaration

Special Levy for Public Works (4) Failure to file, will be listed as in Assessment
A tax ordinance shall describe with reasonable Rolls as taxable
accuracy the nature, extent and location of the
public works to be undertaken, the estimated cost, GOCCs
the metes and bounds by monuments and lines and Philippine Ports Authority vs. City of Iloilo [G.R. No.
the number of annual installments which should not 109791, July 14, 2003]: GOCCs are not covered by
be less than 5 nor more than 10 years. the exemption since the exemption only refers to
The sanggunian may fix different rates for different instrumentalities without personalities distinct from
parts or sections thereof, depending on whether the government.
such land is more or less benefited by the proposed
work. [Sec. 241, LGC] Mactan Airport v. MIAA cases
Provision involved SC Ruling
Special Education Fund (SEF) Mactan Sec 133 (o), LGC. Airport Authority
A province, or city or municipality within Metro Airport LGUs not allowed is a GOCC, not
Manila may levy and collect an annual tax of one Authority to levy… [o] exempt from RPT.
percent (1%) on the assessed value of real property vs. Marcos taxes/fees/ Legislature in
(1996) charges of any amending the law
which shall be in addition to the basic real property kind on the specifically
tax. national gov‘t, its deleted GOCCs
agencies, from the
Exempt from real property tax instrumentalities enumeration in
(1) Owned by the Republic of the Philippines or any and LGUs. Sec 234 (a).
of its political subdivisions except when
beneficial use is granted for a consideration or Sec 234 (a), LGC.
to a taxable person. Properties exempt
(2) Charitable institutions, churches, parsonages, from RPT: real
or convents appurtenant thereto, mosques, properties owned
by the Republic or
non-profit or religious cemeteries, and all lands, any of its political
buildings, and improvements actually, directly subdivisions…
and exclusively used for religious, charitable, or Manila Sec 133 (o), LGC MIAA falls under
educational purposes. Airport the term
(3) Machinery and equipment actually, directly and Authority Sec 234 (a), LGC ―instrumentality‖
exclusively used by local Water utilities and vs. CA outside the scope
GOCCs engaged in the supply and distribution (2006) of LGS‘s local
of water and/or generation and transmission of taxing powers
electric power. under Sec 133[o].
(4) Real property owned by duly registered
cooperatives as provided for under Republic Act Mactan The Mactan
Airport Airport is a
No. 6938 [Cooperative Code of the Philippines]. Authority government
(5) Machinery and equipment used for pollution vs. City of instrumentality;
control and Environmental protection. [Sec. Lapu-Lapu only portions of
234, LGC] (2015) the land leased to
taxable persons
Provincial Assessor of Marinduque v. CA [G.R. No. like private
170532, Apr. 30, 2009]:A claim for exemption parties are
under Sec. 234 (e) should be supported by evidence subject to real
that the property sought to be exempt is actually, estate tax.
directly and exclusively used for pollution control
and environmental protection. Charitable Institutions
Lung Center of the Philippines vs. Quezon City [G.R.
Proof of Exemption No. 144104, June 29, 2004]: A charitable
(1) Documentary evidence such as affidavits, by- institution doesn't lose its character and its
laws, contract, articles of incorporation exemption simply because it derives income from
(2) Given to local assessor paying patients so long as the money received is

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UP COLLEGE OF LAW TAXATION 2
devoted to the charitable object it was intended to
achieve, and no money inures to the benefit of
persons managing the institution.
Property leased to private entities is not exempt
from RPT, as it is not actually, directly and
exclusively used for charitable purposes. Portions of
the land occupied by the hospital and portions used
for its patients, whether paying or non-paying, are
exempt from real property taxes.
I.4. APPRAISAL AND ASSESSMENT OF REAL
PROPERTY TAX
I.5. DECLARATION OF REAL PROPERTY
Declaration by the Owner or Administrator
Prepare a sworn statement declaring the true value
of the property which shall be the current and fair
market value of the property.
It must contain a sufficient description of the
property to enable the assessor or his deputy to
identify the same for assessment purposes
The declaration must be filed with the assessor once
every three (3) years during the period from January
1 to June 30. [Sec. 202, LGC]
Declaration by Any Person Acquiring Real Property
or Making Improvements
The sworn statement declaring the true value of the
property must be filed to the provincial, city or
municipal assessor within sixty [60] days after the
acquisition or upon completion or occupancy of the
improvement, whichever comesealier. [Sec. 203,
LGC]
Declaration by the Provincial or City or Municipal
Assessor
When the person required to file the sworn
declaration refuses or fails to make sich declaration,
the provincial, city or municipal assessor shall
declare the property in the name of the defaulting
owner.
Notice of Transfer of Real Property
Any person who shall transfer real property
ownership to another shall notify the provincial, city
or municipal assessor within sixty [60] days from the
date of such transfer.
The notification shall include:
(1) Mode of transfer,
(2) Description of the property alienated, and
PAGE 225 OF 275
TAXATION LAW
(3) Name and address of the transferee [Sec. 208,
LGC]
I.6. LISTING OF REAL PROPERTY IN THE
ASSESSMENT ROLLS
The local assessor must maintain an assessment
roll wherein all real property, whether taxable or
exempt, located within the territorial jurisdiction of
the LGU, is listed.
Real property in general—
Shall be listed, valued and assessed in the name of
the owner or administrator, or anyone having legal
interest in the property.
For undivided real property—
May be in the name of the estate or of the heirs and
devisees, or in the name of one or more co-owners
Real property of a corporation, partnership or
association—
Same manner as an individual
Real property owned by the Republic of the
Philippines, its instrumentalities, political
subdivision, the beneficial use has been granted to
a taxable person—
In the name of the possessor, grantee or of the
public entity if such property has been acquired or
held for resale or lease. [Sec. 205, LGC]
I.7. APPRAISAL AND VALUATION OF REAL
PROPERTY
Land
The assessor of the province, city or municipality or
his deputy may summon the owners or persons
having legal interest therein and witnesses,
administer oaths, and take deposition concerning
the property, its ownership, amount nature, and
value. [Sec. 213, LGC]
Before any general revision of property assessment
is made, there shall be prepared a schedule of FMV
by the provincial, city or municipal assessors; which
shall be published in a newspaper of general
circulation or in the absence thereof, shall be
posted in the provincial capital, city or municipal
hall and in two other conspicuous public places
therein. [Sec. 212, LGC]
CLASSES OF REAL PROPERTY
(1) Residential – Is land principally devoted to
habitation
UP COLLEGE OF LAW TAXATION 2 TAXATION LAW

(2) Agricultural – Is land devoted principally to the 225, LGC]

planting of trees, raising of crops, livestock and
poultry, dairying, salt making, inland fishing I.8. ASSESSMENT OF REAL PROPERTY
and similar aquaculture activities and other i. Assessment levels
agricultural activities and is not classified as Assessment level – is the percentage applied to the
mineral, timber, residential, commercial or fair market value to determine the taxable value of
industrial land the property [Sec. 199(g), LGC]
(3) Commercial – Is land devoted principally for the Assessment levels shall be fixed by ordinances of
object of profit and is not classified as the sanggunian at rates not exceeding those
agricultural, industrial, mineral, timber or prescribed in Sec. 218
residential land
(4) Industrial – Is land devoted principally to ii. General revisions of assessments and property
industrial activity as capital investment and is classification
not classified as agricultural, commercial, The local assessor shall undertake a general
timber, mineral or residential land revision of real property assessments every 3 years.
(5) Mineral – Are lands in which minerals exist in [Sec. 219, LGC]
sufficient quantity or grade to justify the
necessary expenditures to extract and utilize iii. Date of effectivity of assessment or
such minerals reassessment
(6) Timberland General rule: All assessments or reassessments
(7) Special – all lands, buildings and other made after the first day of January of any year shall
improvements actually, directly and exclusively take effect on the first day of January of any year
used for hospitals, cultural, or scientific
purposes, and those owned and used by local Exceptions: reassessments due to
water districts, and GOCCs rendering essential (1) partial or total destruction
public services in the supply and distribution of (2) major change in actual use;
water and/or generation and transmission of (3) great and sudden inflation or deflation of real
electric power [Sec. 216, LGC] property values;
(4) gross illegality of the assessment when made;
Machinery or
Brand New The FMV is the acquisition cost (5) any other abnormal cause shall be made within
If the machinery is imported, the ninety (90) days from the date of any cause and
acquisition cost includes freight, shall take effect at the beginning of the quarter
insurance, bank and other next following the reassessment. [Sec. 221,
charges, brokerage, arrastre and
LGC]
handling, duties and taxes, plus
cost of inland transportation,
handling, and installation iv. Assessment of property subject to back taxes
charges at the present site. [Sec. Property declared for the first time: assessed for
224, LGC] taxes for the period during which it would have been
All other Cases FMV is determined by dividing the liable but in no case for more than ten [10] years
remaining economic life of the prior to the date of initial assessment [Sec. 222,
machinery by its estimated LGC]
economic life and multiplied by
the replacement/reproduction v. Notification of new or revised assessment
cost. [Sec. 224, LGC] When real property is assessed for the first time or
Depreciation Rate—not exceeding five percent
when an existing assessment is increased or
Allowance (5%) of its original cost or
replacement cost, for each year of
decreased, the local assessor shall within thirty [30]
use days give written notice of the new or revised
The remaining value shall be fixed assessment to the person in whose name the
at not less than twenty percent property is being declared.
(20%) of such original,
replacement or reproduction cost Notice may be given personally or by registered mail
for so long as the machinery is or through the assistance of the punong barangay to
useful and in operation. [Sec.

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UP COLLEGE OF LAW TAXATION 2 TAXATION LAW

the last known address of the person to be served. Payments of real property taxes shall first be applied
[Sec. 223, LGC] to prior years delinquencies, interests and penalties,
if any, and only after the delinquencies are settled
I.9. COLLECTION OF REAL PROPERTY TAX may tax payments be credited for the current period.
Real property tax for any year [Sec. 250, LGC]
Date of Accrual shall accrue on the first day of
(5.1) January. [Sec. 246, LGC] ii. Interests on unpaid real property tax
On or before the 31st of January In case of failure to pay the basic real property tax or
or on any date prescribed, the any other tax when due shall subject the taxpayer to
local treasurer shall post the the payment of interest at the rate of two percent per
notice of the dates when the tax
may be paid without interest at a
month on the unpaid amount or a fraction thereof
Notice for conspicuous and publicly until the delinquent tax shall have been fully paid.
Collection (5.2) accessible place at the city or But the total interest on the unpaid tax shall not
municipal hall. exceed thirty-six months. [Sec. 255, LGC]

The notice shall also be iii. Condonation of real property tax

published in a newspaper of By SANGGUNIAN: in case of general failure of crops
general circulation in the locality or substantial decrease in the price of agricultural or
once a week for two consecutive agri-based products or calamity in any LGU [Sec.
weeks. [Sec. 249, LGC] 276, LGC]
Within five years from the date
they become due
Prescriptive By the PRESIDENT of the Philippines: when public
Periods for Within ten years from discovery interest so requires [Sec. 277, LGC]
Collection (5.3) of fraud, in case there is fraud or
intent to evade Remedies of LGUs for Collection of Real Property
Local treasurer is legally Tax
prevented to collect tax.
The owner or property requests i. Administrative
Instances for for reinvestigation and writes a Local Government‘s Lien—
Suspension of waiver before expiration of The basic real property tax shall constitute a lien on
Prescriptive period to collect.
the property subject to tax, superior to all liens,
Period The owner of property is out of
the country or cannot be located
charges or encumbrances in favour of any person,
[Sec. 270, LGC] irrespective of the owner or possessor thereof,
The local treasurer. enforceable by administrative or judicial action and
Collecting He may deputize the barangay may only be extinguished upon payment of the tax
Authority treasurer to collect all taxes and the related interests and expenses. [Sec. 257,
upon filing of a bond. [Sec. 247, LGC]
LGC]
Levy
I.10. SPECIAL RULES ON PAYMENT Upon the failure to pay the tax when due, the local
treasurer shall issue a warrant levying the real
i. Payment of real property tax in installments property subject to tax. The warrant shall include a
Payment of real property tax and the additional tax duly authenticated certificate showing the name of
for the Special Education Fund, without interest, the owner or person having legal interest therein,
may be made in four [4] equal instalments: description of the property, amount of the tax due
1st : March 31st and interest thereon.
2nd : June 30th Warrant must be mailed or served to owner or
3rd : September 30th person having legal interest in the property
4th : December 31st Written notice of levy must be mailed or served to
the assessor and the Register of Deeds where the
This shall not apply to special levies which shall be property is located
governed by ordinance of the sanggunian concerned. The Register of Deeds must annotate the levy on
the tax declaration and certificate of title [Sec. 258,
LGC]
PAGE 227 OF 275
UP COLLEGE OF LAW
Failure to issue or execute the warrant of levy
within one year from the time the tax becomes
delinquent or within thirty days from the date of the
issuance thereof shall be dismissed from service
[Sec. 259, LGC]
Purchase by LGU for Want of Bidder
There is no bidder; or
When The highest bid is for an amount
Available insufficient to pay the real property tax
and the related interest and costs of
sale
The local treasurer conducting the sale
shall purchase the property in behalf of
Duty of the the LGU to satisfy the claim and within
Local Treasurer two years thereafter shall make a
report of his proceedings.
Within one year from the date of
Redemption forfeiture
Period
ii. Judicial
The LGU may enforce the collection by civil action in
any court of competent jurisdiction.
Must be filed by local treasurer within 5 to 10 years.
[Sec. 266 in relation to Sec. 270, LGC]
J. TAXPAYER’S REMEDIES
J.1. ADMINISTRATIVE
Protest
Appeal to the Local Board of Assessment Appeals
(LBAA)
(1) Appeal must be filed within 60 days from the
date of receipt of the written notice of
assessment
(2) By filing a petition under oath in the form
prescribed for the purpose
(3) Copies of tax declarations and other affidavits
or documents must be submitted [Sec. 226,
LGC]
The LBAA shall decide the appeal within 120 days
from the date of receipt of such appeal
The LBAA shall have the power to summon
witnesses, administer oaths, conduct ocular
inspection, take depositions, and issue subpoena
duces tecum and/or subpoena
The LBAA must furnish the appellant a copy of the
decision of the board. [Sec. 229, LGC]
PAGE 228 OF 275
TAXATION 2 TAXATION LAW
Fels Energy v. Province of Batangas [G.R. No.
168557, Feb. 16, 2007]: Under Section 226 of R.A.
No 7160, the last action of the local assessor on a
particular assessment shall be the notice of
assessment; it is this last action which gives the
owner of the property the right to appeal to the LBAA.
The procedure likewise does not permit the property
owner the remedy of filing a motion for
reconsideration before the local assessor.
Victorias Milling v. CTA [G.R. No. L-24213, Mar. 13,
1968]: The failure to appeal within the statutory
period renders the assessment final and
unappealable.
Appeal to the Central Board of Assessment Appeals
(CBAA)
Appeal must be filed within 30 days from the receipt
of the decision of LBAA [Sec. 229, LGC]
Effect of payment of tax
Appeal on assessments of real property shall not
suspend the collection of the corresponding realty
taxes on the property involved as assessed by the
provincial or city assessor without prejudice to the
subsequent readjustment depending upon the final
outcome of the appeal. [Sec. 231, LGC]
Payment of real property under protest
Protest must be filed with the local treasurer. No
protest shall be entertained unless the tax is first
paid. The protest must be in writing and filed within
30 days from payment of the tax to the local
treasurer.
Meralco v. Nelia Barlis [G.R. No. 114231, May 18,
2001]: The trial court has no jurisdiction to issue a
writ of prohibition which seeks to set aside the
warrant of garnishment over petitioner‘s bank
deposit in satisfaction of real property taxes without
paying first under protest the tax assessed and
without exhausting available administrative
remedies.
The local treasurer shall decide the protest within 60
days from receipt.
Appeal to the CTA En Banc
Appeal must be filed through a petition for review
within 30 days from the receipt of the decision of
CBAA [Sec. 11, R.A. 1125 as amended]
Appeal to the SC
Appeal must be filed within 15 days from receipt of
decision of the CTA [Rule 45, Rules of Court]
UP COLLEGE OF LAW TAXATION 2 TAXATION LAW

J.2. JUDICIAL
Question on the legality of a tax ordinance
Any question on the constitutionality or legality of a
tax ordinance may be raised on appeal within 30
days from effectivity to the Secretary of Justice who
shall render a decision within 60 days from the date
of receipt of the appeal.

The appeal shall not have the effect of suspending

the effectivity of the tax ordinance and the accrual
and payment of the tax.

Within 30 days after receipt of the decision or the

lapse of the sixty-day period without the Secretary of
Justice acting upon the appeal, the aggrieved party
may file appropriate proceedings with a court of
competent jurisdiction. [Sec. 187, LGC]

Assailing the validity of a tax sale

No court shall entertain any action assailing the
validity of any sale at public auction until the
taxpayer shall have deposited with the court the
amount for which the real property was sold,
together with interest of two percent per month from
the date of sale to the time of the institution of the
action. [Sec. 267, LGC]

PAGE 229 OF 275

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Flowchart V: Procedure for Assessment of Land Value for Real Property Tax
Purposes-Local Gov’t Code
For purposes of this flowchart owner means owner or administrator of real property or any person having legal interest thereto
Owner declares real
property once every 3
START
years (sec. 202) w/n
Jan 1 to June 30
Submit documents
supporting exemption w/
in 30 days from
Required
declaration (sec. 206)
Documents
submitted w/in
30 days?
Property
Yes proven as tax
No exempt?
Property shall be
listed as taxable in
No
the assessment
roll (sec. 206)
Within 30 days from
assessment, assessor
sends notice to owner
(sec. 223)
Owner may protest
assessment within 60
days from receipt of notice
to the Local Board of
Assessment Appeals
(LBAA) (Sec. 226)
Appeal to the
END Supreme Court w/
in 15 days
PAGE 230 OF 275
TAXATION LAW
Assessor prepares
Assessor declares
assessment rolls
real property if owner/
wherein real property
administrator fails to
shall be listed, valued
do so (sec. 204)
and assessed (sec. 205)
Owner may claim
Is real property
for tax exemption Yes
tax exempt?
(sec. 206)
Property shall be
dropped from
Yes
assessment roll
(sec. 206)
END
No
If LBAA rejects protest, owner
LBAA must decide
may appeal to the Central
within 120 days
Board of Assessment Appeals
from receipt of
(CBAA) w/in 30 days from
appeal (sec. 229)
receipt of notice (Sec. 229)
If CBAA rejects protest,
owner may appeal to
the CTA en banc within
30 days from receipt of
decision
UP COLLEGE OF LAW TAXATION 2 TAXATION LAW

Flowchart VI: Taxpayer’s Remedies Involving Collection of Real Property

Tax-Loc Gov’t Code
For purposes of this flowchart owner means owner or administrator of real property or any person having legal interest thereto

LT- Local Treasurer

LGU - Local Government Unit
LBAA- Local Board of Assessment Appeals
CBAA- Central Board of Assessment Appeals
START CTA- Court of Tax Appeals

LT posts notice of deadline for

Owner pays the tax.
Assessor submits payment at a conspicuous place at LT collects the tax
Written protest must be
assessment roll to the LGU hall OR publish the same starting Jan 1 of
filed with the local
local treasurer in a newspaper of general the calendar year.
treasurer w/in 30 days
(sec. 248) circulation in the LGU 1x a week for (Sec. 257)
from payment. (sec. 252)
2 consecutive weeks (sec. 249)

Amount of tax
LT must decide w/
protested shall be
LT grants LT decides w/in in 60 days from
refunded or Yes Yes
protest? 60 days? receipt of protest
applied as tax
(sec. 252)
credit (Sec. 252)

No

Refund or tax credit must Taxpayer may appeal within within 60

No days from receipt of notice (or expiration
be claimed with the local
treasurer w/in 2 years from of 60 days) to the LBAA (Sec. 226)
the date taxpayer is entitled
to such (sec. 253) LBAA must decide
within 120 days
from receipt of
appeal (sec. 229)
LT acts on claim
LT grants
for refund/tax Taxpayer happy.
Yes refund/tax Yes END
credit w/in 60
credit?
days?

If LBAA rejects protest/

No
Taxpayer may appeal
w/in 60 days from
No receipt of notice (or
expiration of 60 days)
to LBAA (Sec. 226)
END
refund, owner may
appeal to the CBAA w/
in 30 days from receipt
of notice (Sec. 229)
If CBAA rejects protest/
Appeal to the refund, owner may appeal to
Supreme Court w/ the CTA en banc within 30
in 15 days days from receipt of decision
(Rule 43, ROC)

PAGE 231 OF 275

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Flowchart VII: Procedure for Levy for Purposes of Satisfying Real
Property Taxes-Local Gov’t Code
START
Tax constitutes a lien on the
property superior to all liens
& may only be extinguished
upon payment of the tax and
charges. (sec. 257)
Before the date of sale,
the owner may stay the
proceedings by paying the
delinquent tax, interest &
the expenses of sale.
Sale is held:
1. at the main entrance
of the LGU building, OR
2. on the property to be
sold, OR at
3. any other place
specified in the notice
Is there a
bidder?
Yes
Bidder pays & 30 days
after the sale, the LT
shall report the sale to
the sanggunian
LT shall deliver to
purchaser certificate
of sale
Proceeds of sale in
excess of delinquent
tax, interest & conveyance to the
expenses of sale
remitted to the owner
(sec. 260)
TAXATION 2 TAXATION LAW
For purposes of this flowchart owner means owner or administrator of real property or any
person having legal interest thereto
Warrant of Levy issued
by the Local Treasurer Warrant is mailed
Time for payment
(LT), which has the force to or served upon
of real property
of legal execution in the the delinquent
taxes expires
LGU concerned. (sec. owner (sec. 258)
258)
30 days from service of warrant, local
treasurer shall advertise sale of the
property by:
1. posting notice at main entrance of written notice of the levy &
LGU hall/bldg and in a conspicuous the warrant is mailed/served
place in the barangay where prope is upon the assessor and the
located AND Registrar of Deeds of the
2. by publication once a week for 2 LGU (sec. 258)
weeks (sec. 260) (Note: In cases of
levy for unpaid local taxes publication
is once a week for 3 weeks)
LT shall purchase the property in behalf of
the LGU (sec. 263) (Note: in cases of levy
No for unpaid local taxes, LT may purchase if
there is no bidder or if the highest bid is
insufficient-sec. 181)
w/in 1 year from sale, owner may
Registrar of Deeds shall transfer the
redeem upon payment of the
title of the forfeited property to the LGU
1. delinquent tax,
w/o need of a court order (sec. 263)
2. interest due,
3. expenses of sale (from date of
delinquency to date of sale) and
4. add’l interest of 2% per month on W/n 1 year from forfeiture, the
the purchase price from date of sale owner, may redeem the property by
to date of redemption. (sec. 261) paying to the local treasurer the full
Delinquent owner retains amount of the tax and the related
possession and right to the fruits interest and the costs of sale
(sec. 261) otherwise the ownership shall be
vested on the local government unit
concerned. (sec. 263)
LT returns to the
Sanggunian concerned
purchaser/bidder the
may, by ordinance sell
price paid + interest
and dispose of the real
of 2% per month
property acquired under
(sec. 261)
the preceding section at
public auction. (sec. 264)
If property is not
redeemed, the local Levy may be repeated
treasurer shall until the full amount due,
execute a deed of including all expenses, is
collected. (sec. 265)
purchaser (sec. 262)
END
PAGE 232 OF 275
UP COLLEGE OF LAW TAXATION 2
VII. Tariff and Customs
Code of 1978, as
Amended
[Note: The Tariff and Customs Code (TCC) has been
repealed by RA 10863 or the Customs
Modernization and Tariff Act (CMTA). CMTA came
into effect on 30 May 2016]
A. TARIFF AND DUTIES, DEFINED
Tariff
Taxes or list of articles liable to duties
A list or schedule of articles on which a duty is
imposed upon the importation into the country, with
the rates at which they are severally taxed. And
derivatively, the system of imposing duties or taxes
on the importation of foreign merchandise.
Custom duties – taxes on the importation or
exportation of commodities. Tariff or tax assessed
upon the merchandise imported from or exported to
a foreign country –
Export tariff – levied, assessed and collected an
export duty on the gross FOB value at the time of
shipment based on the prevailing rate on traditional
export products, such as certain wood products,
mineral products, plant and vegetable products [Sec.
514, TCC]
Note: Export duties imposed upon all export
products under Sec. 514, TCC had been abolished,
except the export duty upon logs [Sec. 1, EO 26
issued on 1 July 1986].
Import tariff – All articles, when imported from any
foreign country into the Philippines, shall be subject
to duty upon each importation, even though
previously exported from the Philippines, except as
otherwise specifically provided for in this Code or in
other laws [Sec. 101, TCC]
CMTA, Sec. 104: ―All goods, when imported into the
Philippines, shall be subject to duty upon
importation, including goods previously exported
from the Philippines, except as otherwise
specifically provided under CMTA or other laws.‖
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TAXATION LAW
B. GENERAL RULE: ALL IMPORTED
ARTICLES ARE SUBJECT TO DUTY [SEC.
101, TCC; SEC. 104, CMTA]
Importation by the government taxable ―except as
otherwise specifically provided, all importations by
the government for its own use or that of its
subordinate branches on instrumentalities, or
corporations, agencies or instrumentalities owned
or controlled by the government, shall be subject to
the duties, taxes, fees and other charges provided
for in this code: provided, however, that upon
certification of the head of the department or
political subdivision concerned, with the approval of
the auditor general, that the imported article is
actually being used by the government or any of 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.‖ [Sec. 1205 TCC]
CMTA, Sec. 406: ―Except those provided for in Sec.
800 (conditionally tax and/or duty-exempt
importation), all importations by the Government for
its own use or that of its subordinate branches or
instrumentalities, or corporations, agencies or
instrumentalities owned or controlled by the
government, shall be subject to the duties, taxes,
fees and other charges under the CMTA.‖
Articles – goods, wares, merchandise and in general
anything that may be made subject of importation or
exportation [Sec. 3514, TCC]
U.S. Dollars, having ceased to be legal tender in the
Philippines, fall within the meaning of the term
merchandise [Bastida v. Commissioner of Customs
(1970)]
C. PURPOSE FOR IMPOSITION
For the protection of consumers and manufacturers,
as well as Philippine products from undue
competition posed by foreign-made products.
D. FLEXIBLE TARIFF CLAUSE
Constitutional Basis: Sec. 28[2], Art. VI, 1987
Constitution. The Congress may, by law, authorize
the President to fix with specified limits, and subject
to such limitations and restrictions, as it may
impose, tariff rates, import and export quotas,
tonnage and wharfage duties, and other duties or
imposts within the framework of the national
development program of the Government.
UP COLLEGE OF LAW TAXATION 2
The flexible clause refers to the authority given to
the President, upon the recommendation of NEDA,
to adjust the tariff rates in the interest of national
economy, general welfare and/or national security
[Sec. 401, TCC].
CMTA, Sec. 1608: ―In the interest of the general
welfare and national security,‖ the President is
empowered to adjust the tariff rates, upon
recommendation of NEDA.
The President is empowered to increase (by not
more than 5x) or reduce (by not more than 50%) the
rates of import duty expressly fixed by statute. This
includes the authority to modify the form of duty.
[Sec. 401, TCC]
CMTA, Sec. 1608: The President is empowered to:
(1) Increase, reduce or remove existing rates
[increase in the rate cannot exceed 100% ad
valorem], including authority to modify the form
of duty
(2) Establish import quotas or ban imports of any
commodity
(3) Impose an additional duty not exceeding 10%
ad valorem
E. REQUIREMENTS OF IMPORTATION
E.1. BEGINNING AND ENDING OF
IMPORTATION
Importation begins when the carrying vessel or
aircraft enters the jurisdiction of the Philippines with
intention to unload therein [Sec. 1202, TCC; the
same under CMTA, Sec. 103]
Importation is deemed terminated upon payment of
duties, taxes and other charges due upon the
articles, or secured to be paid, at a port of entry AND
the legal permit for withdrawal shall have been
granted, or in case said articles are free of duties,
taxes and other charges, until they have legally left
the jurisdiction of the customs. [Sec. 1202, TCC; the
same under CMTA, Sec. 103]
Note: The payment of the duties, taxes, fees and
other charges must be in full. [Papa v. Mago (1968)]
Imported articles shall be deemed "entered" in the
Philippines for consumption when the specified
entry form is properly filed and accepted, together
with any related documents required by the TCC
and/or regulations to be filed with such form at the
time of entry, at the port or station by the customs
PAGE 234 OF 275
TAXATION LAW
official designated to receive such entry papers and
any duties, taxes, fees and/or other lawful charges
required to be paid at the time of making such entry
have been paid or secured to be paid with the
customs official designated to receive such monies,
provided that the article has previously arrived
within the limits of the port of entry. [Sec. 206, TCC]
CMTA, Sec. 115: ―Imported goods shall be deemed
―entered‖ in the Philippines for consumption when
the goods declaration is electronically lodged,
together with any required supporting documents,
with the pertinent customs office.‖
E.2. OBLIGATIONS OF IMPORTER
i. Cargo manifest
[Sec. 1005, TCC; the same under CMTA, Sec. 1204]
Every vessel from a foreign port must have on board
a complete manifest of all her cargo.
All the cargo intended to be landed at a port in the
Philippines must be described in separate
manifests for each port of call.
The manifest shall include:
(1) Port of departure
(2) Port of delivery
(3) Marks, numbers, quantity and description of
the packages
(4) Names of the consignees
General rule: It cannot be changed or altered after
entry of vessel.
Exception:
Amendment by the master, consignee or agent
attached to the original manifest
CANNOT amend the manifest after the invoice
and/or entry covering the importation have been
received and recorded in the office of the appraiser
EXCEPT: (a) Obvious clerical error or any other
discrepancy is committed in the preparation; (b)
Without fraudulent intent; (c) Discovery would not
have been made until after examination of the
importation is completed.
The cargo manifest and each copy thereof shall be
accompanied by a translation into the official
language of the Philippines, if originally written in
another language. [Sec. 1006, TCC; different under
UP COLLEGE OF LAW TAXATION 2
CMTA, Sec. 1205—the translation shall be in
English]
Master shall deliver and mail the cargo manifest to
(endorsed by boarding officer):
(1) Auditor General
(2) Collector (Present original) [Sec. 1007, TCC;
different under CMTA, Sec. 1206—the Bureau
of Customs shall provide electronic copies to
the COA Chairperson; the master shall present
to the District Collector the original properly
endorsed by the boarding officer]
ii. Import entry
- Now called ―Goods Declaration‖ under the CMTA
Imported articles must be entered in the
customhouse at the port of entry within fifteen days
from date of discharge of the last package from the
vessel either
(1) by the importer, being holder of the bill of
lading
(2) by any other holder of the bill of lading in due
course,
(3) by a customs broker acting under authority from
a holder of the bill, or
(4) by a person duly empowered to act as agent or
attorney-in-fact for such holder.
The Collector may grant an extension of not more
than fifteen days. [Sec. 1301, TCC; the same under
CMTA, Sec. 106 and 407, except that for declarants,
#2 is changed to—the exporter, being the owner of
the goods to be shipped out. And, in case the
consignee or the person who has the right to
dispose of the goods is a juridical person, it may
authorize a responsible officer of the company to
sign the goods declaration as declarant on its
behalf.]
CMTA, Sec. 102(y): ―Goods Declaration - a
statement made in the manner prescribed by the
Bureau and other appropriate agencies, by which
the persons concerned indicate the procedure to be
observed in the application for the entry or
admission of imported goods and the particulars of
which the customs administration shall require.‖
All imported articles, except importation admitted
free of duty, shall be subject to a formal or informal
entry. [Sec. 1302, TCC]
CMTA, Sec. 401: ―Unless otherwise provided for in
this Act, all imported goods shall be subject to the
PAGE 235 OF 275
TAXATION LAW
lodgement of a goods declaration. A goods
declaration may be for consumption, for customs
bonded warehousing, for admission, for conditional
importation, or for customs transit.‖
Kinds of Import Entry [Sec. 1302, TCC]
(1) Formal Entry
(2) Informal Entry
CMTA, Sec. 401—Kinds of Goods Declaration
(1) For Consumption
(2) For Customs Bonded Warehousing
(3) For admission
(4) For conditional importation
(5) For customs transit
Content and Form of Import Entry
Content [Sec. 1304, TCC]
(1) That the entry delivered to the Collector
contains a full account of the value or price
articles, including subject of the entry;
(2) That the invoice and entry contain a just and
faithful account of the value or price of said
articles including and specifying the value of all
containers or coverings, and that nothing has
been omitted, therefrom or concealed whereby
the government of the Republic of the
Philippines be defrauded of any part of the
duties lawfully due on the articles;
(3) That, to the best of the declarant's information
and belief, all the invoice and bills of lading to
the articles are the only ones in existence
relating to the importation in question and that
they are in the state in which they were actually
received by him;
(4) That, to the best of the declarant's information
and belief, the entries, invoices and bill of and
the declaration thereon under penalties of
falsification of perjury are in all respects
genuine and true, and were made by the person
by whom the same purpose to have been made.
[The same under CMTA, Sec. 412, except that
#1 is omitted]
Form
(1) signed by the importer, consignee or holder of
the bill, by or for whom the entry is effected [Sec.
1305, TCC; CMTA, Sec. 107—signed by the
declarant];
(2) in the required number of copies in such form
as prescribed by regulations [Sec. 1306, TCC];
and
(3) shall contain the names of the importing vessel
or aircraft, port of departure and date of arrival,
UP COLLEGE OF LAW TAXATION 2
the number and mark of packages, or the
quantity, if in bulk, the nature and correct
commodity description of the articles contained
therein, and its value as set forth in a proper
invoice to be presented in duplicate the entry
[Sec. 1306, TCC; the same under CMTA, Sec.
411, except that the latter provides for the
inclusion of the names of the consignees and
port of destination]
Articles to be cleared on informal entry
[Sec. 1302, TCC]
(1) Articles of a commercial nature intended for
sale, barter or hire, the dutiable value of which
is P2000 or less; [Value changed to P50,000
under CMTA, Sec. 402]
(2) Personal and household effects or articles,
regardless of value, imported in passenger's
baggage, mail, or otherwise, for personal use.
The Collector may, upon instruction of the Secretary
of Finance, when he deems it necessary for the
protection of the revenue, require a formal entry
regardless of value.
Types of Formal Entry
[Sec. 1302, TCC]
A formal entry may be:
(1) For immediate consumption, or
(2) Under irrevocable domestic letter of credit,
bank guarantee or bond for:
(a) Placing the article in customs bonded
warehouse;
(b) Constructive warehousing and immediate
transportation to other ports of the
Philippines upon proper examination and
appraisal; or
(c) Constructive warehousing and immediate
exportation.
CMTA, Sec. 402: ―All goods declaration for
consumption shall be cleared through a formal entry
process.‖
Note: All importations entered under formal entry
shall be covered by a letter of credit or any other
verifiable document evidencing payment. [R.A.
9135 (2001); slightly modified under CMTA, Sec.
402—―a letter of credit or any verifiable commercial
document evidencing payment or in cases where
there is no sale for export, by any commercial
document indicating the commercial value of the
goods.‖]
PAGE 236 OF 275
TAXATION LAW
iii. Declaration of correct weight or value
[Sec. 1313, TCC]
Classification
When article is not specifically classified in the Code,
the interested party, importer or foreign exporter
may submit a sample with full description of
component materials in a written request.
Value
Upon written application, Collector shall furnish
importer within 30 days the latest information as to
the value of the articles to be imported.
Importer must present all pertinent papers and
documents, act in good faith and unable to obtain
information due to unusual conditions
Information given is not an appraisal nor is it
binding upon the Collector‘s right of appraisal.
The declaration, ascertainment or verification of the
correct weight of the cargo at the port of loading is
the duty or obligation of the master, pilot, owner,
officer or employee of the vessel. If he omits or
disregards this duty and a punishable discrepancy
between the declared weight and actual weight of
the cargo exists, the inevitable conclusion is that he
is negligent or careless. Similarly, if in the exercise
or performance of this duty, he is negligent or
careless resulting in the commission of excessive
discrepancy in the weight of the ship's cargo
penalized under the law, carelessness or
incompetency is, nonetheless, imputable to him.
PROVISIONAL GOODS DECLARATION (PGD) UNDER
CMTA, SEC. 403: Where the declarant does not have
all the information or supporting documents
required to complete the goods declaration, the
lodging of a provisional goods declaration may be
allowed: Provided, That it substantially contains the
necessary information required by the Bureau and
the declarant undertakes to complete the
information or submit the supporting documents
within 45 days from the filing of the PGD, extentible
for another 45 days for valid reasons.
If the Bureau accepts a PGD, the duty treatment of
the goods shall not be different from that of goods
with complete declaration.
Goods under a PGD may be released upon posting
of any required security equivalent to the amount
ascertained to be the applicable duties and taxes.
UP COLLEGE OF LAW TAXATION 2
iv. Liability for payment of duties
[Sec. 1204, TCC; the same under CMTA, Sec. 405]
General rule: the liability for duties, taxes, fees and
other charges attaching on importation constitutes
a personal debt due from the importer to the
government; it constitutes a lien upon the articles
imported which may be enforced while such articles
are in custody or subject to the control of the
government.
How to discharge: Discharged only by payment in
full of all duties, taxes, fees and other charges
legally accruing
Exception: Relieved by laws or regulations
v. Liquidation of duties
When made: Upon approval by the Collector of the
returns of the appraiser and reports of the weights,
gauge or quantity [Sec. 1601, TCC]
How: the liquidation shall be made on the face of
the entry showing the particulars thereof, initiated
by the liquidating clerk, approved by the chief
liquidator, and recorded in the record of
liquidations. [Sec. 1601, TCC]
Additional Process: A daily record of all entries
liquidated shall be posted in the public corridor of
the customhouse, stating the name of the vessel or
aircraft, the port from which she arrived, the date of
her arrival, the name of the importer, and the serial
number and date of the entry. A daily record must
also be kept by the Collector of all additional duties,
taxes and other charges found upon liquidation, and
notice shall promptly be sent to the interested
parties. [Sec. 1601, TCC]
Tentative and Final Liquidation
Tentative Liquidation
[Sec. 1602, TCC]
When liquidation shall be deemed to be tentative: If
to determine the exact amount due under the law in
whole or in part some future action is required [only
as to item/s affected]
Effect: shall to that extent be subject to future and
final readjustment and settlement; entry in such
case shall be stamped "Tentative liquidation"
Final Liquidation
[Sec. 1603, TCC as amended by RA 9135]
When liquidation is final and conclusive upon all the
parties: when articles have been entered and
PAGE 237 OF 275
TAXATION LAW
passed free of duty or final adjustment of duties
made, after the expiration of 3 years from the date
of the final payment of duties.
Exceptions:
(1) Fraud
(2) Protest
(3) Compliance audit pursuant to the provisions of
the Code
Note: Exceptions do not apply in case of tentative
liquidation
Fractions in the Liquidation — a fraction of a peso
less than fifty centavos shall be disregarded, and a
fraction of a peso amounting to fifty centavos or
more shall be considered as one peso. In case of
overpayment or underpayment of duties, taxes,
surcharges, wharfage and/or other charges paid on
entries, where the amount involved is less than five
pesos, no refund or collection shall be made. [Sec.
1604, TCC]
Other Notes:
Readjustment of Appraisal, Classification or Return
[Sec. 1407, TCC]
Prescriptive Period for Appraisal, Classification or
Return
General rule: Appraisal, classification or return as
finally passed upon and approved or modified by the
Collector shall not be altered or modified in any
manner.
Exceptions:
(1) Within one year after payment of the duties,
upon statement of error in conformity with
seventeen hundred and seven hereof, approved
by the Collector
(2) Within fifteen days after such payment upon
request for reappraisal and/or reclassification
addressed to the Commissioner by the Collector,
if the appraisal and/or classification is deemed
to be low
(3) Upon request for reappraisal and/or
reclassification, in the form of a timely protest
addressed to the Collector by the interested
party if the latter should be dissatisfied with the
appraisal or return
(4) Upon demand by the Commissioner of Customs
after the completion of compliance audit
pursuant to the provisions of this Code." [R.A.
9135 (2001)]
vi. Keeping of records
UP COLLEGE OF LAW TAXATION 2
All importers are required to keep at their principal
place of business, in the manner prescribed by
regulations to be issued by the Commissioner of
Customs and for a period of 3 years from the date of
importation, all records of their importations and/or
books of accounts, business and computer systems
and all customs commercial data including payment
records relevant to the verification of the accuracy of
the transactions value declared by the
importer/customs brokers on the import duty
All brokers are required to keep at their principal
place of business for a period of 3 years from date of
importation copies
Custom officer authorized by BOC may enter during
office hours any premises or place where the records
are kept to conduct an audit examination,
inspection, verification or investigation. The officer
may make copies or take extracts from any of such
documents. A certified copy may be evidence
admissible in all courts as if original.
Note: The same under CMTA, Secs. 1002-1003.
F. IMPORTATION IN VIOLATION OF TCC
F.1. SMUGGLING
In order to prevent smuggling and to secure the
collection of the legal duties, taxes and other
charges, the customs service shall exercise
surveillance over the coast, beginning when a vessel
or aircraft enters Philippine territory and concluding
when the article imported therein has been legally
passed through the customhouse. [Sec. 2202]
Smuggling – any person who shall fraudulently
import or bring into the Philippines, or assist in so
doing, any article, contrary to law, or shall receive,
conceal, buy, sell, or in any manner facilitate the
transportation, concealment, or sale of such article
after importation, knowing the same to have been
imported contrary to law; includes the exportation of
articles in a manner contrary to law. [Sec. 3519,
TCC]
Penalties for Unlawful Importation:
Person found guilty of smuggling shall be punished
by a fine of not less than six hundred pesos nor more
than five thousand pesos and imprisonment for not
less than six months nor more than two years and, if
the offender is an alien, he shall be deported after
serving the sentence.
PAGE 238 OF 275
TAXATION LAW
When the defendant is shown to have or to have had
possession of the article in question, such
possession shall be deemed sufficient evidence to
authorize conviction, unless the defendant shall
explain the possession to the satisfaction of the
court. [Sec. 3601, TCC]
Note: The penalties for unlawful importation are very
different in the CMTA, under Sec. 1401; the
penalties are dependent on the appraised value of
the goods unlawfully imported.
F.2. OTHER FRAUDULENT PRACTICES
(1) Various Practices against Customs Revenue:
Any person who
(1) makes or attempts to make any entry of
imported or exported article by means of
any false or fraudulent invoice, declaration,
affidavit, letter, paper, or
(2) by means of any false statement, written or
verbal, or by means of any false or
fraudulent practice whatsoever, or
(3) shall be guilty of any willful act or omission
by means of whereof the Government might
be deprived of the lawful duties, taxes and
other charges, or any portion thereof,
accruing from the article or any portion
thereof, embraced or referred to in such
invoice, declaration, affidavit, letter, paper,
or statement, or affected by such act or
omission [Sec. 3602, TCC]
(2) Failure to Report Fraud: Any master, pilot in
command or other officer, owner or agent of any
vessel or aircraft trading with or within the
Philippines and any employee of the Bureau of
Customs, who, having cognizance of any fraud
upon the customs revenue, shall fail to report
all information relative thereto to the Collector,
as required by law [Sec. 3603, TCC]
(1) Concealment or Destruction of Evidence of
Fraud: Any person who willfully conceals or
destroys, any invoice, book or paper relating to
any article liable to duty, after an inspection
thereof has been demanded by the Collector of
any Collection district, or at any time conceals
or destroys any such invoice, book or paper for
the purpose of suppressing any evidence of
fraud therein contained [Sec. 3605, TCC]
(2) Affixing Seals: Any person who shall willfully
break or destroy any seal placed by a customs
official upon any car, or other conveyance by
land, sea or air, or any compartment thereof
[Sec. 3606, TCC]
UP COLLEGE OF LAW TAXATION 2
(3) Removal, Breakage, Alteration of Marks: Any
person who alters, defaces or obliterates any
distinctive mark placed by a customs official on
any package of warehoused articles [Sec. 3607,
TCC]
(4) Removing Goods from Customs Custody: Any
importer or owner of warehoused articles, or
person in his employ, who by contrivance,
fraudulently opens the warehouse, or gains
access to the articles, except in the presence of
the proper official of the customs acting in the
execution of his duty [Sec. 3608, TCC]
(5) Failure to Keep Importation Records and Give
Full Access to Customs Officers: Any person
who shall fraudulently remove warehoused
articles from any public or private warehouse or
shall fraudulently conceal such articles in any
such warehouse, or shall aid or abet any such
removal or concealment [Sec. 3609, TCC]
G. CLASSIFICATION OF GOODS
G.1. TAXABLE IMPORTATION
All articles, when imported from any foreign country
into the Philippines, shall be subject to duty upon
each importation, even though previously exported
from the Philippines, except as otherwise
specifically provided for in this Code or in other laws.
[Sec. 100, TCC]
G.2. PROHIBITED IMPORTATION
[Sec. 101, TCC] (POPP-LAW-DING)
(1) Dynamite, gunpowder, ammunitions and other
explosives, firearm and weapons of war, and
detached parts thereof, except when authorized
by law.
(2) Written or printed article in any form containing:
(a) any matter advocating or inciting treason,
rebellion, insurrection or sedition against
the Government of the Philippines
(b) forcible resistance to any law of the
Philippines
(c) containing any threat to take the life of or
inflict bodily harm upon any person in the
Philippines.
(3) Written or printed articles, photographs,
engravings, lithographs, objects, paintings,
drawings or other representation of an obscene
or immoral character.
(4) Articles, instruments, drugs and substances
designed, intended or adapted for preventing
human conception or producing unlawful
abortion, or any printed matter which advertises
or describes or gives directly or indirectly
information where, how or by whom human
PAGE 239 OF 275
TAXATION LAW
conception is prevented or unlawful abortion
produced.
(5) Roulette wheels, gambling outfits, loaded dice,
marked cards, machines, apparatus or
mechanical devices used in gambling, or in the
distribution of money, cigars, cigarettes or other
articles when such distribution is dependent
upon chance, including jackpot and pinball
machines or similar contrivances.
(6) Lottery and sweepstakes tickets,
advertisements thereof and lists of drawings
therein.
Except those authorized by the Philippine
Government
(7) Any article manufactured in whole or in part of
gold silver or other precious metal, or alloys
thereof, the stamps brands or marks of which
do not indicate the actual fineness or quality of
said metals or alloys.
(8) Any adulterated or misbranded article of food or
any adulterated or misbranded drug in violation
of the provisions of the "Food and Drugs Act."
(9) Marijuana, opium poppies, coca leaves, or any
other narcotics or synthetic drugs which are or
may hereafter be declared habit forming by the
President of the Philippines, any compound,
manufactured salt, derivative, or preparation
thereof,
Except: when imported by the Government of
the Philippines or any person duly authoriwhen
imported by the Government of the Philippines
or any person duly authorized by the Collector of
Internal Revenue for medicinal purposes only
(10) Opium pipes and parts thereof, of whatever
material.
(11) All other articles the importation of which is
prohibited by law.
G.3. CONDITIONALLY-FREE IMPORTATION
[Sec. 105, TCC]
The following articles shall be exempt from the
payment of import duties upon compliance with the
formalities prescribed in, or with, the regulations
which shall be promulgated by the Commissioner of
Customs with the approval of the Secretary of
Finance:
(1) Aquatic products (e.g., fishes, crustaceans,
mollusks, marine animals, seaweeds, fish oil,
roe), caught or gathered by fishing vessels of
Philippine registry: Provided, That they are
imported in such vessels or in crafts attached
thereto: And provided, further, That they have
not been landed in any foreign territory or, if so
landed, they have been landed solely for
UP COLLEGE OF LAW TAXATION 2
transshipment without having been advanced in
condition;
(2) Equipment for use in the salvage of vessels or
aircrafts, not available locally, upon
identification and the giving of a bond in an
amount equal to one and one-half times the
ascertained duties, taxes and other charges
thereon, conditioned for the exportation thereof
or payment of the corresponding duties, taxes
and other charges within six [6] months from
the date of acceptance of the import entry:
Provided, That the Collector of Customs may
extend the time for exportation or payment of
duties, taxes and other charges for a term not
exceeding six [6] months from the expiration of
the original period;
(3) Cost of repairs, excluding the value of the
article used, made in foreign countries upon
vessels or aircraft documented, registered or
licensed in the Philippines, upon proof
satisfactory to the Collector of Customs [1] that
adequate facilities for such repairs are not
afforded in the Philippines, or [2] that such
vessels or aircrafts, while in the regular course
of her voyage or flight was compelled by stress
of weather or other casualty to put into a foreign
port to make such repairs in order to secure the
safety, seaworthiness or airworthiness of the
vessel or aircraft to enable her to reach her port
of destination;
(4) Articles brought into the Philippines for repair,
processing or reconditioning to be re-exported
upon completion of the repair, processing or
reconditioning: Provided, That the Collector of
Customs shall require the giving of a bond in an
amount equal to one and one-half times the
ascertained duties, taxes and other charges
thereon, conditioned for the exportation thereof
or payment of the corresponding duties, taxes
and other charges within six [6] months from
the date of acceptance of the import entry;
(5) Medals, badges, cups and other small articles
bestowed as trophies or prizes, or those
received or accepted as honorary distinction;
(6) Personal and household effects belonging to
residents of the Philippines returning from
abroad including jewelry, precious stones and
other articles of luxury which were formally
declared and listed before departure and
identified under oath before the Collector of
Customs when exported from the Philippines by
such returning residents upon their departure
therefrom and during their stay abroad;
personal and household effects including
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wearing apparel, articles of personal
adornment [except luxury items], toilet articles,
portable appliances and instruments and
similar personal effects, excluding vehicles,
watercrafts, aircrafts, and animals purchased in
foreign countries by residents of the Philippines
which were necessary, appropriate and
normally used for the comfort and convenience
in their journey and during their stay abroad
upon proof satisfactory to the Collector of
Customs that same have been in their use
abroad for more than six [6] months and
accompanying them on their return, or arriving
within a reasonable time which, barring
unforeseen circumstances, in no case shall
exceed ninety days before or after the owners'
return: Provided, That the personal and
household effects shall neither be in
commercial quantities nor intended for barter,
sale or hire and that the total dutiable value of
which shall not exceed two thousand pesos
[P2,000.00]: Provided further, That the
returning residents have not previously received
the benefit under this section within one year
from and after the last exemption granted:
Provided furthermore, That a fifty [50] per cent
ad valorem duty across the board shall be
levied and collected on the personal and
household effects [except luxury items] in
excess of two thousand pesos: And provided,
finally, That the personal and household effects
[except luxury items] of a returning resident who
has not stayed abroad for six months shall be
subject to fifty per cent ad valorem duty across
the board, the total dutiable value of which
does not exceed two thousand pesos; any
excess shall be subject to the corresponding
duty provided in this Code;
(7) Wearing apparel, articles of personal
adornment, toilet articles, portable tools and
instruments, theatrical costumes and similar
effects accompanying travelers, or tourists. or
arriving within a reasonable time before and
after their arrival in the Philippines, which are
necessary and appropriate for the wear and use
of such persons according to the nature of the
journey, their comfort and convenience:
Provided, That this exemption shall not apply to
articles intended for other persons or for barter,
sale or hire: Provided, further, That the Collector
of Customs may, in his discretion, require either
a written commitment or a bond in an amount
equal to one and one-half times the
ascertained duties, taxes and other charges
UP COLLEGE OF LAW TAXATION 2
conditioned for the exportation thereof or
payment of the corresponding duties, taxes and
other charges within three [3] months from the
date of acceptance of the import entry: And
Provided finally, That the Collector of Customs
may extend the time for exportation or payment
of duties, taxes and other charges for a term not
exceeding three months from the expiration of
the original period;
(8) Personal and household effects and vehicles
belonging to foreign consultants and experts
hired by, and/or rendering service to, the
government, and their staff or personnel and
families, accompanying them or arriving within
a reasonable time before or after their arrival in
the Philippines, in quantities and of the kind
necessary and suitable to the profession, rank
or position of the person importing them, for
their own use and not for barter, sale or hire
provided that, the Collector of Customs may in
his discretion require either a written
commitment or a bond in an amount equal to
one and one-half times the ascertained duties,
taxes and other charges upon the articles
classified under this subsection; conditioned
for the exportation thereof or payment of the
corresponding duties, taxes and other charges
within six [6] months after the expiration of their
term or contract; And Provided, finally, That the
Collector of Customs may extend the time for
exportation or payment of duties, taxes and
other charges for term not exceeding six [6]
months from the expiration of the original
period;
(9) Professional instruments and implements, tools
of trade, occupation or employment, wearing
apparel, domestic animals, and personal and
household effects belonging to persons coming
to settle in the Philippines or Filipinos and/or
their families and descendants who are now
residents or citizens of other countries, such
parties hereinafter referred to as Overseas
Filipinos, in quantities and of the class suitable
to the profession, rank or position of the
persons importing them, for their own use and
not for barter or sale, accompanying such
persons, or arriving within a reasonable time, in
the discretion of the Collector of Customs,
before or after the arrival of their owners, which
shall not be later than February 28, 1979 upon
the production of evidence satisfactory to the
Collector of Customs that such persons are
actually coming to settle in the Philippines, that
change of residence was bona fide and that the
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privilege of free entry was never granted to them
before or that such person qualifies under the
provisions of Letters of Instructions 105, 163
and 210, and that the articles are brought from
their former place of abode, shall be exempt
from the payment of customs duties and taxes:
Provided, That vehicles, vessels, aircrafts,
machineries and other similar articles for use in
manufacture, shall not be classified hereunder;
(10) Articles used exclusively for public
entertainment, and for display in public
expositions, or for exhibition or competition for
prizes, and devices for projecting pictures and
parts and appurtenances thereof, upon
identification, examination, and appraisal and
the giving of a bond in an amount equal to one
and one-half times the ascertained duties,
taxes and other charges thereon, conditioned
for exportation thereof or payment of the
corresponding duties, taxes and other charges
within six [6] months from the date of
acceptance of the import entry; Provided, That
the Collector of Customs may extend the time
for exportation or payment of duties, taxes and
other charges for a term not exceeding six [6]
months from the expiration of the original
period; and technical and scientific films when
imported by technical, cultural and scientific
institutions, and not to be exhibited for profit:
Provided, further, That if any of the said films is
exhibited for profit, the proceeds therefrom
shall be subject to confiscation, in addition to
the penalty provided under Section Thirty-six
hundred and ten as amended, of this Code;
(11) Articles brought by foreign film producers
directly and exclusively used for making or
recording motion picture films on location in
the Philippines, upon their identification,
examination and appraisal and the giving of a
bond in an amount equal to one and one-half
times the ascertained duties, taxes and other
charges thereon, conditioned for exportation
thereof or payment of the corresponding duties,
taxes and other charges within six [6] months
from the date of acceptance of the import entry,
unless extended by the Collector of Customs for
another six [6] months; photographic and
cinematographic films, undeveloped, exposed
outside the Philippines by resident Filipino
citizens or by producing companies of
Philippine registry where the principal actors
and artists employed for the production are
Filipinos, upon affidavit by the importer and
identification that such exposed films are the
UP COLLEGE OF LAW TAXATION 2
same films previously exported from the
Philippines. As used in this paragraph, the
terms "actors" and "artists" include the
persons operating the photographic cameras or
other photographic and sound recording
apparatus by which the film is made;
(12) Importations for the official use of foreign
embassies, legations, and other agencies of
foreign governments: Provided, That those
foreign countries accord like privileges to
corresponding agencies of the Philippines;
(13) Articles imported for the personal or family use
of the members and attaches of foreign
embassies, legations, consular officers and
other representatives of foreign governments:
Provided, That such privilege shall be accorded
under special agreements between the
Philippines and the countries which they
represent: And Provided, further, That the
privilege may be granted only upon specific
instructions of the Secretary of Finance in each
instance which will be issued only upon request
of the Department of Foreign Affairs;
(14) Imported articles donated to, or for the account
of, any duly registered relief organization, not
operated for profit, for free distribution among
the needy, upon certification by the Department
of Social Services and Development or the
Department of Education, Culture and Sports,
as the case may be;
(15) Containers, holders and other similar
receptacles of any material including kraft
paper bags for locally manufactured cement for
export, including corrugated boxes for bananas,
mangoes, pineapples and other fresh fruits for
export, except other containers made of paper,
paperboard and textile fabrics, which are of
such character as to be readily identifiable
and/or reusable for shipment or transportation
of goods shall be delivered to the importer
thereof upon identification, examination and
appraisal and the giving of a bond in an amount
equal to one and one-half times the
ascertained duties, taxes and other charges
within six months from the date of acceptance
of the import entry;
(16) Supplies which are necessary for the
reasonable requirements of the vessel or
aircraft in her voyage or flight outside the
Philippines, including articles transferred from
a bonded warehouse in any collection district to
any vessel or aircraft engaged in foreign trade,
for use or consumption of the passengers or its
crew on board such vessel or aircrafts as sea or
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TAXATION LAW
air stores; or articles purchased abroad for sale
on board a vessel or aircraft as saloon stores or
air store supplies: Provided, That any surplus or
excess of such vessel or aircraft supplies
arriving from foreign ports or airports shall be
dutiable;
(17) Articles and salvage from vessels recovered
after a period of two years from the date of filing
the marine protest or the time when the vessel
was wrecked or abandoned, or parts of a
foreign vessel or her equipment, wrecked,
abandoned in Philippine waters or elsewhere:
Provided, That articles and salvage recovered
within the said period of two years shall be
dutiable;
(18) Coffins or urns containing human remains,
bones or ashes, used personal and household
effects [not merchandise] of the deceased
person, except vehicles, the value of which does
not exceed ten thousand pesos, upon
identification as such;
(19) Samples of the kind, in such quantity and of
such dimension or construction as to render
them unsalable or of no appreciable
commercial value; models not adapted for
practical use; and samples of medicines,
properly marked "sample-sale punishable by
law," for the purpose of introducing a new
article in the Philippine market and imported
only once in a quantity sufficient for such
purpose by a person duly registered and
identified to be engaged in that trade: Provided,
That importations under this subsection shall
be previously authorized by the Secretary of
Finance: Provided, however, That importation of
sample medicine shall be previously authorized
by the Secretary of Health that such samples
are new medicines not available in the
Philippines: Provided, finally, That samples not
previously authorized and/or properly marked
in accordance with this section shall be levied
the corresponding tariff duty.
(20) Commercial samples, except those that are not
readily and easily identifiable [e.g., precious
and semi-precious stones, cut or uncut, and
jewelry set with precious stones], the value of
any single importation of which does not exceed
ten thousand pesos [P10,000.00] upon the
giving of a bond in an amount equal to twice the
ascertained duties, taxes and other charges
thereon, conditioned for the exportation of said
samples within six [6] months from the date of
the acceptance of the import entry or in default
thereof, the payment of the corresponding
UP COLLEGE OF LAW TAXATION 2
duties, taxes and other charges. If the value of
any single consignment of such commercial
samples exceeds ten thousand pesos
[P10,000.00],the importer thereof may select
any portion of same not exceeding in value of
ten thousand pesos [P10,000.00] for entry
under the provision of this subsection, and the
excess of the consignment may be entered in
bond, or for consumption, as the importer may
elect;
(21) Animals (except race horses), and plants for
scientific, experimental, propagation, botanical,
breeding, zoological and national defense
purposes: Provided, That no live trees, shoots,
plants, moss, and bulbs, tubers and seeds for
propagation purposes may be imported under
this section, except by order of the Government
or other duly authorized institutions: Provided,
further, That the free entry of animals for
breeding purposes shall be restricted to
animals of recognized breed, duly registered in
the book of record established for that breed,
certified as such by the Bureau of Animal
Industry: Provided, furthermore, That certificate
of such record, and pedigree of such animal
duly authenticated by the proper custodian of
such book of record, shall be produced and
submitted to the Collector of Customs, together
with affidavit of the owner or importer, that such
animal is the animal described in said
certificate of record and pedigree: And Provided,
finally, That the animals and plants are certified
by the National Economic and Development
Authority as necessary for economic
development;
(22) Economic, technical, vocational, scientific,
philosophical, historical, and cultural books
and/or publications: Provided, That those
which may have already been imported but
pending release by the Bureau of Customs at
the effectivity of this Decree may still enjoy the
privilege herein provided upon certification by
the Department of Education, Culture and
Sports that such imported books and/or
publications are for economic, technical,
vocational, scientific, philosophical, historical
or cultural purposes or that the same are
educational, scientific or cultural materials
covered by the International Agreement on
Importation of Educational Scientific and
Cultural Materials signed by the President of
the Philippines on August 2, 1952, or other
agreements binding upon the Philippines.
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(23) Educational, scientific and cultural materials
covered by international agreements or
commitments binding upon the Philippine
Government so certified by the Department of
Education, Culture and Sports.
(24) Bibles, missals, prayer books, Koran, Ahadith
and other religious books of similar nature and
extracts therefrom, hymnal and hymns for
religious uses;
(25) Philippine articles previously exported from the
Philippines and returned without having been
advanced in value or improved in condition by
any process of manufacture or other means,
and upon which no drawback or bounty has
been allowed, including instruments and
implements, tools of trade, machinery and
equipment, used abroad by Filipino citizens in
the pursuit of their business, occupation or
profession; and foreign articles previously
imported when returned after having been
exported and loaned for use temporarily abroad
solely for exhibition, testing and
experimentation, for scientific or educational
purposes; and foreign containers previously
imported which have been used in packing
exported Philippine articles and returned empty
if imported by or for the account of the person
or institution who exported them from the
Philippines and not for sale, barter or hire
subject to identification: Provided, That any
Philippine article falling under this subsection
upon which drawback or bounty has been
allowed shall, upon re-importation thereof, be
subject to a duty under this subsection equal to
the amount of such drawback or bounty.
(26) Aircraft, equipment and machinery, spare parts
commissary and catering supplies, aviation gas,
fuel and oil, whether crude or refined, and such
other articles or supplies imported by and for
the use of scheduled airlines operating under
Congressional franchise: Provided, That such
articles or supplies are not locally available in
reasonable quantity, quality and price and are
necessary or incidental for the proper operation
of the scheduled airline importing the same;
(27) Machineries, equipment, tools for production,
plants to convert mineral ores into saleable
form, spare parts, supplies, materials,
accessories, explosives, chemicals, and
transportation and communication facilities
imported by and for the use of new mines and
old mines which resume operations, when
certified to as such by the Secretary of
Agriculture and Natural Resources upon the
UP COLLEGE OF LAW TAXATION 2
recommendation of the Director of Mines, for a
period ending five [5] years from the first date of
actual commercial production of saleable
mineral products: Provided, That such articles
are not locally available in reasonable quantity,
quality and price and are necessary or
incidental in the proper operation of the mine;
and aircrafts imported by agro-industrial
companies to be used by them in their
agriculture and industrial operations or
activities, spare parts and accessories thereof;
(28) Spare parts of vessels or aircraft of foreign
registry engaged in foreign trade when brought
into the Philippine exclusively as replacements
or for the emergency repair thereof, upon proof
satisfactory to the Collector of Customs that
such spare parts shall be utilized to secure the
safety, seaworthiness or airworthiness of the
vessel or aircraft, to enable it to continue its
voyage or flight;
(29) Articles of easy identification exported from the
Philippines for repair and subsequently
reimported upon proof satisfactory to the
Collector of Customs that such articles are not
capable of being repaired locally: Provided,
That the cost of the repairs made to any such
article shall pay a rate of duty of thirty per cent
ad valorem;
(30) Trailer chassis when imported by shipping
companies for their exclusive use in handling
containerized cargo, upon posting a bond in an
amount equal to one and one-half times the
ascertained duties, taxes and other charges
due thereon to cover a period of one year from
the date of acceptance of the entry, which
period for meritorious reasons may be extended
by the Commissioner of Customs from year to
year, subject to the following conditions:
(a) That they shall be properly identified and
registered with the Land Transportation
Commission;
(b) That they shall be subject to customs
supervision fee to be fixed by the Collector
of Customs and subject to the approval of
the Commissioner of Customs;
(c) That they shall be deposited in the
Customs zone when not in use; and
(d) That upon the expiration of the period
prescribed above, duties and taxes shall be
paid, unless otherwise re-exported
H. CLASSIFICATION OF DUTIES
H.1. ORDINARY/REGULAR DUTIES
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Ordinary or regular duties refer to those that, as a
matter of course, are imposed on dutiable articles
[Sec. 104, TCC]
i. Ad valorem; Methods of valuation
The tax rates are based on
(1) The cost (FMV) or price of the imported articles,
in wholesale quantities in the principal market
of the exporting country or the country of origin,
including expenses connected with the
importation, such as insurance, freight,
packaging, loading and unloading charges, but
excluding internal excise taxes to be remitted or
rebated; or
(2) In case such value is not ascertainable, the
reports of the Revenue or commercial attaches;
or
(3) If still not ascertainable, the domestic
wholesale market price in the ordinary course of
trade less import duty and not more than 25%
for expenses and profits. [Sec. 201, TCC]
Basis for all Methods of Valuation
[Sec. 201, TCC and CAO 4-2004]
Methods for determining dutiable value –
(1) Transaction value – an ad valorem rate of duty
equivalent to the price actually paid or payable
for the goods when sold for export to the
Philippines, as adjusted;
(2) Transaction value of identical goods – the
transaction value of identical goods sold for
export to the Philippines and exported at or
about the same time as the goods being valued;
―identical goods‖ shall mean goods which are
the same in all respects, including physical
characteristics, quality and reputation,
discounting minor differences in appearances;
(3) Transaction value of similar goods – the
transaction value of similar goods sold for
export to the Philippines and exported at or
about the same time as the goods being valued;
―similar goods‖ shall mean goods which,
although not alike in all respects, have like
characteristics and like component materials
which enable them to perform the same
functions and to be commercially
interchangeable;
(4) Deductive value – an amount based on the unit
price at which the imported gods or identical or
similar imported goods are sold in the
Philippines, in the same condition as when
imported, in the greatest aggregate quantity, at
or about the time of importation of the goods
being valued, to persons not related to the
UP COLLEGE OF LAW TAXATION 2
persons from whom they buy such goods, as
adjusted
(5) Computed value – the aggregate value of the
cost or value of materials and fabrication or
other processing employed in producing the
imported goods, amount for profit and general
expenses, freight, insurance fees and other
transportation expenses for the importation of
the goods, among others; and
(6) Fallback value – an amount determined by
using other reasonable means and on the basis
of data available in the Philippines.
General rule: The foregoing methods are
sequentially applied
Exception: [CAO 4-2004] Methods 4 and 5 may be
reversed at the request of the importer, subject to
the approval of the Commissioner.
Ground to refuse the request: if the Commissioner
deems that he will experience real difficulties in
determining the dutiable value using Method 5
Dutiable Value (DV) must not include:
(1) Charges for construction, erection, assembly
maintenance or technical assistance
undertaken after importation
(2) Cost of transport after importation
(3) Duties and taxes of Phil
(4) Other permissible deduction under WTO
Valuation Agreement
ALL the following conditions must be satisfied so
the Transaction Value (TV) shall be the DV (CREPD):
(1) Sale for export to Phil
(2) No restrictions as to the disposition or use of
goods by buyer except:
(3) Those imposed by law or Phil authorities
(4) Limit the geographical area where goods may
be resold
(5) Do not substantially affect the value of the
goods
(6) Not be subject to some condition or
consideration for which value cannot be
determined
(7) No part of the proceeds of any subsequent
disposal shall accrue to the seller
(8) Buyer and seller are not related or if they are,
relationship did not affect the price
Deemed related if:
(1) They are officers or directors of one another‘s
business;
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(2) They are legally recognized partners in
business;
(3) There exists in an employer-employee
relationship between them;
(4) Any person directly or indirectly owns, controls
or holds 5% or more of the outstanding voting
stock or shares of bother seller and buyer;
(5) One of them directly or indirectly controls the
other;
(6) Both of them are directly or indirectly controlled
by a 3rd person;
(7) Together they directly or indirectly control a 3rd
person; or
(8) Related by affinity or consanguinity up to 4th
civil degree.
If related, use of TV acceptable if:
(1) circumstances surrounding transaction
show that relationship did not influence the
price
(2) TV closely approximates:
(3) TV of unrelated buyers of identical or
similar goods
(4) Deductive value of identical or similar
goods determined according to method #4
(5) Computed value of identical or similar
goods determined according to method #5
Transaction Value of Identical Goods
The DV shall be the transaction value of identical
goods sold for export to the Phil and exported at or
about the same time as the goods being valued.
Identical goods must be same commercial level and
substantially same quantity as the goods being
valued.
Identical goods
(1) Same in all respects (physical characteristics,
quality and reputation)
(2) Produced in the same country as the goods
being valued
(3) Produced by producer of the goods being
valued
Excludes: imported goods for which engineering,
development, artwork, design work, plans and
sketches is undertaken in the Phil and provided
by the buyer to the producer free of charge or at
a reduced rate
When no identical goods produced by the same
person: Identical goods produced by different
producer in the same country
UP COLLEGE OF LAW
If NO identical goods at same commercial level and
same quantity,
(1) TV of identical goods at a different commercial
level and different quantity may be utilized
(2) TV shall be adjusted upward or downward to
account for the difference
Transaction value of similar goods
The DV shall be the transaction value of similar
goods sold for export to the Phil and exported at or
about the same time as the goods being valued.
Similar goods must be same commercial level and
substantially same quantity as the goods being
valued.
Similar goods
(1) like characteristics and like component
materials
(2) capable of performing same functions
(3) commercially interchangeable
(4) produced in same country
(5) produced by same producer
Excludes: imported goods for which engineering,
development, artwork, design work, plans and
sketches is undertaken in the Phil and provided
by the buyer to the producer free of charge or at
a reduced rate
When no similar goods produced by the same
person: similar goods produced by different
producer in the same country
If NO similar goods at same commercial level and
same quantity,
(1) TV of similar goods at a different
commercial level and different quantity
may be utilized
(2) TV shall be adjusted upward or downward
to account for the difference
Deductive value
DV is determined on the basis of sales in the Phil of
goods being valued of identical or similar imported
goods less certain expenses resulting from
importation and sale of goods.
Deductive Value is determined by making a
deduction from the established price per unit for the
aggregate of the ff. elements:
(a) Commissions or
(b) additions made in connection with profit and
general expenses and
PAGE 246 OF 275
TAXATION 2 TAXATION LAW
(c) transport, insurance and associated costs
(d) customs duties and other national taxes
PRICE
Less: COMMISSIONS/ADDITIONS
Less: COSTS
Less: DUTIES and TAXES
DEDUCTIVE VALUE
The sales must meet the following conditions:
(1) sold in the Phil in the same condition as
imported
(2) sales taken place at or about the same time of
importation of good being valued
If no sale took place at or about the time of
importation, use sales at the earliest date after
importation (of the similar or identical good])but
before expiration of 90 days
If no sale meet the above conditions, importer may
choose the use of sales of goods being valued after
further processing
―At or about the same time‖
45 days prior to and 45 days following the
importation
Computed value
DV is determined on the basis of cost of production
+ profit + general expenses reflected in sales from
exporting country to the Phil of goods of same class
or kind
DV is calculated by:
Determining aggregate of relevant costs, charges
and expenses or value of
(1) materials and
(2) production or processing costs
Costs* containers, packing, assists, engineering,
artwork, plans and sketches undertaken in Phil and
charged to producer
profits and general expenses
cost of transport, insurance and charges to the port
or place of importation
*Note: these additional costs are added only if not
included in the determination of the aggregate of
relevant costs, charges and expenses or value of
materials and production.
Fallback value
If DV cannot be determined using any of the above
methods, use other reasonable means consistent
UP COLLEGE OF LAW TAXATION 2
with principles and general provisions of General
Agreements on Tariffs and Trade [GATT]
ii. Specific
[Sec. 202, TCC]
Rates are based on units of weight number or
measurement
Kinds of weight:
Gross Weight – weight of same, together with the
weight of all containers, packages, holders and
packings, of any kind, in which said articles are
contained, held or packed at the time of importation
Legal Weight – weight at the time of their sale to the
public in usual retail quantities
Net Weight – only the actual weight at the time of
importation excluding the weight of the immediate
and all other containers
H.2. SPECIAL DUTIES
These are additional import duties imposed on
specific kinds of imported articles [See Table of
Special Duties]
I. REMEDIES
I.1. GOVERNMENT
i. Administrative/Extrajudicial
Search, seizure, forfeiture, arrest
Enforcement of Tax Lien
Tax Lien – attaches upon the articles imported
which may be enforced while such are in custody or
subject to the control of the government [Sec. 1204]
Sec. 1508.
When an importer has an outstanding and
demandable account with the Bureau of Customs,
Collector shall hold the delivery of the article.
Upon notice, he may sell such importation or a
portion of it to satisfy the obligation.
Importer may settle his obligation anytime before
the sale.
Seizure and Forfeiture
[Sec. 2205]
Who may effect:
(1) Customs official;
(2) Fisheries Commissions;
(3) Philippine Coast Guard
Note: Person who is exercising such an authority has
the duty to make known his official character, upon
being questioned at the time of the exercise. If his
authority came from a special authorization, he has
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the duty to exhibit the written authority upon
demand.
What is seized:
To make seizure of any vessel, aircraft, cargo,
animal or any movable property when the same is
subject to forfeiture or liable for any fine under the
tariff and customs law
Where authority may be exercised:
At any place within the jurisdiction of the Bureau of
Customs
Other Rights/Authority of the Official effecting the
search and seizure
(1) Authority to require assistance of any police
officer if necessary [Sec. 2207]
(2) At any time, right to enter, pass through or
search any inclosure or warehouse, or other
building, not being a dwelling house [Sec.
2208]
(3) Right to enter and search a dwelling house,
upon warrant issued by the Judge of the Court,
or any responsible officer as may be authorized
[Sec. 2209]
(4) Right to Search Vessels or Aircrafts and Persons
or Articles Conveyed [Sec. 2210]
(5) Right to Search Vehicles, Beasts and Persons
when he has reasonable cause to suspect the
presence therein of dutiable or prohibited
article introduced into the Philippines contrary
to law [Sec. 2211]
(6) Search of Persons Arriving From Foreign
Countries [Sec. 2212]
Administrative Proceedings [Secs 2301 – 2316]
Procedure for Seizure:
Collector shall issue a warrant for the detention of
the property
Cash bond
If the importer wishes to secure release of article for
legitimate use
(1) amount fixed by Collector
(2) appraised value of article and/or fine, expenses,
costs
Note: Article will not be released if:
(1) there is prima facie evidence of fraud in the
importation
(2) article is prohibited by law
UP COLLEGE OF LAW TAXATION 2
Report to Commissioner and Chairman of
Commission of Audit
Written notice to owner or importer. He shall he
given opportunity to be heard
Notification to an unknown owner
(1) posting for 15 days in the public corridor of
customhouse
(2) publication in newspaper
(3) other means Collector considers desirable
Collector shall make a list and particular description
and classification of the seized property, appraisal
based on local wholesale values by
(1) at least 2 appraising officials
(2) absent such, 2 competent disinterested citizens
If within 15 days from notification, no owner or
agent is found or appears before Collector, then the
property would be forfeited to Government and sold
at auction
Settlement
[Sec. 2307]
While case is pending, Collector may accept
settlement of any seizure case
(1) Upon approval of Commissioner
(2) Payment of fine (25% to 80% of the landed cost
of the article)
In case of forfeiture, should pay the domestic
market value of the seized article
When settlement not allowed
(1) Fraud in importation
(2) Importation prohibited by law
(3) Release would be contrary to law
Compromise
[Sec. 2316, TCC]
Commissioner may compromise any case subject to
approval by Secretary of Finance
ii. Judicial
Requisites for filing of criminal/civil case
[Sec, 2401, TCC]:
(1) Brought in the name of the government of the
Phil
(2) Conducted by Customs officers
(3) With approval from the Commissioner
Rules on appeal including jurisdiction
The party aggrieved by a ruling of the Commissioner
in any matter brought before him upon protest or by
PAGE 248 OF 275
TAXATION LAW
his action or ruling in any case of seizure may appeal
to the Court of Tax Appeals, in the manner and
within the period prescribed by law and
regulations.
Unless an appeal is made to the Court of Tax
Appeals in the manner and within the period
prescribed by laws and regulations, the action or
ruling of the Commissioner shall be final and
conclusive. [Sec. 2402, TCC]
I.2. TAXPAYER
i. Protest
When made: at the time payment of the amount
claimed to be due is made within 15 days thereafter
[Sec. 2308]
Form
(1) Must be in writing
(2) Must point out the particular decision or ruling
of the Collector of Customs to which exception
is taken or objection made
(3) Must state the grounds relied upon for relief
[Sec. 2310, TCC]
Scope
Limited to the subject matter of a single adjustment
(refers to the entire content of one liquidation
including duties, fees, surcharges and fines) or other
independent transaction
Other requirements:
(1) Payment of the amount due and the
corresponding docket fee shall be made before
protest [Sec. 2308]
(2) Upon demand of Collector, the importer shall
furnish samples of the articles which are the
subject of the protest
Effect of Failure to Protest
Failure renders the action of the Collector final and
conclusive except for manifest error
Review of Commissioner
[Sec. 2313]
A person aggrieved by the decision or Collector in
any matter presented upon protest or by his action
in any case of seizure may, within days after
notification on writing by the Collector of his actions
or decisions, file a written notice to the Collector
with a copy furnished to the Commissioner of his
intention to appeal the action or decision of the
Collector to the Commissioner
UP COLLEGE OF LAW TAXATION 2 TAXATION LAW

Automatic Review (2) error in return of weight, measure and gauge

Happens in case a decision is made adverse to the
Government
ii. Abandonment
When article deemed abandoned
(1) owner, importer or consignee expressly signifies
in writing to Collector his intention to abandon
(2) after due notice, fails to file an entry within 30
days from date of discharge of last package
from vessel or aircraft
(3) after filing entry, fails to claim his importation
15 days from date of posting of the notice to
claim such importation [Sec. 1801, TCC]
Effect
[Sec. 1802, TCC]
(1) deemed to have renounced his interest and
property rights
(2) ipso facto deemed property of the Government
If the abandoned articles are transferred to a
customs bonded warehouse, the operator shall be
liable for the payment of duties and taxes in the
case of loss of the stored abandoned imported
articles [R.V. Marzan v. CA, GR No. 128064, March
4, 2004]
Liability of Official for Failure to Report
Abandonment
Any official or employee who:
(1) had knowledge of the existence of
abandoned article
(2) custody or charge of such article
fails to report within 24 hours from time article
deemed abandoned shall be punished according to
sec. 3604 (fine: P5000 – P50,000; imprisonment:
1 yr – 10 yrs, perpetual disqualification to hold
public office, vote and participate in election)
(certified, under penalties of falsification or
perjury, by examining official)
(3) error in the distribution of charges on invoices
[which does not involve any question of law and
certified, under penalties of falsification or
perjury, by examining official] [Sec. 1707]
Conditions for refund of excess payments
(1) errors discovered before payment or discovered
within 1 year after the final liquidation
(2) written request and notice from importer or
statement of error certified by the Collector
How claimed
(1) Claim made in writing
(2) Collector shall verify with the records in his
office
(3) Certify claim to Commissioner with his
recommendation and necessary papers
(4) Commissioner shall then cause the claim to be
paid if found correct
If the result of the refund would result to a
corresponding refund of the internal revenue taxes
on the same importation, Collector shall certify to
Commissioner who shall cause the said excess to be
paid, refunded or credited in favor of the importer

iii. Abatement and Refund

When available
(1) Abatement for Damage incurred during Voyage
[Sec. 1701]
(2) Abatement or Refund for the following:
(3) Missing Packages [Sec. 1702]
(4) Deficiency of Contents in Packages [Sec. 1703]
(5) Articles Lost or Destroyed after Arrival [Sec.
1704]
(6) Dead or Injured animals [Sec. 1705]

Refund in case of excess payments due to:

(1) manifest clerical error made in invoice or entry

PAGE 249 OF 275

UP COLLEGE OF LAW TAXATION 2 TAXATION LAW

Flowchart IX: Remedies from Seizure and Forfeiture Cases-Tariffs and

Customs Code

START

Collector seizes goods

Importer may secure
Collector determines and reports it to the
release of goods by Collector conducts
probable cause Commissioner and to
(illegal importation) filing of cash bond hearing
COA. Owner is notified
(Sec. 2301)
of seizure

Collector’s Amount
decision favorable Automatic review* by Customs
Yes involved less Yes
to taxpayer/ Commisioner (Sec. 2313)
than 5M?
adverse to gov’t?

Is
Does
No Commissioner’s
commissioner
Yes decision favorable
decide w/in 30
Taxpayer appeals to taxpayer/
days?
to Customs adverse to gov’t?
Commissioner 15
days from receipt No
of notice
Inaction construed as affirmation
of Collector’s decision
Does
Commissioner
Yes No, amount is at least
decide w/n 30
Is 5M
days?
Commissioner’s Yes
Automatic Review* by
decision
the Secretary of
favorable to Yes
Finance (SOF) (Sec.
taxpayer/
2313, CMO 3-2002)
adverse to
gov’t?

Is SOF’s
decision Does SOF
No favorable to Yes decide within
No No taxpayer/adverse 30 days?
to gov’t?

No
Yes
Inaction construed as
affirmation of
Decision becomes
commissioner’s decision No
END final &
(or of collector’s decision Appeal
unappealable
in case of inaction by to CTA
commissioner)
Appeal to the
Inaction construed
Court of Tax
as affirmation of
Appeals within 30
Collector’s
days from notice
decision
of decision

Appeal to CTA en
MR within 15 days
banc 15 days from Appeal to the
from receipt of END
receipt of decision Supreme Court
decision
denying MR

*Automatic review is intended to protect the interest of the Government. W/o auto review, the Commissioner and SoF would not know
about the decision laid down by the Collector favoring the taxpayer. Automatic review is necessary because nobody is expected to appeal
the decision of the Collector which is favorable to the taxpayer & adverse to the Government. (Yaokasin v. Commissioner 180 SCTA 591

PAGE 250 OF 275

UP COLLEGE OF LAW TAXATION 2 TAXATION LAW

TABLE OF SPECIAL DUTIES: When Imposed

Anti-Dumping Countervailing
[Sec. 301, TCC as [Sec. 302 as Marking Discriminatory
amended by RA amended by RA [Sec. 303] [Sec. 304]
Safeguard [RA 8800]
8752] 8751]
Where a product or Whenever any If at the time of Whenever the [Sec 5] General [Sec 21] Special
commodity is product, importation any President finds Safeguard Safeguard
imported in the commodity or article [or its that the public Measure: Measure for
Philippines at an article of container if the interest will be Whenever there is Agricultural
export price less commerce is article cannot be served thereby,
a positive final Products: Imposed
than the normal granted directly or marked], is not additional customs
value in the indirectly by the marked in in any duty shall be determination of upon agricultural
ordinary course of government in the official language imposed upon the Commission products,
trade for the like country of origin or of the Philippines articles wholly or in that a product is consistent with
product or article exportation, any and in a part the growth or being imported Phil international
destines for kind or form of conspicuous product of, or into the country in treaty obligations,
consumption in the specific subsidy place as legibly, imported in a increased if its:
exporting country upon the indelibly and vessel of, any quantities, (a) Cumulative
or materially production, permanently as foreign country whether absolute import volume
regarding manufacture or the nature of the whenever he shall or relative to the in a given year
establishment of a exportation of such article (or find as a fact that
domestic exceeds its
domestic industry product, container). such country —
producing the like commodity or This is used to production, as to trigger volume
product [Sec. 3, RA article, and the prevent deception (1) Imposes, be a substantial subject to the
8752] importation of such of consumers. directly or cause of serious conditions
subsidized indirectly, upon injury or threat under Sec.
product, has any Phil product thereof to the 23, RA 8800,
caused or unreasonable domestic or but not
threatens to cause charge, exaction, industry; however, currently; and
material injury to a regulation or in the case of (b) Actual CIF
domestic industry limitation which is non-agricultural import price is
or has materially not equally
products, the less than its
retarded the enforced upon the
growth or prevents like articles of
Secretary of trigger price
the establishment other foreign Agriculture shall subject to
of a domestic countries; or first establish that conditions
industry the application of under Sec.
(2) Discriminates such safeguard 24, RA 8800
in fact against the measures will be
commerce of the in the public
Philippines, as to interest
place the
commerce of the
Philippines at a
disadvantage
compared with the
commerce of any
foreign country.

PAGE 251 OF 275

UP COLLEGE OF LAW TAXATION 2 TAXATION LAW

TABLE OF SPECIAL DUTIES: Imposing Authority and Amount

Anti-Dumping
Countervailing [Sec.
[Sec. 301, TCC as Marking Discriminatory
302 as amended by Safeguard [RA 8800]
amended by RA [Sec. 303] [Sec. 304]
RA 8751]
8752]
Secretary of Trade and Industry - non- Commissioner of President [through a For non- Secretary of
agricultural products Customs proclamation] agricultural Agriculture
Secretary of Agriculture - agricultural products:
products Secretary of Trade
Tariff Commission - decides whether or and Industry
not to impose anti- For agricultural
dumping/countervailing duty products:
Secretary of
Agriculture

Anti-Dumping Equivalent to the 5% ad valorem of Not exceeding tariff increase, For a]:
Duty = Normal subsidy the articles 100% ad valorem either ad valorem
Value - Export upon the articles or specific, or appropriately set to
Price both, to be paid a level not
through a cash exceeding one-
bond set at a level third of the
sufficient to applicable out-
redress or prevent quota customs duty
injury to the on the agricultural
domestic industry product under
[Sec. 8, RA 8800] consideration in
the year when it is
imposed

For b], compute as

follows:
0 - if price
difference is at
most 10% of the
trigger price
30% of the amount
by which the price
difference exceeds
10% of the trigger
price
50% - if it exceeds
40% but less than
60%
70% - if it exceeds
60 but at most
75%
90% - if it exceeds
75%

PAGE 252 OF 275

UP COLLEGE OF LAW TAXATION 2 TAXATION LAW

Notes:
Exceptions to the Marking of Articles (in the following
situations, the containers shall be the one subject to
marking):
(1) Article is incapable of being marked
(2) Article cannot be marked prior to shipment to the
Philippines without injury
(3) Article cannot be marked prior to shipment to the
Philippines, except at an expense economically
prohibitive of its importation
(4) Marking of a container of such article will reasonably
indicate the origin of such article
(5) Article is a crude substance
(6) Article is imported for use by the importer and not
intended for sale in its imported or any other form
(7) Article is to be processed in the Philippines by the
importer or for his account otherwise than for the
purpose of concealing the origin of such article and in
such manner that any mark contemplated by this
section would necessarily be obliterated, destroyed or
permanently concealed

(8) An ultimate purchaser, by reason of the character of

such article or by reason of the circumstance of its
importation, must necessarily know the country of origin
of such article even though it is not marked to indicate
its origin
(9) Article was produced more than twenty years prior to its
importation into the Philippines
(10) Article cannot be marked after importation except at an
expense which is economically prohibitive, and the
failure to mark the article before importation was not
due to any purpose of the importer, producer, seller or
shipper to avoid compliance with this section

PAGE 253 OF 275

UP COLLEGE OF LAW
VIII. Judicial Remedies
A. JURISDICTION OF THE COURT OF TAX
APPEALS
A.1. CIVIL TAX CASES
i. Exclusive Original Jurisdiction
Tax collection cases involving final and executory
assessments for taxes, fees, charges and penalties,
where the principal amount of taxes and fees,
exclusive of charges and penalties, claimed is one
million pesos or more.
ii. Exclusive Appellate Jurisdiction in civil cases
CTA Division
(1) Decisions and Inaction of CIR in cases involving
disputed assessments, refunds of internal
revenue taxes, fees or other charges, penalties
in relation thereto, or other matters arising
under the National Internal Revenue or other
laws administered by the Bureau of Internal
Revenue;
Inaction of the CIR shall be deemed a denial
in which the taxpayer may appeal.
Inaction does not necessarily constitute a
formal decision and the taxpayer may opt to
await the final decision of the CIR by constitute
a formal decision and the taxpayer may opt to
await the final decision of the CIR beyond the
180 days and may appeal such final decision.
For claim for refund, the taxpayer must file a
petition for review with the CTA prior to the
expiration of the two year prescriptive period.
(2) Decisions, orders or resolutions of the RTC in
local tax cases and in tax collection cases
originally decided or resolved by them in their
original jurisdiction.
(3) Decisions of the Commissioner of Customs in
cases involving liability for customs duties, fees
or other money charges, seizure, detention or
release of property affected, fines, forfeitures or
other penalties in relation thereto, or other
matters arising under the Customs Law or other
laws administered by the Bureau of Customs;
(4) Decisions of the Secretary of Finance on
customs cases elevated to him automatically
for review from decisions of the Commissioner
of Customs which are adverse to the
Government under Sec. 2315 of the TCC;
(5) Decisions of the Secretary of Trade and Industry,
in the case of non-agricultural product,
commodity or article, and the Secretary of
Agriculture in the case of agricultural product,
commodity or article, involving dumping and
PAGE 254 OF 275
TAXATION 2 TAXATION LAW
countervailing duties under Section 301 and
302, respectively, of the Tariff and Customs
Code, and safeguard measures under Republic
Act No. 8800, where either party may appeal
the decision to impose or not to impose said
duties. [Sec. 7, RA No. 1125 as amended]
CTA en Banc
(1) Decisions or resolutions on motions for
reconsideration or new trial of the Court in
Divisions in the exercise of its exclusive
appellate jurisdiction over:
(2) Cases arising from administrative agencies –
Bureau of Internal Revenue, Bureau of Customs,
Department of Finance, Department of Trade
and Industry, Department of Agriculture;
(3) Local tax cases decided by the Regional Trial
Courts in the exercise of their original
jurisdiction; and
(4) Tax collection cases decided by the Regional
Trial Courts in the exercise of their original
jurisdiction involving final and executory
assessments for taxes, fees, charges and
penalties, where the principal amount of taxes
and penalties claimed is less than one million
pesos;
(5) Decisions, resolutions or orders of the Regional
Trial Courts in local tax cases and in tax
collection cases decided or resolved by them in
the exercise of their appellate jurisdiction;
(6) Decisions, resolutions or orders on motions for
reconsideration or new trial of the Court in
Division in the exercise of its exclusive original
jurisdiction over tax collection cases;
(7) Decisions of the Central Board of Assessment
Appeals (CBAA) in the exercise of its appellate
jurisdiction over cases involving the assessment
and taxation of real property originally decided
by the provincial or city board of assessment
appeals;
A.2. CRIMINAL CASES
[Sec. 7, RA 1125 as amended]
i. Exclusive Original Jurisdiction
All criminal offenses arising from violations of the
National Internal Revenue Code or Tariff and
Customs Code and other laws administered by the
Bureau of Internal Revenue or the Bureau of
Customs. Principal amount of taxes and fees,
exclusive of charges and penalties, claimed is more
than or equal to one million pesos.
UP COLLEGE OF LAW
The filing of the criminal action being deemed to
necessarily carry with it the filing of the civil action,
and no right to reserve the filling of such civil action
separately from the criminal action will be
recognized.
ii. Exclusive appellate jurisdiction in criminal cases
CTA Division
(1) Over appeals from the judgments, resolutions
or orders of the Regional Trial Courts in tax
cases originally decided by them, in their
respected territorial jurisdiction.
(2) Over petitions for review of the judgments,
resolutions or orders of the Regional Trial
Courts in the exercise of their appellate
jurisdiction over tax cases originally decided by
the Metropolitan Trial Courts, Municipal Trial
Courts and Municipal Circuit Trial Courts in their
respective jurisdiction.
Does the CTA have jurisdiction over a special civil
action for certiorari assailing an interlocutory order
issued by the RTC in a local tax case? YES.
While there is no express grant of such power, with
respect to the CTA, Section 1, Article VIII of the
1987 Constitution provides, nonetheless, that
judicial power shall be vested in one Supreme Court
and in such lower courts as may be established by
law and that judicial power includes the duty of the
courts of justice to settle actual controversies
involving rights which are legally demandable and
enforceable, and to determine whether or not there
has been a grave abuse of discretion amounting to
lack or excess of jurisdiction on the part of any
branch or instrumentality of the Government.
On the strength of the above constitutional
provisions, it can be fairly interpreted that the power
of the CTA includes that of determining whether or
not there has been grave abuse of discretion
amounting to lack or excess of jurisdiction on the
part of the RTC in issuing an interlocutory order in
cases falling within the exclusive appellate
jurisdiction of the tax court. It, thus, follows that the
CTA, by constitutional mandate, is vested with
jurisdiction to issue writs of certiorari in these cases.
[City of Manila v. Grecia-Cuerdo, (2014)]
CTA En Banc
(1) Decisions, resolutions or orders on motions for
reconsideration or new trial of the Court in
Division in the exercise of its exclusive original
PAGE 255 OF 275
TAXATION 2 TAXATION LAW
jurisdiction over cases involving criminal
offenses arising from violations of the National
Internal Revenue Code or the Tariff and
Customs Code and other laws administered by
the Bureau of Internal Revenue or Bureau of
Customs;
(2) Decisions, resolutions or orders on motions for
reconsideration or new trial of the Court in
Division in the exercise of its exclusive
appellate jurisdiction over criminal offenses
mentioned in the preceding subparagraph; and
(3) Decisions, resolutions or orders of the Regional
trial Courts in the exercise of their appellate
jurisdiction over criminal offenses mentioned in
subparagraph [f].
B. JUDICIAL PROCEDURES
B.1. JUDICIAL ACTION FOR COLLECTION OF
TAXES
i. Internal revenue taxes
The remedies for the collection of internal revenue
taxes, fees or charges, and any increment thereto
resulting from delinquency can be through the
institution of a civil or criminal action. [Sec. 205,
NIRC]
Note: Please refer to Taxpayer‘s Remedies (B.
Collection)
When this remedy is resorted to:
The tax assessment becomes final and executory
because of the failure to appeal.
Even pending decision of the administrative protest
[CIR v. Union Shipping, 1990]
ii. Local taxes
The LGU concerned may enforce the collection of
delinquent taxes, fees, charges or other revenues by
civil action in any court of competent jurisdiction.
The civil action shall be filed by the local treasurer.
[Sec. 183, LGC]
MTC/RTC depending on jurisdictional threshold
amount.
Prescriptive period
Local taxes, fees, or charges may be collected within
5 years from the date of assessment by
administrative or judicial action.
No judicial or administrative action for collection
can be instituted after lapse of the period for
assessment except when there is fraud or intent to
evade tax. [Sec. 194 LGC]
UP COLLEGE OF LAW TAXATION 2
The running of the periods of prescription shall be
suspended for the time during which:
(1) The treasurer is legally prevented from making
the assessment of collection;
(2) The taxpayer requests for a reinvestigation and
executes a waiver in writing before expiration of
the period within which to assess or collect; and
(3) The taxpayer is out of the country or otherwise
cannot be located. [Sec. 194, LGC]
B.2. CIVIL CASES
i. Who may appeal, mode of appeal, effect of appeal
Appeal to CTA Division
(1) A party aggrieved or adversely affected by the
decision or ruling or inaction of
(a) The CIR;
(b) The Commissioner of Customs;
(c) The Secretary of Finance;
(d) The Secretary of Trade and Industry;
(e) The Secretary of Agriculture; or
(f) The RTC exercising original jurisdiction
(2) may appeal within 30 days from the receipt of
the copy of the decision or ruling, or the
expiration of the period fixed by law for the
Commissioner to decide, to the Court of Tax
Appeals Division.
Mode of Appeal: Rule 42
Aggrieved party may file a motion for
reconsideration or new trial within 15 days from
receipt of the copy of the decision.
Appeal to CTA en Banc
A party adversely affected by a decision or resolution
of a Division of the Court on a motion for
reconsideration or new trial may appeal within 15
days from receipt of the copy of the decision.
Mode of Appeal: Rule 43
A party adversely affected by a decision or ruling of
the Central Board of Assessment Appeals and the
Regional Trial Court in the exercise of their appellate
jurisdiction may appeal within 30 days from the
receipt of the copy of the decision.
Suspension of collection of tax
General rule: No appeal taken to the Court shall
suspend the payment, levy, distraint, or sale of any
property of the taxpayer for the satisfaction of his tax
liability as provided under existing laws.
Exception: Where the collection of the amount of the
taxpayer‘s liability, sought by means of a demand
PAGE 256 OF 275
TAXATION LAW
for payment, by levy, distraint or sale of any property
of the taxpayer, or by whatever means, as provided
under existing laws, may jeopardize the interest of
the Government or the taxpayer, an interested party
may file a motion for the suspension of the
collection of the tax liability (Sec. 11, RA 1125, as
amended by RA 9282)
Injunction not available to restrain collection
No court shall have authority to grant an injunction
to restrain the collection of any national internal
revenue tax, fee or charge imposed by the Code.
[Sec. 217, NIRC]
Exception: Sec. 11, RA 1125, supra.
Note: The Local Government Code does not have a
provision prohibiting injunction in the collection of
tax.
Taking of evidence
The Court may receive evidence in the following
cases:
(1) In all cases falling within the original
jurisdiction of the Court in Division pursuant to
Section 3, Rule 4 of these Rules; and
(2) In appeals in both civil and criminal cases
where the Court grants a new trial pursuant to
Section 2, Rule 53 and Section 12, Rule 124 of
the Rules of Court. [Sec. 2, Rule 12, A.M. No.
05-11-07]
Taking of evidence by:
Justice—
The Court may, motu proprio or upon proper motion,
direct that a case, or any issue therein, be assigned
to one of its members for the taking of evidence,
when the determination of a question of fact arises
at any stage of the proceedings, or when the taking
of an account is necessary, or when the
determination of an issue of fact requires the
examination of a long account. The hearing before
such justice shall proceed in all respects as though
the same had been made before the Court.
Upon the completion of such hearing, the justice
concerned shall promptly submit to the Court a
written report thereon, stating therein his findings
and conclusions. Thereafter, the Court shall render
its decision on the case, adopting, modifying, or
rejecting the report in whole or in part, or, the Court
may, in its discretion, recommit it to the justice with
instructions, or receive further evidence. [Sec. 12,
UP COLLEGE OF LAW
RA No. 1125, as amended; also Sec. 3, Rule 12,
A.M. No. 05-11-07]
Court Official –
In default or ex parte hearings, or in any case where
the parties agree in writing, the Court may delegate
the reception of evidence to the Clerk of Court, the
Division Clerks of Court, their assistants who are
members of the Philippine bar, or any Court attorney.
The reception of documentary evidence by a Court
official shall be for the sole purpose of marking,
comparison with the original, and identification by
witnesses of such documentary evidence. The Court
official shall have no power to rule on objections to
any question or to the admission of exhibits, which
objections shall be resolved by the Court upon
submission of his report and the transcripts within
ten days from termination of the hearing. [Sec. 4,
Rule 12, A.M. No. 05-11-07]
Motion for reconsideration or new trial
[Rule 15, A.M. No. 05-11-07]
Who: Any aggrieved party may seek a
reconsideration or new trial of any decision,
resolution or order of the Court.
May be opposed by: The adverse party may file an
opposition to the motion for reconsideration or new
trial within ten days after his receipt of a copy of the
motion for reconsideration or new trial of a decision,
resolution or order of the Court.
When: He shall file a motion for reconsideration or
new trial within fifteen days from the date he
received notice of the decision, resolution or order
of the Court in question.
The Court shall resolve the motion for
reconsideration or new trial within three months
from the time it is deemed submitted for resolution.
How: The motion shall be in writing stating its
grounds, a written notice of which shall be served by
the movant on the adverse party.
A motion for new trial shall be proved in the manner
provided for proof of motions. A motion for the
cause mentioned in subparagraph [a] of the
preceding section shall be supported by affidavits of
merits which may be rebutted by counter-affidavits.
A motion for the cause mentioned in subparagraph
(b) of the preceding section shall be supported by
affidavits of the witnesses by whom such evidence is
expected to be given, or by duly authenticated
PAGE 257 OF 275
TAXATION 2 TAXATION LAW
documents which are proposed to be introduced in
evidence.
A motion for reconsideration or new trial that does
not comply with the foregoing provisions shall be
deemed pro forma, which shall not toll the
reglementary period for appeal.
Effect: The filing of a motion for reconsideration or
new trial shall suspend the running of the period
within which an appeal may be perfected.
Grounds: A motion for new trial may be based on
one or more of the following causes materially
affecting the substantial rights of the movant:
(1) Fraud, accident, mistake or excusable
negligence which ordinary prudence could not
have guarded against and by reason of which
such aggrieved party has probably been
impaired in his rights; or
(2) Newly discovered evidence, which he could not,
with reasonable diligence, have discovered and
produced at the trial and, which, if presented,
would probably alter the result.
A motion for new trial shall include all grounds then
available and those not included shall be deemed
waived.
Restrictions: No party shall be allowed to file a
second motion for reconsideration of a decision,
final resolution or order; or for new trial.
ii. Appeal to the CTA, en banc
No civil proceeding involving matter arising under
the National Internal Revenue Code, the Tariff and
Customs Code or the Local Government Code shall
be maintained, except as herein provided, until and
unless an appeal has been previously filed with the
CTA and disposed of in accordance with the
provisions of this Act.
A party adversely affected by a resolution of a
Division of the CTA on a motion for reconsideration
or new trial, may file a petition for review with the
CTA en banc. [Sec. 18, RA No. 1125 as amended]
iii. Petition for review on certiorari to the Supreme
Court
[Rule 16, A.M. No. 05-11-07]
A party adversely affected by a decision or ruling of
the Court en banc may appeal by filing with the
Supreme Court a verified petition for review on
certiorari within fifteen days from receipt of a copy of
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the decision or resolution, as provided in Rule 45 of Regional Trial 15 days from Appeal pursuant
the Rules of Court. If such party has filed a motion Court in the receipt of to Sec. 3[a] and
for reconsideration or for new trial, the period herein exercise of its decision 6, Rule 122 of
fixed shall run from the party‘s receipt of a copy of original the Rules of
jurisdiction Court
the resolution denying the motion for
[to CTA Division]
reconsideration or for new trial. CTA Division 15 days from Petition for
[to CTA En Banc] receipt of review as
The motion for reconsideration or for new trial filed decision provided in Rule
before the Court shall be deemed abandoned if, 43 of the Rules
during its pendency, the movant shall appeal to the May be extended of Court
Supreme Court. for good cause
for not more The Court en
B.3. CRIMINAL CASES than 15 days banc shall act on
i. Institution and prosecution of criminal actions the appeal.
Regional Trial 15 days from Petition for
Institution of criminal action
Courts in the receipt of review as
Instituted by the filing an information in the name of exercise of their decision provided in Rule
the People of the Philippines appellate 43 of the Rules
jurisdiction of Court
Those involving violations of the NIRC and other [To CTA division]
laws enforced by the BIR: Must be approved by the
CIR
Solicitor General as counsel for the People and
Those involving violations of the tariff and Customs government officials sued in their official capacity
Code and other laws enforced by the Bureau of The Solicitor General shall represent the People of
Customs: Must be approved by the Commissioner of the Philippines and government officials sued in
Customs their official capacity in all cases brought to the
Court in the exercise of its appellate jurisdiction. He
Institution shall interrupt the running of the period of may deputize the legal officers of the Bureau of
prescription Internal Revenue in cases brought under the
National Internal Revenue Code or other laws
Prosecution of criminal action enforced by the Bureau of Internal Revenue, or the
Conducted and prosecuted under the direction and legal officers of the Bureau of Customs in cases
control of the public prosecutor brought under the Tariff and Customs Code of the
Philippines or other laws enforced by the Bureau of
Those involving violations of the NIRC and other Customs, to appear in behalf of the officials of said
laws enforced by the BIR or violations of the tariff agencies sued in their official capacity: Provided,
and Customs Code and other laws enforced by the however, such duly deputized legal officers shall
Bureau of Customs - The prosecution may be remain at all times under the direct control and
conducted by their respective duly deputized legal supervision of the Solicitor General.
officers.
iii. Petition for review on certiorari to the Supreme
Institution on civil action in criminal action Court
In cases within the jurisdiction of the Court, the A party adversely affected by a decision or ruling of
criminal action and the corresponding civil action the CTA en banc may file with the Supreme Court a
for the recovery of civil liability for taxes and verified petition for review on certiorari pursuant to
penalties shall be deemed jointly instituted in the Rule 45 of the 1997 Rules of Civil Procedure. [Sec.
same proceeding. The filing of the criminal action 19, R.A. No. 1125 as amended]
shall necessarily carry with it the filing of the civil
action. No right to reserve the filing of such civil C. TAXPAYER’S SUIT IMPUGNING THE
action separately from the criminal action shall be
VALIDITY OF TAX MEASURES OR ACTS
allowed or recognized.
OF TAXING AUTHORITIES
ii. Appeal and period to appeal criminal cases
Deciding Body Period to Appeal Mode of Appeal C.1. TAXPAYER’S SUIT, DEFINED
PAGE 258 OF 275
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Taxpayer‘s suit – refers to a case where the act
complained of directly involves the illegal
disbursement of public funds derived from taxation.
[Kilosbayan v. Guingona, Jr. (1994)]
C.2. DISTINGUISHED FROM CITIZEN’S SUIT
The plaintiff in a taxpayer's suit is in a different
category from the plaintiff in a citizen's suit. In the
former, the plaintiff is affected by the expenditure of
public funds, while in the latter, he is but the mere
instrument of the public concern. [De Castro v.
Judicial and Bar Council (2010)]
C.3. REQUISITES FOR CHALLENGING THE
CONSTITUTIONALITY OF A TAX MEASURE
OR ACT OF TAXING AUTHORITY
i. Concept of locus standi as applied in taxation
The doctrine of locus standi is the right of
appearance in a court of justice. The doctrine
requires a litigant to have a material interest in the
outcome of a case. In private suits, locus standi
requires a litigant to be a "real party in interest,"
which is defined as "the party who stands to be
benefited or injured by the judgment in the suit or
the party entitled to the avails of the suit."
In public suits, this Court recognizes the difficulty of
applying the doctrine especially when plaintiff
asserts a public right on behalf of the general public
because of conflicting public policy issues. On one
end, there is the right of the ordinary citizen to
petition the courts to be freed from unlawful
government intrusion and illegal official action. At
the other end, there is the public policy precluding
excessive judicial interference in official acts, which
may unnecessarily hinder the delivery of basic
public services.
The Court has adopted the "direct injury test" to
determine locus standi in public suits. In People v.
Vera, it was held that a person who impugns the
validity of a statute must have "a personal and
substantial interest in the case such that he has
sustained, or will sustain direct injury as a result."
The "direct injury test" in public suits is similar to
the "real party in interest" rule for private suits
under Section 2, Rule 3 of the 1997 Rules of Civil
Procedure. [Planter‘s Products, Inc. v. Fertiphil
Corporation, G.R. No. 166006, March 14, 2008]
As applied to taxation:
It is well-stated that the validity of a statute may be
contested only by one who will sustain a direct injury
in consequence of its enforcement. Yet, there are
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TAXATION LAW
many decisions nullifying, at the instance of
taxpayers, laws providing for the disbursement of
public funds, upon the theory that "the expenditure
of public funds by an officer of the State for the
purpose of administering an unconstitutional act
constitutes a misapplication of such funds," which
may be enjoined at the request of a taxpayer.
[Pascual v. Secretary of Public Works (1960)]
A taxpayer is allowed to sue where there is a claim
that public funds are illegally disbursed, or that the
public money is being deflected to any improper
purpose, or that there is wastage of public funds
through the enforcement of an invalid or
unconstitutional law. A person suing as a taxpayer,
however, must show that the act complained of
directly involves the illegal disbursement of public
funds derived from taxation. He must also prove that
he has sufficient interest in preventing the illegal
expenditure of money raised by taxation and that he
will sustain a direct injury because of the
enforcement of the questioned statute or contract.
In other words, for a taxpayer‘s suit to prosper, two
requisites must be met:
(1) public funds derived from taxation are disbursed
by a political subdivision or instrumentality and in
doing so, a law is violated or some irregularity is
committed and
(2) the petitioner is directly affected by the alleged
act. [Mamba v. Lara, G.R. No. 165109, Dec. 14,
2009]
ii. Doctrine of transcendental importance
Recognizing that a strict application of the "direct
injury" test may hamper public interest, this Court
relaxed the requirement in cases of "transcendental
importance" or with "far reaching implications."
Being a mere procedural technicality, it has also
been held that locus standi may be waived in the
public interest. [Ibid]
Planters Products, Inc. v. Fertiphil Corp.: Even
assuming arguendo that there is no direct injury, We
find that the liberal policy consistently adopted by
this Court on locus standi must apply. The issues
raised by Fertiphil are of paramount public
importance. It involves not only the constitutionality
of a tax law but, more importantly, the use of taxes
for public purpose. Former President Marcos issued
LOI No. 1465 with the intention of rehabilitating an
ailing private company. This is clear from the text of
the LOI. PPI is expressly named in the LOI as the
direct beneficiary of the levy. Worse, the levy was
made dependent and conditional upon PPI
UP COLLEGE OF LAW TAXATION 2
becoming financially viable. The LOI provided that
"the capital contribution shall be collected until
adequate capital is raised to make PPI viable."
The constitutionality of the levy is already in doubt
on a plain reading of the statute. It is Our
constitutional duty to squarely resolve the issue as
the final arbiter of all justiciable controversies. The
doctrine of standing, being a mere procedural
technicality, should be waived, if at all, to
adequately thresh out an important constitutional
issue.
iii. Ripeness for judicial determination
―Ripeness for judicial determination‖ means that
litigation is inevitable or there is no adequate relief
available in any other form or proceeding.
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TAXATION LAW
CJH Development Corp. v. BIR (2008): However, CJH
is not left without recourse. The Tariff and Customs
Code provides for the administrative and judicial
remedies available to a taxpayer who is minded to
contest an assessment, subject of course to certain
reglementary periods. The TCC provides that a
protest can be raised provided that payment first be
made of the amount due. The decision of the
Collector can be reviewed by the Commissioner of
Customs who can approve, modify or reverse the
decision or action of the Collector. If the party is not
satisfied with the ruling of the Commissioner, he
may file the necessary appeal to the Court of Tax
Appeals. Afterwards, the decision of the Court of Tax
Appeals can be appealed to this Court.