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Taxation Law

to the other
• Applies only to entities exercising
government functions (acta jure
TAXATION – power inherent in every sovereign imperii)
State to impose a charge or burden upon persons,
properties, or rights to raise revenues for the use and
support of the government to enable it to discharge CONSTITUTIONAL LIMITATIONS
its appropriate functions A. Direct
1) Due process
SCOPE OF TAXATION • Should not be harsh, oppressive,
TAXATION IS: or confiscatory (Substantive)
ƒ Unlimited, • By authority of valid law
ƒ Far-reaching, (Substantive)
ƒ Plenary • Must be for a public purpose
ƒ Comprehensive (Substantive)
ƒ Supreme • Imposed within territorial
jurisdiction (Substantive)
STAGES OF TAXATION: (LAP) • No arbitrariness in assessment
1. Levy and collection (Procedural)
2. Assessment • Right to notice and hearing
3. Payment (Procedural)
2) Equal protection
Basic Principles of a Sound Tax System • All persons subject to legislation
1. Fiscal Adequacy shall be treated alike, under like
2. Theoretical Justice circumstances and conditions
3. Administrative Feasibility both in privileges conferred and
liabilities imposed.
INHERENT LIMITATIONS (SPING) • Power to tax includes power to
1) Situs or territoriality of taxation classify provided:
2) Must be for a Public purpose (a) Based on substantial
• Test is whether proceeds will be distinction
used for something which is the (b) Apply to present and future
duty of the State to provide. conditions
• Legislature is not required to (c) Germane to purpose of law
adopt a policy of “all or none.” (d) Apply equally to all members of
• Incidental benefit to individual the same class
does not defeat exemption 3) Non-impairment clause
3) International comity • Rules
• Property of a foreign State of (a) When government is party to
government may not be taxed by contract granting exemption
another Æ cannot be withdrawn
4) Non-delegability of the taxing power without violating non-
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determine kind, object,
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are needed to see this picture. extent, (b) When exemption generally
amount, coverage, and situs of granted by law Æ withdrawal
tax; does not violate
• Distinguish from power to assess (c) When exemption granted
and collect under a franchise Æ may be
• Exemptions: (a) presidential revoked; Consti provides that
taxing powers; (b) local franchise is subject to
governments amendment, alteration, or
5) Exemptions of Government agencies repeal by Congress.
• Taking money from one pocket 4) Must be uniform and equitable
—Advisers: Atty. Serafin Salvador, Atty. Michael Dana Montero, Atty. Gaudencio Mendoza; Head: Julie Ann B.
Domino, Juan J. P. Enriquez III; Understudies: Rachelle T. Sy, Aldwin Mendoza, Timothy John Batan—
Taxation Law Summer Reviewer

• Uniform: all articles or properties ACTUALLY, DIRECTLY and EXCLUSIVELY

of the same class taxed at same USED for charitable, religious and
rate educational purposes shall be exempt from
• Equity: apportionment must be taxation
more or less just in the light of • Pertains only to real estate tax.
taxpayer’s ability to shoulder tax • Test of exemption: actual use of the
burden property, not ownership
5) Non-imprisonment for non-payment • Use of word “exclusively” means
of poll tax “primarily” rather than “solely.”
• Taxpayer may be imprisoned for • Exemption extends to property incidental
non-payment of other kinds of to or reasonably necessary for the
taxes where the law so expressly accomplishment of the purposes
provides. mentioned.
6) Congress shall evolve a progressive 11) Tax exemption of all revenues and assets of
system of taxation (a) non-stock, non-profit educational
• As resources of the taxpayer institutions
becomes higher, his tax rate (b) used ACTUALLY, DIRECTLY AND
likewise increases (ex. Income EXCLUSIVELY for educational
tax) purposes
• Constitution does not prohibit • Exemption covers income, property,
regressive taxes; this is a donor’s tax, and customs duties
directive upon Congress, not a (distinguish from previous which pertains
justiciable right. only to property tax)
7) All appropriation, revenue or tariff bills shall • Revenue must both be (a) derived from
originate exclusively in the House of an activity in pursuance of educational
Representatives, but the Senate may purpose; and (b) proceeds must be used
propose or concur with amendments for the same purpose (ex. hospital
• It is the bill, not the law, that must adjunct to medical school tax exempt)
originate from House; bill may undergo (ex. Interest income not exempt).
extensive changes in Senate • Income exempt provided it is used for
• Rationale: members of House are more maintenance or improvement of
sensitive to local needs. institution.
8) Freedom of religion • Distinguish from tax treatment of (a)
• Activities simply and purely for proprietary educational institutions
propagation of faith are exempt (e.g. sale (Preferential Tax); and (b) government
of bibles and religious articles by non- educational institutions (exempt, ex. UP)
stock, non-profit organization at minimal 12) Delegated authority of President to impose
profit). tariff rates, import and export quotas,
• Tax is unconstitutional if it operates as a tonnage and wharfage dues
prior restraint on exercise of religion • delegated by Congress
• Income even of religious organizations • through a law
from any activity conducted for profil or • subject to Congressional limits and
from any of their property, real or restrictions
personal, regardless of disposition of • within the framework of national
such income, is taxable development program
9) Freedom of press/expression
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a prior restraint
picture. amnesties, condonations and refunds) shall
invalid. be passed with concurrence of Congress -
• If fee is only for purpose of defraying cost majority of all members voting separately
of registration and not for exercise of • Relative majority (majority of quorum) is
privilege, no violation. sufficient to withdraw exemption.
10) Charitable institutions, churches, and 14) No use of public money or property for
parsonages or convents appurtenant thereto, religious purposes except if priest is assigned
mosques and non-profit cemeteries and all to armed forces, penal institutions,
lands, buildings and improvements government orphanage or leprosarium

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Taxation Law Summer Reviewer

15) Special purpose - special fund for said (c) without regard to their property,
purpose, balance goes to general funds occupation or business
16) Veto power of the President - revenue/tariff Ex. Community Tax (Cedula)
bill 2) property tax –
17) Power of review of the SC (a) imposed on property, real or personal
18) Power of Local Government to create their (b) in proportion to its value or other
own sources and levy taxes, fees, charges reasonable method of apportionment
19) Just share of local government in national Ex. Real estate tax
revenue which shall be automatically 3) excise, privilege tax - (different from the
released. excise tax in Taxation II)
20) Tax exemption of all revenues and assets of (a) imposed upon performance of an act, the
(a) proprietary or cooperative educational enjoyment of a privilege or the engaging
institutions in an occupation, profession or business
(b) subject to limitations provided by law Ex. Income tax, VAT, estate tax, donor’s tax
21) Tax exemption of grants, endowments, B. As to who bears the burden
donations or contributions USED 1) Direct – the tax is imposed on the person
ACTUALLY, DIRECTLY and EXCLUSIVELY who also bears the burden thereof
for educational purposes Ex. Income tax, community tax, estate tax
2) Indirect – imposed on the taxpayer who
CIR v. CA (298 SCRA 85) shifts the burden of the tax to another
Ex. VAT, specific tax, percentage tax,
Facts: YMCA is a non-stock, non-profit institution, customs duties
which conducts various programs and activities C. As to determination of amount
beneficial to the public pursuant to its religious, 1) Specific – tax imposed and based on a
educational and charitable objective. In 1980, YMCA physical unit of measurement, as by head,
earned an income of more than P600K from leasing number, weight, length or volume
out a portion of its premises to small shop owners Ex. Tax on distilled spirits, fermented
and P47K from parking fees. liquors, cigars
2) Ad Valorem - tax of a fixed proportion of the
Issue: Is the rental income from real property owned value of property with respect to which the
by the YMCA subject to income tax? tax is assessed; requires intervention of
Held: YES, the exemption claimed by YMCA is Ex. Real estate tax, excise tax on cars, non-
expressly disallowed by the last paragraph of then essential goods
§27 of the NIRC. Furthermore, Art. XIV, §4 (3) of the D. As to purpose
Constitution only exempts YMCA from property taxes 1) General, fiscal or revenue - imposed for the
NOT income tax. YMCA cannot be considered as an general purpose of supporting the
“educational institution” within the purview of the government
above-cited article. The term “educational institution” Ex. Income tax, percentage tax
under the Education Act of 1982 refers to schools. 2) Special or regulatory - imposed for a
The school system is synonymous with formal special purpose, to achieve some social or
education, which refers to hierarchically structured economic objectives
and chronologically graded learnings organized and Ex. Protective tariffs or customs duties on
provided by the formal school system and for which imported goods intended to protect local
certification is required in order for the learner to industries
progress through grades or more to higher levels. E. As to authority imposing the tax
Nothing in the Articles of Incorporation
decompressor or By-Laws of
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1) National - imposed by the national
the YMCA suggests that it is an educational
are needed to see this picture. government
institution. Ex. National internal revenue taxes, custom
Classification of Taxes 2) Municipal or local - imposed by the
A. As to subject matter of object municipal corporations or local governments
1) personal, poll, capitation tax – Ex. Real estate tax, occupation tax
(a) fixed amount
(b) individuals residing within specified

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Taxation Law Summer Reviewer

F. As to graduation of rate (Three systems of taxes accrue is given the owner

taxation) to the general of the expropriated
1) Proportional - based on a fixed percentage benefit of the property
of the amount of the property, income or citizens of the
other basis to be taxed taxing State
Ex. Real estate tax, VAT, percentage tax Persons Applies to all Only particular
2) Progressive or graduated - tax rate affected persons, property is
increases as the tax base or bracket property and comprehended
increases excises that
Ex. Income tax, estate tax, donor’s tax may be
3) Regressive - tax rate decreases as the tax subject
base increases thereto
4) Degressive - increase of rate is not
proportionate to the increase of tax base TAX DISTINGUISHED FROM LICENSE FEE

• SITUS OF TAXATION - the place of taxation, the TAX LICENSE FEE

country that has the power to levy and collect the
tax. Source Exercise of Emanate from the police
Taxing power power of the State
Purpose Raise Regulation
Object Persons, Right to exercise a
property and privilege
the form of a FEE)
Purpose Raise revenue Exercise to promote
Amount no limit only necessary to carry
public welfare through
out regulation
Amount of No limit Limited to the cost of
exaction regulation, issuance • Distinction lies in the primary purpose:
of license, or • License fee if primary purpose is to
surveillance regulate and the excess of the amount
collected from the cost to carry out the
Superiority Contracts may Contracts may be
regulation is minimal and incidental.
of be impaired impaired
• Tax if primary purpose, or at least one of
contracts unless (a)
the real and substantial purposes is to
government is
raise revenue.
party to
contract • If amount is too high for regulation, it would
granting be a tax; unless imposed on non-useful
exemption; or occupations or businesses.
(b) involves
franchise • Purpose of distinction: limitations and
exemptions apply only to one and not to the
Transfer Taxes paid Allows merely the
other (ex. Exemption from taxation does not
of form part of the restraint on the
include exemption from fee)
property public funds exercise of property
rights rights
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Source Law; legal Based on contract
Purpose Raise The taking of Personal Assignable
revenue property for public
Compensation Payment of Just compensation

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Taxation Law Summer Reviewer

Generally not May be the subject

compensation/set- compensation/set-
off off TAX TOLL
Kind of Demand of Demand of
Imprisonment is No imprisonment demand sovereignty ownership
sanction for non- for non-payment Purpose support of Collection for the
payment government use of property
Amount no limit – depends Fair return of the
on need of the cost of the property
government or improvement
GENERAL RULE: Taxes cannot be the subject of
compensation or set-off
* A person cannot refuse to pay a tax on the ground
that the government owes him an amount equal to or TAX DISTINGUISHED FROM CUSTOMS DUTY
greater than the tax being collected. The collection of
tax cannot await the results of a lawsuit against the TAX CUSTOMS
government. DUTY
Coverage More comprehensive kind of tax
Reasons: than customs duty
a) lifeblood theory Object Persons, prop, etc goods imported
b) taxes are not contractual obligation (absence or exported
of consent of taxpayer)
c) taxpayer and government are not mutual
debtors and creditors of each other
1) refund of a tax illegally or erroneously collected
or overpaid by a taxpayer
EXCEPTIONS: 2) such tax refund is barred by prescription
1) Both claims already became overdue and 3) tax presently being assessed against a taxpayer
demandable as well as fully liquidated Æ there
4) may be recouped or set-off against the tax barred
must have already been an act of appropriation
by prescription
by the government (legislative) of funds for not allowed in Philippines, reason - LIFE BLOOD
payment of the debt.
2) Tax overpayment (BIR’s obligation to refund or
set-off arises from time tax was paid)
Kinds of Double Taxation
3) If the case involves local government taxes
• taxing same person, property or right
• for the same purpose
• by the same taxing authority
• within the same jurisdiction or taxing
Imposed persons, Only on land • within the same taxable period
on properties, etc. • and they must be of the same kind or
Why regardless of Public improvement character of tax
imposed public that benefits the land B. INDIRECT DUPLICATE
improvement QuickTime™ and a
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Purpose Support are
of needed to see thisContribution
to cost taxation is not present
government of public •
improvement ¾ No constitutional prohibition on double taxation.
When Regular exaction Exceptional as to However, where there is direct duplicate taxation
imposed time and locality then there may be violation of the constitutional
Basis Necessity Benefits obtained precepts of equal protection and uniformity in

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TAX TREATY AS A MODE OF ELIMINATING taxpayer’s property. As long as the power to tax
DOUBLE TAXATION: does not violate any constitutional or statutory
1) EXEMPTION METHOD – the income or capital provisions, said power can be a power to destroy.
which is taxable in the state of source or situs is
exempted in the state of residence, although in But for all its plenitude, the power to tax is not
some instances it may taken into account in unconfined as there are restrictions. Adversely
determining the rate of tax applicable to the tax effecting as it does property rights, both the due
payer’s remaining income or capital (ex. Tax process and equal protection clauses of the
Sparing Credit scheme) Constitution may properly be invoked to invalidate in
2) CREDIT METHOD – the tax paid in the state of appropriate cases a revenue measure. If it were
source is credited against the tax levied in the otherwise, there would be truth to the dictum that “the
state of residence power to tax involves the power to destroy.” The web
Afisco Insurance Corp v. CA (G.R. No. 112675, or unreality spun from Justice Marshall’s famous
Jan. 25, 1999) dictum was brushed away by one stroke of Mr.
Justice Holmes’ pen, thus: “The power to tax is not
Petitioners are local non-life insurance corps. Which the power to destroy while this Court sits.” “So it is in
formed a “pool” in order to enter into a Reinsurance the Philippines.” [Reyes v. Almanzor (1991), citing
Treaty with a German company. BIR assessed Sison v. Ancheta (1984); Obillos v. CIR (1985)].
deficiency taxes against the “pool” on the ground that
it is considered a partnership taxable as a corp. Tax Avoidance (Tax Minimization) – tax saving
Petitioners insist that the pool is a mere agent, not device that is legally permissible
acting on its own and therefore, cannot be taxed as a
corp., there being no risk undertaken by the pool, no
common fund and no control exercised by its board in Tax Evasion (Tax Dodging) – connotes fraud
the management of its fund. through the use of pretenses and forbidden devices
to lessen or defeat taxes; must be willful and
Issue (1) : Is the Pool Taxable as a Corp? intentional.

Held (1): YES. Pursuant to §24 of the NIRC, the CIR vs. The Estate of Benigno Toda, GR No.
pool is included within the definition of “domestic 147188, Sept. 14, 2004
corps.” Which comprises even unregistered
partnerships and associations. In this case, the Facts: This Court is called upon to determine in
ceding cos. Entered into an association that would this case whether the tax planning scheme adopted
handle all business under the Treaty. It has a by a corporation constitutes tax evasion that would
common fund and an executive board to manage its justify an assessment of deficiency income tax.
affairs. Moreover, even if the pool itself did not issue CIC authorized Toda, Jr., President and owner
any policies on its own, its work was indispensable to of 99.991% of its issued and outstanding capital
the business of the ceding companies and the stock, to sell the Cibeles Building and the two
German Co, parcels of land on which the building stands for an
amount of not less than P90M. Toda then
Issue (2): Is there double taxation? purportedly sold the property for P100 M to Rafael
Altonaga, who, in turn, sold the same property on
Held(2): NO. Double taxation means taxing the the same day to RMI for P200M. These 2
same person twice by the same jurisdiction for the transactions were evidenced by Deeds of Absolute
same thing. The pool is a taxable entity distinct from Sale. For the sale of the property to RMI, Altonaga
the individual corporate entities of the ceding paid capital gains tax in the amount of P10M.
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different from the tax on the dividends received by 1989, declaring, among other things, its gain from
the said companies. the sale of real property in the amount of
P75,728.021. Toda sold all his shares. He died 3
Power to Tax Involves Power to Destroy [Chief yrs. later.
Justice Marshall, McCullough v. Maryland, 4 L.Ed. The BIR sent an assessment notice and
579 (1819)] demand letter to the CIC for deficiency income tax
for the year 1989 in the amount of P79,099,999.22,
The imposition of a valid tax could not be judicially representing the tax, surcharge, & interest on the
restrained merely because it would prejudice a

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particular accused and not the character of

the acts charged in the information


CODE OF 1997




1) Assessment and Collection of national internal
(a) taxes
(b) fees
(c) charges
2) Enforcement of all
(a) forfeitures
(b) fines and
(c) penalties
connected therewith
3) Execution of all judgments decided in BIR’s favor
(a) the Court of Tax Appeals (CTA) and
(b) the ordinary courts
4) Give effect to and Administer the supervisory and
police powers conferred to it by NIRC or by other
1) general or intentional overlooking by the State of
laws. (Sec. 2)
its authority to impose penalties on persons
otherwise guilty of evasion or violation of a
Officials of the BIR
revenue or tax law
1) one chief - Commissioner of Internal Revenue
2) partakes of an absolute forgiveness or waiver of
the Government of its right to collect
2) four assistant chiefs - Deputy Commissioners
3) to give tax evaders, who wish to relent & are
(Sec. 3)
willing to reform a chance to do so
*E.O. 430 (July 28, 1997) designates each of the
4 Deputy Commissioners to head the following
RULES ON TAX AMNESTY functional groups:
1) Tax amnesty (a) Operations group
(a) like tax exemption, never favored nor (b) Legal Enforcement Group
presumed (c) Information Systems Group
(b) construed strictly against the taxpayer (must (d) Resource Management Group
show complete compliance with the law)
2) Government not estopped from questioning the Powers of the Commissioner
tax liability even if amnesty tax payments were A. Power to interpret tax law and decide tax
already received QuickTime™ and a cases (Sec 4)
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Reason: Erroneous application
are needed to see this picture. and 1) Interpret provisions of NIRC and other tax
enforcement of the law by public officers do laws subject to review by the Secretary of
not block subsequent correct application of Finance
the statute. The government is never 2) Decide:
estopped by mistakes or errors of its agents. (a) disputed assessments
Basis: Lifeblood Theory (b) refunds of internal revenue taxes, fees
3) Defense of Tax amnesty, like insanity, is a and charges
personal defense. (c) penalties imposed in relation thereto
Reason: Relates to the circumstances of a (d) other matters arising from NIRC or other

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laws or portions thereof administered by tax due -

the BIR subject to the exclusive appellate (a) After a return has been filed the
jurisdiction of the CTA Commissioner or his representative may
B. Power to obtain information, summon, i. the Examination of any taxpayer;
examine and take testimony of persons (Sec. and
5) ii. the Assessment of the correct
1) For the Commissioner to ascertain: amount of tax;
(a) correctness of any return or in making a (b) Failure to file a return shall not prevent
return where none has been made the Commissioner from
(b) liability of any person for any internal authorizing the examination of any
revenue tax or in correcting such liability taxpayer;
(c) tax compliance
Any tax or deficiency tax so assessed shall be
The Commissioner is authorized: paid upon notice and demand from the
2) to Examine any relevant Book, paper, record Commissioner or his representative.
or other data
3) to Obtain any Information (costs, volume of Any return, statement or declaration filed in any
production, receipts, sales, gross income, authorized office shall not be withdrawn; but
etc), on a regular basis from: within THREE YEARS from date of filing, the
(a) any person other than the person under same may be modified, changed or amended;
investigation or provided that no notice for audit or investigation
(b) any office or officer of the national/local of such return, has in the meantime, been
government, government agencies and actually served upon the taxpayer.
instrumentalities (Bangko Sentral,
GOCCs) 2) Failure to submit required returns and other
4) To Summon documents
(a) the person liable for tax or required to file If a person
a return or (a) fails to file a required return or report at
(b) any officer or employee of such person the time prescribed or
or (b) Willfully or otherwise files a false or
(c) any person having in his fraudulent return,
possession/custody/ care The Commissioner shall Make or Amend the
1. the books of accounts return from
2. accounting records of entries relating (a) his own knowledge or
to the business of the person liable (b) from such information as he can obtain
for tax or any other person through testimony or otherwise
which shall be prima facie correct and sufficient
5) to Produce such books, papers, records and for all legal purposes
other data and to give testimony
6) to take the Testimony of the person 3) Inventory-taking, Surveillance, Presumptive
concerned, under oath as may be relevant to Gross Sales
the inquiry (a) Commissioner may, at any time during
7) To cause revenue officers and employees to the taxable year
make a Canvass of any revenue district or 1. order the Inventory taking of goods
region of any taxpayer; or
• nothing in Section 5 shallandbe
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construed as 2. may place the business operations of
granting the Commissioner the authority to
are needed to see this picture. any person (natural/juridical) under
inquire into bank deposits other than as provided Observation or Surveillance
for under Sec. 6 (F) of the Code (authority to if there is reason to believe that such
inquire into bank deposits). person is not declaring his correct
income, sales or receipts for tax
C. Power to make assessments, prescribe purposes.
additional requirements for tax administration The findings may be used as basis for
and enforcement (Sec. 6) assessing the taxes and shall be deemed
1) Examination of returns and determination of prima facie correct.

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(b) Commissioner may prescribe a Minimum The taxpayer’s application for compromise
amount of gross receipts, sales and shall not be considered unless he waives in
taxable base (taking into account the writing his privilege under RA 1405 and other
sales and income of other persons general or special laws. Such waiver shall
engaged in similar business) : authorize the Commissioner to inquire into
1. When a person has failed to issue his bank deposits.
receipts as required by Sec. 113
(Invoice requirements for VAT- 7) Authority to Register tax agents -
registered persons) and Sec. 237 (a) The Commissioner shall Accredit and
(Issuance of Receipts or Commercial Register, individuals and general
Invoices); or professional partnerships and their rep.
2. When the books of accounts or who prepare and file tax returns and
records do not correctly reflect the other papers or who appear before the
declarations made or required to be BIR
made in a return, (b) The Commissioner shall create national
such minimum amount shall and regional accreditation boards
be prima facie correct
Those who are denied accreditation may
4) Terminate taxable period - appeal the same to the Sec. of Finance who
Commissioner shall declare the tax period of shall rule on the appeal within 60 days from
a taxpayer terminated and send notice to the receipt of such appeal. Failure of the Sec. of
taxpayer of such decision with a request for Finance to rule on the appeal within the said
immediate payment of the tax, when it has period shall be deemed as approval for
come to the knowledge of the Commissioner: accreditation.
(a) that a taxpayer is Retiring from business 8) Authority to Prescribe Additional
subject to tax or Requirements-
(b) is Intending to leave the Philippines or The Commissioner may prescribe the
(c) to Remove his property therefrom or manner of compliance with any documentary
(d) to Hide or conceal his property or or procedural requirement for the submission
(e) is performing any act tending to Obstruct or preparation of financial statements
the proceedings for the collection of tax accompanying tax returns.

5) Prescribe Real Property Values - D. Authority to delegate power (Sec. 7)

The Commissioner is authorized to:
(a) divide the Philippines into different zones The Commissioner may delegate the powers vested
or areas and in him to subordinate officials with rank equivalent to
(b) determine the fair market value of real Division Chief or higher, subject to
properties located in each zone or area limitations/restrictions imposed under the rules and
For tax purposes, the value of the property regulations EXCEPT, (the following powers shall
shall be whichever is higher of: NOT be delegated): (RIR CoA A)
(a) Fair market value as determined by the 1) power to Recommend the promulgation
Commissioner; or of rules and regulations by the Sec. of
(b) Fair market value as shown in the Finance
schedule of values of the provincial and 2) power to Issue rulings of first impression
city assessors. or to Reverse, revoke, modify any
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existing rule of the BIR
6) Authority to Inquire into
are needed to Bank
see this picture.Deposit - 3) power to Compromise or Abate any tax
Notwithstanding R.A. 1405 (Bank Secrecy liability
Law) the Commissioner is authorized to
inquire into the Bank deposits of: EXCEPT, the regional evaluation board
(a) a decedent to determine his gross estate may compromise:
(b) a taxpayer who has filed an application to (a) assessments issued by regional
compromise payment of tax liability by offices involving deficiency taxes of
reason of financial incapacity P500,000 or less; and
(b) minor criminal violations as may be

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determined by the rules 3) To Submit reports to the appropriate committee

of Congress upon its request and in aid of
legislation, which information or report shall
include, but not be limited to:
Regional Evaluation Board is composed (a) industry audits
of: (b) collection performance data
i. Regional Director as Chairman (c) status reports in criminal actions initiated
ii. Asst. Regional Director against persons
iii. Heads of the Legal, Assessment and (d) taxpayer’s returns
Collection Div. provided, any return or information which can
iv. Revenue District Officer having be associated with or identifies, directly or
jurisdiction over the taxpayer indirectly a particular taxpayer, shall be
furnished to the appropriate committee of
4) power to Assign or reassign internal Congress only when sitting in Executive
revenue officers to establishments where Session, unless the taxpayer consents in
articles subject to excise tax are kept writing to such disclosure
4) Submit reports to the Oversight Committee
through the Chairman of the Committee on Ways
E. Assignment of Internal Revenue Officers and Means of the Senate and House of
(Secs. 16 &17) Representatives, on the exercise of his powers of
abatement and compromise of taxes (Sec. 204)
The Commissioner may assign/ reassign internal every 6 months of each calendar year. (Sec. 20)
revenue officers:
1) involved in excise tax functions as often as the NATIONAL INTERNAL REVENUE TAXES: (Sec.
exigencies of revenue service may require; 21) (I VEE DOO)
provided that he shall in no case stay in his 1) Income tax
assignment for more than 2 years (Sec. 16) 2) Estate and Donor’s tax
2) without change in rank and salary, to other or 3) Value-Added tax
special duties connected with the enforcement 4) Other percentage tax
and administration of internal revenue laws as 5) Excise tax
the exigencies of the service may require; 6) Documentary stamp tax
provided that officers assigned to perform 7) Such Other taxes as are or hereafter may be
assessment or collection functions shall not imposed and collected by the BIR
remain in the same assignment for more than 3
years; assignment of officers and employees to
special duties shall not exceed 1 year (Sec. 17)
F. Internal Revenue Districts (Sec. 9)
The Commissioner, with approval of the Sec. of
Finance, shall divide the Philippines into such
1) Person – an individual, a trust, estate or corp.
number of revenue districts for administrative 2) Corporation – include partnerships (distinguish
purposes. Each district shall be under the supervision between ordinary and general professional
of a Revenue District Officer.
3) General professional partnership –
Duties of the Commissioner: (PASO) partnerships formed for the sole purpose of
1) To Prescribe, provide and distribute to the proper
exercising their common profession, no part of its
officials the requisite licenses,
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TIFF (Uncompressed) decompressor income being derived from engaging in any trade
stamps, labels, areall neededother forms, certificates,
to see this picture.
or business
bonds, records, invoices, books, receipts,
4) Shares of stock – includes shares of stock of a
instruments and appliances used in administering corp., warrants & options to purchase shares of
laws falling within the jurisdiction of BIR stock, as well as units of participation in a
2) To Acknowledge payment of any tax under this
partnership (except gen. professional
Code expressing
partnership), joint stock companies, joint
a) the amount paid and
accounts, joint ventures taxable as corp.,
b) the particular account for which payment
associations & recreation or amusement clubs &
was made (Sec. 8)
mutual fund certificates

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Taxation Law Summer Reviewer

5) Taxpayer – any person subject to tax • Income can be realized actually and
6) Taxable Year – can either be calendar year (Jan constructively.
1 to Dec 31), or the fiscal year • Assignment of Income Doctrine – Ex: A is
7) Fiscal Year – an accounting period of 12 months entitled to his salary of P10m but assigns it to B
ending on the last day of any month other than for unknown reasons. In this case, both A and
December (ex. Feb 1 to Jan 31) B realize income. A constructively received
8) Paid or incurred (cash method) or Paid or income (because he was able to assign thus
accrued (accrual method) – payment actually has complete control/dominion over it) and B
made or if not paid, actually liable for the actually received it. The income is taxable in
expense the hands of both A and B.
• Doctrine of Constructive Receipt – Ex: A was
TAXABLE INCOME informed that his check dated December 16 is
already available and he can get it anytime. A
REQUISITES FOR INCOME TO BE TAXABLE: did not get the check until January 30. In this
1) There must be a gain or addition to net worth case, A constructively received income in
2) The gain must be realized or received, actually or December and is taxable in that taxable period.
constructively; recipient must have complete • Not recognized as income if proceeds are
dominion merely a return of capital. Ex. Creditor lends
3) The gain must not be excluded by law or treaty debtor x amount. Debtor repays x amount plus
from taxation y interest. Creditor does not have income on x
amount as this is merely return on capital; he
has income only with respect to the amount of
Note: y interest.
• Not recognized as income - when funds
were merely entrusted/held money in trust (with COMPUTATION OF TAXABLE INCOME
obligation to return) to taxpayer because
taxpayer acquires no control and does not 1) Taxpayer earning purely compensatory
receive economic benefit from it. income
• Proceeds of embezzlement/swindling are Gross Compensation
income because embezzler/swindler already less : Personal Exemption
has complete dominion over them and can use premium payments on health and/or
such for his economic benefit. hospital insurance amounting to P2,400
• Increase in the value of property is not per year
recognized as income; this only constitutes equals: Taxable income
an unrealized increase which becomes taxable
income only upon disposition and realization of 2) Taxpayer doing business, whether individual
gains. Same situation for stocks and stock or corporation (domestic or FC doing
dividends. business)
• Deposit with no interest does not produce Gross Revenue/Sales
income for the depositary; there is no flow of less: Cost of Sales
wealth. equals: Gross Income
• In a debt/loan situation it is important to less : Allowable Deductions
determine whether there was an original equals: Taxable Income
intention to pay/consensual recognition of an ¾ for individuals, an additional deduction for
obligation to repay. personal exemptions is allowed
• If yes, then the liability that
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results just offsets
TIFF (Uncompressed) decompressor the increase in Situs of Taxation is the place or authority that has the
are needed to see this picture.
assets of the taxpayer borrower; right to impose and collect taxes (CIR v. Marubeni
therefore, no increase in net worth Corp). The state where the subject to be taxed has a
and no income derived from the situs may rightfully levy and collect the tax. The situs
debt/loan. is necessarily in the state which has jurisdiction or
• If no (as in the case of a which exercises dominion over the subject in
swindler/estafa), the proceeds will question.
be considered as income and
therefore taxable in the hands of SOURCES OF INCOME
the borrower swindler.

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Taxation Law Summer Reviewer

Taxpayer Tax Base Taxable on

Interest Residence of the debtor Resident Citizen Taxable Within and
Compensation for Place of performance Income without the
personal services Philippines
Rent and royalty Location of property Nonresident Citizen Taxable Within the
Gain from sale of Location of property Income Philippines
real property Resident Alien Taxable Within the
Gain from sale of Place of sale Income Philippines
personal property Nonresident Alien Taxable Within the
Gain from sale of Philippine source engaged in trade or Income Philippines
shares of stock of business
domestic Nonresident Alien not Gross Within the
corporation engaged in trade or Income Philippines
Dividend income (a) From a domestic corp. – business
deemed income from within General Professional Taxable Within
Phil. Partnership Income or/and
(b) From a foreign corp. – without the
deemed income from without Philippines
provided more than 50% of the (depending
corp.’s worldwide income is not on
derived from Phil. sources classification
of individual
Allocation of Unallocated Deductions (partly Phil. partner)
partly foreign) Estate and Trust Taxable Same basis
Income as an
GI, Philippines x Unallocated = Phil deductions individual
GI, Worldwide deductions (depending
GI, Outside Phil x Unallocated = Foreign classification
GI, Worldwide deductions deductions of decedent,
if estate,
Income from sale of personal property derived from trustor, if
sources partly within and partly without the Phils. trust)
Domestic Corporation Taxable Within and
Income Without the
Gain from sale of personal property produced in Philippines
whole or in part in one country and sold in another Resident Foreign Taxable Within the
country, where one of the countries is the Philippines Corporation Income Philippines
is income derived from sources partly within and
Non-resident Foreign Gross Within the
partly outside the Philippines.
corporation Income Philippines
Gains from the purchase of personal property within
and sold without the Philippines or the purchase of *Taxable Income = Gross income (less) Deductions
personal property without and and itsa sale within the (less) Personal and additional exemptions
Philippines shall beTIFFare
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treated asthisderived
needed to see picture. entirely from
sources within the country in which it was sold. *Gross Income = all income derived from whatever


IN THE PHILIPPINES Deductions – Exemptions)
2) Gross Income Tax (All income from whatever
3) Final Income Tax (On passive income and capital

Page 13 of 145
Taxation Law Summer Reviewer


4) Fringe Benefits Tax (amount of benefits to 1) General (part of gross income, subject to 5-
Managerial and Supervisory Employee paid by 32%)
Employer; Ee is taxed but burden is on Er) a) Compensation Income
5) Capital Gains Tax (Real property and stocks not b) Income from Business
traded in stock market) c) Income from Exercise of Profession
6) Optional Corporate Income Tax 2) Special Types of Income (not part of gross
7) Minimum Corporate Income Tax (2% of GI) income, subject to final tax)
8) Improperly Accumulated Earnings Tax a) Interests, royalties, prizes and other
9) Preferential Rates (for special corporations) winnings subject to final tax (Passive
10) Branch Profit Remittance Tax Income)
b) Cash & property dividends (does not
include stock dividends; these are
TYPES OF TAXPAYERS realized only upon their subsequent sale)
(Passive Income)
A. Individuals c) Capital gains from sale of real property
d) Capital gains from sales of shares of
Kinds of Individuals stock not listed in the stock exchange
1) Resident Citizen e) Capital gains from sale of shares of stock
2) Nonresident Citizen = citizen of the listed in stock exchange (subject to
Philippines who: percentage tax
(a) Establishes the fact of his physical
presence abroad with a definite intention B. Estates and Trusts
to reside therein
(b) Leaves the Philippines during the taxable Estate: property, rights and obligations of a
year to reside abroad, as immigrant or for person which are not extinguished by his death
employment on a permanent basis and those that accrues thereto; taxed in the same
(c) Works & derives income from abroad & way as an individual provided it is irrevocable and
whose employment requires him to be earns income; what is taxed is not the property
physically present abroad most of the that constitutes the trust (this was already subject
time (i.e. not less than 183 days) during to donor’s tax) but the income of such property.
the taxable year
(d) Previously considered as nonresident Trust: arrangement created by agreement under
citizen & arrives in the Philippines at any which title to property is passed to another for
time during the taxable year to reside conservation or investment with the income and
permanently in the Philippines the corpus/principal distributed in accordance
3) Resident Alien with the directions of the creator; to be taxable as
4) Nonresident Alien a separate entity, grantor must have absolutely
a) Those engaged in trade or business in and irrevocably given up control and benefit over
the Philippines who come and stay in the the trust.
Philippines for an aggregate period of
more than 180 days during any calendar C. Corporation
b) Those not engaged in trade or business A corporation shall include partnerships, no matter
in the Philippines, which include non- how created or organized. Joint stock companies,
resident aliens whose stay in the joint accounts, associations, and insurance
Philippines is QuickTime™
180 days and aor less
TIFF (Uncompressed) decompressor
c) Aliens employed bypicture.
are needed to see this regional or area • But does not include, for the purpose of
headquarters and regional operating imposing ordinary 35% corporate income tax:
headquarters of multinational companies o general professional partnerships
in the Philippines o joint venture or consortium formed for the
d) Aliens employed by offshore banking purpose of undertaking construction
units projects or engaging in petroleum, coal,
e) Aliens employed by petroleum geothermal & other energy operations
contractors and subcontractors pursuant to an operating or consortium
agreement under a service contract with

Page 14 of 145
Taxation Law Summer Reviewer

the govt. B. Optional Gross Income Taxation

General Types: Effective Jan. 1, 2000: the President (upon

1) Domestic Corporation is created or recommendation of the Sec of Finance) may
organized in the Philippines or under its laws allow corporation an option to be taxed at 15% of
2) Foreign Corporation is organized and gross income after the ff. conditions are
existing under the laws of a foreign country satisfied:
(a) Resident foreign corporation – foreign
corp. engaged in trade or business within Tax effort ratio 20% of
the Philippines GNP
(b) Nonresident foreign corporation – Ratio of IT collection to total tax 40%
foreign corp. not engaged in trade or revenue
business within the Philippines
VAT tax effort 4% of GNP
D. Partnerships Ratio of Consolidated Public 0.9%
Kinds of Partnerships Sector Financial Position
1) General Professional Partnerships (CPSFP) to GNP
• Established solely for purpose of exercising Ratio of Cost of Sales to Gross Does not
common profession and not part of income Sales from all sources exceed 55%
derived from engaging in trade or business.
• As an entity, it is not subject to income tax. The election of the option shall be irrevocable
Partners are liable for income tax on their for 3 consecutive taxable years during which the
distributive share (computed by dividing net corp. is qualified under the scheme
income of GPP). Each partner shall report his
distributive share as part of his gross income. ¾ Gross Income = Gross Sales
2) Taxable/Business/Ordinary Partnership ( - ) Sales returns,
• All other partnerships no matter how created discounts and
or organized. allowances
• Includes unregistered joint ventures and ( - ) Cost of goods sold
business partnerships.
• Taxable as an entity Æ ordinary corporate Cost of Goods Sold
income tax. Trading and Merchandising Concern
• Joint ventures are not taxable as • Invoice cost plus import duties and
corporations when its purpose if a) freight in transporting goods to the place
undertaking construction projects; b) where actually sold, including insurance
engaged in petroleum, coal and other energy while in transit
operation under a service contract with the Manufacturing concern
government. • Cost of production of finished goods (raw
• Partners are considered stockholders; materials, direct labor and manufacturing
therefore, their distributive share is taxed as overhead, freight cost, insurance
dividends. premiums, and other costs to bring the
raw materials to the factory)
If taxpayer is engaged in sale of service:
I. DOMESTIC CORPORATIONS ¾ Gross Income = Gross receipts
( - ) Sales returns,
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A. In general TIFF (Uncompressed) decompressor allowances and
are needed to see this picture.
On taxable income from all 32% (2000-2005) C. Special Types of Domestic Corporations
sources within and without 35% (2006-2008)
the Philippines 30% (2009
Proprietary 10% On related trade,
educational business or activity;
institutions and 35% (2006) if total
hospital which are gross income from

Page 15 of 145
Taxation Law Summer Reviewer

nonprofit unrelated trade,

business, or activity
exceed 50% of total D. Rule for Corporations Exempt from Taxation
GOCC, Agencies 32% Same tax rate upon General Rule: those enumerated under section 30
and (2000- their taxable are exempt.
Intrumentalities, 2005) income in a similar
including 35% business, industry, Exception: exempted corporations are subject to
PAGCOR (2006) or activity income tax on their income from any of their
properties, real or personal, or from any activities
conducted for profit regardless of the disposition
GSIS/ SSS / PHIC Exempt made of such income.
• Ex. Non-stock, non-profit religious
Depository Banks 10% On interest income organization is exempt from 35% ordinary
from foreign income tax on corporations (by virtue of
currency section 30 which uses “as such”) and from all
transactions property tax (by virtue of Constitution,
including interest provided ADE use for its religious purpose).
income from However, if it derives income from its
foreign loans property or conducts an activity that is for
profit (even if the proceeds will be used for
the religious purpose), the proceeds will be
Proprietary Educational Institutions & Hospitals taxable.
(non-profit) • Ex. For educational institutions, the
proceeds, to be exempt, must be both a)
• Proprietary educational institution – any realized from educational activities and b)
private school maintained & administered by used for educational activities.
private individuals or groups with an issued
permit to operate from DECS, or CHED or
TESDA E. Minimum Corporate Income Tax (MCIT)
• Taxable at 10% on taxable income, except on
certain passive income (which are subject to final 1. MCIT Rate = 2% of gross income (GI)
• Predominance Test: if GI from unrelated When to begin/apply MCIT? Beginning on the
trade/business/other activity > 50% of the total GI 4 taxable year immediately following the year in
from all sources, ENTIRE taxable income shall which such corporation commenced its business
be subject to the REGULAR corporate tax rate operation
(35% Effective 2006) (Commencement of Business Operation:
• Distinguish from non-profit non-stock educational Upon Issuance of BIR Certificate of
institutions which are exempt from tax on Registration)
revenues and assets Actually, Directly and
Exclusively used for educational purposes (See Imposed when on the 4th taxable year, 2% of
above for discussion). the corporations GI is greater than 35% of its TI.

GOCCs Example: for 2006 calendar year

GI = P500,000 2% of GI = P10,000
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General Rule:TIFFall corporations,
(Uncompressed) decompressor agencies, or TI = P27,000 35% of TI = P9,450
are needed to see this picture.
instrumentalities owned or controlled by the govt. 2006 IT = P10,000
are taxable.
Rationale: This is designed to prevent
Exceptions: corporations from escaping being taxed by
1) GSIS including frivolous expenses in their statement of
2) SSS income (Ex. Over statement of depreciation
3) PHIC expense)
2. Carry Forward of Excess Minimum Tax

Page 16 of 145
Taxation Law Summer Reviewer

( - ) Sales returns,
Excess of MCIT over the normal income tax shall discounts and
be carried forward & credited against normal allowances
income tax for the 3 succeeding years ( - ) Cost of Services

Example: (proceeding from above example) *means all direct costs and expenses
necessarily incurred to provide the services
Situation A: If regular income tax (35% of taxable required by the customers including:
income) is greater than MCIT (2% of GI) Æ Pay a) salaries and employee benefits of
Regular Income Tax personnel, consultants and specialists
directly rendering the service;
For 2007 calendar year: b) costs of facilities directly utilized in
GI = P500,000 2% of GI = P10,000 providing the service such as depreciation or
TI = P50,000 35% of TI = P17,500 rental of equipment used and costs of
Income Tax payable for 2007
= 17,500 (Regular Income Tax) – 550 (MCIT II. RESIDENT FOREIGN CORPORATION
Carry Forward from 2006: 10,000-9450)
= 16,950 A. In General (the rest is the same as domestic
NOTE: You can deduct MCIT Carry Forward only if
Regular Income Tax is greater than MCITY On taxable income from all 32% (2000-2005)
sources within the 35% (2006-2008)
Situation B: If regular income tax is less than Philippines. 30% (2009 onwards)
B. MCIT - same as domestic corp.
For 2007 calendar year:
GI = P500,000 2% of GI = P10,000 C. Special types of resident foreign corporations:
TI = P20,000 35% of TI = P7,000 International Air 2.5% On Gross Philippine
carriers Billings (see case of Air
Income Tax payable for 2007 Canada vs. CIR infra)
= 10,000 International 2.5% On Gross Philippine
Shipping Billings
NOTE: MCIT carry forward as of 2007 is already Offshore 10% Any interest income
3,550 (550 from 2006 and 3,000 from 2007). banking units derived from foreign
So if in 2008, Regular Income Tax is already currency loans granted
greater than MCIT, you may deduct 3,550 to residents other than
from payable Regular Income Tax. offshore banking units
or local commercial
3. Relief from MCIT banks, including local
MCIT may be suspended by the Sec of branches of foreign
Finance when corporation’s losses are due banks that may be
to: authorized by the BSP
(a) prolonged labor dispute to transact business
(b) force majeure with offshore banking
(c) legitimate business reverses units
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TIFF (Uncompressed) decompressor
are needed to see this picture. Offshore Exempt Income derived by
4. Gross Income (for purposes of applying
banking units offshore banking units
authorized by the BSP,
Gross Income = Gross Sales
from foreign currency
( - ) Sales returns,
transactions with
discounts & allowances
nonresidents, other
( - ) Cost of Goods sold
offshore banking units,
local commercial
If taxpayer is engaged in sale of service:
banks, including
Gross Income = Gross Receipts

Page 17 of 145
Taxation Law Summer Reviewer

branches of foreign o Off line carriers: those without landing

banks that may be rights but may nevertheless be selling
authorized by the BSP tickets in the Phil Æ subject to tax
to transact business treatment of ordinary resident foreign
with offshore banking corporation
units. • What’s controlling is the amount stated in the
Regional/Area Exempt ticket and not the actual purchase value.
Air Canada vs. CIR, CTA Case No. 6572, Dec. 22,
Regional 10% On taxable income
Headquarters of
It is evident that the definition of ‘Gross Philippine
Billings’ under Section 28(A)(3)(a) of the 1997 Tax
Code covers the gross revenue derived from the
carriage of persons, excess baggage, cargo and mail
Gross Philippine Billings ‘originating from the Philippines in a continuous and
• For international air carriers, refers to gross uninterrupted flight’ irrespective of the place or sale
revenue derived from carriage of persons, or issue and the place of payment of the ticket or
excess baggage, cargo, and mail originating passage document. ‘To originate’ would mean ‘to
from the Philippines in a continuous and cause the beginning of; to start (a person or thing) on
uninterrupted flight, irrespective of the place a course or journey; to begin, start’. In other words,
of sale or issue and the place of payment of the flights carrying the passengers must have
the ticket or passage document originated or started from the Philippines. Verily,
• Provided, tickets revalidated, exchanged petitioner, being an off-line international carrier, as
and/or indorsed to another international authorized to operate by the CAB and having no
airline form part of the GPB if the passenger flights originating from the Philippines in a continuous
boards a plane in a port or point in the and uninterrupted flight, cannot be taxed pursuant to
Philippines Section 28(A)(3)(a) of the 1997 Tax Code, that is,
o If the ticket is indorsed to another airline, based on their Gross Philippine Billings.”
the GPB will be charged to the However, although petitioner Air Canada is not
transferee/indorsee liable to pay the tax as an international air carrier
• Provided, for a flight which orginates in the (2.5% on gross Phil. Billings), it is still liable to pay
Philippines but transshipment (transfer) of income tax as a resident foreign corporation.
passenger takes place at any port outside Under Section 22 of the 1997 Tax Code, the term
the Philippine on another airline, only the ‘resident foreign corporation’ applies to a foreign
aliquot portion of the cost of the ticket corporation engaged in trade or business within the
corresponding to the leg flown from the Philippines, while the term ‘non-resident foreign
Philippines to the point of transshipment shall corporation’ applies to a foreign corporation not
form part of the GPB. engaged in trade or business within the Philippines.
o Note: Transfer of airline company, not However, with regard to the term ‘doing’ or ‘engaged
transfer of aircraft in’ business, there is no fixed or specific criterion as
• GPB rule in the NIRC is a departure from the what constitutes ‘doing’ or ‘engaging’ in business. In
old rule which emphasized where tickets the case of The Mentholatum Co., Inc., et al. vs.
were bought. Mangiliman, et al., 72 PHIL 524, the Honorable
• Now we adopt the originating rule meaning Supreme Court had thoroughly and clearly explained
to form part of GPB, passenger/cargo must the term in this way:
originate from
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the Philippines
TIFF (Uncompressed) decompressor “…There is no specific criterion as to what

are needed to see this picture.
Does not apply to domestic corporations (Ex. constitutes ‘doing’ or ‘engaging in’ or ‘transacting’
PAL) business. Each case must be judged in the light of
• Carrier must be an alien resident corporation; its peculiar environmental circumstances. The term
if its not, then it will be subject to 35% tax on implies continuity of commercial dealings and
GI as non-resident alien corporation. arrangements, and contemplates, to that extent, the
performance of acts or works or the exercise of some
• Does not apply to offline carriers
of the functions normally incident to, and in
o On line carriers: those with landing rights
progressive prosecution of commercial gain or for the
in the Philippines
purpose and object of the business organization.”

Page 18 of 145
Taxation Law Summer Reviewer

“In order that a foreign corporation may be reducing their tax liability in the Philippines
regarded as doing business, there must be continuity and in their residence countries.
of conduct and intention to establish a continuous • Ex. Domestic corporation paid cash dividend
business, such as the appointment of a local agent, to non-resident foreign corporation (NRFC)
and not one of a temporary character. In other organized in Brazil. This shall form part of
words, a foreign airline company selling tickets in the NRFC’s income therefore taxable also in
Philippines through their local agents, whether liaison Brazil. The dividend received shall only be
offices, agencies or branches, as in the case at bar, taxed at 15% in the Phils (instead of 35%) if
shall be considered as resident foreign corporation Brazil will reduce/credit at least 20% of the
engaged in trade or business in that country for such tax imposed in the Phils. from its tax imposed
activities show continuity of commercial dealings or in Brazil. [See Section 28(5)(b)]
arrangements and performance of acts or works or • If Brazil will credit/reduce less than 20% or
the exercise of some functions normally incident to will not credit any amount, then the Phils will
and in progressive prosecution of commercial gain or tax the dividend at 35% (ordinary income
for the purpose and object of the business tax).
organization.” • Phils. cannot give more than 15% tax credit
because the law only allows such.
Branch Profit Remittance Tax
• BPRT shall be imposed on any profit remitted III. NONRESIDENT FOREIGN CORPORATION
by a branch to its head office.
• Distinguish between a branch and a A. In General
o If branch, subject to BPRT Gross Income from all sources 32% (2000-2005)
o If subsidiary Æ amounts received by within the Philippines (except 35% (2006-2008)
non-resident foreign corporation would Capital Gains on sale of 30% (2009
be treated as dividends Æ it becomes domestic shares subject to final onwards)
part of its Gross Income from within tax)
taxable at 35%
• Branch will first be subjected to ordinary ¾ Gross Income includes interest, dividends,
corporate tax as a resident foreign rents, royalties, salaries, premiums (except
corporation (35%). Afterwards, the profits for reinsurance prem.), annuities, emoluments or
remittance shall then be subject to 15% other fixed/determinable annual,
BPRT. (Because branch assumes periodic/casual gains, Capital Gains (not
personality of an RFC and is therefore subject to FT)
taxable as such)
• Any remittance, so long as you can trace it NON-RESIDENT FOREIGN CORPORATION
from a branch to the foreign parent
Cinematographic 25% On gross income
corporation subject to BPRT
Film owner, lessor
o Ex. X foreign corp. has both regional
or distributor
headquarters and branch in Philippines.
Instead of remitting straight to X, branch Owner or lessors 4.5% On gross income
pays amount to regional headquarters of vessel charted
supposedly for administrative support by Philippine
services Æ The amount paid for the nationals
services will still be subject to BPRT Owner or lessors 7.5% On gross income
because the tax is imposed
QuickTime™ and a on “any form of aircraft,
of remittance, direct or indirect.”
TIFF (Uncompressed) decompressor
are needed to see this picture.
machineries and
other equipment
• Tax reduced by the Philippines should be
fully applied or credited to the tax on dividend INCOME TAX RATES
income received by the non-resident foreign
corporation imposed by the country of its I. INDIVIDUALS
domicile. This serves as an incentive by
A. In general

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Taxation Law Summer Reviewer

utilization of the proceeds), the difference

ƒ Graduated rates of 5 to 32%. will be subject to CGT.
o Exemption does not include exchange of
B. Passive Income – Please see exhibit principal residence for a new principal
residence Æ subject to rules on
Capital Gains from Sale of Real Property exchange above.
• Final tax on gross selling price or current fair
market value, whichever is higher. C. Special Tax Rates for Aliens – Please see
• Imposed upon capital gains presumed to exhibit
have been realized from the sale, exchange,
or other disposition of real property located in II. CORPORATIONS
the Philippines, including pacto de retro sales
and other forms of conditional sales. A. In general
• Law presumes a gain, hence, even if the sale 2006-2008 – 35%
was at a loss (bought for 2M, sold for 1M), 2009-onwards – 30%
CGT will still be imposed on entire proceeds
of the disposition; law does not talk about the
net gain, it only considers gross selling B. Passive Income and other income – Please see
price/FMV whichever is higher. exhibit
• Refers to real property held as capital asset
(not used for business/investment) as C. Tax rate for Resident Foreign Corporation –
opposed to ordinary asset (used in ordinary Please see exhibit
course of business).
• Special Rule for disposition to government D. Tax rate for special types of Resident Foreign
o Taxpayer has option of treating the Corporation – Please see exhibit
proceeds as (a) taxable income (5-32%
on net gain) or as capital gains (6% final
o If second option is chosen: 6% final tax (“IAET”)
shall be based on actual consideration (Sec. 29, as implemented by Rev. Reg. 2-2001
and not FMV since the former is usually which prescribes rules governing the imposition of
lower than FMV (BIR Ruling). IAET)
o If the disposition took nature of
expropriation (no meeting of the minds, A. Rule
not voluntary), transaction is not subject There is imposed for each taxable year, in
to CGT. Net gain (if any) will be treated addition to other taxes, a tax equal to 10% of the
as part of GI. Includes disposition by improperly accumulated taxable income of
judicial order and other forms of forced domestic and closely-held corporations
disposition. formed or availed of for the purpose of avoiding
• Rule for Exchange the income tax with respect to its shareholders or
o FMV of the property exchanged/given up the shareholders of any other corporation, by
shall be basis of CGT. (Ex. A exchanges permitting the earnings and profits of the
property worth 1M for B’s property worth corporation to accumulate instead of dividing
2M Æ CGT on A will be based on 1M, them among or distributing them to the
CGT on B will be based on 2M) shareholders (Ex. Holding company).
• Exception on Principal Residence
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o Gains TIFF presumed
(Uncompressed)to have been realized
B. Rationale
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from sale or disposition of principal If the earnings and profits were distributed, the
residence, the proceeds of which is fully shareholders would then be liable for income tax;
utilized in acquiring new principal if the distribution were not made to them, they
residence within 18 months from would incur no tax in respect to the undistributed
disposition shall be exempt from CGT. earnings and profits of the corporation. It is a tax
o Can be availed only once every 10 years. in the nature of a penalty to the corporation for
o If the new principal residence is cheaper the improper accumulation of its earnings, and a
than old (meaning there is no full deterrent to the avoidance of tax upon
shareholders who are supposed to pay dividends

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Taxation Law Summer Reviewer

tax on the earnings distributed to them.

1. Closely-held corporations are those:
C. Exception a) at least 50% in value of the outstanding capital
The use of undistributed earnings and profits for stock; or
the reasonable needs of the business would b) at least 50% of the total combined voting power
not generally make the accumulated or of all classes of stock entitled to vote is owned
undistributed earnings subject to the tax. What is directly or indirectly by or for not more than 20
meant by “reasonable needs of the business” individuals. Domestic corporations not falling
is determined by the Immediacy Test. under the aforesaid definition are, therefore,
publicly-held corporations.
¾ Immediacy Test – It states that the
“reasonable needs of the business” are the F. Exempt Corporations: The IAET shall not apply
1) immediate needs of the business; and to the following corporations:
2) reasonably anticipated needs (Ex. (BIG-PEN-T)
Expansion) 1) Banks and other non-bank financial
¾ How to prove the “reasonable needs of 2) Insurance companies;
the business”: The corporation should prove 3) Publicly-held corporations;
that there is 4) Taxable partnerships;
1) an immediate need for the accumulation 5) General professional partnerships;
of the earnings and profits; or 6) Non- taxable joint ventures; and
2) a direct correlation of anticipated 7) Enterprises that are registered:
needs to such accumulation of profits. (a) with the Philippine Economic Zone
Authority (PEZA) under R.A. 7916;
D. Composition: The following constitute (b) pursuant to the Bases Conversion and
accumulation of earnings for the reasonable Development Act of 1992 under R.A.
needs of the business: (ILL ABE) 7227; and
1) Allowance for the increase in the (c) under special economic zones declared
accumulation of earnings up to 100% of the by law which enjoy payment of special
paid-up capital of the corporation as of tax rate on their registered operations or
Balance Sheet date, inclusive of activities in lieu of other taxes, national or
accumulations taken from other years; local.
2) Earnings reserved for definite corporate
expansion projects or programs requiring
considerable capital expenditure as approved
by the Board of Directors or equivalent body; G. Period for Payment of Dividend/IAET: The
3) Earnings reserved for building, plants or dividends must be declared and paid or issued
equipment acquisition as approved by the not later than one year following the close of
Board of Directors or equivalent body; the taxable year, otherwise, the IAET, if any,
4) Earnings reserved for compliance with any should be paid within fifteen (15) days
loan covenant or pre-existing obligation thereafter.
established under a legitimate business
agreement; H. Determination of Purpose to Avoid Income
5) Earnings required by law or applicable Tax
regulations to be retained by the corporation 1) The fact that a corporation is a mere holding
or in respect of which there is legal company or investment company shall be
prohibition TIFF
against its distribution;
QuickTime™ and a
(Uncompressed) decompressor
prima facie evidence of a purpose to avoid
6) In the case of tosubsidiaries
are needed see this picture. of foreign the tax upon its shareholders or members
corporations in the Philippines, all
undistributed earnings intended or reserved ¾ A “holding or investment company” is a
for investments within the Philippines as can corporation having practically no activities except
be proven by corporate records and/or holding property, and collecting the income
relevant documentary evidence. therefrom or investing the same; and

E. Covered Corporations: Only domestic and 2) where the earnings or profits of a corporation
closely-held corporations are liable for IAET. are permitted to accumulate beyond the

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Taxation Law Summer Reviewer

reasonable needs of the business. partnerships is taxable as dividends; in this case,

the ordinary partnership has already been subject
I. Prima facie instances of accumulation of to ordinary corporate income tax)
profits beyond the reasonable needs of a
business and indicative of purpose to avoid ¾ All income from whatever source derived
income tax upon shareholders Recovery of damages (compensation for Not
injury; from tortious acts) taxable
1) Investment of substantial earnings and profits Recovery of items previously deducted Taxable
of the corporation in unrelated business or from gross income (return of capital)
in stock or securities of unrelated business;
2) Investment in bonds and other long-term Forgiveness of indebtedness (if effect of Not
securities; and entire transaction is a reduction of Taxable
3) Accumulation of earnings in excess of 100% purchase price of property acquired in
of paid-up capital, not otherwise intended prior year)
for the reasonable needs of the business. Income derived form illegal business Taxable
The controlling intention of the taxpayer is (gain)
that which is manifested at the time of Recovery of lost earnings Taxable
accumulation. A speculative and indefinite
purpose will not suffice. The mere recognition BIR Ruling #017-2003
of a future problem or the discussion of The transfer of land made by a person to another in
possible and alternative solutions is not payment of services rendered in the form of attorneys
sufficient. Definiteness of plan/s coupled with fees shall be considered as part of the gross income
action/s taken towards its consummation is of the latter valued at either the fair market value or
essential. the zonal valuation, whichever is higher, in the
taxable year received.
Cyanamid Phils. vs. CA, GR No. 108067, Jan. 20,
Ideally, the working capital should equal the CRM)
current liabilities and there must be 2 units of current
assets for every unit of current liability, hence the so- 1) Gifts, Bequests & devises
called "2 to 1" rule. A Debt-to-Equity ratio (Current
• But, income from such property shall be
Assets over Current Liabilites) of 2:1 is indicative of
included in GI
the liquidity of a corporation, and further
• Must be characterized by disinterested
accumulation would expose it to the IAET.
generosity and pure liberality
• Difficult to establish gift situations if there is
an Er-Ee relationship (A bonus/assistance as
recognition of service rendered is not
All income derived from whatever source, including
(but not limited to the following items) (GRIP CARD • If given under a) constraining force of any
GPP) moral or legal duty or b) from the incentive of
1) Gross income derived from the conduct of trade c) an anticipated benefit of an economic
or business or the exercise of a profession nature or where it is a return for services
2) Rent Income rendered, proceeds cannot qualify as a gift.
3) Interest Income • Most critical consideration is the giver’s
4) Prizes & winnings intention or motive.
5) Compensation TIFF for (Uncompressed)
QuickTime™in whatever
and a form paid, • Can be a gift if given on account of filial
including, but notarelimited to fees, salaries, wages,
needed to see this picture. relationship.
commissions & similar items 2) Income Exempt under Treaty
6) Annuities • To the extent required by any treaty
7) Royalties obligation binding upon the Phil govt.
8) Dividend Income 3) Amount Received by Insured as Return of
9) Gains derived from dealings in property Premium
10) Pensions • Under life insurance, endowment, or annuity
11) Partner’s distributive share from the net income contracts, received either during the term or
of the GPP (distributive share from ordinary at the maturity of the terms or upon surrender

Page 22 of 145
Taxation Law Summer Reviewer

of the contract resident citizens or aliens who reside

4) Life Insurance permanently in the Philippines
• Proceeds of life insurance policies paid to the d) Veterans benefits
heirs/beneficiaries upon the death of the e) Benefits under SSS
insured f) Benefits received from GSIS
• If such amounts are held by the insurer under
an agreement to pay interest, the interest • 2 Options under paragraph (a), Section
payments shall be included in the GI 32(B)(6)
• Insured must die to avail of total exemption. If g) RA 7641
he survives, there/s only partial exemption Æ o Conditions: (i) at least 60 years old;
to the extent that the proceeds constitute (ii) 5 years of service at time of
return of capital (total amount of premiums retirement
paid). o Availed if there is no reasonable
5) Compensation for Injuries or Sickness private benefit plan (benefits under
• Received through Accident/Health Insurance this option is less)
or Workmen’s Compensation Act, as o Limted exemption: ½ month salary
compensation for personal injuries/sickness for every year of service. In RPBP,
+ amount of damages received on account of all is excludable.
such injuries/sickness h) Reasonable Private Benefit Plan
• Damages will be exempt only if they arise o Conditions: (i) at least 50 yrs old; (ii)
together with personal injury; however, if in the service of same employer for
damages only amount to return of capital, it at least 10 years at time of retirement
is exempt (Ex. Damages from car accident o Must be approved by BIR
exempt only if claim includes compensation o A pension, gratuity, stock bonus or
for personal injury. If no personal injury, profit-sharing plan maintained by an
damages for car wreckage will only be ER for the benefit of some or all of
exempt to the extent of the amount of the his officials/employees, wherein
actual damage Æ return of capital) contributions are made by such ER
• Must be physical injury, not injury to rights. for the officials/employees, or both,
6) Retirement Benefits, Pensions, Gratuities for the purpose of distributing to such
• Forms officials & employees the earnings &
a) RA 7641 or Reasonable Private principal of the fund thus
Benefit Plan accumulated; & provided in the plan
o See below for rules that no part of the income shall be
b) Amount received as a consequence used for/be diverted to any purpose
of separation for any cause beyond other than for the exclusive benefit of
control (death, sickness or other the said officials & employees
physical disability) • Service must be continuous.
o Sickness must be job threatening • You can “avail of the benefits only once”
Æ must render taxpayer (once you’ve availed of RPBP, you cannot
incapable of working (Ex. Does avail of another RPBP); but you can avail of
not include STD) exemption under another ground
o Benefits from separation due to o Ex. A government employee can claim
retrenchment come under exemption for retirement benefits
exemption (no choice/option; but received from the GSIS even after
if the Ee avails of an optional availing of RPBPÆ taxpayer can claim
QuickTime™ and a
(Uncompressed) plan, he cannot
decompressor RPBP after qualifying as a private
are needed to see this picture.
reason that he was separated for employee then under GSIS proceeds
reasons beyond his control, exemption after qualifying as a
therefore, he cannot claim government employee
exemption of the benefits on this o Ex. Employee can claim exemption
ground Æ but he can claim under RPBP then later claim on the
under other grounds such as ground that the amount he received is a
RPBP or RA 7641. consequence of his separation in a
c) Benefits received from a foreign subsequent job for any cause beyond his
government by resident of non control

Page 23 of 145
Taxation Law Summer Reviewer

• Terminal Leave Pay: amount paid for the

commutation of leave credits BIR Ruling #125-98
o Excludable only for government The phrase “shall not have availed of the privilege
employees (this exemption does not find under a retirement benefit plan of the same or
support in NIRC but is backed by SC another ER” found in Sec. 32 (B) (6) (a) of the Tax
decision and BIR Ruling #143-98) Code means that the retiring official or EE must not
have previously received retirement benefits from the
7) Miscellaneous Items same or another employer who has a qualified
(a) income derived by foreign government (from retirement benefit plan.
investments in Philippines in loans, stocks,
bonds or other domestic securities) BIR Ruling #143-98
• Refers only to passive income. If the The terminal leave pay of government employees
foreign government engages in trade, whose employment is coterminous is exempt since it
income is taxable. falls within the meaning of the phrase “for any cause
(b) income derived by govt./its political beyond the control of the said official or EE” found in
subdivisions (from public utility or exercise Sec. 32(B) of the CTRP.
essential governmental function)
• Key: Income should accrue to
government; if the income is retained by
the public utility, it is not exempt Æ look
at charter of political subdivision/GOCC
to determine whether its income accrues
to the government or not.
(c) prizes, awards in sports competition
A. Fringe Benefit
sanctioned by national sports associations
whether held in Philippines or abroad Any good, service or other benefit furnished or
• Contemplates a particular competition, granted in cash or in kind by an employer to an
not a cumulative achievement (Ex. individual employee (except rank and file employees)
Sportsman of the year award does not such as, but not limited to the ff:
qualify for exemption) 1) housing
(d) prizes & awards 2) expense account
¾ in recognition of religious, charitable, 3) vehicle of any kind
scientific, educational, artistic, literary or 4) household personnel (such as maid, driver &
civic achievement, but only if: others)
¾ recipient was selected without any action 5) interest on loan at less than market rate to the
on his part extent of the difference between the market rate
¾ recipient not required to render & actual rate granted
substantial future services as a condition 6) membership fees, dues & other expenses borne
of receiving the prize/award by the employer for the employee in social &
Example: Nobel prize award athletic clubs or other similar organizations
• Construed strictly, take note of 7 7) expenses for foreign travel
categories. It does not include athletic 8) holiday & vacation expenses
achievement. 9) educational assistance to the employee or his
• Contemplates a rational selection dependents
process; cannot just be randomly 10) life or health insurance & other non-life insurance
selected. premiums or similar amounts in excess of what
th QuickTime™ and a
(e) 13 month pay & decompressor
TIFF (Uncompressed) other benefits (i.e. the law allows
are needed to see this picture.
productivity incentives & Christmas bonus)
¾ Total exclusion shall not > P30,000 B. Nature of FBT
(f) GSIS, SSS, Medicare, Pag-ibig contributions
& union dues of individuals Final tax imposed on the grossed-up monetary value
(g) Gains form the sale of bonds, debentures or of fringe benefit furnished/granted to the EE by the
other certificates of indebtedness with a ER, whether an individual or corp. (payable by the
maturity of more than 5 years employer)
(h) Gains from redemption of shares in mutual Effective 1/1/98 34%

Page 24 of 145
Taxation Law Summer Reviewer

1/1/99 33%
• When a fringe benefit is given solely for the
Fringe benefit is an income of the employee subject convenience of the employer, the fringe
to Fringe Benefit Tax but is payable by the Employer. benefit is exempt from FBT because the
Er can deduct FBT from its taxable income. employee does not recognize income from
the benefit.
Fringe benefits are only for corporate • Ex. Expenditure on housing of engineer
officers/management. For rank and file, it is called an within factory premises is not subject to
allowance. Allowances (benefits to rank and file) are FBT
not subject to FBT. • General Rule: If housing is located
outside, it is subject to FBT.
C. Fringe Benefits not subject to FBT • Exception: If the nature of the Er’s
business is hazardous to health of
(a) FB authorized & exempted from tax under Ee, housing can be located outside
special laws the factory without being subject to
(b) Contributions of ER for the benefit of the FBT.
employee to retirement, insurance & • Ex. If employee is given housing allowance in
hospitalizations benefit plan cash, this will constitute compensation of
(c) Benefits given to the rank & file employees, the employee (income from whatever
whether granted under a CBA or not source). However, if it qualifies as a Fringe
(d) De minimis benefits Benefit, then it will be subject to FBT and
the burden is shifted to Er (Tax on Ee,
De Minimis benefits Burden on Er)
a) Monetized unused vacation leave credits of
private employees not exceeding 10 days
during the year and monetized value of leave III. DEDUCTION FROM GROSS INCOME
credits paid to government officials and
employees • Defined as: Items or amounts which the law allow
b) Medical cash allowance to dependents of to be deducted from gross income in order to
employees not exceeding P750 per semester arrive at the taxable income.
or P125 per month • The basic principle governing deductions from
c) Rice subsidy of P1,000 or 1 sack of 50 kg gross income apply to all taxpayers.
rice amounting to not more than P1,000
• Because deductions are strictly construed
d) Uniform and clothing allowance not
against the taxpayer, one seeking a deduction
exceeding P3,000 per year
must point to some specific provisions of the
e) Actual yearly medical benefits not exceeding
statute in which that deduction is authorized &
must be able to prove that he is entitled to the
f) Laundry allowance of P300 per month
deduction which the law allows.
g) Employee achievement awards, for length of
• Adequate records should be kept to support the
service or safety achievement in the form of
tangible personal property other than cash or
gift certificate, with an annual monetary value • The deduction claimed must have been
not exceeding P10,000 received by the subjected to withholding tax, if required.
employee under an established written plan • Deductions for income tax purposes partake of
which does not discriminate in favor of highly the nature of tax exemptions; hence, if tax
paid employees QuickTime™ and a exemptions are to be strictly construed, then it
TIFF (Uncompressed) decompressor
h) Christmas are and major
needed to see this picture. anniversary follows that deductions must be STRICTLY
celebrations not exceeding P5,000 per construed.
employee per annum • He must be able to prove that he is entitled to the
i) Flowers, fruits, books or similar items given deduction authorized or allowed. (Atlas
to employees under special circumstances Consolidated Mining & Dev’t. Corp. vs. CIR,
on account of illness, marriage, birth of a January 12, 1981)
baby, etc
j) Daily meal allowance of overtime work not WHO MAY AVAIL OF THE DEDUCTIONS?
exceeding 25% of basic minimum wage 1) Individuals

Page 25 of 145
Taxation Law Summer Reviewer

(a) citizen 4) Taxes

(b) resident alien 5) Depreciation
(c) non-resident alien doing business in the 6) Interest
Philippines 7) Depletion of oil & gas wells & mines
(d) member of GPP 8) Charitable & other contributions
2) Corporations 9) Research & Development
(a) domestic corp. 10) Pension trusts
(b) resident foreign corp.
(c) proprietary educational institutions & 1. EXPENSES (SEC 34A)
(d) GOCCs 1) Ordinary & necessary trade, business or
professional expenses only
GROSS INCOME: a. Must be ordinary AND necessary (both
1. Citizens and resident aliens whose income is must be complied with)
purely compensation income (except for b. Must be paid or incurred during the
premium payments on health and/or taxable year
hospitalization insurance); c. Must be paid or incurred in carrying on or
2. Non-resident aliens not engaged in trade or which are directly attributable to, the
business in the Philippines; and development, management, operation
3. Non-resident foreign corporation and or conduct of the trade, business or
exercise of a profession, including
THE FOLLOWING ARE THE ALLOWABLE reasonable allowance for:
DEDUCTIONS FROM GROSS INCOME BASED ON 1. salaries, wages & other forms of
CLASSES OF TAXPAYER: compensation for personal services
1. Individuals with gross income from employee- actually rendered (including grossed-
employer relationship only (gross income only): up monetary value of FB); but the
o Premium payments on health and/or hospital final tax should have been paid
insurance (if requisites are complied with) 2. travel expenses in pursuit of trade,
o Personal exemptions and additional business/ profession
exemptions 3. rentals &/or other payments as
lessee, user or possessor
2. Individuals with gross income from business or 4. entertainment, amusement &
practice of profession: recreation expenses directly
o Optional Standard Deduction (OSD) OR connected to the devt., mgt. &
Itemized deductions operation & conduct of trade,
o Optional Standard Deductions – 10% of the business/ profession
gross income. May be availed only by > The Regulations impose a limit of
individuals (except nonresident aliens) who 0.50% of net sales (gross sales less sales
are not purely compensation income earners. returns/allowances & sales discounts) for
This is in lieu of the itemized deductions. taxpayers engaged in sale of goods or
o Premium payments on health and/or hospital properties; or 1% of net revenue (gross
insurance (if requisites are complied with) revenue less discounts) for those engaged in
o Personal and additional exemptions sale of services, including exercise of
profession and use or lease of properties.
3. Corporations (RR No. 10-02)
o Itemized Deductions QuickTime™ and a
TIFF (Uncompressed) decompressor
are needed to see this picture.
4. Estates and Trusts - Amount must be reasonable.
Section 62 of the NIRC - Amount must be substantiated.
- It is not contrary to law, public policy or morals.
ITEMIZED DEDUCTIONS/ ALLOWABLE - Tax required to be withheld must have been paid to
1) Bad Debts
2) Expenses
3) Losses 2) Substantiation Requirements: sufficient

Page 26 of 145
Taxation Law Summer Reviewer

evidence (i.e. official receipts, financial incurred during the taxable year
statements or other adequate records) to (f) interest must have been stipulated in
substantiate: writing
(a) amt. of expense deducted (g) interest must be legally due
(b) direct connection/relation of the expense (h) interest payment arrangement must not
to the development, management be between related taxpayers
operation &/or conduct of the trade, (i) interest must not be incurred to finance
business or profession of the taxpayer petroleum operations
(j) in case of interest incurred to acquire
3) Bribes, Kickbacks & Other Similar Payments: property used in trade, business or
not deductible exercise of profession, the same was not
treated as a capital expenditure
¾ Ordinary expense – normal or usual in relation (k) the interest id not expressly disallowed
to the taxpayer’s business and the surrounding by law to be deducted from gross income
circumstance. of the taxpayer.
¾ Necessary expense – appropriate and helpful in
the development of taxpayer’s business and are GENERAL RULE ON DEDUCTION
intended to minimize losses or to increase profits. - The amount of interest expense
These are the day to day expenses. paid or incurred within a taxable year
¾ While illegal income will form part of the income of indebtedness in connection with
of the taxpayer, expenses which constitute bribe, the taxpayer’s trade, business, or
kickback, and other similar payment, being exercise of profession shall be
against law and public policy are not deductible allowed as a deduction from the
from gross income (Sec. 34A1c). taxpayer’s gross income.
¾ Business expense – expenditure related to the
business that is deductible in the year incurred, in LIMITATION ON DEDUCTION
the same taxable year. Interest expense shall be reduced by an amt.
¾ Capital expense – expenditure that improves or equal to the ff. % of interest income
adds to the value of your property or equipment. subjected to FT:
Not immediately deductible. It is deductible over 1/1/00 38%
time, such as in the form of depreciation. 1/1/06 42% (RA9337)
1/1/09 33%
¾ Expenses allowable to private educational
institutions: In addition to the expenses
allowable as deductions, a private educational
institution has the option to elect either: Example: Year 2006
(a) to deduct as expense those otherwise Int. exp. = P2,000 Int. income subjected to
considered as capital outlays of FT = P1,500
depreciable assets for the expansion of Deduct as int. exp.: P2,000 - (P1,500 x 42%)
school facilities = P1,370
(b) to capitalize asset & deduct allowance
for depreciation The objective of the limitation is to discourage tax
arbitrage on back to back loans, the proceeds of
2. INTEREST which are invested in income earning interest that
is subject to 20% final tax.
Requisites for deductibility, as implemented
by Rev. Reg. 13-2000 QuickTime™ and a
TIFF (Uncompressed) decompressor Tax arbitrage- is a method of borrowing without
(a) there must be an
are needed indebtedness
to see this picture.
entering into a debtor/creditor relationship, often
(b) there should be an interest expense paid to resolve financing and exchange control
or incurred upon such indebtedness problems. In tax cases, back-to-back loan is used
(c) indebtedness must be that of the to take advantage of the lower rate of tax on
taxpayer interest income and a higher rate of tax on
(d) indebtedness must be connected with interest expense deduction.
the taxpayer’s trade, business or
exercise of profession
(e) interest expense must have been paid or DEDUCTIBLE INTEREST EXPENSE:

Page 27 of 145
Taxation Law Summer Reviewer

1. interest on taxes, such as those paid for reality is dividend

deficiency or delinquency, since taxes are 9. interest on unpaid salaries and
considered indebtedness (provided that the bonuses
tax is a deductible tax, except in the case of 10. interest calculated for cost keeping
income tax). However, fines, penalties, and on account of capital or surplus
surcharges on account of taxes are not invested in business which does not
deductible. The interest on unpaid business represent charges arising under
tax shall not be subjected to the limitation on interest-bearing obligation
deduction. 11. interest paid when there is no
2. Interest paid by a corporation on scrip stipulation for the payment thereof
3. Interest on deposits paid by authorized banks OPTIONAL TREATMENT OF INTEREST
of the BSP to depositors, if it is shown that EXPENSE
the tax on such interest was withheld. - at the option of taxpayer, interest
4. Interest paid by a corporate taxpayer who is incurred to acquire property used in trade
liable on a mortgage upon real property of or business may be allowed as:
which the said corporation is the legal or (a) as expense (deduction)
equitable owner, even though it is not directly (b) as capital expenditure
liable for the indebtedness.
NON-DEDUCTIBLE INTEREST - -the term “taxes” refers to national and local
(a) interest paid in advance through discount taxes, and means TAXES PROPER, hence,
or otherwise(in case of cash basis no deductions are allowed for:
taxpayer) o a. Interests
¾ allowed as deduction in the year the o b. surcharges
debt is paid o c. penalties or fines incident to
¾ if indebtedness is payable in delinquency (sec. 80, Rev. Reg. 2)
periodic amortizations, int. is
deducted in proportion of the amt. of DEDUCTIBLE TAXES
the principal paid. - All taxes, national, or local, paid or incurred
(b) payments made: during the taxable year in connection with the
1. between members of a family taxpayer’s profession, trade or business, are
(include only brothers & sisters, deductible from gross income.
spouse, ancestors, & lineal
2. between an individual & a corp. more a. it must be paid or incurred within the
than 50% in value of outstanding taxable year
stock is owned by such individual b. it must be paid or incurred in
(except in case of distributions in connection with the taxpayer’s trade,
liquidation) profession or business
3. between 2 corps. more than 50% in c. it must be imposed directly on the
value of outstanding stock owned by taxpayer
same individual, if either one is a d. it must not be specifically excluded
personal holding co. or a foreign by law from being deducted from the
holding co. during the taxable yr. taxpayer’s gross income
preceding the date of sale/exchange
4. between grantorand&a fiduciary of any
TIFF (Uncompressed) decompressor
trust are needed to see this picture. (a) Philippine income tax (but FBT can be
5. between Fiduciary of a trust & the deducted from gross income RR 8-98))
fiduciary of another if same person is (b) income tax imposed by authority of any
a grantor to each trust foreign country (except when the
6. between Fiduciary & a beneficiary of taxpayer signifies his desire to avail of
a trust the tax credit for taxes of foreign
7. indebtedness is incurred by a service countries)
contractor to finance petroleum corp. (c) estate & donor’s taxes
8. interest on preferred stock which in (d) taxes assessed against local benefits of

Page 28 of 145
Taxation Law Summer Reviewer

a kind tending to increase the value of Limitation of Credit (Substantiation

the property assessed Requirements)
(e) final taxes, being in the nature of income -The tax credit shall be allowed only
tax if the taxpayer establishes to the satisfaction of
(f) special assessments the Commissioner the following:
a. The total amount of the income derived
¾ Taxes, when refunded or credited, shall be
from sources without the Philippines;
included as part of GI in the year of receipt to
the extent of income tax benefit of said b. The amount of income derived from each
deduction. (Tax Benefit Rule) country, the tax paid or incurred to which is
¾ For NRAETB and RFC, taxes paid or claimed as a credit under said paragraph, such
incurred are allowed as deductions only if amount to be determined under rules and
and to the extent that they are connected regulations prescribed by the Secretary of
from income within the Philippines. Finance; and
¾ Exceptions to the rule that only such persons
c. All other information necessary for the
on whom the tax is imposed by law can claim
verification and computation of such credits.
deduction thereof:
a. taxes of shareholder upon his What amount may be taken as tax credit: The
interest as such and paid by the amount of tax credit allowed is equivalent to the
corporation without tax paid or incurred to a foreign country during
reimbursement from him, can be the taxable year but NOT TO EXCEED THE
claimed by the corporation as FOLLOWING LIMITS:
b. A corporation paying the tax for Per Country Limitation – Amount of credit to tax
the holder its bonds or other paid/incurred to any country shall not exceed
obligation containing a tax-free same proportion of the tax against which such
covenant clause cannot claim credit is taken
deduction for such taxes paid by
it pursuant to such covenant.
Income from outside the Phils (per country)
In case of a nonresident alien individual Subtotal
engaged in trade/business in the Philippines, Multiplied by: TOTAL income from ALL sources
taxes to be deducted shall be allowed only if Limitation per country
& to the extent that they are connected with
income from sources w/in the Philippines
Global Limitation – Total amount of credit shall
not exceed same proportion of tax which such
Tax Credit: a right of an income taxpayer to credit is taken
deduct from income tax payable the foreign
income tax he has paid to his foreign country Total income from OUTSIDE the Phils.
subject to limitation. Divided by total income from ALL sources
WHO CAN CLAIM? Multiplied by Philippine Income
1. Citizen Global Limitation
2. Domestic Corp
3. Member of GPP and a
TIFF (Uncompressed) decompressor WHEN CREDIT FOR TAXES MAY BE TAKEN:
4. Beneficiary
are needed toof
seean estate or trust
this picture.
- The credit for taxes provided by Section
34(C)(3) to (7) may ordinarily be taken either
WHO CANNOT CLAIM? in the return for the year in which the taxes
1. Alien individual (except resident accrued or on which the taxes were paid,
aliens deriving income from within & dependent upon whether the accounts of the
without the Phils., if there is taxpayer are kept and his returns filed upon
reciprocity) the accrual basis or upon cash receipts and
2. Foreign Corp. disbursements.

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Taxation Law Summer Reviewer

DIFFERENCES: (d) incurred in trade, business or profession

Deduction: included in the gross income but later OR property connected w/ trade,
deducted. business or profession lost through fires,
Exclusion: not included in the computation of gross storm, shipwreck, or other casualties OR
income. Refers to income received or earned but is from robbery, theft or embezzlement
not taxable as income because of exemption by (e) evidenced by a completed transaction
virtue of a law or treaty. (f) not claimed as a deduction for estate tax
Tax Credit: paid beforehand and is deducted from the purposes
tax liability of the taxpayer. (g) notice of loss must be filed with the BIR
within 45 days from the date of discovery
Example: of the casualty or robbery, theft or
Particulars Net Actual Foreign Phil embezzlement
Income Tax Paid in Income
Philippine Tax due at • No loss shall be allowed as a deduction
Peso 32% for income tax purposes if such loss has
Country A P50,000 P18,000 been claimed as a deduction for estate
Country B 40,000 P11,000 tax purposes.
Phil- 110,000 • The taxpayer’s failure to record in his
source books the alleged loss proves that the
income loss had not been suffered, hence, not
Total NI – P200,000 P29,000 P64,000 deductible. (City Lumber Vs. Domingo
all and CA, January 30, 1964).

A. PER COUNTRY LIMITATION Category and Types of Losses

Country A : [(50,000/200,000 x 64,000)] = 16,000 1. Ordinary Losses
Country B : [(40,000/200,000 x 64,000)] = 12,800
** maximum tax credit limit a. incurred in trade or business, or practice of
[(90,000/200,000 x 64,000)] = NET OPERATING LOSS CARRY-OVER (NOLCO)
P28,800 - Refers to the excess of allowable deductions over
gross income of the business for any taxable year,
Computation of Allowable tax credit which has not been previously offset as deduction
Tax Due on P200,000 P64,000 from gross income.
Less: Allowable Foreign Tax Credit 1. the taxpayer was not exempt from income tax in
Country A P16,000 the year of such net operating loss;
Country B 11,000 27,000 2. the loss was not incurred in a taxable year during
Tax Still Due P37,000 which the taxpayer was exempt from income tax, and
** Cannot exceed maximum tax credit limit 3. there has been no substantial change in the
NOTE: For limitation A, Country A, 16K is lower than ownership of the business or enterprise.
the actual; Country B, 11K (actual) is the lower
amount; get the total of all per country amounts. For There is no substantial change in the ownership of
limitation B, 28.8K is lower than the total of the actual the business when:
amount. Comparing the total of limitation A vs. B, the a. not < 75% in nominal value of outstanding
former is the lower amount so that is the allowable tax issued shares is held by same persons
credit. QuickTime™ and a
TIFF (Uncompressed) decompressor b. not < 75% of paid up capital of corp. is
are needed to see this picture.
held by same persons
(a) Net operating loss of a business shall be
Requisites for deductibility of ordinary loss carried over as deduction from GI for the
(a) loss must be of the taxpayer next 3 consecutive taxable yrs.
(b) actually sustained during the taxable immediately ff. the yr. of such loss
year - the 3 year period shall continue to
(c) not compensated for by insurance or run notwithstanding that the
other forms of indemnity corporation paid its taxes under

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Taxation Law Summer Reviewer

MCIT, or that the individual availed of extent of the gains from such losses
the 10% Optional Standard (d) Abandonment Losses
Deduction ¾ In case of abandoned petroleum
operations, accumulated
(b) Net Operating Loss = excess of expenditures incurred prior to 1/1/79
allowable deduction over the GI allowed as deduction only from
income derived from same contract
(c) For mines other than oil & gas wells, if area; notice of abandonment shall be
loss incurred in any of the 1st 10 yrs. of filed with Commissioner
operation, carry-over for the next 5 yrs. ¾ In case of abandoned producing
well, unamortized cost &
b. of property connected with the trade, undepreciated costs of equipment
business, or profession, if the loss arises directly used, allowed as deduction
from fires, storms, shipwreck or other in the yr. of abandonment
casualties, or from robbery, theft or (e) Losses from Illegal Transactions - not
embezzlement deductible
(f) Losses due to voluntary removal of
Total Destruction- the replacement cost to building incident to renewal or
restore the property to its normal operating replacements – deductible expense from
condition, but in no case shall the deductible gross income
loss be more than the net book value of the (g) Loss of useful value of capital assets due
property as a whole, immediately before to charges in business conditions –
casualty. deductible expense only to the extent of
actual loss sustained (after adjustment
Partial Destruction- the excess over the net for improvement, depreciation, and
book value immediately before the casualty salvage value)
should be capitalized, subject to depreciation (h) Losses from sales or exchanges of
over the remaining useful life of the property. property between related taxpayers –
Not deductible as provided under
2. Special Types of Losses Section 36 of the NIRC but the gains are
(a) Capital Losses – deductions allowed only taxable
to the extent of the gains from such sales (i) Losses of Farmers – deductible if
or exchanges of capital assets (does not incurred in the operation of farm
apply to banks and trust companies) business
a. losses from sale or exchange (j) Loss in shrinkage in value of stock – if
of capital assets the stocks of the corporation become
b. losses resulting from securities worthless, the cost or other basis may be
becoming worthless and which deducted by the owner in the taxable
are capital assets year in which the stocks became
c. losses from short sales of worthless. Any amount claimed as a loss
property on account of shrinkage in value of the
d. losses due to failure to stock through fluctuation in the market or
exercise privilege or option to otherwise cannot be deducted from gross
buy or sell property income
(b) Losses from wash sales of stock or
securities 5. BAD DEBTS
¾ 30 TIFFdays before
QuickTime™and and a after the date of
(Uncompressed) decompressor
- debts due to the taxpayer actually
the sale, the
are needed to seetaxpayer
this picture. has acquired ascertained to be worthless and charged
or has entered into a contract or off during the year.
option so as to acquire, substantially
identical stock/securities “Actually ascertained to be worthless”-
¾ General rule: not deductible unless Worthlessness is not determined by an
claim is made by a dealer in inflexible formula or slide rule calculation but
stock/securities & made in ordinary upon the exercise of sound business
course of business judgment. The determination of
(c) Wagering Losses - allowed only to the worthlessness must depend upon the

Page 31 of 145
Taxation Law Summer Reviewer

particular facts and circumstances of the absolute owner of the property & allowed to
case. It must be uncollectible even in the life tenant
future. (Collector v. Goodrich International (b) In case of property held in trust, deduction
Rubber Co., 21 SCRA 1336) apportioned between the income
beneficiaries & trustees


1..Existing indebtedness due to the taxpayer which a. The allowance for depreciation must be
must be valid and legally demandable, reasonable.
2. Connected with the taxpayer’s trade, business b. It must be for property used for
or practice of profession, employment in trade or business or out
3. Must not be sustained in a transaction entered of its not being used temporarily during
into between related parties, the year.
4. Actually ascertained to be worthless and c. The allowance must be charged off.
uncollectible as of the end of the taxable year, and d. Schedule on the allowance must be
5. Actually charged off in the books of accounts attached to the return.
of the taxpayer as of the end of the taxable year.
1) Methods of Depreciation
¾ Recovery of bad debts previously allowed (a) straight-line method =
as deduction in the preceding yrs. shall be
included as part of gross income in the yr. of cost - salvage value
recovery to the extent of the income tax estimated life
benefit of such deduction (Tax Benefit example: cost=15,000; SV=5000;
Rule) est. life=5 years
¾ Ascertainment of Worthlessness: 15,000 - 5,000 = 2,000
Proof of two facts: 5 years
a. taxpayer did in fact ascertain the debt
to be worthless in the year for which (b) declining balance method =
the deduction was sought;
b. that in so doing, he acted in good faith cost - accumulated depreciation x rate
(Collector Vs. Goodrich, December 22, estimated life
¾ depends upon the facts and the example: rate 200%
circumstances of the case year 1 -- 15,000 - 0 x 200% = 6,000
¾ good faith does not require that the 5
taxpayer be an incorrigible optimist
but on the other hand, he may not year 2 -- 15,000 - 6000 x 200% = 3,600
be unduly pessimistic 5

(c) sum of years digits method

- gradual diminution in the service or useful = nth period x (cost - salvage value)
value of tangible property due from sum of the years digits
exhaustion, wear and tear and normal
obsolescence. example: SYD: 5+4+3+2+1 = 15
- also applies to amortization of intangible
assets, theTIFF
use ofQuickTime™
which and in atrade or business
(Uncompressed) decompressor
year 1 -- 5/15 x (15,000 - 5,000) = 3,333.33
is of limited duration.
are needed to see this picture. year 2 - 4/15 x (15,000 - 5,000) = 2,666,67

A reasonable allowance for the exhaustion, wear 2) Special Types of Depreciation

& tear of property used in the trade or business; (a) Petroleum operations
to cause plant elements or the plant as a whole i. Depreciation of all properties directly
to suffer diminution in value related to production of petroleum
(a) In case of property held by one person for life shall be allowed under straight-line
w/ remainder to another person, deduction is or declining-balance (DB) method
computed as if the life tenant were the ii. May shift from DB method to SL

Page 32 of 145
Taxation Law Summer Reviewer

method ¾ actual exploration & development

iii. Useful life: 10 yrs. or shorter life as expenditures net of 25% of NI shall
may be permitted by Commissioner be carried forward to succeeding yrs.
iv. Useful life of prop. not used directly: until fully deducted
5 yrs. under straight-line method ¾ exploration expenditures =
(b) Mining operations pd/incurred for the purpose of
i. depreciation on all properties in ascertaining the existence, location,
mining operations other than extent, or quality of any deposit of
petroleum operations at the normal ore/other mineral & pd/incurred
rate if expected life is 10 yrs or less. before the beginning of the
ii. if expected life is > 10 yrs., development stage of the
depreciate over any no. of yrs. bet. 5 mine/deposit
yrs. & the expected life ¾ development expenditures =
paid/incurred during development
¾ Depreciation deductible by non-resident aliens stage of the mine or other natural
engaged in trade/business or non-resident deposits
corporation only when such property is located in (4) Depletion of Oil and Gas wells and mines
the Philippines deductible by a non-resident alien
or foreign corporation only in respect of
¾ The BIR and the taxpayer may agree in writing oil and gas wells or mines located in the
on the useful life of the property to be Phils.
depreciated. The agreed rate may be modified if
justified by facts or circumstances. The change 8. CHARITABLE & OTHER CONTRIBUTIONS
shall not be effective before the taxable year on
which notice in writing by certified mail or (a) Contributions subject to limitations
registered mail is served by the party initiating. i. Contributions or gifts actually paid or made
w/in the taxable yr.:
7. DEPLETION OF OIL & GAS WELLS & MINES ii. to or for the use of the govt. or its agencies or
any political subdivision, exclusively for public
The reduction of cost or value of natural purpose
resources such as oil & gas wells, & mines as the iii. or, to accredited domestic
resources are converted into inventories. corps./associations organized & operated
exclusively for:
¾ No further allowance is granted if the allowance (1) religious
for depletion = the capital invested (2) charitable
(3) scientific
(1) Intangible exploration & development (4) youth & sports development
drilling costs: (5) cultural or educational purposes
a) deduct in the yr. incurred if incurred for (6) for the rehabilitation of veterans
non-producing wells & mines (7) to social welfare institutions
b) deduct in full OR capitalize & amortize (8) to NGOs
of incurred for producing wells & mines iv. no part of NI inures to the benefit of any
in same contract area private stockholder or individual
(2) Intangible costs in petroleum operations: ¾ for individual: not > 10% of taxable
no salvage value & incidental to & income before deducting the charitable
necessary for dwelling of wells & contributions
preparation ofQuickTime™
wells for and a the production of
TIFF (Uncompressed) decompressor
¾ for corporation: not > 5 % of taxable
petroleum are needed to see this picture. income before deducting the charitable
(3) Election to deduct exploration & contributions
development expenditures for mining
corps. (b) Contributions deductible in full
(a) deduct as cost i. Donations to the govt. – to finance, to
(b) deduct as adjusted basis provide for, or to be used in undertaking
provided, total amt. priority activities in education, health, youth &
deductible shall not exceed sports development, human settlements,
25% of NI science & culture & in economic development

Page 33 of 145
Taxation Law Summer Reviewer

according to National Priority Plan determined connection with trade business or profession
by NEDA c. not chargeable to capital account
¾ If not in accordance w/ annual priority
plan, donation is subject to limitations in Requisites for amortization of certain R&D
(1) above expenditures (treated as deferred expenses):
ii. Donations to certain foreign institutions (1) paid/incurred by the taxpayer in
or international organizations - in pursuance connection w/ his trade/business
or compliance with agreements, treaties, or (2) not treated as expense
commitments entered into by Phil. govt. & (3) chargeable to capital acct. but not
foreign institutions/international organizations chargeable to property of a character w/c
iii. Donations to accredited NGOs is subject to depreciation/depletion
¾ Organized & operated exclusively for (4) amortized over a period of not < 60
scientific, educational, character-building months as may be elected by the
& youth & sports development, health, taxpayer
social welfare, cultural or charitable
purposes or combination thereof (no part LIMITATIONS ON DEDUCTIONS – not
of NI inures to the benefit of any private applicable to, EXCLUSIONS:
individual) (1) Any expenditure for the acquisition or
¾ W/in 15th of the 3rd month after the close improvement of land, or for the important
of the taxable yr., makes utilization of prop. to be used in connection w/ R&D
directly for the active conduct of activities of a character subject to depreciation &
constituting the purpose/function of the depletion
org., unless pd. is extended (2) Any expenditure paid/ incurred for the
¾ Administrative expense should not be > purpose of ascertaining the existence,
30% of total expenses location, extent, or quality of any deposit
¾ Upon dissolution, assets would be distributed to of ore or other mineral, including oil or
another nonprofit domestic corp. organized for gas (exploration exp.)
similar purpose or to the state for public purpose
or to another org. to be used in same purpose as 10. PENSION TRUSTS (past service cost)
the dissolved corp.
Pension Trust Contributions – a deduction applicable
REQUISITES FOR DEDUCTIBILITY: only to the employer on account of its contribution to
a. the contribution or gift must be actually a private pension plan for the benefit of its employee.
paid. This deduction is purely business in character.
b. it must be given to the organizations
specified in the code. Established or maintained by employer to provide for
c. the net income of the institution must not the payment of reasonable pensions to his
inure to the benefit of any private employees.
stockholder or individual. • Normal Cost – the contributions during the
taxable year to cover the pension liability
(c) VALUATION of property donated other than accruing during the taxable year. Allowed as a
money: acquisition cost deduction under Sec. 34(A)(1) as “expenses in
9. RESEARCH AND DEVELOPMENT • Past Service Cost – amount in excess of the
above contribution (covering pension liability
Paid or incurred by a taxpayer during the taxable pertaining to old employees which accrued during
yr. in connection w/ his and
QuickTime™ trade,
TIFF (Uncompressed) decompressor
business or the years previous to the establishment of the
profession as ordinary
are needed& necessary
to see this picture. expenses w/c pension trust); allowed as deduction only if:
are not chargeable to capital account; allowed as (a) such amount not been allowed as a
deduction during the taxable yr. when deduction
pd./incurred (b) apportioned in equal parts over 10
consecutive years beginning w/ the yr. in w/c
REQUISITES FOR DEDUCTIBILITY AS the transfer/payment is made (Sec. 34[J])
a. paid or incurred during the taxable year REQUISITES FOR DEDUCTIBILITY:
b. ordinary and necessary expenses in a. The employer must have established a

Page 34 of 145
Taxation Law Summer Reviewer

pension or retirement plan to provide for the spouse claiming additional exemption
payment of reasonable pensions to his shall be entitled to this deduction.
b. The pension plan is reasonable and Who may Avail of this deduction:
actuarially sound; 1. Individual taxpayers earning purely
c. It must be funded by the employer; compensation income during the year.
d. The amount contributed must be no longer 2. Individual taxpayers earning business
subject to the control and disposition of the income or in practice of his profession
employer; whether availing of itemized or optional
e. The payment has not yet been allowed as a standard deductions during the year.
deduction; and
f. The deduction is apportioned in equal parts 12. OPTIONAL STANDARD DEDUCTION (OSD)
over a period of 10 consecutive years a. Applicable to any individual, except a
beginning with the year in which the transfer nonresident alien
of payment is made. b. Taxpayer may elect to pay a standard
deduction in an amount not exceeding 10%
Summary rules on Retirement Benefits Plan/ of GI
Pension Trust a. Such election should be signified in his return
1. EXEMPT FROM INCOME TAX – employees’ & shall be irrevocable for the taxable year for
trust under Sec. 60(B) which the return was made
2. EXCLUSION FROM GROSS INCOME – Individual is not required to submit his financial
amount received by the employee from the fund statements
upon compliance of certain conditions under Sec.
a. amounts contributed by the employer DEDUCTIBILITY OF CERTAIN PAYMENTS -
during the taxable year into the pension plan to tax required to be deducted/withheld has been
cover the pension liability accruing during the paid to BIR
year – considered as ordinary and necessary
expenses under Sec. 34(A)(1). B. NON-DEDUCTIBLE ITEMS
b. 1/10 of the reasonable amount paid by the
employer to cover pension liability applicable to Specific Items Under Section 36:
the years prior to the taxable year, or so paid to 1. Personal, living or family expenses
place the trust in a sound financial basis – 2. Amounts paid out for new buildings or for
deductible under Sec. 34 (J). permanent improvements or betterments made to
increase the value of any property or estate (not
applicable to intangible drilling & development
11. PREMIUM PAYMENTS ON HEALTH AND/OR costs incurred in petroleum operation)
HOSPITALIZATION INSURANCE- 3. Amounts expended in restoring property or in
an amount of premium on health and or making good the exhaustion thereof for w/c an
hospitalization paid by an individual taxpayer allowance is or has been made
(head of family or married), for himself and 4. Premiums on life insurance policy when the
members of his family during the taxable taxpayer is directly/indirectly a beneficiary under
year. such policy
5. No deduction shall be allowed in Losses from
REQUISITES FOR DEDUCTIBILITY: Sales or Exchanges of Property
a. Insurance must
and a
TIFF (Uncompressed) decompressor
actually been directly/indirectly:
taken; are needed to see this picture. a) between members of a family (include only
b. The amount of premium deductible from brothers & sisters, spouse, ancestors, &
gross income does not exceed P2400 lineal descendants)
per family or P200 per month during the b) between an individual & a corp. more than
taxable year; 50% in value of outstanding stock is owned
c. That said family had a gross income of by such individual (except in case of
not more than P250,000 for the taxable distributions in liquidation)
year; c) between 2 corps. more than 50% in value of
d. In case of married individuals, only the outstanding stock owned by same individual,

Page 35 of 145
Taxation Law Summer Reviewer

if either one is a personal holding co. or a term “dependents.”

foreign holding co. during the taxable yr. • A senior citizen, whether relative or not,
preceding the date of sale/exchange lliving with the taxpayer or not, can be
d) between grantor & fiduciary of any trust classified as a dependent to make a taxpayer
e) between Fiduciary of a trust & the fiduciary of a head of a family not exceeding 4 (RA 7432)
another if same person is a grantor to each • In case of married individuals, where only
trust 1 of the spouses is deriving gross income,
f) between Fiduciary & a beneficiary of a trust only such spouse shall be allowed additional
A person is said to be “financially interested” in the • Chief support means more than one half
taxpayer’s business if he is a stockholder thereof or of the requirements for support.
he is to receive as his compensation a share of the • Parents, brothers, and sisters, who are
profits of the business. qualified dependents may entitle the taxpayer
to the personal exemption of P25,000 as
head of the family but not to the additional
• Note:
Personal Exemption • Personal and additional exemptions are
available only to business income and
Single Married Individual (or judicially P20,000 compensation income earners.
declared as legally separated without any > Non-resident aliens engaged in trade or
dependent) business (NRAETB) may be entitled to personal
Head of Family (unmarried or legally exemptions subject to reciprocity:
separated with qualified dependent/s) 25,000 1. country from which he is a citizen has an
Each married individual income tax law; and
32,000 2. the income tax law of his country allows
Each dependent (not exceeding 4) personal exemption to citizens of the Philippines not
8,000 residing therein but deriving income therefrom and
not to exceed the amount allowed in NIRC.
3. the personal exemption shall be equal to that
¾ Head of Family allowed by the income tax law of the country to a
citizen of the Philippines not residing therein, or the
1) an unmarried/legally separated amount provided in the NIRC, whichever is LOWER.
man/woman with
(a) One or both parent ADDITIONAL EXEMPTION
(b) One or more brothers or sister P8,000 for EACH of the qualified dependent
(c) One or more legitimate, recognized children not exceeding 4 in number.
natural/legally adopted children
Qualified dependent children – legitimate,
2) Who are living with & dependent upon recognized natural, illegitimate and legally
him for their chief support adopted
3) Where such brothers/sisters/children are:
(a) Not more than 21 years old The proper claimant of the additional
(b) Unmarried, and exemption would be the husband, being the
(c) Not gainfully employed head of the family except under the following
(d) Or,TIFF (Uncompressed)
QuickTime™ and sucha
children, cases:
are needed to see thisregardless
picture. of age, 1. husband is unemployed
are incapable of self support 2. husband is working abroad like an
because of mental or physical defect OFW or a seaman
3. husband explicitly waived his right
• An illegitimate child is within the meaning of the exemption in favor of his wife in the
of a “recognized natural child.” withholding exemption certificate.
• Under the provision on additional
exemption for dependents, illegitimate Senior Citizen is:
children are specifically included under the 1. any resident citizen of the PHilippines

Page 36 of 145
Taxation Law Summer Reviewer

2. at least sixty 60 years old, including those d. Non-resident alien NOT engaged in trade
who have retired from both government or business
offices and private enterprises, and e. Alien individual employed by Regional or
3. has an income of not more than sixty Area Headquarters of Multinational
thousand pesos per annum subject to the Companies
review of the National Economic f. Alien Individual employed by Offshore
Development Authority(NEDA) every three Banking Units
years. g. Alien Individual employed by Pertroleum
Service Contractor and Subcontractor
¾ NRAETB may deduct personal exemption (but
NOT additional exemption), but only to the extent
allowed by his country to Filipinos not residing Deduction for Estate or Trust - P20,000
therein, and shall not exceed the aforementioned
¾ NRANETB cannot claim any personal or COMPANIES
additional exemption.
1. Income & Deductions of Insurance
a. Dependent = legitimate/illegitimate/legally Companies
adopted child chiefly dependent upon & living a. Special deductions: net additions
with the taxpayer if such dependent is not > required by law to reserve funds & the
21 years old, unmarried & not gainfully sums other than dividends paid w/in the
employed OR if such dependent regardless yr. on policy & annuity contracts;
of age is incapable of self-support because of released reserve treated as income for
mental/physical defect the yr. of release
i. For married individuals, claimed by only 1 b. Mutual Insurance Companies
of the spouses ¾ Shall not report as income premium
ii. For legally separated spouses, claimed deposits returned to policyholder
only by the spouse who has custody of the ¾ Report income received from all
children; may be claimed by both as long other sources plus such portion of
as they have custody of the children but premium deposits retained by the
total amount claimed by both shall not companies for purposes other than
exceed the maximum allowed payment of losses & expenses &
reinsurance reserves
b. Change of Status c. Mutual Marine Insurance Companies
i. The death of the taxpayer during the ¾ Include in gross income, gross
taxable year shall not affect the amount premiums collected & received by
of personal and additional exemptions them less amounts paid for
his estate can claim, as if he died at the reinsurance; include as deductions
end of such year amounts repaid to policyholders on
ii. If the taxpayer got married or should account of premiums previously paid
have additional dependent (child born by them & interest paid upon those
within the year) during the taxable year, amounts between the ascertainment
he may claim the corresponding personal & payment thereof
exemptions in full for such year d. Assessment Insurance Companies
iii. If the spouse should die or any of the ¾ Deduct from gross income the actual
dependents become twenty one years of deposit of sums w/ the officers of the
age, or
QuickTime™ and a
become decompressor
TIFF (Uncompressed) gainfully employed Phil. governmentt as additions to
are needed to see this picture.
during the taxable year, the taxpayer guarantee or reserve funds
may still claim the same exemptions as if
he/she died, or became twenty one years G. CAPITAL GAINS & LOSSES
old or became gainfully employed at the
close of such year. 1. Definitions - No definition in the Code for
capital assets. Only Ordinary assets are defined
Individuals not entitled to personal and additional (a) stock in trade of taxpayer
exemptions: (b) property which would properly be

Page 37 of 145
Taxation Law Summer Reviewer

included in an inventory of the form (including one issued by the

taxpayer, if on hand government or political subdivision)
(c) merchandise inventory
(d) depreciable assets used in the 4. Net Capital Loss Carry-over
trade/business a. Corporations cannot carry over a net
(e) real property used in trade/business capital loss
b. If net capital loss is sustained in any
taxable yr., such loss is treated in the
b. CAPITAL ASSETS – property held by succeeding taxable yr. as a loss from the
the taxpayer (whether or not connected with sale/exchange of a capital asset held for not
his trade or business) more than 12 mos. (100% deduction)
c. Such net capital loss that should be carried
Hence, capital assets are property of a over should not exceed the net income for
taxpayer other than ordinary assets. the year Incurred (prior year’s net income)
d. Example: NI in 1996 = P6,000
c. NET CAPITAL GAIN – gains > loss from NCL in 1996 = 10,000
sales/ exchanges of capital assets • treated as a loss in 1997(100%) = P6,000
only since it should not exceed the net
d. NET CAPITAL LOSS – loss > gains from income of the taxable yr. w/c the loss was
sales/ exchanges of capital assets incurred
• Net income should be understood as
2. Percentage taken into account TAXABLE income according E.O. 37
Taxpayer other than a corporation
(Individuals, estates and trusts) 5. Retirement of Bonds, Debentures, Notes or
- - 100% if the capital asset is held for more Certificates or other evidences of
than 12 months indebtedness
- - 50% if the capital asset is held for less than ¾ Tax Base: Amount received by the holder
12 months for such transaction
- Note: ¾ These transactions result in capital gain or
GR: for purposes of computing capital loss loss although there is no sale of capital assets
and capital gain, the actual holding period
is taken into account. 6. Gain or Loss from Short Sales of Property
Exception: If securities become worthless a. Considered as gains & losses from
during the taxable year and are capital sales/exchanges of capital assets
assets, the loss resulting therefrom shall be b. Gains & Losses attributable to failure to
considered as a loss from the sale or exercise privileges or options to buy or
exchange, on the last day of such taxable sell property = capital gains/losses
year, of capital assets.
3. Limitation on Capital Loss Short sale is a transaction in which the seller
¾ Allowed only to the extent of the gains sells securities which he does not own and,
from such sales or exchanges, hence, therefore, cannot himself supply the securities for
the net capital loss is not deductible. delivery, in expectation of the decline in their
Example: Gains P 5,000
Losses 15,000 Option to buy or sell property:
NCL QuickTime™ and a
TIFF (Uncompressed) decompressor
P10,000 Example: Suppose X Inc. owns real property
In this case, are
neededP5,000 can be claimed as
to see this picture.
worth Php 10 M. Y gives X Inc. Php 2M as option
deduction (to the extent of the gain) money for a 2-year option period. Before the 2
year period ends, Y exercised the option and
Exception: Losses from such sale incurred bought the property. What will the tax treatment?
by a domestic bank/trust co. substantial It will be subject to 6% capital gains tax under
part of business is receipt of deposits, sell Section 27 (D) (5). Section 39 (F) or the provision
any bond, debenture, note or certificate or on the failure to exercise privilege will not apply.
other evidence of indebtedness issued by
any corp, w/ int. coupons or in registered Suppose the same situation above but Y fails to

Page 38 of 145
Taxation Law Summer Reviewer

exercise his option. What will be the tax other property received
treatment? • liability assumed by the
In that case, the option money will be a capital transferee
gain for X and a capital loss for Y.

Note: the property subject of option need not

be a capital asset. The law does not say if it
should be an ordinary or capital asset. It only
says “attributable to a property.”

H. DETERMINATION OF AMOUNT & 2. Exchange of property

the gain or loss shall be recognized upon
1. Computation of Gain or Loss the sale or exchange of property
a. GAIN = amt. realized > basis/adjusted b. EXCEPTION: no gain or loss is
basis for determining gain (in other words, recognized (tax-free exchanges)
selling price or proceeds > cost) (1) If in pursuance to a plan of merger or
b. LOSS = basis/adjusted basis for consolidation
determining loss > amt. realized (cost > (a) a corporation exchanges property
selling price/proceeds) solely for stocks in a corp. (both
c. AMOUNT REALIZED = money received + parties to merger/consolidation)
fair market value of the property (other (b) shareholder exchanges stock in a
than money, if any) received corp. for the stock of another
corp. (both corps. are parties to
Mode of Basis for determining gain/loss the merger/consolidation)
Acquisition from sale/disposition of (c) security holder of a corp.
property exchanges his securities in such
Purchase cost of property acquired on/after corp. solely for stock or securities
3/1/1913 in another corp. (both corps. are
parties to the
Inheritance fair market value as of the date merger/consolidation)
of acquisition (at the time of (2) If property is transferred to a corp. by
death) a person in exchange for stock/unit of
Gift the cost to the donor or to the participation in such corp. of w/c as a
previous owner who did not result of such exchange such person,
acquire it by gift; BUT, if such alone/together w/ others, not exceeding 4
basis > FMV at the time of the gift, persons, gains control of said corp.
the basis shall be such FMV for (stocks issued for services shall not be
the purpose of determining the considered as issued in return for
loss property)
Acquired for amount paid by the transferee o Control is ownership of stocks in a
less than corporation possessing at least 51%
adequate of the total voting power of all
consideration classes of stocks entitled to vote.
if property Same as the basis of property,
acquired where QuickTime™ and a
stock/securities exchanged
TIFF (Uncompressed) decompressor
BASIS: same as the basis of
G/L is not are needed to see this picture.
(1) increased by: property, stock/securities exchanged
recognized • dividends (a) decreased by:
• amt. of any gain • money received
recognized by the • fair market value of the other
exchange property received
(2) decreased by: (b) increased by:
• money received • amount treated as dividend
• fair market value of the • amount of any gain recognized
by the exchange

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Taxation Law Summer Reviewer

¾ property received as ‘boot’ shall have Dividends a) from domestic corp.– income
the FMV as basis within
¾ if part of the consideration to the b) from foreign corp.
transferor, the transferee of property
assumes a liability of the income within, if :
transferor/acquires from the latter > 50% of the Gross Income of
property subject to a liability, such such foreign corp. for the 3-
assumption shall be treated as yr. period ending w/ the close
money received by the transferor on of the taxable yr. prior to the
the exchange declaration of dividends (or
¾ if transferor receives several kinds of for such part of such period
stock/securities, Commissioner is as the corporation has been
authorized to allocate the basis in existence) was derived
among the several classes of from sources w/in the
stocks/securities Philippines
¾ basis of the prop. transferred in the
hands of the transferee: same as Extent:
would be in the hands of the Phil Gross Income x Dividend
transferor increased by the amt. of =Income Total Gross Income
the gain recognized to the transferor within
on the transfer
Income without, if
Note: < 50% of the Gross Income of
- Transferor’s basis is Section 40 (C) (5) (a) such foreign corp. for the 3-
while transferee’s basis is Section 40 (C) (5) yr. period ending w/ the close
(b). of the taxable yr. prior to the
- Boot is any cash or property given in declaration of dividends was
addition to the shares of stock received by a derived from sources w/in the
transferor in a tax-free exchange. Philippines.
- When there is no boot, the basis is the Therefore, nothing of such
transferor’s property given up because the dividends forms part of
rules provided that the basis would be the income within
same basis as the property given up by the Services Place of performance of service
transferor. In this kind of transaction, the rule (Compensation
is always the transferor’s basis. for
- When there is boot, the basis is the same labor/personal
as transferor’s basis minus boot increased by services)
the recognized gain.
Rentals Location of the property/interest
in such property
Royalties Place of use or location of
IV. SOURCES OF INCOME intangibles (such as patents,
trademarks, etc.) giving rise to
* The need to identify the situs of the income arises royalties
only when the taxable entity is merely taxed on Gain on sale of Location of property
income within. Hence, when the taxable entity is an Real property
individual resident TIFF
citizen or a domestic
QuickTime™ and a
(Uncompressed) decompressor
corporation, Gain on sale of Place of Sale
the situs becomes irrelevant since
are needed to see they are taxed on
this picture.
worldwide income. Property other
than shares of
Income Test of Source of Income purchased in
Interests Residence of Debtor one country and
sold in another

Page 40 of 145
Taxation Law Summer Reviewer

Gain on sale of Philippines regardless of where gross income within. However, the cost of
shares of stock sold selling the shoes may not be deducted from
in a domestic income within since it is not attributable to
corporation income within. Rather, it is specifically
attributable to income without.
ROYALTIES (from property or use of property
located in Philippines), includes: 2. Deductions: expenses, losses & other deductions
(a) use of/the right/privilege to use in the properly allocated thereto & a ratable part of
Philippines any copyright, patent, design or expenses, interests, losses & other deductions
model, plan, secret formula or process, effectively connected w/ the business/trade
goodwill, trademark, trade brand or other like conducted exclusively w/in the Philippines which
property or right cannot definitely be allocated to some items or
(b) use of/the right to use in the Philippines any class of gross income
industrial, commercial or scientific equipment ¾ Such deductions shall be allowed
(c) supply of scientific, technical, industrial or only if fully substantiated by all info
commercial knowledge or information necessary for its calculation
(d) supply of any assistance that is ancillary &
subsidiary to, & is furnished as a means of 3. EXCEPTION: no deduction for interest
enabling the application or enjoyment of, any paid/incurred abroad shall be allowed unless
such property/right in (a) above, such • Indebtedness was actually incurred
equipment in (b) above or knowledge/info in (c) • Indebtedness must be that of the taxpayer
above • Interest must be legally due and stipulated in
(e) supply of services by a nonresident person/his writing
employees in connection with the use of • Interest must be paid or incurred during the
prop./rights belonging to, or the installation or taxable year
operation of any brand, machinery or other • Indebtedness must be in connection w/ the
apparatus purchased from such nonresident conduct or operation of trade/business in the
person Philippines
(f) technical advice, assistance or services
rendered in connection with technical B. GROSS INCOME FROM SOURCES WITHOUT
mgt./admin. Of any scientific, industrial or THE PHILIPPINES
commercial undertaking, venture, project or 1) Interests (other than those derived from
scheme sources within the Philippines)
(g) the use of or the right to use: 2) Dividends (other than those derived from
i. motion picture films sources within the Philippines)
ii. films or video tapes for use in connection 3) Compensation for labor or personal services
with TV performed w/o the Philippines
iii. tapes for use in connection with radio 4) Rentals or royalties from property located
broadcasting w/o the Philippines or from any interest in
such property including rentals/royalties for
Taxable Income from Sources Within the Phils. the use of or for the privilege of using w/o
1. General Rule the Philippines, patents, copyrights, secret
Gross Income [GI] (within the Philippines) processes & formulas, goodwill, trademarks,
( - ) Deductions (attributable to GI within) trade brands, franchises & other like
= Taxable Income properties
5) Gains, profits & income from the sale of real
QuickTime™ and a
• by “attributable” is meant decompressor
TIFF (Uncompressed) that the expense can property located w/o the Philippines
are needed to see this picture.
be identified as the expense that generated the
income. For instance, if ABC Corp. Tip: The foregoing enumeration is merely the
manufactures clothes and sells it in the Phils., reverse of the enumeration of gross income
and sells shoes in the US. The cost of from sources within the Philippines. Hence,
manufacturing the clothes are attributable to so long as you know which income are
the income generated from selling the clothes. considered as income within, all else are
Since the income from the sale of clothes is income without.
income within, then the expense for
manufacturing them must be deducted from Taxable Income from Sources Without the

Page 41 of 145
Taxation Law Summer Reviewer

Income Deductions
Income Deductions within
----------------- x Unallocated = from
--------------- x Unallocated = from
---------- expense
------------ expense
Worldwide income Worldwide income
Income without Income within
1. General Rule
Gross Income (without the Philippines)
( - ) Deductions (attributable to GI without) ACCOUNTING PERIOD & METHODS OF
= Taxable Income ACCOUNTING

2. Deductions: expenses, losses & other deductions A. ACCOUNTING PERIODS

properly apportioned/allocated thereto & a ratable
part of expenses, interests, losses & other deductions 1. General Rule (Sec. 43): Taxable income is
w/c cannot definitely be allocated to some items or computed upon the basis of taxpayer’s
class of gross income annual accounting period (fiscal or calendar
year) in accordance with the method of
accounting employed
C. INCOME FROM SOURCES PARTLY WITHIN 2. If no method of accounting employed or
AND PARTLY WITHOUT THE PHILIPPINES. method does not clearly reflect the income,
computation shall be made in accordance w/
These are: such method as the opinion of the
1. Income from services rendered partly within Commissioner clearly reflects the income.
and partly without; 3. taxable income is computed based on
2. Income from sale of personal property calendar year if:
produced (in whole or in part) within and sold (a) accounting period is other than a fiscal
without the Philippines; and year
3. Income from sale of personal property (b) taxpayer has no accounting period
produced (in whole or in part) without and (c) taxpayer does not keep books
sold within the Philippines. (d) taxpayer is an individual
4. fiscal year: accounting period of 12 months
Personal Property Income ending on the last day of any month other
Produced here and sold party within, partly than December
without without 5. calendar year: accounting period from
Produced here and sold Income within January 1 to December 31
Produced abroad and Income partly within,
sold here partly without
Purchased without and Income within 1. Amount of all items of gross income shall be
sold within included in the gross income for the taxable
Purchased within and Income without year in which received by the taxpayer,
sold without unless, any such amounts are to be properly
Purchased within and Income wiithin accounted for in a different period under
sold within QuickTime™ and a
methods of accounting permitted
Taxpayer sells it TIFF (Uncompressed) decompressor
are needed toIncome
see this picture. partly within, 2. In case of death of taxpayer include for the
through a sales office partly without taxable year in which falls the date of his
death, all amounts which accrued up to the
date of his death, if not otherwise properly
As for unallocated expenses, meaning those which includible in respect of such period or a prior
are not entirely attributable to either income within or period
without, such expenses shall be allocated using the

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Taxation Law Summer Reviewer

lease payments are made on a yearly basis and

1. Deductions provided in this Title shall be are due every January 5. A leased out the space
taken for the taxable year in which ‘paid or to X on January 1, 2004. However, X will only
accrued’ or ‘paid or incurred’, dependent pay rent for one year on January 5, 2005. For
upon the method of accounting upon the the year 2004, A should recognize income of
basis of which the net income is computed, P1M as of December 31, even if he will receive
unless, in order to reflect the income, payment only on January 5 because the he is
deductions should be taken as of a different considered to have earned the P1M already for
period. allowing X to actually use the space for the year
2. In case of death of taxpayer: deductions 2004.
allowed for the taxable period in which falls
the date of his death, amounts accrued up to F. ACCOUNTING FOR LONG-TERM
the date of his death if not otherwise properly CONTRACTS
allowable in respect of such period or a prior
period 1. Long-term contracts: building, installation or
construction contracts covering a period in
D. CHANGE OF ACCOUNTING PERIOD (Sec. 46) excess of 1 yr
1. Kinds of changes: 2. Persons whose gross income is derived in
(a) from fiscal year to calendar year whole or in part from such contracts shall
(b) from calendar year to fiscal year report such income upon the basis of
(c) from one fiscal year to another fiscal percentage of completion
year 3. The return should be accompanied by a
2. effect of change: net income shall, with the return certificate of architects or engineers
approval of the Commissioner, be computed showing the percentage of completion during
on the basis of the new accounting period, the taxable year of the entire work performed
subject to Sec. 47 on Final or Adjustment under the contract
Returns for a Period of Less Than 12 Months 4. Deductions from gross income: all
(as discussed below) expenditures made during the taxable year
on account of the contract, account being
E. METHODS OF ACCOUNTING taken of the material and supplies on hand at
the beginning and end of the taxable period
1. CASH METHOD - recognition of income and for use in connection with the work under the
expense dependent on inflow or outflow of contract but not yet so applied.
cash (meaning, you recognize the income 5. Amended return may be permitted/required
when you actually receive the cash payment by the Commissioner: if upon completion of
for the sale, and you recognize the expense contract, taxable income has not been clearly
when you actually pay cash for the expense) reflected for any year(s)

2. ACCRUAL METHOD - method under which • This provision takes into account that certain
income, gains and profits are included in businesses, like construction, takes more than a
gross income when earned whether received year for a project to be completed. As such, it is
or not, and expenses are allowed as not practical (from the point of view of the
deductions when incurred, although not yet government) to wait until the project is finished
paid. It is the right to receive and not the before the income arising therefrom is actually
actual receipt that determines the inclusion of reported and taxed. Hence, income is spread
the amount in gross income over the years where the construction is in
QuickTime™ and a progress, and the allocation is made on the basis
TIFF (Uncompressed) decompressor
Examples: are needed to see this picture.
of percentage of completion.
(a) interest or rent income earned but not yet
received Illustration:
(b) rent exp. accrued but not yet paid
(c) wages/salaries due but remaining unpaid ABC Corp. entered into a contract with X whereby the
former agreed construct a condominium for the latter
Illustration: to be completed in 5 years for a fee of P10M. For the
first year of construction, ABC Corp was able to
A leases an office space at P1M per year and construct 30% of the condominium. It will therefore

Page 43 of 145
Taxation Law Summer Reviewer

declare a gross income of P3M computed as follows: initial payments: payments received in
cash or property other than evidence of
P 10 M indebtedness of the purchaser during the
x 30% taxable period in which the sale or other
P 3M disposition is made


• Under Rules and Regulations (R&R) 1) individual who sells of disposes of real
prescribed by the Sec. of Finance, upon property, considered as capital asset & is
recommendation of the Commissioner: a otherwise qualified to report the gain
person who regularly sells or otherwise under (2) above may pay the capital
disposes of personal property on the gains tax in installments under R&R to be
installment plan may return as income promulgated by the Sec. of Finance,
therefrom in any taxable year that upon recommendation of the
proportion of the installment payments Commissioner
actually received in that year, which the 2) capital asset: property held by the
gross profit realized or to be realized taxpayer (whether or not connected with
when payment is completed, bears to the his trade or business) but does not
contract price. include:
(a) stock in trade of taxpayer
(b) property which would properly
Example: Sale in 1997 payable in 2 equal included in inventory, if on hand
annual installments. How to compute for (c) merchandise inventory
income: (d) depreciable assets used in the
Contract Price/ Installments (e) real property used in trade/business
Receivable P100,000

* installments payable in 2 equal annual 1) taxpayer must be entitled to benefits

installments under 1 (sales of dealers in personal
GP/Contract Price ratio = 25T/100T = 25% 2) in computing income for the year of
Collections in 1997 = P50T change or any subsequent year:
Income for 1997 = P50T x 25% = P12,500 amounts actually received during any
such year on account of sales or other
2. SALES OF REALTY AND CASUAL SALES dispositions of property made in any prior
OF PERSONALTY year shall not be excluded


(a) casual sale or other casual
disposition of personal property 1) Applicable to: cases of 2 or more
(other than inventory
QuickTime™ and a
TIFF (Uncompressed) decompressor on hand of the organizations, trades or businesses (w/n
taxpayer at the close of the taxable
are needed to see this picture. incorporated & w/n organized in the
year) for a price > P1,000, or Philippines) owned or controlled
(b) sale or other disposition of real directly/indirectly by the same interest
property, if in either case the initial 2) Commissioner is authorized to distribute,
payments do not exceed 25% of the apportion or allocate gross income or
selling price deductions between or among such
2) how may income be returned: same as organization, trade or business, if he
in sales of dealer in personal property determines that such distribution,
above apportionment or allocation is necessary in

Page 44 of 145
Taxation Law Summer Reviewer

order to prevent evasion of taxes or clearly to P 60,000 and the income tax on which has
reflect the income of any such organization, been correctly withheld
trade or business • An individual whose income has been
subjected to final withholding tax (alien
RETURNS AND PAYMENT OF TAX employee as well as Filipino employee
occupying the same position as that of the
Tax Return- This is a report made by the taxpayer to alien employee of regional headquarters and
the BIR of all gross income received during the regional operating headquarters of
taxable year, the allowable deductions including multinational companies, petroleum service
exemptions, the net taxable income, the income tax contractors and sub-contractors and
rate, the income tax due, the income tax withheld, if offshore-banking units, non-resident aliens
any, and the income tax still to be paid or refundable. not engaged in trade or business)
• Those who are qualified under “substituted
I. INDIVIDUAL RETURN filing”. However, substituted filing applies
only if all of the following requirements are
I. Individual • the employee received purely compensation
1) Filipino citizen residing in the Philippines income (regardless of amount) during the
2) Filipino citizen residing outside the taxable year
Philippines, on his income from sources • the employee received the income from only
within the Philippines one employer in the Philippines during the
3) Alien residing in the Philippines, on taxable year
income derived from sources within the • the amount of tax due from the employee at
Philippines the end of the year equals the amount of tax
4) Nonresident alien engaged in trade or withheld by the employer
business or in the exercise of profession • the employee’s spouse also complies with all
in the Philippines 3 conditions stated above
5) An individual (citizen/alien) engaged in • the employer files the annual information
business or practice of a profession return (BIR Form No. 1604-CF)
within the Philippines regardless of the
• the employer issues BIR Form No. 2316 (Oct
amount of gross income
2002 ENCS version ) to each employee.
6) Individual deriving compensation income
concurrently at any time during the
SUBSTITUTED FILING - is when the employer’s
taxable year
annual return may be considered as he “substitute”
7) Individual whose pure compensation
Income Tax Return of employee inasmuch as the
income derived from sources within the
information provided in his income tax return would
Philippines exceeds P60,000.
exactly be the same information contained in the
II. Taxable Estate and Trust
employer’s annual return.
III. General Professional Partnership
IV. Corporation
1. Not exempt from Income tax
2. Exempt from income tax under
Section 30 of the NIRC but has not shown
1. The employee receives purely compensation
proof of exemption.
income (regardless of amount) during the taxable
2. The employee receives the income only from one
ITR: (but TIFFmay be required
QuickTime™ and a to file an
(Uncompressed) decompressor employer during the taxable year.
information return
are needed topursuant
see this picture. to Rules and
3. The amount of tax due from the employee at the
Regulations prescribed by the Sec. of
end of the year equals the amount of tax withheld by
Finance, upon recommendation of the
the employer.
4. The employee’s spouse also complies with all 3
• An individual whose gross income does not conditions stated above.
exceed his total personal and additional 5. The employer files the annual information return.
exemptions 6. The employer issues BIR form 2316
• An individual whose compensation income
derived from one employer does not exceed

Page 45 of 145
Taxation Law Summer Reviewer


SUBSTITUTED FILING: • Except in cases where the Commissioner
1. Individuals deriving compensation from two or otherwise permits:
more employers concurrently or successively during 1) Authorized agent bank
the taxable year. 2) Revenue District Officer
2. Employees deriving compensation income 3) Collection Agent
regardless of the amount, whether from a single or 4) Duly authorized Treasurer of the
several employers during the calendar year, the city/municipality in w/c such person has
income tax of which has not been withheld correctly his legal residence/principal place of
resulting to collectible or refundable return business in the Philippines, or
3. Employees whose monthly gross compensation 5) Office of Commissioner, if there be no
income does not exceed P5,000 or the statutory legal residence/ place of business in the
minimum wage, whichever is higher, and opted for Philippines
non-withholding of tax on said income.
4. Individuals deriving other non-business, non- D. WHEN TO FILE:
profession-related income in addition to 1) for any individual (compensation,
compensation income not otherwise subject to final business, professional income)
tax. • on or before April 15 of each year
5. Individuals receiving purely compensation income covering income for preceding
from a single employer although the income tax of taxable year
which has been correctly withheld, but whose spouse • example: individual’s income from
falls under 1 to 4 above. Jan. to Dec. 1997, shall be filed on or
6. Non-resident aliens engaged in trade or business before April 15, 1998
in the Philippines deriving purely compensation 2) individual subject to capital gains tax
income, or compensation income and other non- (a) sale/exchange of shares of stock not
business, non-profession-related income. traded thru a local stock exchange:
• within 30 days after each
Non-filing of ITR, for employees who are qualified for transaction
the substituted filing shall be OPTIONAL for the (b) sale/disposition of real property
taxable year 2001, the returns fro which shall be filed • within 30 days following each sale
on or before April 15, 2002. Thereafter, substituted or other disposition
filing where applicable shall be MANDATORY.
Joint Certification- It is a sworn statement made by • File 1 return for the taxable yr., if ff.
the employer and employee, which serve the requisites complied :
following purposes: 1) Married individuals (citizens, resident
1. It contains the employee’s consent that BIR or nonresident aliens)
form 1604CF may be considered his substituted 2) Do not derive income purely from
return, in lieu of BIR Form No 1700, which the compensation
employee no longer filed. • If impracticable to file 1 return: each
2. It contains the employer’s certification that spouse may file a separate return but the
he has reported the employee’s income to the BIR returns shall be consolidated by the
and that he has remitted the taxes on the employee’s Bureau for purposes of verification for the
income, as indicated in BIR Form 1604-CF. taxable yr.
3. It serves as a proof of financial capacity in
case the employee decides to apply for a bank loan
or credit car, or for TIFF
any other purpose,
QuickTime™ and a as if he had in
(Uncompressed) decompressor • Income of unmarried minors derived from
fact filed a BIR Form are1700.
needed to see this picture.
property received by the living parent
shall be included in the return of the
Individuals required to file an information return:
parent, except:
Individuals not required to file an income tax
1) when donor’s tax has been pd. on
return may nevertheless be required to file an
such property, or
information return pursuant to rules and regulations
2) when transfer of such property is
prescribed by the Secretary of Finance upon
exempt from donor’s tax
recommendation of the Commissioner.

Page 46 of 145
Taxation Law Summer Reviewer

PERSONS UNDER DISABILITY It was held that the 30-day period is counted from
• If unable to make a return, return may be the approval of the SEC of the corporation’s adopted
made by: authority to dissolve.
1) duly authorized agent or
3) other person charged w/ the care of TRADED IN PSE
his person/property • File a return within 30 days after each
• principal & his rep. or guardian assumes transaction
responsibility of making the return & • AND, a final consolidated return of all
incurs penalty for erroneous, transactions must be filed on or before
false/fraudulent returns 15th day of the fourth month following the
• an individual’s name signed in the return close of the taxable yr.
is prima facie evidence for all purposes
that the return was actually signed by D. EXTENSION OF TIME TO FILE RETURNS
such individual • Commissioner may, in meritorious cases,
grant a reasonable extension of time for
II. CORPORATION RETURNS filing returns of income (or final &
A. WHO IS REQUIRED TO FILE AN ITR: adjustment returns in case of corps.) This
• Every corporation subject to tax, except is exceptional and in case of calamity only
foreign corp. not engaged in based on precedents.
trade/business in the Philippines.
& accurate quarterly income tax return & PARTNERSHIPS
final/adjustment return • each GPP shall file in duplicate, a return of
• Taxable year: fiscal or calendar (corp. its income (except items under exclusions
shall not change accounting period w/o from gross income)
prior approval by the Commissioner) • set forth:
1) items of gross income & of deductions
• Which corporation? Every corporation, 4) Share of each partner
including a corporation w/c has been
notified of possible involuntary dissolution F. PAYMENT OF TAX
by the SEC, or for its reorganization 1) IN GENERAL: Who shall pay?
• within 30 days after the adoption by the (a) Total amount of tax shall be paid
corp. of a resolution/plan for its dissolution • by the person subject thereto
or for the liquidation of the whole/any part • at the time the return is filed
of its capital stock: (b) For tramp vessels:
1) render a correct return • Filed & paid before departure by: the
2) verified under oath shipping agents &/ or the husbanding
3) set forth the terms of such agents; in their absence, captains
resolution/plan & such other • failure to do so: Bureau of Customs
information as the Sec. of Finance, is authorized to hold the vessel &
upon recommendation
QuickTime™ and a
of the prevent departure until proof of
Commissioner, shall,
TIFF (Uncompressed) decompressor
are needed to see this picture.
by Rules and payment of tax is presented or a
Regulations, prescribe sufficient bond is filed to answer for
• prior to issuance by the SEC of Certificate the tax due
of Dissolution/Reorganization:
dissolving/reorganizing corporation shall 2) INSTALLMENT PAYMENT (for individuals
secure a certificate of tax clearance from only)
BIR to be submitted to the SEC • If tax due > P2,000, the taxpayer,
other than a corp., may elect to pay
BPI vs. CIR, GR No. 38504, April 14, 2000 in 2 equal installments:

Page 47 of 145
Taxation Law Summer Reviewer

(a) 1st inst. pd. at the time the 1. no amt. is shown upon the
return is filed return as the tax, or
(b) 2nd inst. paid on/before July 2. no return is made, then:
15 ff. the close of calendar yr. • the amt. by w/c tax exceeds
(c) If any inst. is not pd. on fixed the amts. previously assessed
date, whole amount of the tax as a deficiency; but such
unpaid becomes due & amounts previously
payable + delinquency assessed/collected w/o
penalties assessment shall first be
decreased by the amts.
3) PAYMENT OF CAPITAL GAINS TAX previously abated, credited,
• Paid on the date the return is filed returned or otherwise repaid
• No payment is required if the seller in respect of such tax
submits proof of his intention to avail
of exemption provided by law • Withholding of Creditable Tax at Source:
• In case of failure to qualify for Sec. of Finance may require the w/holding of a tax by
exemption, the tax due shall payor-corp., on income payable to natural/juridical
immediately become due & payable persons, residing in the Philippines, at rate of not
+ penalties more than 1% but not more than 32%, which shall be
• If tax has been paid, and seller credited against the income tax liability for the taxable
submits proof of intent w/in 6 mos. year
From the registration of the
document transferring real property,
he shall be entitled to a refund upon • Most favored nation clause – Royalty income
verification of his compliance with paid by a domestic corporation to a non-resident
requirements for such exemption foreign corporation which is a resident of a
• If taxpayer elects to report gain by Contracting State with which the Philippines has
installments, tax due shall be paid an effective tax treaty is generally subject to 15%
w/in 30 days from such receipt of final withholding tax, but the rate may be reduced
payments to 10% for certain royalty payments or under the
• No registration of document most-favored-nation-clause of the tax treaty, such
transferring real prop. Unless as the Philippines-US Tax Treaty.
Commissioner/duly authorized → The purpose of the clause in a tax treaty is to
representative certified that such grant to the other Contracting State a tax
transfer has been reported & tax due treatment that is no less favorable than that
has been paid which is granted to the “most favored” among
other countries.
4) ASSESSMENT & PAYT. OF DEFICIENCY → It means each party to the treaty pledges that
TAX any tax concession given to any other treaty
• After return is filed, Commissioner country will also be extended to the other party to
shall examine & assess the correct the treaty; that is, it will not grant more favorable
amt. of tax terms to other treaty countries without granting
• Any deficiency shall be paid upon the same concession to the treaty partner
notice & demand of Commissioner involved.
• Deficiency means:
a. tax imposed > amount shown by ESTATES AND TRUSTS
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taxpayer upon
(Uncompressed) his return
are needed to see this picture.
• amount shown in the return SEPARATE TAXABLE ENTITIES Sec. 60 (A):
shall be increased by 1. Estates of deceased persons under administration
amount previously assessed or settlement;
as a deficiency & decreased 2. Trusts where the income is to be accumulated or
by amounts previously held for future distribution by the fiduciary;
abated, credited, returned/ 3. Trusts where the income may be either
otherwise repaid accumulated or distributed at the discretion of the
b. if: fiduciary, and
4. Trusts where the income which is to be distributed

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Taxation Law Summer Reviewer

currently by the fiduciary or is collected by a guardian Income accumulated in trust for

of an infant to be held or distributed as the court may the benefit of unborn or
direct. unascertained person or persons Estate or Trust
with contingent interest, and
REQUISITIES FOR THE TAXABILITY OF TRUST: income accumulated or held for
1. it should be an irrevocable trust; future distribution under the
2. tax must be imposed on the income of the trust, terms of the will or trust
and Income to be distributed currently
3. the trust retains the income by the fiduciary to the
beneficiaries, and income Beneficiary
REVOCABLE TRUST collected by a guardian of an
A revocable trust is one where, under the trust infant which is to be held or
treatment, the power to revest in the grantor title distributed as the court may
to the property transferred to the trust or any part direct
of the corpus of such trust is vested:
a. in the grantor, either alone or in Income received by estates of Fiduciary or
conjunction with any person not having deceased persons during the Beneficiary,
substantial adverse interest in the disposition of period of administration or depending upon
such part of the corpus, or the income therefore; settlement of estates the amounts
or which are
b. in any person not having a substantial property paid or
adverse interest in the disposition of such part of credited
the corpus or the income therefrom Incom which, in the discretion of Fiduciary or
- in short, it is a trust where the title can revest the fiduciary, may be either beneficiary,
back to the grantor anytime distributed to the beneficiaries or depending upon
- not taxable as an entity because the income accumulated the amounts
forms part of the income of the grantor which are
property paid or
NOTE: credited
¾ An estate is taxable as a separate entity Revocable trusts Grantor
when it is already subject to a judicial Income for the benefit of the Grantor
proceeding grantor
¾ A trust is taxable as a separate entity if the
trust is irrevocable. This is because the IMPOSITION OF TAX
grantor has absolutely given up the corpus A. Application of tax:
and any incidents thereto. In this case, the 1) Applies to income of estates or of any
grantor has no control over the corpus of the kind of property held in trust, including:
trust. The benefits of the trust will not to go (a) income accumulated in trust:
the grantor. The grantor has transferred the 1. for the benefit of unborn/
income earning property to a beneficiary. He unascertained person(s) w/
has absolutely given up the incidents of it. If contingent interests
there is a condition that provides that a 2. held for future distribution under the
portion shall be reserved for the grantor’s terms of the will or trust
medical expenses (for example), this (b) income:
condition does not convert the irrevocable 1. to be distributed currently by the
trust to a revocable trust. But that portion is fiduciary to the beneficiaries
taxable income of the and
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If it is a 2. collected by a guardian of an infant
revocable trust, then
are needed the
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picture. income or he to be held or distributed as the court
property is taxable on the part of the grantor. may direct
¾ An irrevocable trust is where the grantor has (c) income received by estates of deceased
unconditionally parted with all the incidents of persons during the period of
ownership. administration or settlement of the estate
¾ If the transfer is revocable, the entire income (d) income which, in the discretion of the
shall be taxable in the hands of the grantor. fiduciary, may be either distributed to
beneficiaries or accumulated
Income Liable for Tax

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2) Exception: period of administration or

Employee’s trust which forms part of a pension, settlement of the estate
stock bonus or profit-sharing plan of an employer 2. income w/c, in the discretion of the
for the benefit of all or some of his employees: fiduciary, may be either
distributed to the beneficiary or
(a) if contributions are made to the trust by
the employer/employees, or both for the
3. amt. deducted is included in TI of
purpose of distributing to such
the legatee, heir or beneficiary
employees the earnings + principal of the
2) for trust administered in a foreign country:
fund accumulated by the trust in
deductions in a) and b) not allowed provided,
accordance w/ such plan
the amt. of income included in the return of
(b) if under the trust instrument, it is
said trust shall not be included in computing
impossible, at any time prior to the
the income of the beneficiaries
satisfaction of all liabilities w/ respect to
employees under the trust, for any part of
D. Exemption Allowed to Estates and Trusts:
income to be used for/diverted to,
purposes other than for the exclusive
benefit of his employees (any amount
E. Revocable Trusts
distributed to employees shall be taxable
1) Requisites: the power to re-vest in the
in the yr. so distributed)
grantor title to any part of the corpus of the
trust is vested-
B. Consolidation of Income of 2/more trusts:
(a) in the grantor either alone/ in conjunction
1) Requisites:
w/ any person not having a substantial
(a) 2/more trusts exist
adverse interest in the disposition of
(b) creator of the trust in each instance is the
such part of the corpus/income
same person
(c) beneficiary in each instance is the same
(b) in any person not having a substantial
2) tax computed on such consolidated income
adverse interest in the disposition of
3) proportion of each tax be assessed &
such part of the corpus/income
collected from each trustee
2) effect: the income of such trust shall be
included in computing the taxable income of
C. Taxable Income
the grantor
1) Computed in same manner & on the same
basis as in the case of an ‘individual’,
F. Income for Benefit of Grantor
1) Requisites: where any part of the income
(a) deduction allowed: amount of income of
of a trust is, or in the discretion of the
the estate/trust for the taxable yr. w/c is
grantor/any person not having a
to be distributed currently by the fiduciary
substantial adverse interest in the
to the beneficiaries & the amt. of the
disposition of such part of the income
income collected by a guardian of an
(a) may be held/accumulated for future
infant w/c is to be held./distributed as the
distribution to the grantor
court may direct
(b) may be distributed to the grantor
1. amt. allowed as deduction is
(c) may be applied to the payment of
included as TI of the beneficiaries,
premiums upon policies of insurance
whether distributed or not
on the life of the grantor
2. amt. allowed as deduction under
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this subsection
TIFF (Uncompressed) will not be allowed
are needed to see this picture. included in computing the taxable income
as deduction under (b) hereof
of the grantor
(b) additional deduction: amt. of the income
of the estate/trust for its taxable yr.,
G. Fiduciary Returns
properly paid/credited during such yr. to
1) Who shall make the return?
any legatee, heir or beneficiary applies to
(a) Guardians
cases of :
(b) Trustees
1. income received by estates of
(c) Executors
deceased person during the
(d) Administrators

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(e) Receivers
(g) All persons/corp. CORPS.
2) File, in duplicate, a return of the income of • Dividends = any distribution made by a corp. to
the person, trust, or estate for whom or its SH out of its earnings or profits & payable to
which they act in case such person, trust, its SH, whether in money or in other property
or estate has a gross income = P20,000 or 1. Gain/loss sustained by SH for any liquidating
over during the taxable yr. dividends received is a taxable income or a
deductible loss (as the case may be)
OTHER INCOME TAX REQUIREMENTS 2. Stock Dividends representing the transfer of
surplus to capital account shall not be subject
• Brokers(individual/corp./gen. pawnshop) shall 3. Amt. distributed in redemption or cancellation
render a correct return duly verified under oath, of stock is taxable income to the extent that it
showing names of customers for whom such represents a distribution of earnings/profits
person, corp. or duly registered gen. co- 4. Net income of a partnership after deducting
partnership. has transacted any business, w/ the corporate income tax shall be deemed to
such details as to the profits, losses or other info have been actually or constructively received
by the partners in the same taxable yr. &
B. RETURN OF FOREIGN CORPORATIONS shall be taxed to them in their individual
1) Any attorney, accountant, fiduciary, bank, capacity, whether actually distributed or not
trust co., financial institution or other person,
who aids, assists, counsels or advises in, or
w/ respect to, the formation, organization or
reorganization of any foreign corp., shall file DECLARATION OF INCOME TAX BY
a return w/in 30 days INDIVIDUALS
2) Such return shall be in the form prescribe & A. In general:
set forth under oath, to the full extent of the
info w/in the possession or knowledge or
Filing of declaration of estimated income for current
under the control of the person required to
taxable yr.:
file the return
INDIVIDUAL receiving: Income from On/before
C. DISPOSITION OF IT RETURNS, PUBLICATION self-employment (as sole source) or April 15 of
OF LISTS OF TAXPAYERS & FILERS Combined w/ salaries, wages & same taxable
1) After the assessment, the returns, w/ the other fixed/ determinable income yr.
corrections made by the Commissioner, shall NONRESIDENT CITIZEN for: Not required
be filed in the Office of the Commissioner & Income from w/in the Philippines; to file
shall constitute public records & be open to NONRESIDENT ALIEN not
inspection as such upon order of the Pres. engaged in trade/business in the
2) Commissioner may cause, each yr., to Philippines.
publish the lists containing the names &
addresses of such persons who have filed IT B. RETURN & PAYMENT OF ESTIMATED
1) Paid in 4 installments
D. SUIT TO RECOVER BASED ON 2) 1st installment: paid at the time of
1) If tax is collected under and
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the list, arestatement or
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return is Nov. 15 of current yr.
false/fraudulently made, it cannot be 4) 4th installment: paid on/before Apr. 15 of the
recovered by any suit unless it is proved that ff. calendar yr. when final adjusted income
the said list, statement or return was not false tax is due to be filed
nor fraudulent & did not contain any
understatement or undervaluation • Estimated Tax means the amt. which the
2) Not applicable to statements or returns made individual declared as income tax in his final
or to be made in good faith regarding annual adjusted & annual income tax return for the
depreciation of oil or gas wells & mines preceding taxable yr. minus the sum of the

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credits allowed against the said tax the corp. filing the return
• If during the current taxable yr., the taxpayer (b) or place where its main books of
reasonably expects to pay a bigger IT, he accounts & other data from w/c the return
shall file an amended declaration during any is prepared are kept
interval of installment payment dates
3) Time of Filing of IT Return
1) Every corp. shall file in duplicate a quarterly Corp. W/in 60 days ff. the close of the first
summary declaration of its GI and deductions quarterly 3 quarters of the taxable yr.
on a cumulative basis for the preceding declaration
quarter(s) upon w/c the IT shall be levied, Final On/before the 15th day of April
collected & paid adjustment (calendar yr.) On/before the 15th
2) The tax shall be decreased by the amt. of tax return day of the 4th mo. after the close of
previously pd./ assessed during the the taxable yr. (fiscal yr.)
preceding quarters & shall be paid not less
than 60 days from the close of each of the
4) Time of Payment of IT: Income tax is paid at
first 3 quarters of the taxable yr., whether
the time of the filing of the declaration or
calendar/fiscal yr.
1) Every corp. liable to tax shall file a final
adjustment return covering the total taxable
income for the preceding calendar/fiscal yr.
1) Wages means all remuneration (other than
2) If sum of the quarterly tax payments is not
fees paid to a public official) for services
equal to the total tax due on the entire
performed by an employee for his employer,
taxable income of that yr., the corp. shall
including the cash value of all remuneration
paid in any medium other than cash,
(a) pay the balance of tax still due
(a) shall not include remuneration paid for:
(b) carry-over the excess credit
1. agricultural labor paid entirely in
(c) be credited or refunded w/ the excess
products of the farm where the labor
amt. paid, as the case may be
is performed
2. domestic service in a private home
Example: 1997
3. casual labor not in the course of the
employer’s trade or business
Cumulative Tax Payable
4. services by a citizen or resident of the
Taxable Income @35%: (each Q)
Philippines for a foreign government
Q1: P300,000; Q2: 105,000 105,000 or an international organization
P 1,000,000; (sum 350,000 245,000 (b) if remuneration paid by an employer to
of TI of Q1 & Q2); 700,000 350,000 an employee for services performed
Q3:P 2,000,000 during ½ or more of any payroll period of
Q4: P 2,500,000 875,000 175,000 not more than 31 consecutive days
(final adjustment constitutes wages, then all remuneration
return) pd. by such employer to such employee
for such period shall be deemed to be
QUARTERLY CORPORATE INCOME TAX 2) Payroll period means a period for which
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1) The quarterly income tax
TIFF (Uncompressed) declaration & the
payment of wages is ordinarily made to the
are needed to see this picture.
final adjustment return shall be filed with: employee by his employer; miscellaneous
(a) authorized agent banks payroll period means a payroll period other
(b) Revenue District Officer than a daily, weekly, biweekly, semi-monthly,
(c) Collection Agent monthly, quarterly, semi-annual, or annual
(d) Duly authorized Treasurer period
3) Employee refers to any individual who is the
2) Where? recipient of wages & includes an officer,
(a) of the city/municipality having jurisdiction employee or elected official of the Philippine
over the location of the principal office of

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Government; includes an officer of a corp. Every employer must withhold from

4) Employer compensation paid, an amount computed in
(a) the person for whom an individual accordance with the regulations.
performs or performed any service, of Exception:
whatever nature, as the employee of Where such compensation income of an
such person individual:
(b) the person having control of the payment 1. Does not exceed the statutory minimum
of such wages wages; or
(c) person paying wages on behalf of a 2. Five thousand pesos (5,000) monthly
nonresident alien individual, foreign (60,000 a year)
partnership/corp. - whichever is higher

B. LIABILITY FOR TAX Elements of Withholding on Compensation:

1) EMPLOYER: 1. There must be an employer-employee relationship
(a) liable for withholding & remittance of the 2. There must be payment of compensation or wages
correct amt. of tax for services rendered
(b) if failed to withhold & remit, employer is 3. There must be a payroll period
liable for the tax + penalties & additions Compensation Exempted:
to the tax 1. Remunerations received as an incident of
2) EMPLOYEE: 2. Remunerations paid for agriculture labor
(a) If fails to file withholding exemption cert. 3. Remunerations paid for domestic services
or supplies inaccurate/false info, the tax 4. Remunerations for casual not in the course of an
shall be collected from him + penalties or employer’s trade or business
additions to the tax 5. Compensation for services of a citizen, resident of
(b) Excess taxes w/held by the employer shall not be the Philippines, for a foreign government or an
refunded if due to: international organization
1. failure or refusal to file the w/holding 6. Damages
exemption certificate 7. Life insurance
2. false & inaccurate information 8. An amount received by the insured as return of
C. STATEMENTS & RETURNS 9. Compensation for injuries and sickness
1) Requirements 10. Income exempt under treaty
(a) employer shall furnish EE on/before Jan. 11. 13 month pay and other benefits
31 of the succeeding yr. or on the same 12. GSIS, SSS, Philhealth and other contributions
day of last payment made (if employment
is terminated), a written statement Tax Free Covenant Bonds
confirming the wages paid by the
employer to employee Covenant Bonds – bonds, mortgages, deeds of trust
1. Annual Information Returns and other similar obligations of domestic/resident
(b) employer shall submit an annual foreign corporation, which contain a
information return to the Commissioner contract/provision by which the obligor agrees:
containing: 1. to pay any portion of the tax imposed upon the
1. a list of employees obligee;
2. total amt. of compensation income of 2. to reimburse the obligee for any portion of the tax,
each EE or
3. totalTIFFamt. of taxes
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during the 3. to pay the interest without deduction for any tax
yr. are needed to see this picture. which the obligor may be required/permitted to pay or
4. With copies of statement referred to in to retain therefrom.
(A) above
2) Extension of Time ¾ Obligor shall deduct and withhold a tax =
• Commissioner may grant the ER a 30% of the interest and other payments
reasonable extension of time to furnish & whether interest or other payments are
submit the statements & returns required payable annually or at a shorter period;
whether bonds, securities, obligations had
Withholding Tax on Compensation: been/will be issued/ marketed and the

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interest and other payments paid within and All properties, real or Only properties situated
without the Philippines if the interest or other personal, tangible or in the Philippines
payment is payable to a non-resident alien or intangible, wherever provided that, with
a citizen or resident of the Philippines. situated respect to the intangible
personal property, its
inclusion in the gross
Income of Recipient estate is subject to the
- Income which any creditable tax is required rule of reciprocity
to be withheld at source shall be included in provided for under Sec
the return of its recipient. 104 of the NIRC
- The excess of the amount of tax withheld
over the tax due on his return shall be ITEMS OF GROSS ESTATE: (DT RALIC)
refunded to him, subject to Section 204 1) Decedent's Interest
(abatement, refund/credit taxes) 2) Transfer in Contemplation of Death
3) Revocable Transfer
4) Property Passing Under General
Power of Appointment
TITLE III. ESTATE TAX AND DONOR’S TAX 5) Proceeds of Life Insurance
6) Prior Interests
CHAPTER I- ESTATE TAX 7) Transfers for Insufficient Consideration

Nature and Definition DECEDENT’S INTEREST

• To the extent of the interest in property of the
An EXCISE TAX on the rights of transmitting property decedent at the time of his death
at the time of death and on the privilege that a person
is given in controlling to a certain extent the Transfer in Contemplation of Death
disposition of his property to take effect upon death

A tax imposed upon the privilege to transmit property • TRANSFER IN CONTEMPLATION OF

at the time of death; the tax should not be construed DEATH, Transfers impelled by the thought of
as a direct tax on the property of the decedent an impending death (i.e., the motivating
although the tax is based thereon factor or controlling motive is the thought of
death), without regard of the state of health
of the transferor
• Transfers deemed in contemplation of
Gross Estate (Sec. 85) death: transfers involving retention or
Less: (1) Deduction (Sec. 86) reservation of certain rights.
(2) Net share of the surviving spouse in the
CP Transfers made before the decedent’s
---------------------------------------------------------------------- death wherein decedent retained:
Net Taxable Estate a. the possession or enjoyment of,
X Tax rate (Sec. 84) or the right to the income of the
----------------------------------------------------------------------- property;
Estate Tax due b. the right either alone or in
Less: Tax Credit (if TIFF any) Sec. 86 [E]
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are needed to see this picture. designate the person who shall
Estate Tax Due, if any possess or enjoy the property or
its income EXCEPT bona fide
A. GROSS ESTATE includes (Sec. 85) sales for an adequate and full
consideration in money or
money’s worth
Residents and Non- Non-Resident
resident citizen, Alien Decedent
resident alien decedent REVOCABLE TRANSFER
A transfer whereby the terms of enjoyment of

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Taxation Law Summer Reviewer

the property may be altered, amended, revoked

or terminated by the decedent alone or in Proceeds of Life Insurance
conjunction with any other person, or where any
such power is relinquished in the contemplation PROCEEDS FROM LIFE INSURANCE
of the decedent’s death. It is enough that the FORM PART OF THE GROSS ESTATE
decedent had the power to alter, amend or ONLY WHEN:
revoke though he did not exercise such power o the beneficiary is the estate,
EXCEPT bona fide sales for an adequate and full executor or administrator,
consideration in money or money’s worth whether the designation is
revocable or irrevocable
Property Passing Under General Power of o the beneficiary is other than the
Appointment estate, executor or administrator
AND the designation is
APPOINTMENT? The power to designate,
without restrictions, the persons who shall TRANSFERS FOR INSUFFICIENT
receive, succeed to, possess or enjoy the CONSIDERATION
property or its income received from the estate Amount includible in the gross estate is the
of a prior decedent excess of the FMV at the time of death over the
value of consideration received
• How is a general power of appointment
exercised? Exclusions from the Gross Estate


b) deed executed in o Merger of the usufruct in the
contemplation of death owner of the naked title
c) deed under which he has o Transmission or delivery of the
retained for his life or for any inheritance or legacy by the
period which does not in fact end fiduciary heirs or legatee to the
before his death fiduciary
→ The possession or o Transmission from the first heirs,
enjoyment of, or the right legatees or donees in favor of
to the income from, the another beneficiary in
property or accordance with the desire of the
→ The right, either alone or testator
in conjunction with any o All bequests, devises, legacies,
person to designate the or transfers to social welfare,
persons who shall cultural or charitable institutions
possess or enjoy the → Provided, not more than
property or the income 30% of the value given is
therefrom EXCEPT bona used for administrative
fide sales for an purposes
adequate and full • Proceeds from life insurance where the
consideration in money beneficiary is other than estate, executor
or money’s
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• SSS death benefits
PRIOR INTERESTS • Properties held in trust by the decedent
All transfers, trusts, estates, interests, rights, • Benefits received by beneficiaries
powers and relinquishment of powers made, residing in the Philippines under laws
created, arising, existing, exercised or administered by the US Veterans
relinquished before or after the effectivity of the Administration
NIRC. • Separate or exclusive properties of the
surviving spouse

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Valuation • The decedent at that time of his death
was a citizen and resident of a foreign
1. Real Property country which at the time of his death
1. did not impose a transfer tax or
• FMV as determined by the Commissioner death tax of any character
OR the FMV shown in schedule of values 2. in respect of the intangible
fixed by the assessors, whichever is HIGHER personal property of citizens of
• No zonal value: use the FMV in the latest tax the Philippines not residing in
declaration. that foreign country; or

2. Shares of Stock • The law of the foreign country of which

the decedent was a citizen and resident
• Listed shares: average of the highest and a the time of his death:
lowest quotation at date of death (or the date 1. allow a similar exemptions from
nearest to the date of death, if no quotation is transfer taxes or death taxes of
available at the time of death) every character
• Unlisted Shares – 2. in respect of the intangible
• Common stocks: use BOOK VALUE personal property owned by
• Preferred stocks: use PAR VALUE citizens of the Philippines not
residing in that foreign country.
3. Personal Property


A RESIDENT (Revenue Regulations 2-2003
Special Rules on Intangible Properties and Sec. 86):

• INTANGIBLE PERSONAL PROPERTIES 1) Expenses, Losses, Indebtedness, and

(SECTION 104) (a) actual funeral expenses or five percent
1. Franchise which must be exercised (5%) of the gross estate whichever is
in the Philippines. lower (not exceeding P200,000)
2. Shares, obligations or bonds issued (b) judicial expenses of the testamentary or
by any corporation or sociedad intestate proceedings
anonima organized or constituted in (c) claims against the estate
the Philippines in accordance with its (d) claims against insolvent persons
laws, included in the gross estate
3. Shares, obligations or bonds issued (e) unpaid mortgages or indebtedness upon
by any foreign corporation 85% of property
the business of which is located in (f) unpaid taxes
the Philippines, (g) losses incurred during the settlement of
4. Shares, obligations or bonds issued the estate
by any foreign corporation, if such
shares, obligations or bonds have 2) Transfers for Public Use-to the government
acquired a business situs in the of the Republic of the Philippines or any
Philippines, political subdivision thereof, exclusively for
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business or industry established in
the Phil. 3) Vanishing deductions


WHO IS NON-RESIDENT ALIEN, WITH A 5) Standard Deduction -- P1,000,000
104). THE INTANGIBLES SHALL NOT 6) Medical Expenses

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7) Amount Received by Heirs under RA 4917 B. Judicial Expenses

8) Net Share of the surviving spouse in the • What are JUDICIAL EXPENSES for estate
Conjugal Property taxation?

(1) ORDINARY DEDUCTIONS o These deductible items are expenses

incurred during the settlement of the
A. Funeral expenses estate but not beyond the last day
prescribed by law, or the extension
FUNERAL EXPENSES are costs which are thereof, for the filing of the estate tax
actually incurred in connection with the interment return.
or burial of the deceased.
• Judicial Expenses should be supported by a
• EXAMPLES OF FUNERAL EXPENSES: sworn statement of account issued and signed by
the creditor.
a) The mourning apparel of the surviving
spouse and unmarried minor children of the • EXAMPLES OF JUDICIAL EXPENSES
deceased bought and used on the occasion
of the burial; (1) Fees of executor or administrator
b) Expenses for the deceased’s wake, including (2) Attorney’s fees
food and drinks; (3) Court fees;
c) Publication charges for death notices; (4) Accountant’s fee;
d) Telecommunication expenses incurred in (5) Appraiser’s fee;
informing relatives of the deceased; (6) Clerk hire;
e) Cost of burial plot, tombstones, monument or (7) Cost of preserving and distributing the
mausoleum but not their upkeep. In case the estate;
deceased owns a family estate or several (8) Brokerage fees for selling property of the
burial lots, only the value corresponding estate.
to the plot where he is buried is deductible;
f) Interment and/or cremation fees and CIR v. CA 328 SCRA 666
charges; and • Expenses incurred in the extrajudicial settlement
g) All other expenses incurred for the of the estate must be necessary costs toward the
performance of the rites and ceremonies settlement of the case
incident to interment. • Attorney’s fees to be deductible should essential
to the collection of assets, payment of debts or
• EXAMPLES OF NON-DEDUCTIBLE FUNERAL the distribution of the estate
C. Claims against the Estate
a) Expenses incurred after the interment,
such as for prayers, masses,
entertainment, or the like are not Debts or demands of a pecuniary nature which could
deductible. have been enforced against the deceased in his
b) Any portion of the funeral and burial lifetime and could have been reduced to simple
expenses borne or defrayed by relatives money judgments.
and friends of the deceased are not
deductible. QuickTime™ and a • SOURCES OF CLAIMS AGAINST THE
TIFF (Uncompressed) decompressor
are needed to see this picture. ESTATE:
• Substantiation Requirements: 1) Contract;
2) Tort; or
o The expenses must be duly supported by 3) Operation of Law
receipts or invoices or other evidence to
show that they were actually incurred • REQUISITES FOR DEDUCTIBILITY:
(RR 2-2003)
a) A personal obligation of the deceased
existing a the time of his death except

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unpaid obligations incurred incident to his allowed as a deduction from the GE

death such as unpaid funeral expenses and
unpaid medical expenses which are classified F. Taxes
under a different category of deductions,
b) Contracted in good faith and for adequate • What taxes are deductible?
and full consideration in money or money's Income taxes, real estate or property taxes due at the
worth, time of death which were unpaid as of the time of
c) Must be a debt or claim which is valid in law death
and enforceable in court,
d) Must not have been condoned by the
creditors or the action must not have • TAXES NOT DEDUCTIBLE:
prescribed. 1. estate taxes
e) Duly substantiated 2. income tax on income received after
• Substantiation in case of Loans or other Similar 3. property taxes not accrued before death
G. Losses
a) notarized at the time incurred, except loans
from financial institutions where notarization 1. REQUISITES FOR DEDUCTIBILITY:
not part of business practice or policy 1. Losses should arise from fire, storm,
b) A statement under oath executed by the shipwreck, or other casualty, robbery,
administrator or executor of the estate theft or embezzlement;
reflecting the disposition of the proceeds of 2. Losses should not be compensated by
the loan if said loan was contracted within three insurance or otherwise;
(3) years prior to the death of the decedent 3. Losses should not be claimed as
deduction in the income tax return of the
D. Claims against Insolvent Persons taxable estate;
4. The losses should occur during the
settlement of the estate; AND that
• Condition for deductibility: The value of
decedent’s interest in the claim is included in the 5. The losses should occur before the last
gross estate and the incapacity of the debtors to day for the payment of the estate tax
(last day to pay 6 months after the
pay their obligation is proven.
decedent’s death)
E. Unpaid Mortgage
1) the disposition is in the last will and
o The value of the decedent’s interest over
the property encumbered is included as
2) to take effect after death
part of the gross estate undiminished by
3) in favor of the government of the
the amount of mortgage
Philippines or any political subdivision
o The deduction shall be limited to the
extent that the mortgage was contracted
4) exclusive for public purpose
bona fide and for an adequate
5) the value of property given is included in
the gross estate
• Other Rules in TIFF
Respect QuickTime™ and a
to Unpaid Mortgage
(Uncompressed) decompressor
are needed to see this picture. 3. The transfer also contemplates bequests,
devices, or transfers to social welfare, cultural
o Determine the recipient or beneficiary of
and charitable institutions
the loan which must be verified;
o If merely an accommodation made by
decedent, then balance of loan
Previously Taxed)
considered as receivable and part of GE
o If there is a legal impediment to
• Nature and Purpose
recognize the same as receivable of the
estate, the unpaid obligation shall not be

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allowed for properties which were already 1) The family home must be the actual
subjected to transfer taxes (e.g., estate and donor’s residential home of the decedent and his
tax). The purpose is to minimize the effect of family at the time of his death, as
double taxation within a short period of time since certified by the Barangay Captain of the
the same property will be again subjected to tax in locality where the family home is
the form of estate tax. situated;
2) The total value of the family home must
be included as part of the gross estate of
the decedent; and
• REQUISITES FOR DEDUCTIBILITY: 3) Allowable deduction must be in an
1. Present decedent acquired the property amount equivalent to the current fair
by inheritance or donation within 5 yrs market value of the family home as
prior to his death declared or included in the gross estate,
2. The property must have formed part of or the extent of the decedent’s interest
the GE of previous decedent or the (whether conjugal/community or
taxable gift of the donor exclusive property), whichever is lower,
3. Estate tax on the prior estate or the but not exceeding 1 Million.
donor’s tax must have been paid
4. It must be the same property received • Note that:
from previous decedent or donor o The family home must be part of the
5. Estate of previous decedent or donor properties of the absolute community or
have not previously availed of vanishing
of the conjugal partnership, or of the
deduction exclusive properties of either spouse,
6. The property must be located in the depending upon the classification of the
property (family home), and the property
relations prevailing on the properties of
(4) FAMILY HOME the husband and wife. It may also be
constituted by an unmarried head of a
It is the dwelling house, including the land on which it family on his or her own property.
is situated, where the husband and wife, or a head of
the family, and members of their family reside as o For purposes of availing of a family home
certified by Barangay Captain of the locality. deduction to the extent allowable, a
person may constitute only one family
The family home is deemed constituted on the house home.
and lot from the time it is actually occupied as a
family residence and is considered as such for as (5) STANDARD DEDUCTIONS
long as any of its beneficiaries actually resides
therein. • A deduction in the amount of One million pesos
(1,000,000) shall be allowed as an additional
o Actual occupancy of the house or house deductions without need of substantiation
and lot as the family residence shall not
be considered interrupted or abandoned • Full amount shall be allowed as deduction for the
in such cases as the temporary absence benefit of the decedent
from the constituted family home due to
travel or studies or work abroad, etc. (6) MEDICAL EXPENSES
QuickTime™ and a
TIFF (Uncompressed) decompressor
o The are needed to see this picture.
family home is generally • REQUISITES FOR DEDUCTIBILITY:
characterized by permanency, that is, the o Medical cost incurred within the one year
place to which, whenever absent for prior to the death of the decedent
business or pleasure, one still intends to o Up to a maximum amount of 500,000,
return. whichever is lower
o Any excess over 500,000 cannot be
• CONDITIONS FOR THE ALLOWANCE OF deductible as claims against the estate
FAMILY HOME AS DEDUCTION FROM THE o It must be duly substantiated with official
GROSS ESTATE- receipts for services rendered

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o Any amount incurred within one year from unless the executor, administrator, or anyone
death in excess of P500,000 CANNOT be of the heirs, as the case may be, includes in
claimed as a deduction under “claims against the return required to be filed under Section
estate.” 90 the value at the time of his death of that
part of the gross estate of the nonresident
(7) Amount Received by Heirs under RA 4917 not situated in the Philippines.

o Amount received by the heirs from the ESTATE TAX CREDIT

decedent’s employer as a consequence of
death of the decedent employee in ESTATE TAX CREDIT is a remedy against
accordance with RA4917 international double taxation to minimize the onerous
o Provided, such amount is included in the effect of taxing the same property twice
gross estate of the decedent.

(8) Net Share of the surviving spouse in the • Who may avail of tax credits?
Conjugal Property
After deducting the allowable deductions o Only the estate of a citizen or resident alien
(only the ordinary deductions) appertaining to the at the time of the death can claim tax credit
conjugal or community properties included in the for any estate taxes paid to a foreign country
gross estate, the share of the surviving spouse
must be removed to ensure that only the • What amount of tax credit may be claimed?
decedent’s interest in the estate is taxed. ƒ Formulas:
Limitation A:
SPECIAL RULES FOR NONRESIDENT ALIENS For estate taxes paid to one foreign country
(for property situated in the Philippines) Allowable Final Tax Credit =
The lower amount between:
ALLOWABLE DEDUCTIONS: a. Tax actually paid to the foreign country,
A. Expenses, Losses, Indebtedness and
Taxes b. the amount derived from this formula:
• Only the proportion of the total
Net gifts, foreign country x Phil. estate tax
expenses, losses indebtedness and
Net gifts, world
taxes which the value of such part
bears to the value of his entire GE ƒ For estate taxes paid to 2 or more foreign
wherever situated: countries the lower amount between
limitation A and limitation B.
Estate situated in the Phils X expenses, losses = allowable
Total estate everywhere indebtedness,taxes deduction
a. Limitation A (per country):
- the lower amount between the
B. Property Previously Taxed (vanishing
actual foreign taxes paid to each country and
deductions in the properties in the
Philippines) the amount derived from the forumula below:
C. Transfers for Public Use
Net gifts, foreign country x Phils. estate tax
Net gifts, world
b. Limitation B (by total):
• Net ShareTIFFof(Uncompressed)
the surviving
QuickTime™ and a
spouse in the - the lower amount between the sum
Conjugal Property-deducted
are needed to see this picture. from the net
of the actual taxes paid to ALL foreign
estate of the decedent countries and the answer to the formula
• To be allowed deductions for a non-resident below:
alien, executor/administrator/ any heir must
include in the return to be filed, the value of Net gifts, foreign country x Phils. estate tax
the gross estate not situated in the Net gifts, world
• No deduction shall be allowed in the case of
a nonresident not a citizen of the Philippines, EXEMPTION FROM ESTATE TAX (Sec. 84 and

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87): • The person primarily liable is the estate

itself, through the executor and administrator.
1) First P200,000.00 value of the net estate When there are 2 or more executors or
administrators, all of them are severally liable
2) Merger of usufruct in the owner of the naked for the payment of tax.
• The heir or beneficiary has a subsidiary
Example liability for the payment of that portion of the
A died leaving a fishpond; naked title to B, estate which his distributive share bears to
his son, and usufruct to C, another son, for the value of the net estate. The extent of his
life. C died a year later. The fishpond will liability shall not, however, exceed the value
be included in the gross estate of A, being of his share in the inheritance.
the owner. Upon the death of C, the
usufruct will be merged into the owner of
the naked title B who shall become the
absolute owner thereof. The transfer from (2) Procedures
C to B is exempt from estate tax.
1) Filing of Notice of death
3) Transmission or delivery of the inheritance or (a) Who files: the executor, administrator or
legacy by the fiduciary heir or legatee to the any of the legal heirs,
fideicommissary (b) When to file: within 2 months after the
decedent's death, or within a like period
• The substitution must not go beyond one after qualifying as such executor or
degree from the heir originally instituted administrator
• The fiduciary or first heir must be both (c) To whom filed: Commissioner.
living at the time of the testator’s death
2) Filing of Estate Tax Returns
Example • When to file: within six (6) months from
A dies and leaves in his will a lot to his the decedent's death; except, the
brother B who is entrusted with the Commissioner, in meritorious cases,
obligation to transfer the lot to C, a son of grants a reasonable extension not
A when A reaches legal age. B is the exceeding 30 days for filing the return
fiduciary heir and C is the
fideicommissary. The transfer from A to • Mandatory filing of estate tax returns in
B is subject to estate tax. But the all cases of:
transmission or delivery to C upon o transfers subject to the tax
reaching legal age shall be exempt from imposed herein
estate tax. o transfers though exempt from tax,
where the gross value of the estate
4) Transmission from the first heir, legatee or exceeds P200,000
donee in favor of another beneficiary, in o regardless of the gross value, the
accordance with the desire of the predecessor estate consists of registered or
registrable property for which a
5) Bequests, devises, legacies or transfers to clearance from the Bureau of
• social welfare, cultural and charitable Internal Revenue is required for
institutions, the transfer of ownership in the
• no partTIFF theQuickTime™
net income and a
decompressor of which inures name of the transferee
are needed to see this picture.
to the benefit of any individual:
• Provided not more than 30% of the • Where to file:
transfers shall be used by such o Authorized agent bank
institutions for administration purposes o Revenue district officer
o Duly authorized city or municipal
J. COMPLIANCE REQUIREMENTS treasurer of the place of
decedent’s domicile
(1) Persons liable to pay estate tax o If there is no legal residence in the
country, with the Commissioner

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3) Payment of Tax: Time of Payment Definition and Subject

(a) General Rule: at the time the return is filed
by the executor, administrator or the heirs ƒ A tax on the privilege of transmitting one’s
but before delivery of the distributive share property or property rights to another or
in the inheritance to any heir or beneficiary. others without adequate and full valuable
(b) Exception: when the Commissioner finds
that payment on due date would impose
ƒ The subject of donor’s tax is the gift or
undue hardship upon the estate or any of
the heirs, he may extend the time for donation. Article 725 of the Civil Code
payment of such tax: defines a gift or donation as “an act of
liberality whereby a person disposes
1. not to exceed 5 years, in case the
estate is settled through the courts; gratuitously of a thing or right in favor of
or another who accepts it.” Thus, the following
2. 2 years in case the estate is settled are the REQUISITES OF VALID GIFT OR
1. Capacity of the donor
In which case it shall be paid on or before
expiration of the extension and running of 2. Intent to donate
the Statute of Limitations for assessment 3. Delivery of the subject gift, whether
actual or constructive
shall be suspended for the period of any
such extension. 4. Acceptance by the donee

The Commissioner may require a bond not THERE ARE TWO (2) KINDS OF
exceeding double the amount of the tax DONATIONS:
and with such sureties as the
Commissioner deems necessary when an 1. Donation inter vivos: a donation
extension for payment is granted. made between living persons;
perfection is at the moment when the
(c) Restrictions as to Extension of Time to donor knows of the acceptance of
Pay: the donee (exception: donations of
o no extension shall be allowed immovable 1 properties); subject to
when taxes are assessed by donor’s tax
reason of : 1) negligence, 2)
intentional disregard of rules and 2. Donation mortis causa: a donation
regulations, 3) fraud on the part of which takes effect upon the death of
the taxpayer the donor; subject to estate tax
4) Distribution of Estate
• Upon payment, the administrator shall The law in force at the time of the perfection
deliver the distributive share in the or completion of the donation shall govern
inheritance to any heir or beneficiary. The the imposition of the donor’s tax. ( Sec 11 RR
estate tax clearance issued by the 2-2003 )
Commissioner or the Revenue District Note: Any contribution in cash or in kind to
Officer having jurisdiction over the estate any candidate, political party, or coalition of
will serveTIFFas(Uncompressed)
the authority
QuickTime™ and a to distribute the
remaining/distributable properties/share in
are needed to see this picture. 1
Must be in a public document specifying therein the
the inheritance to the heir or beneficiary. property donated. The acceptance may be made in
the same Deed of Donation or in a separate public
• In case of installment payments, the document, but it shall not take effect unless it is done
clearance shall be released only with during the lifetime of the donor. If the acceptance is
respect to the property the corresponding made in a separate instrument, the donor shall be
tax has been paid. notified thereof in an authentic form, and this step
shall be noted in both instruments.

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parties for campaign purposes shall be the final capital gains tax, is
governed by the Election Code as amended. transferred for less than an adequate
(Sec 99 C of the NIRC). and full consideration in money or
money’s worth, then the amount by
PROPERTIES INCLUDED: which the fair market value of the
property at the time of the
1. citizens or residents of the Philippines – all execution of the Contract to Sell or
properties located not only within the execution of the Deed of Sale which
Philippines but also in foreign countries is not preceded by a Contract to Sell
2. non-resident alien – all real and tangible exceeded the value of the agreed
properties within the Philippines, and or actual consideration or selling
intangible personal property, unless there is price shall be deemed a gift, and
reciprocity, in which case it is not taxable. shall be included in computing the
- See reciprocity rules in the estate amount of gifts made during the
taxes for intangible properties (Section 104 calendar year.
NIRC) ƒ Real property considered
capital assets under the Tax
Applicability of Laws Governing the Imposition of Code are exempted from this
Donor’s Tax rule (Sec. 100 in relation to
ƒ The donor’s tax applies to a completed gift. Sec. 24 (D) NIRC).
The transfer is perfected from the moment
the donors knows of the acceptance by the o Debt condoned or remitted
donee; it is completed by the delivery, either
actual or constructively, of the donated o Transfers made in trust for another
property to the donee. The law in force at the person
time of the perfection/completion of the
donation shall govern the imposition of o Renunciation by the surviving
donor’s tax based on the FMV of the spouse of his/her share in the
property. conjugal partnership or absolute
community after the dissolution of
• A GIFT THAT IS INCOMPLETE the marriage in favor of the heirs of
BECAUSE OF RESERVED POWERS, the deceased spouse or any other
BECOMES COMPLETE WHEN person; whereas, a general
EITHER: renunciation by an heir, including the
• the donor renounces the power; surviving spouse, of his/her share in
or the hereditary estate left by the
• his right to exercise ceased decedent is not subject to donor’s
because of the happening of tax, unless specifically and
some event or contingency or categorically done in favor of
the fulfillment of some condition, identified heir/s to the exclusion or
other than the death of the disadvantage of the other co-heirs in
donor. the hereditary estate. (Sec. 11, Rev.
A. Gross Gifts Reg. 2-2003)
• Gifts may be real or personal properties.
Personal properties may be tangible, See Estate of Fidel Reyes,
intangible or mixed. CTA Case No. 6747, Jan. 16, 2006
QuickTime™ and a
TIFF (Uncompressed) decompressor
where the repudiation by the heirs
are needed to see this picture. of an inheritance was held not to be
o Where property, other than a real a donation.
property that has been subjected to
subject to donor’s tax. The rationale is that under
Section 24 (d), the FMV itself, if higher than the gross
Note that in the case of real properties considered selling price, is the base for the computation of
as capital assets, the difference between the FMV capital gains tax. In essence, what the seller avoids
and the actual value received in transfers for less in the payment of donor’s tax, it pays for the capital
than the adequate or full consideration shall not be gains tax.

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2) Relative by consanguinity in the

• Valuation: collateral line within the 4th degree
o Personal property: FMV at the time of relationship
of donation
ƒ A legally adopted child is entitled to
o Real Property: FMV as determined all the rights and obligations provided
by the Commissioner or the FMV in by law to legitimate children, and
the latest schedule of values of the therefore, donation to him shall not
provincial or city assessor, whichever be considered as donation made to
is HIGHER stranger.

OBJECT OF TAXATION: ƒ Donation made between business

The donor’s tax shall be imposed to the transfer organizations and those made
of property by gift, whether the transfer is in trust or between an individual and a
otherwise, whether the gift is direct or indirect, and business organization shall be
whether the property is real or personal, tangible or considered as donation made to a
intangible. The computation of donor’s tax is on a stranger.
cumulative basis over a period of one calendar year.
2. Donee is NOT a Stranger to the Donor

B. Computation of Tax • Rate: Graduated Rates

1. On the 1 donation of the year
Gross Gift xx Exemptions are not to be treated as
Less: deductions/exemptions xx___ exclusions from the gross gifts of the donor.
Net gift xx They partake the nature of deductions and
X tax rate xx___ are, therefore, deductible from gross gifts in
Donor’s tax xx order to arrive at the taxable net gifts.
2. On subsequent donation during the year 1) Made by a Resident
(a) Dowries or gifts made on account of
marriage before its celebration or within
Gross Gift xx
Less: deductions/exemptions xx___ one year thereafter by parents to each of
Net gift xx their legitimate, recognized natural, or
adopted children to the extent of the first
Add: prior net gift xx___
Aggregate net gifts xx P10,000
X tax rate xx___
Note: Both parents may make dowries
Donor’s tax on aggregate gift xx
Less: prior donor’s tax paid xx___ and gifts made on account of marriage.
Each parent shall be entitled to the
Donor’s tax on this date xx
exemption above. This has the effect of
splitting the value of the gift into half for
both spouses so each spouse can claim
the exemption. However, both spouses
QuickTime™ and a must file separate returns because the
C. Rates of Tax TIFF (Uncompressed) decompressor
are needed to see this picture. husband and wife are considered as
distinct entities for purposes of donor’s
1. Donee is a Stranger to the Donor
tax. (Sec. 12 RR-2-2003) However,
where there is failure to prove that the
• Rate: 30%
donation was actually made by both
• Who is a stranger: A STRANGER IS A
spouses, the donation is taxable as an
exclusive act of the husband, without
1) Brother, sister (whether by whole
prejudice to the right of the wife to
or half-blood), spouse, ancestor
question the validity of the donation
and lineal descendant

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without her consent pursuant to the profit corporation/NGO institution (qualified-donee

provisions of the Civl Code and the institution) for administration purposes pursuant to
Family Code. the provisions of Section 101(A)(3)and (B)(2) of the
Code (RR 2-2003).
(b) Gifts made to the National Government
or any entity created by any of its Abello vs. CIR, GR No. 120721, Feb. 23, 2005
agencies which is not conducted for
profit, or to any political subdivision of the Facts: During the 1987 national elections,
said Government petitioners, who are partners in the ACCRA law firm,
contributed P882,661.31 each to the campaign funds
(c) Gifts in favor of an non profit educational of Senator Edgardo Angara, then running for the
and/or charitable, religious, cultural or Senate. The BIR assessed each of the petitioners for
social welfare corporation, institution their contributions. Petitioners questioned the
accredited non-government organization, assessment, claiming that political or electoral
trust or philanthropic organization or contributions are not considered gifts under the
research institution or organization; NIRC, and that, therefore, they are not liable for
provided, not more than 30% shall be donor’s tax. The claim for exemption was denied by
used by such donee for administration the Commissioner.
purposes. On appeal, the CTA ordered the Commissioner
to desist from collecting donor’s taxes from the
WHAT IS A NON-PROFIT petitioners. The CA reversed and set aside the CTA
EDUCATIONAL AND/OR CHARITABLE decision, ordering the petitioners to pay donor’s tax,
CORPORATION? It is one which is reasoning as follows:
incorporated as a non-stock entity paying The NIRC, as amended, provides:
no dividends, governed by trustees who Sec. 91. Imposition of Tax.
received no compensation, and devoting a) There shall be levied, assessed,
all its income to the accomplishment and collected, and paid upon the transfer by
promotion of the purposes enumerated in any person, resident, or non-resident, of
its Articles of Incorporation the property by gift, a tax, computed as
provided in Section 92.
b) The tax shall apply whether the transfer
(d) Encumbrances on the property donated if
is in trust or otherwise, whether the gift is
assumed by the donee in the deed of
direct or indirect, and whether the
property is real or personal, tangible or
(e) Donations made to entities as exempted
Pursuant to the above-quoted provisions of law,
under special laws.
the transfer of property by gift, whether the transfer is
in trust or otherwise, whether the gift is direct or
(f) Donations to persons not strangers of not
indirect, and whether the property is real or personal,
more than P100,000 per year (Sec.
tangible or intangible, is subject to donor’s or gift tax.
A gift is generally defined as a voluntary transfer of
property by one to another without any consideration
In order to be exempt from donor’s tax and to claim
or compensation therefore.
full deduction of the donation given to qualified donee
In the instant case, the contributions are
institutions duly accredited by the Philippine Council
voluntary transfers of property in the form of money
for NGO Certification, Inc.(PCNC), the donor
from private respondents to Sen. Angara, without
engaged in business shall give a notice of donation
QuickTime™ and a considerations therefor. Hence, they squarely fall
on every donationTIFFare
worth at decompressor
least Fifty Thousand
needed to see this picture. under the definition of donation or gift.
Pesos (P50,000) to the Revenue District Office(RDO)
As correctly pointed out by the Solicitor General:
which has jurisdiction over his place of business
The fact that the contributions were given to be
within thirty (30) days after receipt of the qualified
used as campaign funds of Sen. Angara does not
donee institution’s duly issued Certificate of Donation,
affect the character of the fund transfers as donation
which shall be attached to the said Notice of
or gift. There was thereby no retention of control
Donation, stating that not more than thirty percent
over the disposition of the contributions. There was
(30%) of the said donation/gifts for the taxable year
simply an indication of the purpose for which they
shall be used by such accredited non-stock, non-
were to be used. For as long as the contributions

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were used for the purpose for which they were Election Code is essential to appreciate how a
intended, Sen. Angara had complete and absolute political contribution differs from a taxable gift.
power to dispose of the contributions. He was fully Section 94(a) of the said Code defines electoral
entitled to the economic benefits of the contributions. contribution as follows: “The term ‘contribution’
Issue1: What is the definition of a transfer of includes a gift, donation, subscription, loan, advance
property by gift? or deposit of money or anything of value, or a
Held1: The NIRC does not define transfer of contract, promise or agreement to contribute,
property by gift. However, Article 18 of the Civil whether or not legally enforceable, made for the
Code, states: “In matters which are governed by the purpose of influencing the results of the elections but
Code of Commerce and special laws, their deficiency shall not include services rendered without
shall be supplied by the provisions of this Code.” compensation by individuals volunteering a portion or
Thus, reference may be made to the definition of a all of their time in behalf of a candidate or political
donation in the Civil Code. Article 725 of said Code party. It shall also include the use of facilities
defines donation as: “. . . an act of liberality whereby voluntarily donated by other persons, the money
a person disposes gratuitously of a thing or right in value of which can be assessed based on the rates
favor of another, who accepts it.” prevailing in the area.” Since the purpose of an
Donation has the following elements: (a) the electoral contribution is to influence the results of the
reduction of the patrimony of the donor; (b) the election, petitioners again claim that donative intent is
increase in the patrimony of the donee; and, (c) the not present.
intent to do an act of liberality or animus donandi. Held3: Petitioners attempt to place the barrier of
The present case falls squarely within the mutual exclusivity between donative intent and the
definition of a donation. Petitioners each gave purpose of political contributions. The Court
P882,661.31 to the campaign funds of Senator reiterated that donative intent is not negated by the
Angara, without any material consideration. All three presence of other intentions, motives or purposes
elements of a donation are present. The patrimony which do not contradict donative intent.
of the four petitioners were reduced by P882,661.31 Petitioners would distinguish a gift from a political
each. Senator Angara’s patrimony correspondingly donation by saying that the consideration for a gift is
increased by P3,530,645.24. There was intent to do the liberality of the donor, while the consideration for
an act of liberality or animus donandi was present a political contribution is the desire of the giver to
since each of the petitioners gave their contributions influence the result of an election by supporting
without any consideration. candidates who, in the perception of the giver, would
influence the shaping of government policies that
Issue2: Since animus donandi or the intention to would promote the general welfare and economic
do an act of liberality is an essential element of a well-being of the electorate, including the giver
donation, petitioners argue that it is important to look himself.
into the intention of the giver to determine if a political Petitioners’ attempt is strained. The fact that
contribution is a gift. petitioners will somehow in the future benefit from the
Held2: Untenable. First of all, donative intent is a election of the candidate to whom they contribute, in
creature of the mind. It cannot be perceived except no way amounts to a valuable material consideration
by the material and tangible acts which manifest its so as to remove political contributions from the
presence. This being the case, donative intent is purview of a donation. Senator Angara was under no
presumed present when one gives a part of ones obligation to benefit the petitioners. The proper
patrimony to another without consideration. Second, performance of his duties as a legislator is his
donative intent is not negated when the person obligation as an elected public servant of the Filipino
donating has other intentions, motives or purposes people and not a consideration for the political
which do not contradict donative intent. The Court contributions he received. In fact, as a public
was not convincedTIFFthat since the
QuickTime™ and a purpose of the
(Uncompressed) decompressor
servant, he may even be called to enact laws that are
contribution was to help elect
are needed to seeathis
picture. there was contrary to the interests of his benefactors, for the
no donative intent. Petitioners’ contribution of money benefit of the greater good.
without any material consideration evinces animus In fine, the purpose for which the sums of money
donandi. The fact that their purpose for donating was were given, which was to fund the campaign of
to aid in the election of the donee does not negate Senator Angara in his bid for a senatorial seat,
the presence of donative intent. cannot be considered as a material consideration so
as to negate a donation.
Issue3: Petitioners maintain that the definition of
an “electoral contribution” under the Omnibus 2) Made by a Nonresident Alien

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(a) Gifts made to the National Government ƒ Formulas:

or any entity created by any of its Limitation A:
agencies which is not conducted for For donor’s taxes paid to one foreign country
profit, or to any political subdivision of the Allowable Final Tax Credit =
said Government The lower amount between:
a. Tax actually paid to the foreign country,
(b) Gifts in favor of an non profit educational and
and/or charitable, religious, cultural or
social welfare corporation, institution b. the amount derived from this formula:
accredited non-government organization,
trust or philanthropic organization or Net gifts, foreign countryx Phil. donor’s tax
research institution or organization; Net gifts, world
provided, not more than 30% shall be
used by such donee for administration ƒ For donor’s taxes paid to 2 or more foreign
purposes countries the lower amount between
limitation a and limitation b.
E. Net Gift
a. Limitation A (per country):
• The net economic benefit from the transfer - the lower amount between the
that accrues to the donee. actual foreign taxes paid to each country and
the amount derived from the forumula below:
• Accordingly, if a mortgaged property is
Net gifts, foreign country x Phils. donor’s tax
transferred as a gift, but imposing upon the
Net gifts, world
donee the obligation to pay the mortgage
liability, then the net gift is measured by
b. Limitation B (by total):
deducting from the fair market value of the
- the lower amount between the sum
property the amount of mortgage assumed.
of the actual taxes paid to ALL foreign
countries and the answer to the formula
F. Donor’s Tax Credit
A situation may arise when the property given Net gifts, foreign country x Phils. donor’s tax
as a gift is located in a foreign country and Net gifts, world
the donor may be subject to donor’s tax twice
on the same property – by the Philippine G. Special Rules on Husband and Wife
government and by the foreign government
where the property is situated. • Husband and wife are considered as
separate and distinct taxpayer’s for purposes
ƒ Who are entitled to claim credits: only of the donor’s tax.
resident or citizen donors (resident citizens,
non-resident citizens, and resident aliens) • However, if what was donated is a conjugal
or community property and only the husband
Limitations on Tax Credit: signed the deed of donation, there is only
ƒ The amount of the credit in respect to the tax one donor for donor’s tax purposes, without
paid to any country shall not exceed the prejudice to the right of the wife to question
same proportion of the tax against which the validity of the donation without her
such credit is taken, which the decedent’s net consent pursuant to the pertinent provisions
gifts situated within such country taxable of the Civil Code of the Philippines and the
under the TIFF
NIRC bears to his entire net gift;
QuickTime™ and a
(Uncompressed) decompressor Family Code of the Philippines.
and are needed to see this picture.

ƒ The total amount of the credit shall not H. Compliance Requirements (Sec. 103)
exceed the same proportion of the tax
against which such credit is taken, which the 1) Who are liable to file donor’s tax return?
decedent’s net gift situated outside the
• Every person, whether natural or
Philippines taxable under the NIRC bears to
juridical, resident or non-resident, who
his entire net gift.
transfers or causes to transfer property

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by gift, whether in trust or otherwise, • Prescriptive Periods

whether the gift is direct or indirect and 1) Assessment of Tax Liability
whether the property is real or personal, ƒ 3 years from the following, whichever
tangible or intangible. comes later (Sec. 203):
1. the last day prescribed by law for
2) When to file donor’s tax filing the return (when filed on or
• The donor’s tax return shall be filed before such date), or
within 30 days after the date the gift is 2. the day when the return was
made actually filed (when filed after the
last day prescribed).
3) When to pay the tax ƒ 10 years after the discovery of the
• Pay at the time of filing (pay-as-you-file falsity, fraud or omission in case of:
system) 1. false or fraudulent return with
intent to evade tax, or
TITLE VIII – REMEDIES 2. failure to file a return (Sec. 222 a)

PART I. REMEDIES AVAILABLE TO THE The following are covered by the general rule
GOVERNMENT (Sec. 203):
• false return-filed with no intent to
In General evade tax
1. Compromise (Sec. 204) • fraudulent return-filed with intent to
2. Distraint - actual and constructive (Sec. 205- evade tax
3. Levy (Sec. 207b) ƒ within the period agreed upon, when
4. Tax lien (Sec. 219) both the Commissioner and the
5. Civil Action (Sec. 221) taxpayer have agreed in writing, before
6. Criminal Action (Sec. 221-222) the expiration of the period in Sec. 203
7. Forfeiture of Property (Sec. 224-225) for the assessment of tax, to an
8. Suspension of business operations in assessment after such time. Such
violations of VAT (Sec. 115) period agreed upon may be extended
9. Enforcement of administrative fine by written agreement before the
ƒ the remedies of disraint and levy as well expiration of such agreed upon period.
as collection by civil and criminal actions (Sec.222 b)
may in the discretion of the
Commissioner, be pursued singly or
independently of each other, or all of • SUSPENSION OF PRESCRIPTIVE
them simultaneously. PERIODS: (Sec. 223)
1) Periods suspended:
No court shall have the authority to grant an (a) periods for assessment in Sec.
injunction to restrain the collection of any national 203 and 222
internal revenue tax, fee , or charge imposed by the (b) beginning of distraint or levy
NIRC (Sec. 218) (c) proceeding in court for collection
• Justification: lifeblood theory
2) Grounds for suspension of
EXCEPTION: Injunction may be issued by the CTA in prescriptive periods: [ PLORP ]
aid of its appellate jurisdiction
QuickTime™ under
and a Sec. 11 of RA a) Commissioner is Prohibited
1125, as amended by RA 9282
TIFF (Uncompressed) decompressor
are needed to see this picture. in the from making the assessment or
opinion of the Court the collection … may jeopardize beginning distraint or levy or a
the interest of the Government and/or the taxpayer, proceeding in court and for 60
the Court any stage of the proceeding may suspend days thereafter
the said collection and require the taxpayer either to b) Taxpayer requests for
deposit the amount claimed or to file a surety bond Reinvestigation which is granted
for not more than double the amount with the Court.) c) Taxpayer cannot be Located in
the address given in the return
Prescription filed, except if the taxpayer

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informs the Commissioner of a 2. The financial position of the taxpayer

change in address the demonstrates a clear Inability to pay the
prescriptive period will not be assessed tax. (Sec. 204 A) in such case, the
suspended taxpayer should waive the confidentiality
d) When the warrant is duly served privilege on bank deposits under RA 1405
upon the taxpayer and no (Sec 6 (F)(2) NIRC).
Property could be located ƒ The corporation ceased
e) When the taxpayer is Out of the operation or is already dissolved;
Phils. ƒ The taxpayer is suffering from
earning deficit resulting to an
Compromise impairment in the original capital
ƒ Definition by at least 50%
ƒ The taxpayer is suffering from a
ƒ A contract whereby the parties, by net worth deficit computed by
reciprocal concessions, avoid deducting total liabilities form
litigation or put an end to one already total assets, taken from the latest
commenced. (Art. 2028, New Civil audited financial statements
Code) ƒ The taxpayer is a compensation
earner with no other sources of
income and the family’s gross
ƒ REQUISITES: monthly compensation does not
o The taxpayer have a tax
exceed (P 10,500/month if
single; P 21,000/month if
o There must be an offer (by
married) and that it appears that
the taxpayer of an amount to
the taxpayer possesses no other
be paid by the taxpayer)
leviable/distrainable assets,
o There must be an
other than his family home;
acceptance (by the
ƒ The taxpayer has been granted
Commissioner or the
by the SEC or by any competent
taxpayer as the case may
tribunals a moratorium or
be) of the offer in the
suspension of payments to
settlement of the original
creditors or otherwise declared
bankrupt or insolvent (Sec 3, RR
ƒ When may taxes be compromised?
1. A reasonable doubt as to the validity of the
• In general, the taxpayer's criminal liability
claim against the taxpayer exists:
arising from his violation of the pertinent
ƒ The delinquent account or
provision of the Code may be settled
disputed assessment is one
extrajudicially instead of the BIR
resulting from a jeopardy
instituting against the taxpayer a criminal
assessment 3; or
action in Court.
ƒ The assessment seems to be
arbitrary in nature, appearing to
be based on presumptions and • A compromise in extra-judicial settlement
there is reason to believe that it of the taxpayer's criminal liability for his
is lacking in legal and/or factual violation is consensual in character,
basis QuickTime™ and a hence, may not be imposed on the
TIFF (Uncompressed) decompressor taxpayer without his consent. Hence, the
are needed to see this picture.
BIR may only suggest settlement of the
A jeopardy assessment is a tax assessment made taxpayer's liability through a compromise.
by an authorized Revenue Officer without the benefit (RR 012-99)
of complete or partial trial in light of the RO’s belief
that assessment and collection of tax will be • CASES NOT SUBJECT TO COMPROMISE:
jeopardized by the delay caused by the taxpayer’s 1. Withholding tax cases
failure to 1) comply with audit and investigation 2. Criminal tax fraud cases
requirements and 2) substantiate any or all claims, 3. criminal violations already filed in court
deductions or credits in his return. 4. Delinquent accounts with duly approved

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schedule of installment payments P1,000,000 or

5. cases where final reports of b) where the settlement offered is
reinvestigation or reconsideration have less than the prescribed
been issued resulting to reduction in the minimum rates
original assessment and the taxpayer is
agreeable to such decision o Extent of the Commissioner’s Discretion to
6. Cases which become final and executory Compromise Criminal Violations
after final judgment of a court (Sec 2 RR 1. Before the complaint is filed with the
7-2001). prosecutor’s office: the CIR has full
discretion to compromise except
those involving fraud
• Power to Compromise 2. After the complaint is filled with the
o Who has the Power to Compromise? prosecutor’s office but before the
ƒ The Commissioner of Internal information is filed with the court: the
Revenue with respect to criminal CIR can still compromise provided
and civil cases arising from the prosecutor must give consent
violations of the tax code (Sec 7c 3. After information is filed with the
and 204). court: the CIR is no longer permitted
to compromise with or without the
The power to compromise is vested consent of the Prosecutor (People
in the CIR. The NIRC allows the vs. Magdaluyo, April 20, 1961)
Commissioner of Internal Revenue to
compromise the civil as well as ƒ This is more so when the court
criminal cases arising thereunder. No has rendered a final judgment.
similar provision exists, vis-a-vis the As a mere agent of the
Collector or Commissioner of Government, the Commissioner
Customs, in regard to violations of is not authorized to accept
the Tariff and Customs Code. anything less than what is
(People vs. Desiderio L-20805, adjucated in favor of the
November 29, 1965). government by virtue of such
final judgment, the government
If an offer of compromise is has already acquired a vested
rejected by the taxpayer, the rights.
compromise penalty cannot be
enforced thru an action in court or by o Nature of a Compromise in Extrajudicial
distraint and levy. The CIR should Settlement of the Taxpayer’s Criminal
file a criminal action if he believes Liability for his Violation
that the taxpayer is criminally liable ƒ It is consensual in character,
for violation of the tax law as the only hence; may not be imposed on
way to enforce a penalty. the taxpayer without his consent.
(Commissioner vs. Abad, L-19627, The BIR may only suggest
June 27, 1968). settlement of his tax liability
through a compromise. The
extra-judicial settlement and the
o LIMITATIONS FOR COMPROMISE OF TAX amount of the suggested
LIABILITY: (Sec. 204A) compromise penalty should
1. Minimum compromise
QuickTime™ and a
TIFF (Uncompressed) decompressor
rate: conform with the schedule of
a) In case of financial incapacity,
are needed to see this picture. compromise penalties provided
10% of basic assessed tax under the relevant BIR
b) In other cases, 40% of basic regulations or orders.
assessed tax
2. Compromise subject to approval of • Remedy in Case the Taxpayer Refuses or
Evaluation Board (composed of Fails to Abide the Tax Compromise
Commissioner and 4 Deputy 1. Enforce the Compromise
Commissioners): ƒ If it is a judicial compromise, it can
a) when basic tax involved exceeds be enforced by mere execution. A

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judicial compromise is one where a abatement shall only cover the

decision based on the compromise surcharges and the compromise
agreement is rendered by the court penalty and not the interest
on request of the parties imposed under Sec. 249
ƒ Any other compromise is o when the assessment is brought
extrajudicial and like any other about or the result of taxpayer’s
contract can only be enforced by non-compliance with the law due
court action to a difficult interpretation of said
2. Regard it as rescinded and insist upon law
original demand (Art 2041, Civil Code) o when the taxpayer fails to file the
return and pay the correct tax on
• Other Consideration on Compromise time due to circumstances
Agreements beyond his control, provided, the
o Compromise Penalty abatement shall cover only the
ƒ It is the amount of money which the surcharges and the compromise
taxpayer pays to compromise tax penalty and not the interest
violations. This is paid in lieu of imposed under Sec 249
criminal prosecution. A taxpayer o late payment of the tax under
cannot be compelled to pay a meritorious circumstances (Sec.
compromise penalty if he does not 2, RR 13-2001)
want to pay, in which case the CIR 2. the admission and collection costs
must institute a criminal action. involved do not justify the collection of
the amount due (Sec 204 (b)
o When may taxes be abated or cancelled? 3. Abatement of penalties on assessment
[ UJ ] confirmed by the lower court but
1. The tax or any portion thereof appears to be appealed by the taxpayer to a higher
Unjustly or excessively assessed; or court
2. The administration and collection costs 4. Abatement of penalties on withholding
involved do not Justify the collection of the tax assessment under meritorious
amount due (Sec. 204 B) circumstances
5. Abatement of penalties on delayed
Abatement vs. Compromise installment payment under meritorious
In Abatement, there’s a cancellation of the circumstances
entire tax liability, while compromise involves 6. abatement of penalties on assessment
a mere reduction of the tax. reduced after reinvestigation but
taxpayer is still contesting reduced
7. such other circumstances which the
Commissioner may deem analogous to
the enumerations above (Sec. 3, RR
1. the tax or any portion thereof appears
to be unjustly or excessively assessed
(Sec 204 (b))
Distraint (Only For Personal Property)
o when the filing of the
return/payment is made at the
O Definition and Nature
wrong venue
o whenQuickTime™the taxpayer’s
and a
mistake in
TIFF (Uncompressed)of his
decompressor tax is due to It is the seizure by the government of
are needed to see this picture.
erroneous written official advice personal property, tangible or intangible to
of a revenue officer enforce the payment of taxes on the goods,
o when the taxpayer fails to file the chattels or effects of the taxpayer including
return and pay the tax on time other personal property of whatever
due to substantial losses from character. The property may be offered in a
prolonged labor dispute, force public sale if taxes are not voluntarily paid. It
majure, legitimate business is a summary remedy.
reverses, provided, the

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ƒ The warrant is a summary procedure REMEDY OF DISTRAINT:

forcing the taxpayer to pay. The receipt ƒ The taxpayer must be delinquent (except in
of a warrant may or may not partake the constructive distraint) in the payment of taxes
character of a final decision. If it is an ƒ There must be a subsequent demand for its
indication of a final decision, the taxpayer payment
may appeal to the CTA within 30 days ƒ The taxpayer must have failed to pay the tax
from service of the warrant. at the time required; and
ƒ The period within which to assess or collect
Types of Distraint the tax has not yet prescribed.

A. Actual Distraint Distraint of Personal Property (Actual Distraint)

ƒ There is taking of possession of the personal
property from the taxpayer by the WHO MAY EFFECT AMOUNT
government. Physical transfer of possession DISTRAINT INVOLVED
is not always required. This is true in case of Commissioner or his duly In excess of
intangible property such as stocks and authorized representative P1,000,000
credits. Revenue District Officer (Sec. P1,000,000 or
• Resorted to only when the taxpayer becomes 207(a)) less
• There is actual seizure of the property of the PROPERTY SEIZED OR DISTRAINED:
delinquent taxpayer. a) goods, chattels, effects and other personal
• Resorted to when there is actual delinquency property
in tax payment. b) including stocks and other securities, debts,
credits, bank accounts, interests in and rights
B. Constructive Distraint to personal property
• There may be no actual delinquency.
• Taxpayer is prohibited from disposing of the PROCEDURE FOR THE ACTUAL DISTRAINT OR
property and must preserve the same GARNISHMENT
1) Report on the Distraint (Commencement of
DISTRAINT a) by the distraining officer
Made only on the made on the property of 1. submitted within 10 days from receipt of
property of a any taxpayer, whether the warrant
delinquent taxpayer delinquent or not 2. submitted to the Revenue District Officer
there is taking or the taxpayer is merely and to the Revenue Regional Director
possession prohibited from disposing of b) by the Revenue Regional Director - a
his property consolidated report, as may be required by
Effected by leaving a Effected by requiring the the Commissioner
list of distrained taxpayer to sign a receipt of ƒ The order of Distraint may be lifted by the
property or by service the property or by the Commissioner or his representative (Sec.
of a warrant of distraint revenue officer preparing 207 A)
or garnishment and leaving a list of such
property 2) Service of Warrant of Distraint
an immediate step for not necessarily an ƒ Procedure with respect to:
collection of taxes immediate step for (a) Goods, effects, chattels and other personal
QuickTime™ and aof taxes
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are needed to see this picture.
1. a copy of an account of the property
ƒ Are summary remedies for the collection distrained, signed by the officer, shall be
of taxes left either with the owner or the person
ƒ Refer only to personal property from whom the property was taken or at
ƒ Cannot be availed of where the amount the dwelling or place of business of such
of the tax involved is not more than P person and with someone of suitable age
100 and discretion
2. together with a statement of the sum

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3. and also a note of the time and place of 3. not to dispose of the property in any
sale manner, without the express authority of
(b) Stocks and other Securities the Commissioner.
1. serving a copy of the warrant upon the (b) Where taxpayer or person in possession
taxpayer AND upon the president, refuses to sign:
manager, treasurer or other responsible ƒ distraining officer shall prepare a list of
officer of the issuing corporation, the property distrained
company, association ƒ in the presence of 2 witnesses
(c) Debts and Credits ƒ leave a copy in the premises where the
1. leaving a copy of the warrant with the property is located
person owing the debts or having in his = after which the said property shall be
possession such credits or his agent deemed to have been placed under
ƒ the warrant shall be sufficient authority to constructive distraint (Sec. 206)
the person served to pay to the
Commissioner the amount of such debts Note:
or credits - Constructive distraint is an additional
(d) Bank accounts (garnishment) remedy because the government can resort
1. serve a warrant of garnishment upon the to it while the remedy of actual distraint is not
taxpayer AND upon the president, yet available, meaning the assessment
manager, treasurer or other responsible process is still to be done.
officer of the bank
2. bank shall turn over to the Commissioner LEVY (ONLY ON REAL PROPERTY)
so much of the bank accounts as may be
sufficient (Sec.208)
The seizure of real property of the taxpayer and
interests or rights to such property for the
3) Posting of Notice (Sec. 209)
satisfaction of taxes due from the delinquent
ƒ Notice specifying the time and place of sale
taxpayer to enforce the payment thereof. The
and the articles distrained.
property may be offered in a public sale, if after
ƒ The posting shall be made in not less than 2
seizure, the taxes are not voluntarily paid.
public places in the city or municipality where
the distraint is made.
ƒ One of the places for posting of such notice When may Levy be effected?
is the Office of the Mayor of such city or It is effected by issuing a warrant of levy and giving a
municipality. written notice to the taxpayer and the Register of
Deeds, after which the real property shall be sold at a
4) Sale of Property Distrained public sale to satisfy the tax obligation of the
CONSTRUCTIVE DISTRAINT ƒ When exercised: before, simultaneously or
1) When may this occur? [ HORRID ] (Sec. 206) after the distraint of personal property
a) taxpayer is Delinquent belonging to the taxpayer
b) taxpayer is Retiring from any business
subject to tax Procedure of Levy on Real Property
c) taxpayer is Intending to leave the Phil. or to ƒ Prepare Certificate of Levy
Remove his property therefrom (a) Internal revenue officer shall prepare a duly
d) taxpayer Hides or conceals his property authenticated certificate showing:
e) taxpayer performs any act tending to ƒ the name of taxpayer
Obstruct the proceedings
QuickTime™ and fora collection of any ƒ amounts of tax and penalty due
TIFF (Uncompressed) decompressor
tax due are needed to see this picture. (b) Enforceable as a legal execution throughout
the Philippines
2) Procedure (c) officer shall write upon the certificate a
(a) Require the taxpayer or any person having description of the property upon which levy is
possession/control of the property to made
1. sign a receipt covering property ƒ written notice of levy shall be mailed or served
distrained; and upon
2. obligate himself to preserve the same 1. the delinquent taxpayer, or
intact and unaltered; and ƒ if he is absent from the Philippines, to his

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agent or manager if the business in ƒ Within 1 year from the date of sale, the
respect to which the liability arose, or property may be redeemed by the delinquent
ƒ if there be no agent, to the occupant of taxpayer or anyone from him, upon the
the property. payment of the taxes, penalties and interest
2. the Register of Deeds where the property is thereon from the date of delinquency to the
located (Sec. 207[B]) date of sale together with interest on
ƒ Advertisement of the time and place of sale, purchase price at 15% per annum from the
which shall contain date of sale to the date of redemption. (Sec.
a) The amount of tax and penalties due 214)
b) Name of the taxpayer ƒ The taxpayer-owner shall not be deprived of
c) Short description of the property to be sold possession of said property and shall be
• the advertisement shall be made within 20 days entitled to rents and other income until the
after the levy, and the same shall be for a period expiration of the period for redemption.
of at least 30 days. It shall be effected by:
a) posting a notice at the main entrance of the Forfeiture to the Government
municipal building or the city hall and in ƒ If there is no bidder in the public sale or if the
public and conspicuous place in the barrio or amount of the highest bid is insufficient to
district where the property is located pay the taxes, penalties and costs, the real
b) by publication once a week for 3 consecutive property shall be forfeited to the Government
weeks in newspaper of general circulation in (Sec. 215)
the municipality or city where the property is
located (Sec. 213) Further Distraint and Levy
ƒ Sale ƒ The remedy of distraint and levy may be
ƒ Awarded to the highest bidder repeated if necessary until the full amount of
ƒ In case the proceeds of the sale exceeds the the tax delinquency due including all
claim and costs of sale, the excess shall be expenses is collected from the taxpayer.
turned over to the owner of the property. (Sec 217)
ƒ At any time before the day fixed for the sale, ƒ Otherwise, a clever taxpayer who is also able
the taxpayer may discontinue all proceedings to conceal most of the valuable part of his
by paying the taxes, penalties, and interests. property would escape payment of his tax
liability by sacrificing an insignificant portion
of his holdings.
DISTRAINT LEVY It is a legal claim or charge on property, either
refers to personal involves real property real or personal, established by law as a security
property in default of the payment of taxes (51 AmJur
forfeiture of the property Forfeiture authorized if (§ 881). Generally, it attaches to the property
in favor of the 215): irrespective of ownership or transfer thereof.
government is not ƒ There is no bidder or
provided ƒ If the highest bid is o Nature- a lien in favor of the Government of the
insufficient to pay Philippines when a person liable to pay a tax
the taxes, penalties neglects or refuses to do so upon demand
and costs o Duration- lien exists from the time assessment is
There is no right of There is a right of made by the Commissioner until paid, with
redemption on the redemption in case of interests, penalties and costs that may accrue in
QuickTime™ and a
personal property TIFF (Uncompressed)
property levied upon addition thereto
are needed to see this picture.
and sold or forfeited to o Extent- upon all property and rights to property
the government belonging to the taxpayer
Both: o Effectivity against third persons- only when notice
ƒ summary remedies for collection of such lien is filed by the Commissioner in the
ƒ cannot be availed of where amount involved Register of Deeds in the province/city where the
do not exceed P100 property is situated (Sec. 219)

Redemption of Property Sold • Superior to judgment claim of private

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property Executory Assessment

• Attaches not only from the time the warrant was ƒ Invalidity or illegality of the assessment and
served BUT from the time tax was due and ƒ Prescription of the government’s right to
demandable (from the time when the assessment assess
was made [Sec. 219]).
LIEN DISTRAINT ƒ The judgment in the criminal cases shall not
Directed against the Need not be directed only impose the penalty but shall also order
property subject to the against the property the payment of taxes subject of the criminal
tax subject to tax case as finally decided by the Commissioner
Regardless of the owner Property seized must be (Sec 205)
of the property owned by the taxpayer ƒ Resorted not only for the collection of the
taxes but also for the enforcement of
statutory penalties of all sorts.
Where to file
ƒ For tax remedy purposes, these are actions
1) Court of Tax Appeals- on criminal offenses
instituted by the government to collect
arising from violations of the NIRC or TCC and
internal revenue taxes. It includes filing by
other laws administered by the BIR and the BOC,
the government with the probate court claims
where the principal amount of taxes and fees,
against the deceased taxpayer.
exclusive of charges and penalties claimed is
P1,000,000.00 and above.
Resorted to when the tax liability becomes final and
2) RTC, Mun. TC, Metro TC- on criminal offenses
unappealable, or when the decision of the
arising from violations of the NIRC or TCC and
Commissioner becomes final or executory. When:
other laws administered by the BIR and the BOC,
• A tax is assessed and the assessment becomes where the principal amount of taxes and fess
final and unappealable because the taxpayer exclusive of charges and penalties claimed is
fails to file an administrative protest with the BIR less than P1,000,000.00 or where there is no
within 30 days from the receipt of the specified amount claimed (Sec 7[b], RA 9282)
• When an administrative protest filed by the Acquittal of the taxpayer in criminal case does
taxpayer against the assessment is not exonerate him from liability to pay Taxes
o denied, in whole and in part or Under the Penal Code the civil liability is incurred by
o Is not acted upon within 180 days from reason of the offender's criminal act. Stated
submission of the documents, and differently, the criminal liability gives birth to the civil
o The taxpayer adversely affected by the obligation such that generally, if one is not criminally
decision or inaction fails to file an appeal liable under the Penal Code, he cannot become
with the CTA within 30 days from receipt civilly liable thereunder. The situation under the
of said decision or from the lapse of the income tax law is the exact opposite. Civil liability to
180 day period. pay taxes arises from the fact, for instance, that one
has engaged himself in business, and not because of
Where to File any criminal act committed by him. The criminal
1) Court of Tax Appeals- where the principal liability arises upon failure of the debtor to satisfy his
amount of taxes and fees exclusive of civil obligation. The incongruity of the factual
charges and penalties claimed is one million premises and foundation principles of the two cases
pesos and above is one of the reasons for not imposing civil indemnity
2) RTC, Mun. TC,QuickTime™ Metroand aTC- where the on the criminal infractor of the income tax law.
principal amount of taxes and fees, exclusive
TIFF (Uncompressed) decompressor
are needed to see this picture. (Republic vs. Patanao).
of charges and penalties claimed is less than
P1,000,000.00 (Sec 7[c], RA 9282) While there can be no civil action to enforce
ƒ The approval of the CIR is essential in civil collection before the assessment procedures
cases (Sec. 220). However under Sec. 7 of provided in the Code have been followed, there is no
NIRC, the Commissioner may delegate such requirement for the precise computation and
power to a Regional Director. assessment of the tax before there can be a criminal
prosecution under the Code. (Ungab vs. Cusi L-
Defenses which are Precluded by Final and 41919-24, 30 May 1980, 97 SCRA 877)

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Taxation Law Summer Reviewer

Divestiture of property without compensation, in

Effect of Subsequent Satisfaction of Civil Liability consequence of a default or offense.
ƒ The subsequent satisfaction of civil liability by
payment or prescription does not extinguish
ƒ forfeited property shall not be destroyed until
the taxpayer’s criminal liability.
at least 20 days from seizure
No Subsidiary Imprisonment
ƒ In case of insolvency on the part of the ENFORCEMENT OF REMEDY OF FORFEITURE:
taxpayer subsidiary imprisonment cannot be Personal Property Seizure and sale or
imposed as regards the tax which he is destruction of specific
sentenced to pay. However, it may be forfeited property
imposed in cases of failure to pay the fine Real Property Judgment of
imposed. (Sec 280) condemnation and sale
Distille spirits, liquors, Upon forfeiture, may be
Criminal Action May be Filed during the cigars, cigarettes destroyed by order of the
Pendency of an Administrative Protest in the BIR manufactured, products CIR where the sale may
ƒ It is not a requirement for the filing thereof of tobacco and apparatus be injurious to public
that there be a precise computation and used for their production health or prejudicial to
assessment of the tax, since what is involved law enforcement
in the criminal action is not the collection of Other articles subject to Upon forfeiture may be
tax but a criminal prosecution for the violation excise tax which have sold or destroyed at the
of the NIRC. Provided, however, that there is been manufactured or discretion of the CIR.
a prima facie showing of a willful attempt to removed in violation of Forfeited property shall
evade taxes. the Code, dies for not be destroyed until at
ƒ An assessment of a deficiency is not printing or making fake least 20 days from
necessary to a criminal prosecution for willful revenue stamps and seizure
attempt to defeat and evade the income tax. labels
A crime is complete when the violator has
knowingly and willfuly filed a fraudulent return
with intent to evade and defeat the tax. The
perpetration of the crime is grounded upon Effect of the Forfeiture of Property
knowledge on the part of the taxpayer that he ƒ The effect is to transfer the title to the specific
has made an inaccurate return, and the thing from the owner to the government. All
government's failure to discover the error and the proceeds in case of a sale goes to the
promptly to assess has no connections with coffers of the government. The provisions in
the commission of the crime. (Ungab v. Cusi, the Code which entitles the taxpayer to the
L-41919-24, 30 May 1980, 97 SCRA 877) balance of the proceeds in excess of the tax
ƒ See also CIR vs. Pascor Realty, GR No. liability is entirely inapplicable to forfeited
128315, June 29, 1999, which reached the property. It relates solely to the sale of
same conclusion as in Ungab. property distrained to pay taxes of
ƒ HOWEVER, in the case of CIR vs. CA, CTA, delinquents and the disposition of the
& Fortune Tobacco (GR No. 119761, Aug. proceeds thereof. (US v. Surla, 20 Phil 163).
29, 1996), the CIR held a contrary position ƒ There is a great difference between a seizure
under forfeiture and a seizure to enforce a
CIVIL AND CRIMINAL ACTIONS: tax lien. In the former all the proceeds
1. Must be brought in the name of the Government derived from the sale of the thing forfeited
of the Philippines QuickTime™ and a
TIFF (Uncompressed) decompressor
are turned over to the Collector of Internal
2. Conducted by legal officers
are needed ofpicture.
to see this the BIR Revenue; in the latter the residue of such
3. In case of actions for recovery of taxes or proceeds over and above what is required to
enforcement of a fine, penalty or forfeiture, must pay the tax sought to be realized, including
be filed with the approval of the Commissioner expenses, is returned to the owner of the
(Sec. 220) property. (Bank of Phil. Island v. Trinidad, 42
Phil 220).
FORFEITURE: (SEC. 224-225)

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Letter of Authority - 4. Taxpayer to advise the examiner if position

The letter of authority is an official document that paper
empowers a Revenue Officer to examine and
scrutinize a taxpayer’s books of accounts and JEOPARDY ASSESSMENT: a tax
other accounting records, in order to determine assessment made by an authorized revenue
the taxpayer’s correct internal revenue tax officer without the benefit of a complete or
liabilities partial audit if the officer believes that the
assessment and collection will be
jeopardized by the delay caused by the
- WHO ISSUES LOA: taxpayer’s failure to:
o CIR – for those units reporting
a. comply with audit and investigation
directly under him requirements to present his books of
o Regional Directors – for taxpayers accounts and or pertinent records
covered by his particular region. If
b. substantiate all or any of the
the CIR has already issued an LA to deductions, exemptions or credits
investigate a particular taxpayer, the claimed in his return.
Regional Director shall desist from - it is usually when statutory prescriptive
issuing another LA for the same periods for the assessment or collection of
taxes are about to lapse due to taxpayer’s
STEP 3: Issuance of Pre-Assessment Notice
- - Cases involving civil/criminal tax fraud
which fall under the jurisdiction of the tax - - Communication issued by the Regional
fraud division of the enforcement services,
Assessment Division or any other concerned
and BIR office, informing a taxpayer who has
- - policy cases under audit by the special been audited of the findings of the Revenue
teams in national offices
Officer, following the review of these findings.
The assessment shall be in writing, and
PRE-ASSESSMENT STAGE should inform the taxpayer of the law and the
STEP 1: Notice of Informal Conference facts on which the assessment is made;
- - a written notice informing a taxpayer that otherwise, the assessment is void.
the findings of the audit conducted on his - - If the taxpayer disagrees with the findings in
books of accounts and accounting records
the PAN, he has 15 days to file a written
indicate that additional taxes or deficiency reply contesting the proposed assessment.
assessments have to be paid
- - If, after the culmination of an audit, a WHEN PAN NO LONGER REQUIRED:
Revenue Officer recommends the imposition a. mathematical errors
of deficiency tax assessments, this
b. discrepancy has been
recommendation is communicated by the determined between tax withheld
Bureau to the taxpayer concerned during an and amount actually remitted by
informal conference called for this purpose,
the withholding agent
the taxpayer shall have 15 days from receipt c. when a taxpayer who opted to
of the notice of informal conference to claim a refund or tax credit of
explain his side.
excess creditable withholding tax
for a taxable period was
STEP 2: Informal Conference
QuickTime™ and a determined to have carried over
TAKEN UP: decompressor
are needed to see this picture. and automatically applied the
- 1. Discussion on the merits of the
same amount claimed against
the estimated tax liabilities for
- 2. Attempt of taxpayer to convince the
the taxable quarter or quarters of
examiner to conduct a re-investigation and or
the succeeding taxable year, or
d. when the excise tax due has not
- 3. Evaluate if the submission of the waiver of
been paid, or
the SOL is necessary – evaluation may
e. when an article locally purchased
extend beyond 3 years
or imported by an exempt person

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Taxation Law Summer Reviewer

has been sold, traded, or the BIR. Any notice sent to the taxpayer
transferred to a non-exempt demanding the tax liability is an assessment.
GENERAL RULE: Taxes are self-assessing and do
BURDEN OF PROOF: not require the issuance of an assessment notice in
- There is a presumption of order to establish the tax liability of a taxpayer.
correctness and good faith on the Exceptions:
part of the CIR, thus, the burden lies 1. Tax period of a taxpayer is terminated (sec.
on the taxpayer. Otherwise, the 6d, NIRC)
finding of the CIR will be conclusive 2. Deficiency tax liability arisinf from a tax audit
and he will assess the taxpayer. The conducted by a BIR (sec 56b, NIRC)
same is true even if the CIR is 3. Tax lien (sec. 219, NIRC)
wrong, if the taxpayer does not 4. Dissolving Corporation (sec. 52c, NIRC)
controvert it (Cagayan Robina Sugar
Milling V. CA) Requisites of a valid assessment:
Reasons: 1. in writing
> lifeblood theory 2. must state the facts and law upon which it is
> presumption of based (Sec. 228)
regularity in the performance of
public functions Assessments Prima facie correct
Tax assessments by tax examiners are presumed
Note: assessments by the BIR must correct and made in good faith. The taxpayer has the
have on its face the law and facts duty to prove otherwise. (Sy Po v. CTA, GRN L-
upon which the presumption is 81446 August 18, 1988.)
Assessment Discretionary on the part of
Since the office of the Commissioner of Internal
Notice of Assessment is a formal letter of Revenue is charged with the administration of
demand where a declaration of deficiency taxes revenue laws, which is the primary responsibility of
is issued to a taxpayer who fails to respond to a the executive branch of the government, mandamus
pre-assessment notice within the prescribed may not lie against the Commissioner to compel him
period of time, or whose reply to the PAN was to impose a tax assessment not found by him to be
found to be without merit. This is commonly due or proper for that would be tantamount to a
known as the Final Assessment Notice. An usurpation of executive functions. (Meralco Securities
assessment contains not only a computation of vs. Savellano, L-36181 and L-36748, Oct. 23, 1992).
under declaration of taxable sales, receipts or
income, OR a substantial overstatement of
deductions Void vs. Illegal Assessment
- - Failure to report sales, receipts, or income An assessment is illegal and void when the assessor
in an amount exceeding 30% of that declared has no power to act at all. It is erroneous when the
per return, and a claim of deductions assessor has the power but errs in the exercise of
exceeding 30% of actual deductions that power.
constitute substantial under declaration or It is settled in our jurisdiction that where an
over declaration. assessment is illegal and void, the remedy of a
- - The state cannot be estopped by the taxpayer, who has already paid the realty tax under
QuickTime™ and a
neglect of its
TIFF agents and
(Uncompressed) officers. The rule of
are needed to see this picture.
protest, is to sue for refund in the competent court.
estoppel cannot be invoked by the taxpayer On the other hand, where the assessment is merely
in order to preclude the collection of taxes erroneous, his recourse is to file an appeal in the
that is rightfully due the government. Provincial Board of Assessment Appeals within 60
days from receipt of the assessment. (GR L-24213
What Constitutes an Assessment? March 13, 1968)
ƒ There is no form for an assessment, it can be
written anywhere as long as it is signed by

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PRESCRIPTIVE PERIODS FOR THE ƒ Fraud must be the product of

ASSESSMENT AND COLLECTION OF TAXES a deliberate intent to evade
Rationale taxes (Jalandoni V.
ƒ The periods are designated to secure the Republic)
taxpayers against unreasonable investigation ƒ Simple statement that return
after the lapse of the period prescribed. They filed was not fraudulent does
are also beneficial to the government not disprove existence of
because tax officers will be obligated to act fraud (Tayengco V.
promptly. Collector)
ƒ Substantial under-
declarations of income for six
Rules on Prescription consecutive years
ƒ When the tax law itself is silent on demonstrate fraudulence of
prescription, the tax is imprescriptible returns (Perez V. CTA)
ƒ When no return is required, tax is ƒ Presence of fictitious
imprescriptible expenses, with no evidence
N.B. Remedy of taxpayer is to file a return presented, proves existence
ƒ Defense of prescription is waivable of fraud (Tan Guan V. CIR)

No Fraud in the following cases:

Prescriptive Period for the Assessment of Taxes ¾ mere understatement in the tax
a) General Rule: return will not necessarily imply fraud
ƒ 3 years after the date the return is due or (Jalandoni V. Republic)
filed, whichever is later (Sec 203) ¾ Sale of real property for less than
FMV is not necessarily a false return
b) Exceptions: ( CIR v.Ayala Securities)
ƒ failure to file return: 10 years from date of ¾ Fraud is a question of fact and the
discovery of the omission to file the return circumstances constituting fraud
(Sec 222A) must be alleged and proved in the
ƒ False or fraudulent return with intention to trial court (CIR v. Ayala Securities)
evade the tax: 10 years from the date of the ¾ Farud is never imputed and the
discovery of the falsity or fraud (Sec 222A) courts never sustain findings of fraud
™ Nothing in Sec 222A shall be construed to upon circumstances that only create
authorize the examination and investigation suspicion ( CIR v. Javier)
or inquiry into any tax return filed in ¾ Mistakes of revenue officers on three
accordance with the provisions of any tax different occasions remove element
amnesty law or decree of fraud ( Aznar V. CTA and
™ Fraud must be alleged and proved as a fact. Collector)
It must be the product of a deliberate intent to
evade taxes. It may be established by the: ƒ Agreement in writing to the extension of the
1. intentional and substantial period to assess between the CIR and the
understatement of the tax liability by taxpayer before the expiration of the 3 year
the taxpayer (substantial period. The extension period agreed upon
underdeclaration of income; >30% of can further be extended by a subsequent
that declared [Sec. 248]) written agreement made before the
2. intentional and substantial expiration of the extended period previously
overstatement QuickTime™ andof a deductions of
TIFF (Uncompressed) decompressor
agreed upon. (Sec. 222(b))
exemptions (>30%
are needed to see this picture. of the actual ƒ Written waiver or renunciation of the
deductions [Sec. 248]) original 3 years limitation, signed by the
3. recurrence of the above taxpayer.
™ Falsity constitutes a deviation from the truth Notice of the assessment is released, mailed or
due to mistake, carelessness or sent to the taxpayer also within the 3 year period.
ignorance. It is not required that the notice be received by
ƒ There is fraud in the following cases: the taxpayer within the prescribed period. But the

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Taxation Law Summer Reviewer

sending of the notice must clearly be proven. 4. when the warrant of distraint or levy is duly
(Basilan Estate v. CIR, 21 SCRA 17). served and no property is located
5. when the taxpayer is out of the Philippines
Amendment of Return (Sec. 223)
ƒ If the amended return is substantially
different from the original return, the A Tax Return is Considered Filed for Purposes of
prescriptive period shall be counted from the Starting the Running of the Period of Limitation
filing of the amended return. But the said • The return is valid- it has complied
period shall run from the filing of the original substantially with the requirements of the law
return, if the same is sufficiently complete to • The return is appropriate- it is a return for the
enable the CIR to make proper assessment ( particular tax required by law.
CIR v. Phoenix Assurance Co.) • a defective tax return is the same as if no
ƒ Within 3 years from the date of such filing, return was filed at all.
the same may be modified, changed or
amended, provided that no notice for audit or Prescriptive Period for the Violation of Any
investigation of such return, statement, or Provision of the Tax Code (Sec. 281)
declaration has in the meantime been ƒ should be filed 5 years from the (1) day of the
actually served upon the taxpayer. commission of the violation of the law, and if
ƒ Effect of filing a wrong return: the 10 year the same shall be not known, from the (2)
prescriptive period for cases where returns discovery thereof and the institution of the
are not filed applies. judicial proceedings for its investigation and
punishment (Lim v. CA 190 SCRA 616)
Prescriptive Period for the Collection of Taxes 1. Charge is failure or refusal to pay deficiency
• 5 years – from assessment or within period for income-committed only after the finality of
collection agreed upon in writing before the assessment coupled with the taxpayer’s
expiration of the 5 year period (Sec 222) willful refusal to pay the taxes within the
• 10 years – after discovery in case of false or allotted period
fraudulent return with intent to evade or failure to 2. Charge is filing of false or fraudulent return
file return, without need for an assessment (Sec with intent to evade the assessment- in
222) addition to the fact of discovery, there must
be a judicial proceedings for the
Prescriptive Period where the Government’s investigation and punishment of the tax
Action is on a Bond which the Taxpayer Executes offense before the 5 year prescriptive period
in order to Secure the Payment of his Tax begins to run.
• 10 years under Art. 1144(1) of the Civil Code WHEN TAX DEEMED COLLECTED:
and not 3 years under the NIRC. In this case 1. By summary remedies – when the
the taxpayers failed to pay the installments Government avails of the summary
due despite demand. Hence, the method of distraint and levy
Government sued on the bond which is a procedure
separate and distinct obligation of the parties 2. By judicial remedies – by filing a
thereto. The action is for the enforcement of complaint through the proper court
a contractual obligation. (Republic v.
Araneta, GR No. L-14142, May 30, 1961) Note: if the decision of the CIR on
protested assessment is appealed to the
Grounds for Suspension of the Running of the CTA, the collection of tax is considered
Statute of Limitation QuickTime™ and a
TIFF (Uncompressed) decompressor begun when the Government filed its
are needed to see this picture.
1. when the CIR is prohibited from making the answer to the taxpayer’s petition for
assessment or beginning the distraint or levy review. (Fernandez Hermanos v. CIR)
or a proceeding in court, and for 60 days
2. when the taxpayer requests for a -Persons instrumental in the discovery of
reconsideration which is granted by the CIR violations of the NIRC and in the discovery and
3. when the taxpayer cannot be located in the seizure of smuggled goods
address given by him in the return, unless he
informs the CIR of any change in his address REQUISITES TO QUALIFY FOR THE REWARD:

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1. Person is not an internal revenue official or period is optional to the taxpayer. The
employee, public official, or employee or relative relevant supporting documents mentioned in
within the 6th degree of consanguinity the law refers to such documents which the
2. Voluntarily gives definite and sworn information: taxpayer feels would be necessary to support
a. not yet in the possession of the BIR his protest and not what the Commissioner
b. leading to discovery of frauds feels should be submitted, otherwise the
c. resulting in the discovery of revenue, taxpayer would always be at the mercy of the
surcharges and fees, and/or, conviction of BIR which may require production of such
the guilty party documents which taxpayer could not
d. not refer to a case already pending or produce. (Standard Chartered Bank v. CTA,
previously investigated or examined by the Case No. 5696, Aug. 16, 2001)
CIR or his agents or the SOF or his agents ™ A protest is a vital document which is a
formal declaration of resistance of the
Amount of Reward taxpayer. It is a repository of all arguments. It
- - 10% of the revenues, surcharges or fees can be used in court in case of administrative
recovered and/or fine/penalty imposed, or remedies have been exhausted. It is also the
P1,000,000, whichever is LOWER. formal act of the taxpayer questioning the
- - the cash rewards shall be subject to income official actuations of the CIR. This is
tax at the rate of 1-% equivalent to a pleading.
b) Entering into a compromise (Sec. 204)
¾ Status offering rewards must be
liberally construed in favor of CHARACTERISTICS OF A VALID PROTEST:
informers and with regard to the 1. It is made in writing, and addressed to the
purpose for which they are intended, Commissioner of Internal Revenue
with mere technicality yielding to the 2. It contains information as specified in RR12-85
substantive purpose of the law 3. It states the facts, applicable law, rules and
¾ Same amount shall be given if the regulations or jurisprudence on which his protest
offerender offered to compromise is based, otherwise the protest shall be
and such offer has been accepted considered void and without force and effect.
and collected by the CIR 4. It is filed within the period prescribed by law.
¾ If no revenue, surcharge, or fees be
actually collected, such person is not B. After payment of taxes
entitled to a reward a) Claim for refund or tax credit
¾ For discovery and seizure of • Within 2 years from the date of payment
SMUGGLED GOODS -> the cash regardless of any supervening cause
reward is 10% of the FMV of the (Sec. 228)
smuggled and confiscated goods, or
P1,000,000, whichever is lower. 2. Judicial Relief
A. Civil Action
a) Appeal to the CTA
PART II. REMEDIES AVAILABLE TO THE • within 30 days from receipt of the decision on
TAXPAYER the protest or from the lapse of the 180
ƒ General Remedies days inaction of the Commissioner (Sec.
1. Administrative • Within the 30 day period to appeal, the
A. Before payment TIFF
of taxes QuickTime™ and a
(Uncompressed) decompressor taxpayer mat file several motions for
a) protest of assessment
are needed to see this picture.
reconsideration with the Commissioner
• Filing a petition for reconsideration or instead of at once filing his petition for
reinvestigation within 30 days from receipt of review before the CTA. The subsequent
assessment. motion for reconsideration tolls the
• Within 60 days from filing, all relevant running of the prescriptive period. The
documents should be filed, otherwise prescriptive period begins to run again
assessment becomes FINAL and cannot be when the taxpayer receives the letter
appealed (Sec 228) denying its request/motion for recon. He
™ Submission of documents within the 60 days then only has the remainder of the

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original 30-day period to appeal to the of Protest which serves as a Basis for Appeal to
CTA. (Surigao Electric Co. vs. CA, 1974) CTA
• A division of the CTA shall hear the appeal. ƒ filing by the BIR of a civil suit for collection of
(sec. 11, RA 1125) the deficiency tax (CIR v. Union Shipping
b) Action to contest forfeiture of chattel Corp. 185 SCRA 547)
• at any time before the sale or destruction ƒ indication to the taxpayer by the
thereof, to recover the same, and upon Commissioner in clear and unequivocal
giving proper bond, enjoin the sale; or language of his final denial. (CIR v. Union
• after the sale and within 6 months, an action Shipping Corp)
to recover the net proceeds realized at ƒ BIR demand letter reiterating his previous
the sale (Sec 231) demand to pay, sent to taxpayer after his
c) Action for damages protest of the assessment (Surigao Electric
• against a revenue officer by reason of any Co. Inc. v. CTA, 57 SCRA 523)
act done in the performance of official duty ƒ The actual issuance of a warrant of distraint
(Sec 227) and levy in certain cases cannot be
considered as final decision on a disputed
3. Criminal Action settlement (CIR v. Union Shipping Corp)
a) Against erring BIR officials and employees
b) Injunction Protest of Assessment:
• When the CTA in its opinion the 1. File a request for reinvestigation or
collection by the BIR may jeopardize the reconsideration within 30 days from receipt of the
taxpayer. Court may require deposit of assessment
an amount or surety bond for not more • request for reinvestigation-
than double the amount • a plea for re-evaluation of an assessment
™ with the enactment of RA 9282, the on the basis of newly discovered or
CTA has now jurisdiction over criminal additional evidence that a taxpayer
cases intends to present in the reinvestigation.
Involves a question of fact or law or both.
Denial of Protest: • request for reconsideration-
1. Direct Denial • a plea for re-evaluation of the
The decision of the Commissioner or his duly assessment on the basis of existing
rep shall (a) state the facts, applicable law, rules and records without need of additional
regulations or jurisprudence on which his protest is evidence. Involves a question of fact or
based, otherwise the protest shall be considered void law or both. (Revenue Regulation No.
and without force and effect, in which case the same 12-85)
shall not be considered a decision a disputed
assessment and (b) that the same is his final 2. Within 60 days from filing of protest, all relevant
decision. (sec. 3.1.5, RR 12-99) supporting documents should have been
submitted, otherwise, the assessment shall
2. Indirect Denial become FINAL (cannot be appealed). (Sec. 228)
a. Commissioner did not rule on the taxpayer’s MR of
the assessment – it was only when respondent Appeal of Protest to the CTA (Judicial Relief):
received summons on the civil action for the (Sec. 228)
collection of deficiency income tax that the period to 1. Grounds:
appeal commenced to run. (CIR vs. Union Shipping a) if the protest is denied in whole or in part
Corp.) or
QuickTime™ and a
b. Referral by the Commissioner
TIFF (Uncompressed) decompressor of request for b) is not acted upon within 180 days from
are needed to see this picture.
reinvestigation to the Solicitor General (Republic vs. submission of documents
Lim Tian Teng Sons) 2. Appellate Court: Court of Tax Appeals
c. Reiterating the demand for immediate payment of 3. Period to appeal:
the deficiency tax due to taxpayer’s continued refusal a) within 30 days from receipt of decision
to execute waiver (CIR vs. Ayala Securities Corp.) denying the protest or
d. Preliminary collection letter may serve as b) 30 days from the lapse of 180 day period
assessment notice (United Int’l Pictures vs. CIR) 4. Effect of failure to appeal: the decision shall be
final, executory and demandable (NOTE: See
Acts of BIR Commissioner Considered as Denial Lascona doctrine which gives the taxpayer the

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option either to appeal to the CTA or to await the

decision of the CIR.)

If taxpayer is not satisfied with the CTA Division’s Appeal to the SC within 15 days from the receipt of the CTA en banc decision
1. He may first file a motion for recon before the
same division of the CTA within 15 days from notice FILING OF CLAIM FOR TAX REFUND OR TAX
thereof. (sec. 11, RA1125) CREDIT
2. Then, a party adversely affected by a resolution of Parties Entitled to Refund
a division of the CTA on a motion for recon may file a
petition for review with the CTA en banc. (sec. 18, RA GR: The person entitled to ask for a refund is the
1125) taxpayer who paid the same

If the taxpayer is not satisfied with the decision of the Exceptions:

CTA en banc, a party adversely affected may file with Case Who is Reason
the SC a verified petition for review on certiorari entitled to
pursuant to Rule 45 of the Rules of Court. (sec. 19, ask for
RA 1125) refund
Where tax The taxpayer Because the sales tax
REGLEMENTARY PERIODS IN INCOME TAX has been (even if tax is imposed directly on
IMPOSED BY LAW UPON THE TAXPAYER shifted has been the seller as an
(Pursuant to RR 12-99, Sec 228 and Rules of actually occupation tax for
Court) shifted by the selling Once
BIR makes a tax assessment taxpayer to his recovered, the seller
customers as must hold the
in sales tax refunded taxes in trust
If taxpayer is not satisfied with the assessment file a and even if for the individual
protest within 30 days from the receipt thereof the tax has purchasers who
been billed as advanced payment
a separate thereof and whose
Submit supporting documents within 60 days from date of the filing item in the name must appear on
of the protest invoice) (CIR his records
vs. American
Where Theater goers
If protest is denied, elevate the matter to the CIR within 30 days payer is are not
from the receipt of the decision of the CIRs duly authorized not the entitled to
representative taxpayer claim refund
(e.g. of such taxes
theater (Medina vs.
Appeal to the Division of CTA within 30 days from the receipt of the final owners City of
decision of CIR or his duly authorized representative (taxpayer has the who paid Baguio)
option to appeal straight to CTA upon receipt of the decision of CIR illegal
[Lascona doctrine]) municipal
taxes billed
QuickTime™ and a
to and
TIFF (Uncompressed) decompressor
are needed to see this picture. collected
If the CIR or his rep fails to act on the protest within 180 days from date from
of submission by taxpayer, the latter may appeal within 30 days from theater
Where Withholding "Taxpayer" is any
payer is agent (CIR vs. person subject to tax
Appeal to the CTA en banc from receipt of the decision of CTA division withholding Procter & imposed by this title
(after denial by CTA division of motion for reconsideration) agent Gamble) (income tax). The
withholding agent is

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Taxation Law Summer Reviewer

directly and that may arise after the payment

independently liable c) a return filed showing an overpayment
for the correct amount shall be considered a written claim for
of tax that should be credit or refund
withheld, and of 3. Suit or proceeding for refund
deficiency a) a claim for refund or credit has been filed
assessments, with the Commissioner
surcharges and b) the suit may be maintained whether or
penalties not such tax/penalty/sum has been paid
Where Donee is the under protest
donor's tax proper party to c) in any case, suit must be filed within 2
was claim refund yrs. from date of payment of the
assumed of the donor's tax/penalty regardless of any
by donee tax (even if supervening cause that may arise after
the tax was payment
advanced by d) the Commissioner may, even without a
the donor) written claim, refund or credit a tax,
e) where on the face of the return upon
which payment was made, payment
What is the nature of as a claim for refund? appears to be erroneous. (Sec. 204 C,
It partakes of the nature of an exemption and is 229)
strictly construed against the claimant. He burden of 4. Tax Credit Certificate
proof is on the taxpayer claiming the refund that he is a) may be applied against any internal
entitled to the same (CIR v. Tokyo). revenue tax, EXCEPT withholding taxes
b) original copy is surrendered to the
When are there erroneously paid, or illegally revenue officer
assessed or collected taxes? c) no tax refund will be given resulting from
Taxes are erroneously paid when a taxpayer pays availment of incentives granted by law
under a mistake of fact, such as, he is not aware of where no actual payment was made
an existing exemption in his favor at the time that (Sec. 204 C)
payment is made. Taxes are illegally collected when 5. Forfeiture of cash refund/tax credit
payments are made under duress. a) Forfeiture of refund in favor of the
government when a refund check or
When may taxes be refunded or credited? warrant remains unclaimed or uncashed
1. Grounds for Tax refunded or credited: within 5 yrs. from date of mailing or
[EPWroSUn] delivery
a) Taxes erroneously or illegally received b) Forfeiture of Tax Credit-a tax credit
b) Penalties imposed without authority certificate which remains unutilized after
c) Any sum alleged to have been 5 yrs. from date of issue, shall be invalid,
excessively or in any manner wrongfully UNLESS revalidated. (Sec. 230)
d) Refund the value of internal revenue Commencement of 2-year period under Sec.
stamps when returned in good condition 204(3) and 229
by the purchaser
e) Redeem or change unused stamps
rendered unfit for use and refund their Case 2-year Notes
value upon proof of destruction, in the period starts
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discretion of the Commissioner
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2. Procedure for credit/refund If the tax sought From date tax
a) taxpayer files in writing with the to be refunded was paid
Commissioner a claim for credit or refund is illegally or (CIR v
b) filed within 2 yrs after the payment of the erroneously Victorias
tax or penalty collected Milling)
ƒ no suit or proceeding shall begun If the tax is paid From date of There is no
after the expiration of the said 2 yrs in installment or the last or payment until
regardless of any supervening cause only in part final the whole/entire

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installment or tax liability is income tax

payment fully paid (CIR vs. TMX
(CIR vs. Sales)
Prieto; CIR v If tax was not From the Before the right
Palanca; CIR erroneously or date the to refund or
v. TMX illegally paid but taxpayer credit arises,
Sales) the taxpayer becomes there is
If the taxpayer From Merely making became entitled entitled to absolutely no
merely made a conversion of a deposit is not to refund refund and basis to file a
deposit the deposit to equivalent to because of not from the claim with the
payment payment until supervening date of CIR or
(Union the amount is circumstances payment (CIR commence a
Garment v actually applied vs. Don suit in court
Coll) to the specific Pedro Central
purpose for Azucarera)
which it was
deposited Payment Under Protest is NOT Necessary under
If tax has been From date it A taxpayer who NIRC
withheld from falls due at contributes to ƒ A suit or proceedings for tax refund may be
source (through the end of the the withholding maintained whether or not such tax, penalty or
the withholding taxable year tax system sum has been paid under protest or duress (Sec.
tax system) (Gibbs performs and
vs 229)
CIR) He is extinguishes ƒ Similarly, payment under protest is not necessary
deemed to
his tax in refund for local taxes. (Sec. 196 LGC),
have paid his obligation for however, under protest is necessary to claim for
tax liability the year (a) real property taxes (Sec. 252 LGC)
when theconcerned. In (b) custom duties (Sec 2308 TCC)
same fallsother words, he
due at the is paying his Suspension of the 2 yr Prescriptive Period
end of the tax liabilities for 1) there is a pending litigation between the gov’t &
taxable year that year. the taxpayer
(Aguilar vs. 2) CIR in that litigated case agreed to abide by the
CA) decision of the SC as to the collection of taxes
Corporate At the It is only then relative thereto (Panay Electric Co. v. Collector, May
taxpayer earliest, on that the 28, 1858)
the date of corporation can
the filing of ascertain Interest on Tax Refunds
the adjusted whether it General Rule
final return made profits or ƒ Government cannot be required to pay
(ACCPA incurred losses interest on taxes refunded to the taxpayer in
Investment in its business the absence of a statutory provision clearly or
vs. CA) operations expressly directing or authorizing such
The 2-yr payment. (CIR v. Sweeney, 106 Phil 59)
period Exception
provided in 1) When the CIR acted with patent arbitrariness.
Sec QuickTime™ 229 and a
Arbitrariness presupposes inexcusable or
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are needed to see thisbe
picture. obstinate disregard of legal provisions. (CIR v.
computed Victoria Milling, L-19667, Nov. 29, 1966)
from the time 2) Under Sec. 79 (c)(2) with respect to income
of filing of the taxes withheld on the wages of the EEs
Return or
Annual ITR ƒ In case of the CIRs final denial of the claim
and final for refund, the 30 days period to appeal with
payment of the CTA must be within the 2 yr preemptory

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period for instituting a judicial action main tax required to be paid. It is not a
criminal penalty but a civil administrative
TITLE IX. COMPLIANCE REQUIREMENTS sanction provided primarily as safeguard for
the protection of the State revenue and to
Examination and inspection of all books and reimburse the government for the expenses
of investigation and the loss resulting from
records shall be made only once in a taxable
year, EXCEPT: the taxpayer’s fraud. A surcharge added to
1. Fraud, irregularity or mistakes, as determined by the main tax is subject to interest.
the Commissioner
2. The taxpayer requests reinvestigation. General Provisions
3. Verification of compliance with withholding tax laws 1)The additions to the tax or deficiency tax apply
and regulations to all taxes, fees and charges imposed in this
4. Verification of capital gains tax liabilities Code.
5. In the exercise of the Commissioner’s power to 2)The amount so added to the tax shall be
issue an access letter. (sec. 235) collected at the same time, in the same
manner and as part of the tax.
3)If the withholding agent is the Government or
Every person subject to any internal revenue tax
shall register once with the appropriate Revenue any of its agencies, political subdivisions or
District Officer: instrumentalities, or a government-owned or -
- Within ten days from date of employment, or controlled corporation, the employee
- On or before the commencement of responsible for the withholding and
business, or remittance of the tax shall be personally
- Before payment of any tax due, or liable for the additions to the tax.
- Upon filing of a return, statement or 4)The term ‘person’, includes an officer or
declaration as required under the Code (sec. employee of a corporation who as such
236) officer, employee or member is under a duty
to perform the act in respect of which the
violation occurs.
Non-Retroactivity of Rulings (Sec. 246, NIRC)
Any revocation, modification or reversal of any of Additions to Tax
the rules and regulations promulgated in accordance 1. Civil Penalties (Sec. 248)
with the preceding Sections or any of the rulings or A) Penalty: 25% of the amount due, in addition to
circulars promulgated by the Commissioner shall not the tax required to be paid.
be given retroactive application if the revocation, • In case of the following: RIDT (lets get RID of
modification or reversal will be prejudicial to the Tax)
taxpayers, except in the following cases: a) Failure to file any Return and pay the tax
(a) Where the taxpayer deliberately misstates or on the date prescribed; or
omits material facts from his return or any document b) Filing a return with an Internal revenue
required of him by the BIR; officer other than those with whom the
(b) Where the facts subsequently gathered by return is required to be filed, unless
the BIR are materially different from the facts on otherwise authorized by the
which the ruling is based; or Commissioner; or
(c) Where the taxpayer acted in bad faith. c) Failure to pay the Deficiency tax within
the time prescribed for its payment in the
TITLE X. STATUTORY OFFENSES & PENALTIES notice of assessment; or
d) Failure to pay on or before the date
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prescribed for its payment:
are needed THE
to see TAX
this picture.
1. the full or part of the amount of
(Sec. 247-252) Tax shown on any return
required to be filed;
Definitions 2. the full amount of tax due for
• Increments to the basic tax incident due to which no return is required to be
the taxpayer’s non-compliance with certain filed.
legal requirements.
• Surcharge, defined. A surcharge is a civil B) Penalty: 50% of the tax or of the deficiency
penalty imposed by law as an addition to the tax, in case any payment has been made on the

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basis of a return before the discovery of the of funds that rightfully should be in the
falsity or fraud. government's hands
• In case of: [ FiFa ]
a)Willful neglect to File the return within Interest on Extended Payment.
the period prescribed; or 1) any person who is qualified and elects to
b)False or fraudulent return is willfully pay the tax on installment but fails to pay
made, in case any payment has the tax, or any installment, or any part on
been made on the basis of such or before the date prescribed; or
return before the discovery of the 2) where the Commissioner has authorized
falsity or fraud. an extension of time within which to pay
• Prima facie evidence of a false or a tax or a deficiency tax or any part
fraudulent return as determined by the thereof,
Commissioner pursuant to the rules and 3) from the date of notice and demand until
regulations promulgated by the Sec. of it is paid.
1. substantial under declaration of 3. Failure to File Certain Information Returns
taxable sales, receipts or income (Sec. 250)
- failure to report sales, receipts A) Penalty: P 1,000 for each failure
or income in an amount B) The aggregate amount for all such failure
exceeding 30% of that declared shall not exceed P 25,000 during a
per return calendar year
2. substantial overstatement of C) Upon notice and demand by the
deductions - claim of deductions Commissioner
in an amount exceeding 30% of D) Unless it is shown that such failure is due
actual deductions to reasonable cause and not to willful
2. Interest (Sec. 249) In the case of each failure to
A) There shall be assessed and collected an file:
Interest at 20% per annum on any unpaid 1) information return;
amount of tax 2) statement or list;
B) OR higher rate prescribed by rules and 3) keep any record;
regulations from the date prescribed for 4) supply any information
payment until the amount is fully paid. E) required by this Code or by the
C) FROM the date prescribed for its payment Commissioner on the date prescribed
until the full payment. thereof.
(a) Deficiency Interest in the tax due
(b) Delinquency Interest. - In case of failure
to pay: 4. Failure of a Withholding Agent to Collect and
1. tax due on any return required to be Remit Tax (Sec. 251)
filed, or A) Penalty: Amount of the tax not withheld, or
2. tax due for which no return is not accounted for and remitted plus other
required, or penalties.
3. A deficiency tax, or any surcharge or B) Liable only upon conviction
interest thereon on the due date • In case of the following:
appearing in the notice and 1. Any person required to withhold,
demand of the Commissioner. account for, and remit any tax; or
D) Interest shall TIFFform part of
(Uncompressed) the tax.
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2. Who willfully fails to withhold such
are needed to see this picture.
tax, or account for and remit such
Bureau of Internal Revenue Ruling #019-2003 tax; or
• Pursuant to Section 249 of the 1997 Tax Code, 3. Aids or abets in any manner to
the imposition of interest on delinquency is evade any such tax or the payment
mandatory. (Jamora vs. Meer, 74 Phil. 22) The thereof,
imposition of interest is but a just compensation
to the state for the delay in the payment of the 5. Failure of a Withholding Agent to Refund
tax, and for the concomitant use by the taxpayer Excess Withholding Tax. (Sec.252)
ƒ Penalty: Amount of refund which was not

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refunded to the employee resulting from any 1. Willful attempt to evade or defeat tax.
excess of the amount withheld over the tax 2. Failure to file return, supply correct and
actually due on their return plus other accurate information, pay tax, withhold and
penalties in case any employer/withholding remit tax and refund excess taxes withheld
agent fails or refuses to refund excess on compensation.
withholding tax. 3. Penal liability of corporation.
4. Penal liability for making false entries,
CHAPTER II- CRIMES, OTHER OFFENSES AND records, or reports, or using falsified or fake
FORFEITURES accountable forms.
5. Unlawful pursuit of business.
A. General Provisions (Sec. 253) 6. Illegal collection of foreign payments.
1. Any person convicted of a crime under this 7. Unlawful possession of cigarette paper in
Code is liable for the payment of the tax and bobbins or rolls, etc.
is subject to the penalties imposed herein. 8. Unlawful use of denatured alcohol.
2. Payment of the tax due after apprehension is 9. Shipment or removal of liquor or tobacco
not a valid defense in any prosecution for products under false name or brand or as an
violation of any provision of this Code or in imitation of any existing or otherwise known
any action for the forfeiture of untaxed product name or brand.
articles. 10. Unlawful possession or removal of articles
3. A person is liable in the same manner as the subject to excise tax without payment of the
principal when he: tax.
a) willfully aids or abets in the commission 11. Failure or refusal to issue receipts or sales or
of a crime penalized herein or commercial invoices, violations related to the
b) causes the commission of any such printing of such receipts or invoices and other
offense by another. violations.
4. If the offender is not a citizen of the 12. Offenses relating to stamps.
Philippines: 13. Failure to obey summons.
a) he shall serve the sentence; and 14. Declarations under penalties of perjury.
b) Deported immediately after serving the
sentence without further proceedings D. Other crimes and offenses
for deportation. 1. Misdeclaration or misrepresentation of
5. If he is a public officer or employee: manufacturers subject to excise tax.
a) the maximum penalty prescribed for 2. Forfeiture of property used in unlicensed
the offense shall be imposed; and business or dies used for printing false
b) he shall be dismissed from the public stamps, etc.
service and perpetually disqualified 3. Forfeiture of goods illegally stored or
from holding any public office, to vote removed.
and to participate in any election.
6. If the offender is a Certified Public Attempt to Evade or Defeat Tax. (Sec. 254)
Accountant, his certificate as a Certified • Penalty, upon conviction:
Public Accountant shall, upon conviction, be ƒ Fine - P30,000 or 100,000; and
automatically revoked or cancelled. ƒ Imprisonment - 2 to 4 years;
7. In the case of associations, partnerships or ƒ Plus other penalties
corporations, the penalty shall be imposed on • Who is liable: Any person who willfully
the partner, president, general manager, attempts in any manner to evade or defeat
branch manager, treasurer, officer-in-charge, any tax or the payment thereof.
and employees responsible
QuickTime™ and afor the violation.
TIFF (Uncompressed) decompressor • The conviction or acquittal obtained under
8. The fines to are beneeded
imposed for any violation of
to see this picture.
this Section shall not be a bar to the filing
the provisions of this Code shall: of a civil suit for the collection of taxes.
a) not be lower than the fines imposed
herein or Failure to File Return, Supply Correct and
b) twice the amount of taxes, interests Accurate Information, Pay Tax, Withhold and
and surcharges due from the taxpayer, Remit Tax and Refund Excess Taxes Withheld on
whichever is higher. Compensation. (Sec. 264)

C. Crimes Crime 1: Willful Omission of Filing and Payment

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Obligations Accountable Forms (Sec. 257)

• Penalty, upon conviction:
o Fine - P10,000 or more; and • Penalty, upon conviction for each act or
o Imprisonment - 1 to 10 years; omission:
o Plus other penalties • Fine - P50,000 - 100,000; and
• Person liable: Any person required: • Imprisonment - 2 to 6 years;
1. to pay any tax, • Special Penalties
2. make a return, 1) If Offender is a Certified
3. keep any record, or Public Accountant, his
4. supply correct and accurate certificate shall be
information, automatically revoked or
• Nature of Offense: Willful failure to cancelled upon conviction.
1. pay tax, 2) In the case of foreigners,
2. make a return, conviction under this Code
3. keep the record, shall result in his immediate
4. supply such correct and accurate deportation after serving
information, sentence, without further
5. withhold or remit taxes withheld, proceedings for deportation.
6. refund taxes withheld on
compensation, at the time or • Who is liable:
times required. • Any financial officer or
• Independent Certified Public
Crime 2: Withdrawal of Returns Filed Accountant engaged to examine and
• Penalty, upon conviction: audit books of accounts of taxpayers
o Fine - P10,000 - 20,000; and under Sec.232 (A)
o Imprisonment - 1 to 3 years; • Any person under his direction.
o Plus other penalties
ƒ Person liable: Any person who: • Offense: FVC
o attempts to make it appear for any 1) Willfully Falsifies any report
reason that he or another has in fact or statement bearing on any
filed a return or statement, or examination or audit
o actually files a return or statement 2) Renders a report, including
and subsequently withdraws the exhibits, statements,
same return or statement after schedules or other forms of
securing the official receiving seal or accountancy work which has
stamp of receipt of an internal not been Verified by him
revenue office wherein the same was personally or under his
actually filed. supervision or by a member
of his firm or by a member of
Penal Liability of Corporations (Sec 256) his staff in accordance with
sound auditing practices, or
• Penalty, upon conviction: Fine - P50,000 - 3) Certifies financial statements
100,000 of a business enterprise
o In addition to the penalties containing an essential
imposed upon the responsible misstatement of facts or
corporate officers, partners, or omission in respect of the
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• Who is liable: Any of the following liable deduction and exemption of
for any of the acts or omissions penalized his client; or
under this Code.
1. corporation, E. Prescription of Actions
2. association or • All violations of any provision of the Code
3. general co-partnerships shall prescribe after five (5) years

Penal Liability for Making False Entries. Records CHAPTER III – OTHER PENAL PROVISIONS
or Reports, or Using Falsified or Fake

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Informer's Reward to Persons Instrumental in the • A person is instrumental in the discovery

Discovery of Violations of the National Internal and in collection or seizure when he
Revenue Code and in Discovery and Seizure of voluntarily gives definite and sworn
Smuggled Goods (Sec. 282) information :
o not yet in the possession of the
1. Amount of Reward Bureau of Internal Revenue,
• For Violations of Internal Revenue Code o leading to the discovery of frauds
o 10% of the revenues, surcharges upon the internal revenue laws
or fees recovered and/or fine or and violations of any of the
penalty imposed and collected or provisions thereof,
P1M per case, whichever is o thereby resulting in the recovery
lower. Note that where the of revenues, surcharges and
offender has offered to fees and/or the conviction of the
compromise and his offer has guilty party and/or the imposition
been accepted, the same of any fine or penalty.
amount of reward shall be given
to the informer.
o No revenue, surcharges or fees
(RA 7160-Effectivity: January 1, 1992)
actually recovered or collected:

• For Discovery and Seizure of Smuggled Book II

Goods Local Taxation and Fiscal Matters
o 10% of the FMV of the smuggled
and confiscated goods or P1M Title I
per case, whichever is lower. LOCAL GOVERNMENT TAXATION

• The cash rewards of informers subject to CHAPTER 1 - GENERAL PROVISIONS

income tax, collected as a final withholding
tax, at the rate of 10%. Sources of Revenues:
1. Internal Revenue Allotment (IRA)
National internal revenue collected and not
2. Persons Entitled to Reward applied as hereinabove provided or otherwise
specially disposed of by law shall accrue to the
• For Violations of Internal Revenue Code National Treasury and shall be available for the
o Any person, except an internal general purposes of the Government, with the
revenue official or employee, or exception of the amounts set apart by way of
his relative within the sixth allotment as provided for under Republic Act No.
degree of consanguinity. 7160, otherwise known as the Local Government
Code of 1991. (Sec. 283, NIRC)
• For Discovery and Seizure of Smuggled Local government units shall have a share in the
Goods national internal revenue taxes based on the
o Persons instrumental in the collection of the third fiscal year preceding the current
discovery and seizure of fiscal year as follows… (c) On the third year and
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ƒ all public officials,
whether incumbent or
retired, who acquired
information in the course Information shall not refer to a case already
of the performance of pending or previously investigated or examined by
their duties during their the Commissioner or any of his deputies, agents or
incumbency examiners or the Secretary of Finance or any of his
deputies or agents.
3. When is a Person Instrumental

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2. 50% share in collections for the ff: (2nd par., Sec. other impositions shall in no case be Left to any
283, NIRC) private person;
a) VAT on sale of goods or properties under Sec. (d) The revenue collected shall Inure solely to the
106, NIRC benefit of the local government unit levying the
b) VAT on sale of services and use or lease or tax, fee, charge or other imposition unless
properties under Sec. 108, NIRC otherwise specifically provided herein; and,
c) Percentage taxes under Sec. 116, NIRC (e) Each local government unit shall, as far as
practicable, evolve a Progressive system of
taxation. (Sec. 130)
I. Power to Create Sources of Revenue
IV. Local Taxing Authority
POWER TO: The power to impose a tax, fee or charge or to
1. create its own sources of revenue and
generate revenue is exercised by the Sanggunian of
2. levy taxes, fees, and charges subject to the the LGU concerned through an appropriate
provisions herein, consistent with the basic policy ordinance. (Sec. 132)
of local autonomy. (Sec. 129)
The local chief executive may veto any ordinance of
Such taxes, fees, and charges shall accrue
the sangguniang panlalawigan, panlungsod or bayan
exclusively to the local government units. (NOTE: As on the ground that it is ultra vires or prejudicial to the
distinguished from internal revenue taxes which do public welfare, stating his reasons therefore in
not accrue exclusively to the national government but writing. The local chief executive, except punong
are shared to the local governments in the form of barangay, may veto any particular item of an
internal revenue allotments. See Title XI, NIRC of appropriations ordinance. (sec. 132 LGC)
He may only veto an ordinance or resolution only
II. Nature of the Taxing Power of Local once. The sanggunian may override his veto by two-
Government Units (LGUs) thirds vote of all its members, thereby making the
ordinance effective even without the approval of the
1. not inherent local chief executive concerned.
2. exercised only if delegated to them by law or
V. Power to Prescribe Penalties for Tax
3. not absolute subject to limitations provided for by
Violations and Limitations Thereon
1. The Sanggunian is authorized to prescribe fines or
other penalties for violations of tax ordinances
III. Fundamental Principles a. in no case shall fines be less than
P1,000 nor more than P5,000
The fundamental principles governing the exercise of b. nor shall the imprisonment be less than
the taxing and other revenue-raising powers of LGUs one month nor more than six months
are [ U(EPuJul)LIP ]: 2. Such fine or other penalty shall be imposed at the
discretion of the court.
(a) Taxation shall be Uniform in each local
3. The Sanggunian Barangay may prescribe a fine of
government unit; not less than P100 nor more than P1000.
(b) Taxes, fees, charges and other impositions shall
Power to Adjust Local Tax Rate (Sec. 191 LGC)
1) be Equitable and based as far as
- LGUs are authorized to adjust the tax
practicable on the taxpayer's ability to
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2) be levied and collected only for Public
shall such adjustment exceed 10% of the
rates fixed under the LGC.
3) not be unJust, excessive, oppressive, or
Power to Grant Local Exemptions (Sec. 192 LGC)
4) not be contrary to Law, public policy,
- LGUs, may through ordinances duly
national economic policy, or in the
approved, grant tax exemptions,
restraint of trade;
incentives or reliefs under such terms and
(c) The collection of local taxes, fees, charges and
conditions, as they may deem necessary.

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d. Any grant to a type or kind of business

Tax Exemptions existing before the Effectivity of shall apply to all businesses similarly
the LGC: situated.
Unless otherwise provided by the LGC, tax
exemptions or incentives granted to, or presently Levying of Local Taxes (Local Tax Ordinance)
enjoyed by all persons, whether natural or juridical, REQUISITES:
including GOCCs are hereby withdrawn upon the 1. the procedure applicable to local gov’t ordinances
effectivity of the LGC except the ff: in general should be observed. (Sec. 187, LGC)
1. local water districts, 2. Procedural details (Secs. 54, 55, and 59 LGC):
2. cooperatives duly registered under RA 6938, a. necessity of quorum
non-stock and non-profit hospitals and b. submission for approval by the local chief
3. educational institutions. executive
c. the matter of veto and overriding the same
Tax Exemptions not applicable to Regulatory d. the publication and affectivity
Fees 3. Public hearings are required before any local tax
The power to grant tax exemptions, tax ordinance is enacted (Sec. 187, LGC)
incentives and tax reliefs shall not apply to regulatory
fees which are levied under the police power of the Within 10 days after their approval, publication
LGU. in full for 3 consecutive days in a newspaper of
general circulation. In absence of such newspaper in
Tax Exemption Certificate: the province, city or municipality, then the ordinance
Tax exemptions shall be conferred through may be posted in at least two conspicuous and
the issuance of a non-transferable tax exemption publicly accessible places (Sec. 189 LGC)
Residual Taxing Powers of the LGU (Sec. 186
Guidelines for the Granting of Tax Exemptions, LGC)
Tax Incentives and Tax Reliefs (Art. 282 [B], Rules
and Regulations Implementing the LGC) To levy taxes, fees or charges on any base or subject
1. On the grant of tax exemptions or tax reliefs: a. specifically enumerated in LGC
a. the same may be granted in cases of b. taxed under the provisions of the NIRC,
natural calamities, civil disturbance, general as amended
failure of crops, or adverse economic c. other applicable laws.
conditions such as substantial decrease in
prices or agricultural or agri-based products. Conditions:
b. The grant shall be through an ordinance. a. That the taxes, fees or charges shall not
c. Any exemption or relief granted to a type be unjust, excessive, oppressive,
or kind of business shall apply to all business confiscatory or contrary to declared national
similarly situated. policy.
d. The same shall take effect only during the b. The ordinance levying such taxes, fees or
next calendar year for a period not exceeding charges shall not be enacted without any
12 months as may be provided by the prior public hearing conducted for the
ordinance. purpose.
e. In the case of shared revenue, the
exemption or relief shall only extend to the Limitations of the Residual Power
LGU granting such exemption or relief. 1. Constitutional limitations on taxing power
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2. Common limitations prescribed in Sec. 133 of
2. On the grant of taxareincentives
needed to see this picture. LGC
a. The same shall be granted only to new 3. Fundamental principles governing the exercise of
investments in the locality and the ordinance the taxing power of the LGUs prescribed under Sec.
shall prescribe the terms and conditions 130 of the LGC
therefore. 4. The ordinance levying such residual taxes shall
b. The grant shall be for a definite period of not be enacted without any prior public hearing
not exceeding 1 calendar year. conducted for the purpose and
c. The grant shall be by ordinance passed 5. The principle of preemption.
prior to the 1 day of January of any year.

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Principle of Preemption or Exclusion (e) Taxes, fees, and charges and other impositions
Where the national gov’t elects to tax a upon goods carried into or out of, or passing
particular area, it impliedly withholds from the local through, the territorial jurisdictions of local
gov’t the delegated power to tax the same field. This government units in the guise of charges for
doctrine principally rests on the intention of wharfage, tolls for bridges or otherwise,
Congress. (f) Taxes, fees or charges on Agricultural and
aquatic products when sold by marginal farmers
or fishermen;
Excluded impositions pursuant to the doctrine of (g) Taxes on business enterprises certified to by the
preemption) Board of Investments as pioneer or non-pioneer
1. Taxes which are levied under the NIRC, unless for a period of 6 and 4 years, respectively from
otherwise provided by LGC of 1991; the date of registration;
2. Taxes, fees, etc. which are imposed under the (h) Excise taxes on articles enumerated under the
TCC; national Internal Revenue Code, as amended,
3. Taxes, fees, etc. the imposition of which and taxes, fees or charges on petroleum
contravenes existing gov’tal policies or which violates products;
the fundamental principles of taxation; (i) Percentage or VAT on sales, barters or
4. Taxes, fees and other charges imposed under exchanges or similar transactions on goods or
special law. services except as otherwise provided;
(j) Taxes on the gross receipts of Transportation
Local Tax Ordinance: contractors and persons engaged in the
Requirements transportation of passengers or freight by hire
1. Satisfy the requirements of procedural and and common carriers by air, land or water, except
substantive due process; as provided in the Code;
2. Public hearing is required with quorum, (k) Taxes on premiums paid by way of Reinsurance
voting and approval and/or veto requirements or retrocession;
complied with; (l) Taxes, fees or charges for the registration of
3. Publication of ordinance within 10 days from motor vehicles and for the issuance of all kinds of
approval for 3 consecutive days in a Licenses or permits for the driving thereof, except
newspaper of general circulation and/or tricycles;
posting in at least 2 conspicuous and publicly (m) Taxes, fees, or other charges on Philippine
accessible places. products actually Exported, except as otherwise
VI. COMMON LIMITATIONS ON THE TAXING (n) Taxes, fees, or charges, on Countryside and
POWERS OF LGUS Barangay Business Enterprises and cooperatives
duly registered under R.A. 6810 and R.A. 6938
LGUs CANNOT LEVY: [ IDECTA_BEV_TRELEBI ] (Cooperative Code of the Philippines); and
or CADET-VIBE-LIBERTE' (o) Taxes, fees or charges of any kind on the
(a) Income tax, except on banks and other financial National Government, its agencies and
institutions; Instrumentalities, and local government units.
(NOTE: Since income tax is already imposed
by the National Government under NIRC, Classification of Common Limitations
LGUs cannot impose the same even on 1. Taxes which are levied under the NIRC unless
banks and other financial institutions. The otherwise provided by the LGC
exception is referring to the percentage tax *a, b, c, h, I, j
on banks’ specified income.) 2. Taxes, fees, etc. which are imposed under the
(b) Documentary stamp tax;
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acquisitions mortis causa, except as otherwise 3. Taxes, fees and charges where the imposition of
provided; which contravenes existing gov’tal policies or which
(d) Customs duties, registration fees of vessel and are violative of the fundamental principles of taxation
wharfage on wharves, tonnage dues, and all *e, f, g, k, m, n, s
other kinds of customs fees, charges and dues, 4. Taxes, fees and charges imposed under special
except wharfage on wharves constructed and laws.
maintained by the local government unit *l
concerned; Provinces (see chart)

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Provinces (refers to Local Govt. Provisions on Tax)

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Type of Tax Rate Exceptions Notes

Tax on Transfer of Real Property Not more than 50% of Sale, transfer or other It shall be the duty of the seller, donor,
Ownership. The province may the 1% of the total disposition of real transferor or administrator to pay the
impose a tax on the sale, donation, consideration or of the property pursuant to R.A. tax imposed within 60 days from the
barter, or on any other mode of fair market value, No. 6657 (CARL). date of the execution of the deed or
transferring ownership or title of real whichever is higher from the date of the decedent's death.
Tax on Business of Printing and Not exceeding 50% of Newly started business,
Publication. The province may 1% of the gross annual the tax shall not exceed
impose a tax on the business of receipts for the 1/20 of 1% of the capital
persons engaged in the printing preceding calendar investment. School texts
and/or publication of books, cards, year. or references, prescribed
posters, leaflets, handbills, by the DECS shall be
certificates, receipts, pamphlets, and exempt from the tax.
others of similar nature.
Franchise Tax. Notwithstanding any Not exceeding 50% of Newly started business,
exemption granted by any law or 1% of the gross annual the tax shall not exceed
other special law, the province may receipts for the 1/20 of 1% of the capital
impose a tax on businesses enjoying preceding calendar investment.
a franchise. year, within its territorial
Tax on Sand, Gravel and Other Not more than 10% of The permit to extract resources shall be
Quarry Resources. The province fair market value in the issued exclusively by the provincial
may levy and collect taxes on locality governor, pursuant to the ordinance of
ordinary stones, sand, gravel, earth, the sangguniang panlalawigan.
and other quarry resources extracted Proceeds distributed as follows:
from public lands orTIFFfrom the beds
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Province -30% Component City or
seas, lakes, rivers, streams, creeks,
are needed to see this picture. Municipality where the quarry
and other public waters within its resources are extracted - 30%
territorial jurisdiction. Barangay where the quarry resources
are extracted - 40%.
Professional Tax. The province At such amount and Professionals exclusively To be paid to the province where
may levy an annual professional tax reasonable employed in the he/she practices his/her profession or
on each person engaged in the classification as the government shall be where he/she maintains principal office
exercise or practice of his profession sangguniang exempt from the payment in case the practice is in several places

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requiring government examination. panlalawigan may of this tax. Provided, After payment he/she shall
To be paid on or before the 31st day determine but shall in be entitled to practice his/her
of January. Any person first no case exceed profession in any part of the Phils.
beginning to practice a profession P300.00. w/out being subjected to any other
after the month of January must, national or local tax, license, or fee
however, pay the full tax before for the practice of the profession.
engaging therein.
Amusement Tax. The province may Not more than 30% of The holding of operas, Sangguniang panlalawigan may
levy an amusement tax to be the gross receipts from concerts, dramas, recitals, prescribe the time, manner, terms and
collected from the proprietors, admission fees. painting and art conditions for the payment of tax. In
lessees, or operators of theaters, exhibitions, flower shows, case of fraud or failure to pay, the
cinemas, concert halls, circuses, musical programs, literary sangguniang panlalawigan may impose
boxing stadia, and other places of and oratorical surcharges, interest and penalties. The
amusement presentations, except proceeds from the amusement tax shall
pop, rock, or similar be shared equally by the province and
concerts shall be exempt. the municipality where such
amusement places are located.
Annual Fixed Tax For Every Delivery Amount not exceeding
Truck or Van of Manufacturers or P500.00.
Producers, Wholesalers of, Dealers,
or Retailers in, Certain Products.
The province may levy an annual
fixed tax for every truck or any
vehicle used by manufacturers,
producers, wholesalers, dealers or
retailers in the delivery of distilled
spirits, soft drinks, cigars and
cigarettes, and other products as
may be determined by the
sanggunian, to sales outlets, or
consumers, whether directly QuickTime™ andor a
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B. MUNICIPALITIES schedule of graduated tax rates but in no

case shall exceed the rates prescribed in the
SCOPE: Municipalities may levy taxes, fees and LGC.
charges not otherwise levied by provinces. (sec. 142,
LGC) • The tax is payable for every separate or
Tax on Business distinct establishment or place where
business is conducted. (Sec. 146)
The municipality may impose taxes on the following:
a. On manufacturers, assemblers, repackers, • The municipality may impose and collect
processors, brewers, distillers, rectifiers, and such reasonable fees and charges on
compounders of liquors, distilled spirits, and business and occupation except professional
wines or manufacturers of any article of taxes reserved for provinces. (Sec 147)
commerce of whatever kind or nature.
b. On wholesalers, distributors, or dealers in any SPECIFIC:
article of commerce of whatever kind or nature. • Municipalities may im pose such reasonable
c. On exporters, and on manufacturers, millers, rates for the sealing and licensing of weights
producers, wholesalers, distributors, dealers or and measures as shall be prescribed by the
retailers of the following essential commodities sangguniang bayan.
(where the rate prescribed is only ½ of the
regular rate [Sec. 143 par. c, LGC]) • Municipalities shall have the exclusive
authority to grant fishery privileges in the
(RW CLAPS C): municipal waters. The sanggunian may:
1. Rice and corn;
2. Wheat or cassava flour, meat, dairy a) Grant fishery privileges to erect fish
products, locally manufactured, corrals, oysters, or other aquatic beds or
processed or preserved food, sugar, salt bangus fry areas
and other agricultural, marine, and fresh 1. Duly registered organizations and
water products, whether in their original cooperatives of marginal fishermen
state or not; shall have the preferential right;
3. Cooking oil and cooking gas; 2. The sanggunian may require a public
bidding pursuant to an ordinance for
the grant of such privilege;
4. Laundry soap, detergents, and medicine; 3. Absent of such orgs. and coops or
5. Agricultural implements, equipment and their failure to exercise their
post-harvest facilities, fertilizers, preferential right, other parties may
pesticides and other farm inputs; participate in the public bidding
6. Poultry feeds and other animal feeds;
7. School supplies; and b) Grant the privilege to gather, take or
8. Cement. catch bangus fry, prawn fry or fry of other
d. On retailers species and fish from the municipal
e. On contractors and other independent waters by nets or other fishing gears to
contractors marginal fishermen free of rental or fee
f. On banks and other financial institutions,
g. On peddlers engaged in the sale of any c) Issue licenses for the operation of fishing
merchandise or article of commerce vessels of three (3) tons or less. (Sec.
h. On any business, which the sanggunian 149)
concerned may deem proper
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Payment of Business Taxes:
percentage tax, the tax rate shall not exceed 2% a. It shall be payable for every separate or
of gross sales of the preceding calendar year. distinct establishment or place where the
business subject to the tax is conducted and
• Rates of Tax within the Metropolitan Manila one line of business does not become
Area shall not exceed by 50% the maximum exempt by being conducted with some other
rates prescribed for a-h. (Sec. 144) business for which such tax has been paid.
b. The tax on a business must be paid by the
• The sanggunian concerned may prescribe a person conducting the same.

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c. In cases where a person conducts or municipality where the principal office is

operates 2 or more of the businesses located; and
mentioned in Section 143 of LGC
a. Which are subject to the same rate • 70% of all sales recorded in the principal
of tax, the tax shall be computed on office shall be taxable by the city or
the combined total gross sales or municipality where the factory, project office,
receipts of the said 2 or more related plant, or plantation is located.
b. Which are subject to different rates Rule 4: Where the plantation located at a place other
of tax, the gross sales or receipts of than the place where the factory is located, the above
each business shall be separately mentioned 70% shall be divided as follows:
reported for the purpose of ƒ 60% to the city or
computing the tax due from each municipality where the
business. factory is located; and
ƒ 40% to the city or
VII. Situs of Local Taxation municipality where the
Situs According to the Cases: plantation is located.

Excise Tax – not dependent on the domicile of the Rule 5: Where there are 2 or more factories, project
taxpayer, but on the place in which the act is offices, plants, or plantations located in different
performed or the occupation is engaged in; not upon localities, the above mentioned 70% shall be prorated
the location of the office, but the place where the among the localities where the factories, project
place is perfected. (Allied Thread Co., Inc. v. City offices, plants, and plantations are located in
Mayor of Manila, L-40296) proportion to their respective volumes of production
during the period for which the tax is due. (Sec. 150)
Sales Tax – it is the place of the consummation of the
sale, associated with the delivery of the things which NOTE: In case of manufacturers or producers which
are the subject matter of the contract that determines engage the services of an independent contractor to
the situs of the contract for purposes of taxation, and produce or manufacture some of their products,
not merely the place of the perfection of the contract. these rules shall apply except that the factory or plant
(Shell Co., Inc. v. Municipality of Sipocot, Camarines and warehouse of the contractor utilized for the
Sur, 105 Phil 1263) production and storage of the manufacturers’
products shall be considered as the factory or plant
SITUS ACCORDING TO SECTION 150, LGC and warehouse of the manufacturer. (IRR)

Rule 1: For purposes of collection of the taxes under The city or municipality where the port of loading is
Section 143 (tax on business), businesses located shall not levy and collect reasonable fees
maintaining or operating branch or sales outlet unless the exporter maintains in said city or
elsewhere shall record the sale in the branch or sales municipality its principal office, a branch, sales office,
outlet making the sale or transaction, and the tax or warehouse, factory, plant or plantation in which
thereon shall accrue and shall be paid to the case, the rule on the matter shall apply accordingly.
municipality where such branch or sales outlet is (IRR)

Rule 2: In case there is no branch or sales outlet in C. CITIES

the city or municipality where the sale is made, the
sale shall be recorded in QuickTime™
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office and the ƒ The city may levy the taxes, fees, and charges
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which the province or municipality may impose.
municipality. ƒ The tax rates that the city may levy may exceed
the maximum rates allowed for the province or
Rule 3: The following sales allocation for sales municipality by not more than 50% except the
recorded in the principal office of businesses with rates of professional and amusement taxes.
factories, project offices, plants, and plantations: (Sec. 151)

• 30% of all sales recorded in the principal IRR:

office shall be taxable by the city or The cities may levy and collect a percentage

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tax on ANY business not otherwise specified in the of the tolls, and thereafter the said facility shall be
LGC or the IRR, at rates not exceeding 3% of the free and open for public use.
gross sales or recipts of the preceding calendar year.
IX. Community Tax

D. BARANGAYS • Cities or municipalities may levy a community tax

(Sec. 156)
Scope of Taxing Powers. - The barangays may levy
the following taxes and charges, which shall A. Individuals Liable to Community Tax - [ IER ]
exclusively accrue to them: [ TOBS ] a. Inhabitant of the Philippines
b. Eighteen years of age or over
(a) Taxes - On stores or retailers with fixed business c. Regularly employed on a wage or salary basis for
establishments with gross sales of receipts of the at least 30 consecutive working days during any
preceding calendar year of P50,000.00 or less for calendar year,
cities and P30,000.00 or less, in the case of or who is engaged in business or occupation,
municipalities, rate = not exceeding 1% on gross or who owns real property with an aggregate
sales or receipts. assessed value of P1,000.00 or more,
(b) Service Fees or Charges for services rendered or who is required by law to file an income tax
in connection with the regulations or the use of return
barangay-owned properties or service facilities
such as palay, copra, or tobacco dryers. Rate = P5.00 and an annual additional tax of P1.00
(c) Barangay Clearance. - No city or municipality for every P1,000.00 of income regardless of whether
may issue any license or permit for any business from business, exercise of profession or from
or activity unless a clearance is first obtained property which in no case shall exceed P5,000.00.
from the barangay where such business or
activity is located or conducted. ¾ In the case of husband and wife, the tax
(d) Other fees and Charges. - The barangay may imposed shall be based upon the total property
levy reasonable fees and charges: (CRB) owned by them and the total gross receipts or
1. On commercial breeding of fighting earnings derived by them. (Sec. 157)
Cocks and cockpits;
2. On places of Recreation which charge B. Juridical Personalities (Sec. 158)
admission fees; and Corporations, no matter how created or organized,
3. On Billboards, signboards, neon signs, whether domestic or resident foreign, engaged in or
and outdoor ads. (Sec. 152) doing business in the Philippines are also liable to
pay an annual community tax.
LGUS (Secs. 153-155) [ SPT ] Rate = P500.00 and an annual additional tax, which
shall not exceed P10,000.00 in accordance with the
a. Service Fees and Charges for services rendered following schedule:
b. Pubic Utility Charges for the operation of public a. For every P5,000.00 worth of real property in the
utilities owned, operated and maintained by Philippines owned by it during the preceding year
LGUs within their jurisdiction. based on the valuation used for the payment of
c. Toll Fees or Charges for the use of any public real property tax - P2.00; and
road, pier, or wharf, waterway, bridge, ferry or b. For every P5,000.00 of gross receipts derived by
telecommunication system funded and it from its business in the Philippines during the
constructed by the LGU concerned. preceding year - P2.00.
Exceptions: TIFF (Uncompressed)
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The dividends received by a corporation
PNP on mission, shall, for the purpose of the additional tax, be
2. post office personnel delivering mail, considered as part of the gross receipts or earnings
3. physically-handicapped, and disabled of said corporation.
citizens who are sixty-five (65) years or
older. C. Those exempt from the community tax are:
1. Diplomatic and consular representatives; and
When public safety and welfare so requires, the 2. Transient visitors when their stay does not
sanggunian concerned may discontinue the collection exceed 3 months.

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D. Place and time of Payment A. Individual

ƒ Place of Payment - place of residence of the 1. When an individual subject to the comm. tax
individual, or in the place where the principal acknowledges any document before a notary
office of the juridical entity is located. (Sec. 160) public;
2. Takes the oath of office upon election or
ƒ Time for Payment - accrues on the 1st day of appointment to any position in the
Jan. of each year which shall be paid not later government service;
than the last day of Feb. of each year 3. Receives any license, certificate or permit
from any public authority;
ƒ Penalties for Delinquency. - An interest of 24% 4. Pays any tax or fee;
per annum from the due date until it is paid shall 5. Receives any money from any public fund;
be added on the amount due. 6. Transacts other official business; or
7. Receives any salary or wage from any
¾ A community tax certificate may also be issued to person or corporation.
any person or corporation not subject to the
community tax upon payment of P1.00. (Sec. The presentation of the CTC shall not be required in
162) connection with the registration of a voter.

Collection of Local Revenues by the Treasurer: B. Corporation

(Sec. 170, LGC) 1. receives any license, certificate or permit
All local taxes, fees and charges shall be from any public authority;
collected by the provincial, city, municipal or 2. pays any tax or fee;
barangay treasurer, or their duly authorized deputies. 3. receives any money from any public
fund; or
The provincial, city or municipal treasurer 4. transacts other official business.
may designate the barangay treasurer or his deputy
to collect local taxes, fees or charges. In case a bond The city or municipal treasurer deputizes the
is required for the purpose, the provincial, city or barangay treasurer to collect the community tax in
municipal government shall pay the premiums their respective jurisdictions. (Sec. 164, LGC)
thereon in addition to the premiums of the bond that
may be required under the Code. The proceeds of the comm. tax is actually and
directly collected by the city or municipal treasurer
PROVINCE OF BULACAN vs. CA (299 SCRA 442) shall accrue entirely to the general fund of the city or
municipality concerned.
Facts: The Province passed an Ordinance imposing
a 10% tax on the value of stones, sand and other Proceeds of the comm. tax collected through the
quarry resources from public lands. The Provincial barangay treasurers shall be apportioned as follows:
Treasurer levied upon Republic Cement P2.5M for ¾ 50% accrues to the general fund of the city or
its extraction of resources from private land. municipality concerned; and
Issue: Does the province have authority to levy the ¾ 50% accrues to the barangay where the tax
tax? is collected.
Held: NO. Although §186 of the LGC authorizes
municipal corps. to levy taxes other than those CHAPTER 3 - COLLECTION OF TAXES
specifically enumerated therein, the subject
ordinance was quite specific about the fact that the Taxable Period – The tax period of ALL local taxes,
taxable articles TIFF
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(Uncompressed) from public land. fees and charges shall be the calendar year, unless
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Moreover, a province may not levy excise taxes on otherwise provided in the Code.
articles already taxed by the NIRC. The current
Tax Code already imposes a tax on ALL quarry Accrual of Tax – ALL local taxes, fees, and charges
resources, regardless of origin, hence, the Province accrue on first day of January of each hear, unless
may no longer impose any additional amounts from otherwise provided in the Code.
Republic Cement.
Time of Payment – ALL local taxes, fees, and
Presentation of Community Tax Certificate on charges shall be paid within the first twenty (20) days
Certain Occasions: (Sec. 163, LGC) of January or of each subsequent quarter, as the

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case may be, unless otherwise provided in the Code. i. Distraint

seizure or confiscation of assets in
Surcharges and Penalties on Unpaid Taxes, Fees, sufficient quantity to satisfy the liability
or Charges – The sanggunian may impose a
surcharge not exceeding twenty five percent (25%)
per month of the unpaid taxes, fees or charges not accounting of distrained goods
paid on time and an interest at the rate not exceeding
two percent (2%) per month of the unpaid taxes, fees
or charges including surcharges, until such amount is publication of the sale of distrained properties
fully paid but in no case shall the total interest on the
unpaid amount or portion thereof exceed thirty six
(36) months. sale

Interest on other unpaid revenues – On any other

source of revenue, LGUs are authorized to imposed disposition of the proceeds of the sale
an interest of a maximum of 2% per month, maximum by application of such proceeds to the
of 36 months, on the amount unpaid. delinquency and expenses of sale

Manner of Payment – Such taxes, fees or charges

may be paid in quarterly installments. return of balance to the owner

COLLECTION OF LOCAL REVENUES BY THE NOTE: Where the proceeds of the sale are
TREASURER (sec. 170, LGC) insufficient to satisfy the claim, other properties may
All local taxes, fees and charges shall be be distrained.
collected by the provincisl, city, municipal or
barangay treasurer, or their duly authorized deputies. ii. Levy
The provincial, city or municipal treasurer may delinquency
designate the barangay treasurer or his deputy to
collect local taxes, fees or charges. In case a bond is
required for the purpose, the provincial, city or levy of real property before,
municipal government shall pay premiums thereon in simultaneous or after distraint
addition to the premiums of the bond that may be of personal property belonging
required under the Code. to delinquent taxpayer


local treasurer shall prepare a
TAX REMEDIES OF THE LGUs duly authenticated certificate
showing the name of taxpayer
CIVIL REMEDIES OF THE LGU TO EFFECT and amount of tax, fee and
COLLECTION OF TAXES penalty due to him
1. Local Government’s Lien – Local taxes, fees,
charges and other revenues constitute a lien, NOTE: Levy shall be effected by writing upon said
superior to all liens, charges or encumbrances in certificate the description of the property upon which
favor of any person, enforceable by any appropriate levy is made.
administrative or judicial action.
b. by judicial action
2. Civil Remedies TIFF (Uncompressed)
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personal property and by levy upon real property LGU concerned.

Jurisdiction of courts over local taxation cases:

a. With the amendment brought by RA No. 9282, the
Court of Tax Appeals now has appellate jurisdiction
over local taxation cases decided by the RTC in the
exercise of its appellate or original jurisdiction.

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b. Regular judicial courts are not prohibited from After Assessment

enjoining the collection of local taxes, subject to Rule a. Protest – within 60 days from receipt of
58 (preliminary injunction) of the Rules of Court. assessment (sec. 195, LGC). Payment under protest
is not necessary.
NOTE: Unlike the NIRC, the Local Tax Code does
not contain any specific provision prohibiting courts b. Payment & subsequent refund or tax credit – within
from enjoining the collection of local taxes. Such 2 years from payment of taxto local treasurer (sec.
statutory lapse or intent may have allowed 196, LGC). It is to be noted that, unlike in internal
preliminary injunction where local taxes are involved. revenue taxes, the supervening cause applies in local
But it cannot negate the procedural rules and taxation because th period for the filing of the claims
requirements under Rule 58 of the Rules of Court. for refund or credit of local taxes is counted not
(Valley Trading Co. vs. CFI of Isabela, 1989) necessarily from the date of payment but from the
date of taxpayer is entitled to a tax credit.
1. Local taxes, fees or charges – five (5) years from c. Right of redemption – 1 year from the date of
the date they became due (sec. 194, LGC) sale or from the date of forfeiture (sec. 179, LGC)
2. When there is fraud or intent to evade the payment
of taxes, fees or charges – ten (10) years from B. JUDICIAL
discovery of fraud or intent to evade payment (sec.
194, LGC) 1. Court action
- within 30 days after receipt of decision or lapse of
PRESCRIPTIVE PERIOD OF COLLECTION 60 days of Secretary of Justice’s inaction (sec. 187,
Local taxes, fees or charges may be collected LGC)
within five years from the date of assessment by - within 30 days from receipt when protest of
administrative or judicial action. No such action shall assessment is denied (sec. 195, LGC)
be instituted after the expiration of such period. (sec. - if no action is taken by the treasurer in refund cases
194, LGC) and the two year period is about to lapse (sec. 195,
- if remedies available does not provide plain, speedy
Grounds for the Suspension of the Running of and adequate remedy.
the Prescriptive Periods
a. The treasurer is legally prevented from the 2. Action for Declaratory Relief
assessment or collection of the tax;
b. The taxpayer requests for a reinvestigation and 3. Injunction – if irreparable damage would be caused
executes a waiver in writing before the expiration of to the taxpayer and no adequate remedy is available.
the period within which to assess or collect; and
c. The taxpayer is out of the country or otherwise
cannot be located. (sec. 194, LGC)
(LGC of 1991)


TAXATION A direct tax on ownership of lands and
buildings or other improvements thereon payable
A. ADMINISTRATIVE regardless of whether the property is used or not,
although the value may vary in accordance with such
Before assessmentTIFF (Uncompressed)
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a. Protest against a newly enacted
are needed ordinance – any
to see this picture.
appraisal, assessment, levy and collection of Real
question on constitutionality or legality of tax Property Tax, i.e. tax on land and building and other
ordinance within 30 days from effectivity thereof to structures and improvements on it, including
Secretary of Justice (sec. 187, LGC) Such appeal machineries. (Subject to the definition given by Art.
shall not have the effect of suspending the effectivity 415 of the Civil Code)
of the ordinance and the accrual and payment of tax.

b. Declaratory relief whenever applicable Improvement – valuable addition made to a property

or amelioration in its condition amounting to more

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than a mere replacement of parts involving capital microcomputers, facsimile machines, telex
expenditures and labor. machine, cash dispensers, furnitures and
fixtures, freezers, refrigerators, display cases or
I. CHARACTERISTIC OF REAL PROPERTY TAX: racks, fruit juice or beverage automatic
[LIPAD] dispensing machines which are not directly and
1. Direct tax on the ownership of real property exclusively used to meet the needs of a
2. Ad Valorem tax. The value is based on the tax particular industry, business or activity shall not
base be considered within the definition of
3. Proportion - the tax is calculated on the basis of a machinery. (Sec. 290 [o], IRR of RA 7160)
certain percentage of the value assessed
4. Indivisible single obligation III. CLASSIFICATION OF LAND for purposes of
5. Local Tax assessment - Sec 218 (a) [CARMITS]
1. Commercial
PROPERTY TAX 3. Residential
According to the Local Government Code, Real 4. Mineral
Property liable for Real Prop tax are: 5. Industrial
1. Land, 6. Timberland
2. Buildings 7. Special
3. Machinery and ¾ Classification of lands made by respective
4. Other improvements not otherwise exempted sanggunian in accordance with zoning
under said code (Sec 232, LGC) ordinances and
¾ It is based on actual use.
Note: Although the term real property has not been
expressly defined in the LGC, early decisions of the IV. SPECIAL CLASSES OF REAL PROPERTY (Sec
Supreme Court in Mindanao Bus Co. v City Assessor 216, LGC) [HCS LG]
of Cagayan de Oro, 6 SCRA `97; Board of 1. HOSPITALS
Assessment Appeals v Meralco, 119 PHIL 328; 2. CULTURAL and SCIENTIFIC purposes
Manila Electric Co. v Board of Assessment Appeals, 3. owned and used by LOCAL WATER
10 SCRA 68) seem to suggest that Art 415 of the DISTRICTS
Civil Code could also be controlling. 4. GOCCs rendering essential public services in
Real property includes machinery as defined by the supply and distribution of water and/or
the LGC. generation or transmission of electric power.

Machinery – embraces machines, equipment, V. PROPERTIES EXEMPT from real property tax
mechanical contrivances, instruments, (Sec. 234) [CWERC]
appliances or apparatus which may or may not 1. Owned by the REPUBLIC of the PHILS or its
be attached, permanently or temporarily, to the political subdivisions
real property. It includes the physical facilities for except: when beneficial use has been
production, the installations and appurtenant granted to a taxable person
service facilities, those which are mobile, self- 2. Charitable institutions, churches,
powered or self-propelled, and those not parsonages, convents thereto, mosques,
permanently attached to the real property which non-profit or religious cemeteries, buildings
are actually, directly, and exclusively used to and improvements actually directly and
meet the needs of the particular industry, exclusively used for religious, charitable or
business or activity QuickTime™
and which by their very educational purposes.
and a
nature and purpose are
TIFF (Uncompressed) designed
decompressor for, or 3. Machinery and Equipment actually, directly,
are needed to see this picture.
necessary to its manufacturing, mining, logging, and exclusively used by local Water districts
commercial, industrial or agricultural purposes. and GOCCs engaged in the supply and
(Sec. 199 [o], LGC) distribution of water and/or generation and
transmission of electric power
Machinery which are of general purpose use 4. Real property owned by duly registered
including but not limited to office equipment, Cooperatives under RA 6938
typewriters, telephone equipment, breakable or 5. Machinery & equipment for pollution control
easily damaged containers (glass or cartons), and Environment protection

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Exemptions previously granted, (not falling within the value of the property (Sec. 236,
above enumeration) are withdrawn. LGC)
c. For Public Works – on lands
¾ Although powerless to grant RPT exemption, specially benefited by public works,
LGU in MM can exempt the 5% ad valorem projects or improvements funded by
tax on idle lands. the LGU
¾ LGUs (within and outside MM) may also ¾ May be imposed even by
grant condonation which actually partake of municipalities outside MM
exemption. provided:
¾ Special levy shall not exceed
Proof of Tax Exemption: 60% of the actual cost of such
Every person by or for whom real property is projects and improvements,
declared who shall claim the exemption shall file with including the costs of acquiring
the provincial, city or municipal assessor within 30 land and such other real property
days from date of declaration of real property in connection therewith not apply
sufficient documentary evidence in support of such to lands exempt from basic real
claim (i.e. corporate charters, title of ownership, property tax and the remainder
articles of incorporation, contracts, affidavits, etc.) of the land have been donated to
the local government unit
Actual Use of Property as Basis for Assessment concerned for the construction of
(Sec. 217, LGC) said projects. (Sec. 240, LGC)
Real property shall be classified, valued and
assessed on the basis of actual use regardless of What Are Considered as Idle Lands: (Sec. 237,
where located, whoever owns it, and whoever uses it. LGC)
Unpaid realty taxes attach to the property 1. Agricultural lands – More than 1 hectare if
and is chargeable against the person who had actual more than ½ of which remain uncultivated or
or beneficial use and possession of it regardless of unimproved by the owner of the property or
whether or not he is the owner. To impose the RPT person having legal interest therein.
on the subsequent owner which was neither the Not Idle Lands:
owner nor the beneficial user of the property during ¾ Agricultural lands planted to
the designated periods would not only be contrary to permanent or perennial crops with at
law but also unjust. (Estate of Lim v. City of Manila, least 50 trees to a hectare
GR No. 90639, Feb 21, 1990) ¾ Lands actually used for grazing
purposes shall likewise not be
considered idle lands
of REAL PROPERTY TAXES (Sec. 198) [CUANE] 2. Non-Agricultural Lands – More than 1,000
1. CURRENT and fair market value is the basis of sq. m. in area if more than ½ of which remain
appraisal uncultivated or unimproved by the owner of
2. UNIFORMITY in classification in each local gov’t the property or person having legal interest
unit should be observed therein.
3. ACTUAL USE of the property should be the basis
of classification Idle Lands Exempt From Tax: (Sec. 238, LGC)
4. appraisal, assessment, levy and collection should By reason of:
NOT BE LET to any private person. 1. force majeure
5. EQUITABLE appraisal and assessment 2. civil disturbance
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TIFF (Uncompressed) decompressor
3. natural calamity
Types of Real Property Tax:
are needed to see this picture. 4. or any cause which physically or legally
1. Basic real property tax prevents the owner of the property or person
2. Special levies: having legal interest therein from improving
a. Special Education Fund (SEF) – 1% the land
additional real estate tax to finance
MM area only 1. Provinces
b. Additional Ad Valorem on the Lands 2. Cities
– not exceeding 5% of the assessed 3. Municipalities within Metropolitan Manila

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1. Declared by Owner or Administrator (Sec 202- (Sec 205, 207)
¾ Listing of all Real Property whether taxable
When: once every 3 years during the period or exempt within the jurisdiction of LGU
from January 1 to June 30 o Undivided real property – in the
What: file a sworn declaration with the name of the estate or heirs or
assessor with description of the property devisees
o Corporation, partnership and
¾ IF newly acquired property - association – same as individuals
a. files with assessor within 60 DAYS from o Owned by the Republic of the
date of transfer a Philippines, its instrumentalities,
b. SWORN statement containing FMV and political subdivisions, beneficial
description of property use is transferred to a taxable
¾ IF improvement on real property person – in the name of the
a. file w/in 60 DAYS upon completion or possessor
occupation (whichever is earlier)
b. SWORN statement containing FMV and ¾ All declarations shall be kept and filed under
description of property a uniform classification system to be
established by the provincial, city or
2. Declared by Provincial / City / Municipal municipal assessor.
Assessor (Sec 204)

WHEN only when the person under Sec 202

refuses or fails to make the Declaration within STEP 3: APPRAISAL AND VALUATION OF REAL
the prescribed time PROPERTY
No oath by assessor is required (Sec 212-214, 224-225)

• NOTE: IF FILING FOR EXEMPTION (Sec How to determine Fair Market Value:
WHAT person claiming exemptions must file with 1. Assessor of the province/city or municipality may
assessor sufficient documentary evidence to support summon the owners of the properties to be affected
claim and may take depositions concerning the property, its
WHEN within 30 days from the date of ownership amount, nature and value. (sec. 213,
DECLARATION of property LGC)
2. Assessor prepares a schedule of FMV for different
• IF required evidence is not submitted classes of properties
within 30 days, the property will be listed 3. Sanggunian enacts an ordinance
as taxable in the roll 4. The schedule of FMV is published in a newspaper
• IF proven to be tax-exempt, property will of general circulation in the province city or
be dropped from the roll municipality concerned or in the absence thereof
shall be posted in the provincial capitol city or
• NOTE: IF PROPERTY DECLARED FOR municipal hall places therein (sec.212, LGC)
(Sec. 222)
THE FIRST TIMEQuickTime™ and a
If declared for 1st time, real
TIFF (Uncompressed) property shall be
are needed to see this picture.
assessed for back taxes 1. For Brand New machinery : FMV is acquisition
a) for not more than 10 yrs prior to the cost
date of initial assessment 2. In all other cases:
b) taxes shall be computed on the basis FMV = Remaining eco. life X Replacement cost
of applicable schedule of values in Estimated eco. life
force during the corresponding

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3. the owner of the prop is out of the country or

Procedure cannot be located
1. take the schedule of FMV
2. Assessed value = FMV X Assessment level
3. Tax = Assessed value X Tax rate REMEDIES IN REAL PROPERTY TAXATION

Tax Remedies of the Local Government to Effect


WHEN January 1 of every year (Sec 246) A. Administrative

tax shall constitute as superior lien (Sec
246) 1. Lien (Sec. 257, LGC) – superior to all liens,
HOW a. basic real prop tax in 4 equal installments charges or encumbrances and is enforceable
(Mar 31,Jun 30,Sep 30, Dec 31) by administrative or judicial action. It is
b. special levy - governed by ordinance extinguished only upon payment of tax and
other expenses.
• NOTE: INTEREST for LATE PAYMENT 2. Levy (Sec. 258, LGC)
- two percent (2%) each month on unpaid amt.
until the delinquent amt is paid. Issuance of Warrant by the LGU treasurer
- provided in no case shall the total interest (on or before or simultaneously with the
exceed thirty-six (36) months institution of civil action for collection of
delinquent tax)
a) advance payment - discount not exceeding Advertise Sale or Auction (within 30 days
20% of annual tax (Sec 251, LGC) after service of warrant) by posting and
b) prompt payment - discount not exceeding 10% publication
of annual tax due(Art 342 IRR)

Collection of Tax (Sec.247, LGC) Sale

The collection of the real property tax with interest
thereon and related expenses and the enforcement if
the remedies provided by the LGC or any applicable Report of Sale (within 30 days after sale)
laws shall be the responsibility of the city or municipal Preparation of Certificate of Sale (containing
treasurer concerned. the name of the purchaser, description of the
property, amount of delinquent tax and its
The city or municipal treasurer my deputize the interests, expenses)
barangay treasurer to collect all taxes on real
property located in the barangay provided the
barangay treasurer is properly bonded. Redemption (within 1 year from date of sale)

WHO COLLECTS The provincial, city, municipal or

barangay treasurer Issuance of Final Deed to Purchaser (upon
the delinquent taxpayer’s failure to redeem)

PERIOD WITHIN WHICH TO COLLECT (Sec 270): ¾ The proceeds of the sale in excess of the
within five (5) yrsTIFF
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the date
(Uncompressed) they become due
delinquent tax, the interest due thereon and
are needed to see this picture.
within ten (10) yrs. from discovery of fraud, in case the expenses of sale shall be remitted to the
there is fraud or intent to evade owner of real property or person having legal
Period of prescription shall be SUSPENDED
when: (Sec 270, LGC) 3. Distraint (Sec. 254, LGC) - with notice of
1. local treasurer is legally prevented to collect tax delinquency posted and published. Personal
2. the owner of prop requests for reinvestigation property may be distrained to effect payment.
and writes a waiver before expiration of period to

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Taxation Law Summer Reviewer

4. Purchase of property by local treasurer or inaction of the treasurer

for want of bidder (Sec. 263, LGC) – in after the lapse of 60 days)
case there is no bidder for the real property
advertised or if the highest bid for an amount
insufficient to pay the RPT and other costs. Appeal with the CBAA
(w/in 30 days from receipt of
B. Judicial adverse decision by LBAA)

Civil Action (Sec. 266, 270, LGC) – filed by the local

treasurer within 5 or 10 years as provided in Sec. 270 Appeal to CTA (within 30 days
of the LGC. from receipt of adverse
decision rendered by CBAA)
Prescriptive Periods for the Collection of RPT
2. Claim for Tax Refund or Credit (Sec. 253,
1. Basic RPT and any other tax levied under the LGC)
title on RPT – five years from the date they a. The taxpayer may file a written claim for
became due. (Sec. 270, LGC) refund or credit with the provincial or city
2. When there is fraud or intent to evade the treasurer within 2 years from the date the
payment of taxes – ten years from discovery taxpayer is entitled to such reduction or
of the fraud or intent to evade payment. adjustment.
b. Provincial or city treasurer should decide the
GROUNDS FOR THE SUSPENSION OF THE claim within 60 days from receipt of the
1. The treasurer is legally prevented from the c. In case of denial of refund or credit, appeal to
assessment or collection of the tax; LBAA within 30 days as in protest case.
2. The taxpayer requests for a reinvestigation
expiration of the executes a waiver in writing 3. Redemption of Real Property (Sec. 261,
before the expiration of the period within LGC)
which to assess or collect; and a. Within 1 year from the date of sale, the
3. The taxpayer is out of the country or owner of the delinquent real property, or
otherwise cannot be located (Sec.270, LGC) person having legal interest or his
representative, shall have the right to redeem
the property upon payment to the local
Tax Remedies of the Taxpayer treasurer the ff:
a. Amount of delinquent tax
A. Administrative b. Interest thereon
c. Expenses of sale from date of
1. Protest delinquency to date of the sale
d. Interest of not more than 2% per
Pay the Tax under Protest month on the purchase price from
date of sale to date of redemption

File Written Protest with Local Treasurer b. A certificate of redemption shall be issued,
(within 30 days from payment of tax) and the certificate of sale issued to the
purchaser shall be invalidated.

Treasurer Decides
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Remedy against the Assessment/Appeal
(within 60 days fromtoreceipt
are needed of protest)
see this picture. 1st: within 60 days from notice of assessment of
provincial, city or municipal assessor to
Approved Denied (Sec. 226, LGC)
2nd: within 30 days from receipt of decision of
LBAA to CBAA (sec. 230, LGC)
3rd: within 30 days from receipt of decision of
Apply for Tax Refund Appeal with the LBAA CBAA to CTA en banc
or Tax Credit (in case of denial of protest

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Taxation Law Summer Reviewer

4th: within 15 days from receipt of decision of 1. Court Action – appeal of CBAA’s decision to CTA
CTA en banc to SC. en banc;

Appeals in Real Property Taxation 2. Suit assailing validity of tax;

Provincial, City or Municipal Assessor
3. Recovery of refund of taxes paid (Sec. 64, PD
Within 60 days 464)
Owner/Person with legal interest
must file: 4. Suit to declare invalidity of tax due to
1. Written Petition under Oath irregularity in assessment and collection;
2. With Supporting Documents
5. Suit assailing the validity of tax sale (Sec. 83,
Local Board of Assessment Appeals PD 464 and Sec. 267, LGC)
(LBAA should decide within 120 days from receipt of

Within 30 days from receipt of VALUE-ADDED TAX

decision from LBAA,
dissatisfied party may appeal to CBAA Nature and Characteristics
• Value added is the value that a producer adds to
his raw materials or purchases (other than labor)
Central Board of Assessment Appeals before selling the new or improved product or
Party adversely affected by • VAT is an indirect tax levied on goods and
LBAA’s decision may appeal services; not on persons, and ultimately paid by
with CTA within 30 days consumers in the form of higher prices
from receipt of decision. • 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
CTA (En BANC) importation of goods into the Philippines.
• Seller is the one statutorily liable for the payment
Within 15 days 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.
• In the case of importation, the importer is the one
Supreme Court liable for the VAT
• Apply to existing contracts of sale or lease of
Condonation Real Property Taxes goods, properties or services at the time of
effectivity of RA No. 7716 (9337).
1. By Sanggunian

RPT may be condoned wholly or partially in a Person refers to any individual, trust, estate,
given LGU when: partnership, corporation, joint venture, cooperative or
a. There is general failure of crops; association
b. There is substantial decrease in the
price of agricultural or agri-based Taxable person refers to any person liable for
products; or
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c. There areis calamity.
needed to see this picture.
accordance with Sec. 236 of the Tax Code
2. By the President of the Philippines VAT-registered person refers to any person who is
¾ When public interest so requires registered as a VAT taxpayer under Sec. 236 of the
Tax Code. His status shall continue until the
cancellation of such registration.
B. Judicial
Taxable sale refers to the sale, barter, exchange
and/or lease of goods or properties, including

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Taxation Law Summer Reviewer

transactions deemed sale and the performance of ISSUE:

service for a consideration, whether in cash or in kind
Whether or not the sale of the five vessels is subject
Definition of “in the course of trade or business” to VAT?
(Rule of Regularity) HELD:
o The regular conduct or pursuit of a
commercial or an economic activity, including The court ruled that the sale was not in the ordinary
transactions incidental thereto, by any person course of the trade or business of NDC and is
regardless of whether or not the person sufficient to declare the sale as outside the coverage
engaged therein is a non-stock, nonprofit of VAT.
private organization or government entity DOCTRINE:
o Non-resident persons who perform services
in the Philippines are deemed to be making Any sale, barter or exchange of goods or services
sales in the course of trade or business, even not in the course of trade or business is not
if the performance of services is not regular subject to VAT.

Incidental to the principal business Sec 106. VAT on Sale of Goods or

o Something necessary, appertaining to, or Properties
depending upon another which is termed the
• Goods: all tangible and intangible objects
principal, something incident to the main
purpose. which are capable of pecuniary
Exceptions to the rule of regularity • Includes:
1. Any business where the gross sales or receipt do o Real properties held primarily for
not exceed P100,000 during any 12-month period sale to customers or held for lease
shall be considered principally for subsistence or in the ordinary course of business
livelihood and not in the course of trade or o the right or the privilege to use
business patent, copyright, design or model,
2. Services rendered in the Philippines by non-
plan, secret formula or process,
resident foreign persons shall be considered as
being rendered in the course of trade or
goodwill, trademark, trade brand
business. or other like property or right
o the right or the privilege to use in
the Philippines of any industrial,
commercial or scientific equipment
Section 105. Persons liable o the right or the privilege to use
1. Any person who, in the course of trade or motion picture films, film tapes
business and disc
o Sells, barters, or exchanges goods or o radio, television, satellite
properties (seller or transferor) transmission and cable television
o Leases goods or properties (lessor) time
o Renders services (service provider)
2. imports goods (importer)
Gross Selling Price: the total amount of money or
its equivalent which the purchaser pays or is
CIR v.Magsaysay TIFF
Lines, Inc. et and
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(Uncompressed) decompressor
obligated to pay to the seller in consideration of sale,
(2006) are needed to see this picture. barter or exchange of the goods or properties,
excluding the VAT. The excise tax, if any, of such
goods or properties shall form part of the gross
Pursuant to a government program of selling price.
privatization, NDC decided to sell to private
enterprise all of its shares in its wholly-owned Zero-rated transactions
subsidiary the National Marine Corporation(NMC). 1. Export sales
The NDC sold in one lot its NMC shares and five of • The sale and actual shipment of goods
its ships. from the Philippines to a foreign country

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i. Irrespective of any shipping exempt, imports taxable. Situs: country of

arrangement consumption
ii. Paid for in acceptable foreign • Cross boarder doctrine: No VAT shall be
currency or its equivalent in imposed to form part of the cost of goods
goods or services sold destined for consumption outside of the
iii. Accounted for in accordance with territorial boarder of the taxing authority.
the rules and regulations of the • Actual shipment of the goods from the
BSP Philippines to a foreign country is a
• Sale of raw materials or packaging precondition of an export sale following the
materials by a VAT-registered entity to a destination principle being adhered to by our
nonresident buyer VAT system
i. for delivery to a resident local •
export-oriented enterprise CIR v. American Express International, Inc. GR.
ii. Used in the manufacturing, No. 152609 (2006)
processing, packing, repacking The Supreme Court voided the Cross boarder
in the Philippines of the said doctrine.
buyer’s goods The court mentioned that the law neither makes a
iii. Paid for in acceptable foreign qualification nor adds a condition in determining the
currency tax situs of a zero-rated service. Under this criterion,
iv. Accounted for in accordance with the place where the service is rendered determines
the rules and regulations of the the jurisdiction to impose the VAT. Performed in the
BSP Philippines, such service is necessarily subject to its
• Sale of raw materials or packaging jurisdiction, for the State necessarily has to have “a
materials to export-oriented enterprise substantial connection” to it, in order to enforce a
whose export sales exceed 70% of total zero rate. The place of payment is immaterial;
annual production much less is the place where the output of the
• Sale of gold to the BSP service will be further or ultimately used.
• Those considered export sales under the
Omnibus Investment Code of 1987 Sales to export-oriented enterprise
• The sale of goods, supplies, equipment • Seller complies with other requirements like
and fuel to persons engaged in registration with the BOI and the PEZA
international shipping or international air • The entirety of the sales to such enterprise that is
transport operations to be zero-rated, not only a proportion to the
i. Limited to goods, supplies, actual exports made by such enterprise
equipment and fuel pertaining to
or attributable to the transport of Omnibus Investment Code: following sales,
goods and passengers from a without actual exportation are considered
port in the Philippines directly to constructively exported:
a foreign port without docking or • Sales to bonded manufacturing warehouses
stopping at any other ports in the of export-oriented manufacturers
Philippines • Sales to registered PEZA enterprises
• Sales to registered export traders operating
Export sales bonded trading warehouses supplying raw
• Zero-rated if made by VAT-registered materials used in the manufacture of export
persons products
• Exempt sales if made by person not VAT- • Sales to diplomatic missions and other
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needed to see this picture. agencies and/or instrumentalities granted tax
• Origin Principle: only national taxpayers immunities, of locally manufactured,
would be exposed to the tax, without assemble, or repacked products, whether
distinguishing between transactions paid for in foreign currency or not
“consumed” locally or abroad. Export taxable,
imports exempt. Situs: country of production RMO No. 9-2000
• Destination Principle: VAT is imposed in • Sales of goods, properties, or services made
the country in which the products or services by a VAT-registered supplier to a BOI-
are actually consumed or used. Exports

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Taxation Law Summer Reviewer

registered exported shall be accorded intended for sale or for use in the course of
automatic zero-rating business.
• Transfer of goods or properties not in the
RMC No. 74-99 course of business can take place when
• Sales made by a VAT-registered supplier to VAT-registered person withdraws goods
a PEZA-registered enterprise is subject to from his business for personal use
zero-percent VAT. 2. Distribution or transfer to:
• However, if the VAT registration of the PEZA- i. Shareholders or investors share in the
registered enterprise is an erroneous profits of VAT-registered person
registration, it is not entitled to input taxes on • Property dividends which
its purchases from its supplier constitute stocks in trade or
property primarily held for sale or
2. Foreign Currency Denominated Sale (Internal lease declared out of RE on or
Exports) after Jan.1, 1996 and distributed
• Sale to a nonresident of goods, except those by the company to its
mentioned in Section 149(automobiles) and shareholders shall be subject to
150 (non-essential goods), VAT based on the zonal value or
• Assembled or manufactured in the fair market value at the time of
Philippines distribution, whichever is
• For delivery to a resident in the Philippines applicable.
• Paid for in acceptable foreign currency ii. Creditors in payment of debt or obligation
• Accounted for in accordance with the rules 3. Consignment of goods if actual sale is not made
and regulations of the BSP within 60 days following the date such goods
• Sale of locally manufactured or assembled were consigned
goods for household and personal use to • Consigned goods returned by the
Filipinos abroad and other non-residents of consignee within the 60-day period are
the Philippines as well as returning Overseas not deemed sold
Filipinos under the Internal Export Program 4. Retirement from or cessation of business with
paid for in convertible foreign currency, respect to inventories of taxable goods existing
and accounted for in accordance with the as of such retirement or cessation
rules and regulations of the BSP shall be • Change of ownership of the business
considered export sales (when a single proprietorship
incorporates or the proprietor of a single
3. Sales to persons or entities whose exemption proprietorship sells his entire business
under special laws or international • Dissolution of a partnership and creation
agreements to which the Philippines is a of a new partnership which takes over
signatory the business
• Refer to exemptions granted under special
laws or treaties which are extended not only Not subject to output VAT
to the grantee but also to its supplier of The VAT shall not apply to goods or properties
goods existing as of the occurrence of the following:
• Effectively zero-rated sale of goods and 1. Change of control of a corporation by the
properties: refer to the local sale of goods acquisition of the controlling interest of such
and properties by a VAT-registered person to corporation by another stockholder or group of
a person or entity who was granted indirect stockholders.
tax exemption under special laws or 2. Change in the trade or corporate name of the
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• Transactions which, although not involving 3. Merger or consolidation of corporations.
actual export, are considered as constructive
export shall be entitled to the benefit of zero- Changes in or Cessation of Status of a VAT
rating registered Person
1. subject to output VAT
Transactions deemed sale a. change of business activity from VAT
1. Transfer, use or consumption not in the course of taxable status to VAT-exempt status
business of goods or properties originally

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b. approval of a request for cancellation of the initial payments of which in the year of
registration due to reversion to exempt sale do not exceed 25% of the gross selling
status price.
c. approval of a request for cancellation of o In the case of sale on the deferred-
registration due to a desire to revert to payment basis, the transaction shall be
exempt status after the lapse of 3 treated as cash sale which makes the entire
consecutive years from the time of selling price taxable in the month of sale
registration by a person who voluntarily (sale of real property where the initial
registered despite being exempt under payment exceeds 25% of the gross selling
Sec 109 (2) of the Tax Code price.
d. approval of a request for cancellation of o Initial payments: covers any down payment
registration of one who commenced made and includes all payments actually or
business with the expectation of gross constructively received during the year of
sales or receipt exceeding P1,500,000 sale
but who failed to exceed this amount o Real estate dealer: includes any person
during the first 12 months of operations engaged in the business of buying,
2. not subject to output VAT developing, selling, exchanging real
a. change of control of a corporation by the properties as principal and holding himself
acquisition of the controlling interest of out as a full or part-time dealer in real estate
such corporation by another stockholder o Transmission of property to a trustee shall
or group of stockholders not be subject to VAT if the property is to be
b. change in the trade or corporate name of merely held in trust for the trustor and/or
the business beneficiary
c. merger or consolidation of corporations
Allowable deductions from gross selling price ™ VAT is imposed on goods brought into the
a) discounts determined and granted at the time Philippines, whether for use in business or
of sale (expressly indicated in the invoice) not
b) sales returns and allowances for which a ™ Tax base = total value used by BOC in
proper credit or refund was made during the determining tariff and customs duties +
month or quarter to the buyer for sales custom duties + excise tax + other charges
previously recorded as taxable sales (postage, commission, and similar charges,
prior to the release of the goods from
Sale of Real Properties customs custody
o sale of real properties held primarily for sale ™ If the valuation used is based on volume or
to customers or held for lease in the quantity of the imported goods, the landed
ordinary course of trade or business of cost shall be the basis for computing VAT.
the seller shall be subject to VAT ™ Landed cost = invoice amount + customs
o real estate dealer shall be subject to VAT on duties + freight + insurance + other charges
the installment payments, including penalties (excise tax shall form part of the tax base)
and interest (real properties on the ™ the said tax shall be paid by the importer
installment plan) prior to the release of such goods from
o sale of residential lot exceeding P1,500,000, customs custody.
residential house and lot or other residential ™ Importer: refers to any person who brings
dwellings exceeding P2,500,000, where the goods into the Philippines, whether or not
instrument of sale was executed on or after made in the course of his trade or business.
July 1, 2005, shallQuickTime™
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Includes non-exempt persons or entities who
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picture. acquire tax-free imported goods from exempt
course of business) persons, entities or agencies
o installment sale of residential house and lot ™ Sale, transfer, or exchange of imported
or other residential dwellings exceeding goods by tax-exempt persons: In the case
P1,000,000 where the instrument was of goods imported by VAT-exempt persons,
executed prior to July 1, 2005, shall be entities or agencies which are subsequently
subject to VAT sold, transferred or exchange in the
o sale of real property on installment plan: Philippines to non-exempt persons or
sale of real property by a real-estate dealer, entities, the latter shall be considered the

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importers thereof and shall be liable for VAT xiii. Sales of electricity by generation,
due on such importation. transmission, and/or distribution
™ Importation begins when the carrying vessel companies
or aircraft enters the jurisdiction of the xiv. Franchise grantees of electric
Philippines with intention to unload therein utilities, telephone and telegraph,
™ Importation is deemed terminated upon radio and/or broadcasting television
payment of the duties, taxes and other and all other franchise grantees
charges due upon the articles, or secured to except franchise grantees of radio
be paid, at the port of entry and the legal and/or television broadcasting whose
permit for withdrawal shall have been annual gross receipt of the preceding
granted year do not exceed P10,000,000 and
franchise grantees of gas and water
OR LEASE OF PROPERTIES xv. Non-life insurance companies
(except their crop insurances),
1. Sale or exchange of service, as well as the including surety, fidelity, indemnity
use or lease of properties shall be subject to and bonding companies
12% VAT xvi. Similar services regardless of
2. Sale or Exchange of Service: the whether or not the performance
performance of all kind of services in the thereof calls for the exercise or use
Philippines for others for a fee, remuneration of the physical or mental faculties
or consideration, whether in cash or in kind 3. Sale or exchange of service shall also
i. Construction and service contract include:
ii. Stock, real estate, commercial, i. Lease or the use of or the right or
customs and immigration brokers privilege to use any copyright,
iii. Lessors of property, whether patent, design or model, plan, secret
personal or real formula or process, goodwill,
iv. Persons engaged in warehouse trademark, trade brand, or other like
services property or right
v. Lessors or distributors of ii. The lease or the use of, or the right
cinematographic film to use any industrial, commercial or
vi. Persons engaged in milling, scientific equipment
processing, manufacturing, or iii. The supply of scientific, technical,
repacking goods for others industrial or commercial knowledge
vii. Proprietors, operators, or keepers of or information
hotels, motels, rest houses, pension iv. The supply of any assistance that is
houses, inns, resorts, theaters, and ancillary and subsidiary to and
movie houses furnished as a means of enabling the
viii. Proprietors or operators of application or enjoyment of any such
restaurants, refreshment parlors, property, or right as is mentioned in
cafes and other eating places, subparagraph (b) hereof or any such
including clubs and caterers knowledge or information as is
ix. Dealers in securities mentioned in subparagraph (c)
x. Lending investor hereof
xi. Transportation contractors on their v. The supply of services by a non-
transport of goods or cargoes, resident person or his employee in
including personsandwho
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transport connection with the use of property
goods are or cargoes
needed for hire and other
to see this picture. or rights belonging to, or the
domestic common carriers by land installation or operation of any brand,
relative to their transport of goods or machinery, or other apparatus
cargoes purchased from such nonresident
xii. Common carriers by air and sea person
relative to their transport of vi. The supply of technical advise,
passenger, goods, or cargoes from assistance or services rendered in
one place in the Philippines to connection with technical
another place in the Philippines management or administration of any

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scientific, industrial or commercial 8. warehousing service: rendering personal

undertaking, venture, project or service of a warehouseman such as
scheme i. engaging in the business of receiving
vii. The lease of motion picture films, film and storing goods for compensation
tapes, and discs ii. receiving goods and merchandise to
viii. The lease or use of, or the right to be stored in his warehouse for hire;
use, radio, television, satellite or
transmission and cable television iii. keeping and storing goods for others,
time as a business and for use
4. Lessors of property – all forms of property 9. miller: a person engaged in milling for others
for lease, whether real or personal, are liable (except palay into rice and corn into corn
to VAT grits, and sugarcane into raw sugar) is
5. real estate lessor: includes any person subject to VAT on sale of services.
engaged in the business of leasing or • Cash: VAT shall be based on his gross
subleasing real property receipts for the month or quarter
i. regardless of the place where the • Receives a share of the milled products
contract of lease or licensing instead of cash: VAT shall be based on
agreements was executed if the the actual market value of his share
property leased or used is located • Sale by the owner or miller of his share
in the Philippines of the milled product (except rice, corn
ii. VAT on rental and/or royalties grits and raw sugar) shall be subject to
payable to non-resident foreign corp VAT)
or owners for the sale of services 10. all receipts from service, hire, or operating
and use or lease of properties in the lease of transportation equipment not subject
Philippines shall be based upon on to the percentage tax on domestic carriers
the contract price agreed upon by and keepers of garages shall be subject to
the licensor and the licensee VAT
6. non –resident lessor/owner: any person, 11. common carries: refers to persons,
natural or juridical, an alien, or a citizen who corporations, firms or associations engaged
establishes to the satisfaction of the CIR the in the business of carrying or transporting
fact of physical presence abroad with definite passengers or goods or both, by land, water
intention to reside therein, and who or air for compensation, offering services to
owns/leases properties, real or personal, the public and shall include transportation
whether tangible or intangible, located in the contractors
Philippines 12. common carriers by land with respect to
7. Advance payment: their gross receipts from the transport of
i. A loan to the lessor from the lessee, passengers including operators of taxicabs,
or utility cars for rent or hire driven by the
ii. An option money for the property, or lessees, and tourist buses used for the
iii. A security deposit to insure the transport of passengers shall be subject to
faithful performance of certain percentage tax
obligations of the lessee to the 13. domestic common carriers by air and sea are
lessor, or subject to 12% VAT on their gross receipts
iv. Pre-paid rental from their transport of passengers, goods or
• If the advance payment is for the faithful cargoes from one place in the Philippines to
performance of certain obligations of the another place in the Philippines
it is not subject
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• A security deposit that is applied to rental
are needed to see this picture.
transmission, and distribution companies
shall be subject to VAT at the time of its shall be subject to 12% vat on their gross
application receipts (sale of power or fuel generated
• If the advance payment constitutes a pre- through renewable sources of energy
paid rental, then such payment is taxable such as biomass, solar, wind,
to the lessor in the month when received, hydropower, geothermal, ocean energy,
irrespective of the accounting method and other emerging energy sources using
employed by the lessor technologies such as fuel cells and

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hydrogen fuels shall be subject to 0% • gross receipts: total premiums collected,

VAT) whether paid in money, notes, credits or
15. generation companies: refers to persons or any substitute for money
entities authorized by the ERC to operate • non-life reinsurance premiums are
facilities used in the generation of electricity. subject to VAT
16. Gross receipts (sale of electricity): • insurance and reinsurance commissions,
i. Total amount charged by generation whether life or non-life, are subject to
companies for the sale of electricity VAT
and related ancillary services; and/or • Vat due from the foreign reinsurance
ii. Total amount charged by company is to be withheld by the local
transmission companies for insurance company and to be remitted to
transmission of electricity and related the BIR
ancillary services; and/or, 20. pre-need companies: the compensation for
iii. Total amount charged by distribution their services is the premiums or payments
companies and electric cooperatives received from the plan holders
for distribution and supply of 21. health maintenance organizations (HMO)
electricity and related electric • gross receipts: total amount of money or
services. The universal charged its equivalent representing the service
passed on and collected by fee actually or constructively received
distribution companies and electric during the taxable period for the services
cooperatives shall be excluded from performed or to be performed , excluding
the computation of the GR VAT
17. dealers in securities and lending
investors: subject to VAT on the basis of Gross Receipts: total amount of money or its
their gross receipts. For dealer in securities, equivalent representing the contract price,
the term gross receipts means gross compensation, service fee, rental or royalty, including
selling price less cost of the securities the amount charged for materials supplied with the
sold services and deposits applied as payments for
18. service of franchise grantees of telephone services rendered and advance payments actually or
and telegraph, radio and/or television constructively received during the taxable period for
broadcasting, toll road operations and all the services performed or to be performed for
other franchise grantees, except gas and another person, excluding VAT.
water utilities, shall be subject to VAT
• radio and/or television broadcasting: Constructive receipt: occurs when the money
annual gross receipt of the preceding consideration or its equivalent is placed at the control
year do not exceed P10,000,000 shall of the person who rendered the service without
not be subject to VAT but 3% restrictions by the payor.
percentage tax. • Deposit in banks which are made
• Gas and water utilities: subject to 2% available to the seller of service without
franchise tax on their gross receipts restrictios
• Telephone and telegraph: subject to • Issuance by the debtor of a notice to
VAT on their gross receipts derived from offset any debt or obligation and
their telephone, telegraph, telewriter acceptance thereof by the seller as
exchange, wireless and other payment for services rendered
communication equipment services • Transfer of amounts retained by the
• Amounts received for overseas payor to the account of the contractor
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originating from the Philippines are Zero-rated sales of service
subject to percentage tax and hence The following services performed in the Philippines
exempt from VAT by a VAT-registered person shall be subject to 0%
19. non-life insurance companies: including VAT rate:
surety, fidelity, indemnity and bonding 1. processing, manufacturing, or repacking
companies are subject to VAT goods for other persons doing business
• not liable to premium tax under Sec. 23 outside the Philippines,
(percentage tax) of the Tax Code

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a. which goods are subsequently technologies such as fuel cells and

exported hydrogen fuels.
b. where the services are paid for in • Zero rating shall apply strictly to the sale
acceptable foreign currency of power or fuel generated through
c. accounted for in accordance with renewable sources of energy, and shall
the rules and regulations of the BSP not extend to the sale of services related
2. services other than processing, to the maintenance or operation of plants
manufacturing, or repacking generating said power
a. rendered to a person engaged in
business conducted outside the Effectively Zero-Rated Sale of Services: refer to
Philippines or to a non-resident the local sale of services by a VAT-registered person
person not engaged in business to a person or entity who was granted indirect tax
who is outside the Philippines when exemption under special laws or international
the services are performed [CIR v. agreement (limited to 3, 4, 5)
Busmeirter, et al, GR No. 153205 • Concerned taxpayer must seek prior
(2007) require performance of approval or prior confirmation from the
services to nonresident to qualify as appropriate offices to the BIR so that a
zero-rated.] transaction is qualified for effectively
b. The consideration of which is paid zero-rating
for in acceptable foreign currency • Without an approved application for
c. accounted for in accordance with effective zero-rating, the transaction
the rules and regulations of the BSP otherwise entitled to zero-rating shall be
3. services rendered to persons or entities considered exempt
whose exemptions under special laws or
international agreements to which the SEC 109. VAT EXEMPT TRANSACTIONS
Philippines is a signatory effectively subjects • Refer to the sale of goods or properties
the supply of such services to zero percent and/or services and the use or lease of
rate properties that is not subject to VAT and the
4. services rendered to persons engaged in seller is not allowed any tax credit of VAT on
international shipping or air transport purchases
operations, including leases of property for Exempt transactions:
use thereof 1. sale or importation of agricultural and
• shall not pertain to those made to marine food products in their original state,
common carriers by air and sea relative livestock and poultry of a kind generally
to their transport of passengers, goods or used as, or yielding or producing foods for
cargoes from one place in the Philippines human consumption; and breeding stock
to another place in the Philippines and genetic materials thereof
(subject to 12% VAT) • Livestock: cows, bulls and calves, pigs,
5. services performed by subcontractors sheep, goats and rabbits
and/or contractors in processing, converting, • Poultry: fowls, ducks, geese and turkey
or manufacturing goods for an enterprise • Does not include fighting cocks, race
whose export sales exceed 70% of the total horses, zoo animals and other animals
annual production generally considered as pets
6. transport of passengers and cargo by • Marine food products: fish and
domestic air or sea carriers from the crustaceans, such as but not limited to,
Philippines to a foreign country. eels, trout, lobster, shrimps, prawns,
• Gross receipts of international
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doing business in the Philippines and
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• Meat, fruit, vegetables and other
international sea carriers doing business agricultural and marine food products are
in the Philippines are still liable to considered in their original state even if
percentage tax hey undergone the simple process of
7. sale of power or fuel generated through preparation or preservation for the
renewable sources of energy such as, but market : freezing, drying, salting, broiling,
not limited to, biomass, solar, wind, roasting, smoking or stripping, shrink
hydropower, geothermal and steam, ocean wrappings in plastic, vacuum packing,
energy, and other emerging sources using

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tetra-pack, and other similar packaging • Upon the production of evidence

methods satisfactory to the CIR that such
• Polished and/or husked rice, corn persons are actually coming to
grits and raw cane sugar and settle in the Philippines
molasses, ordinary salt and copra • The change of residence is
shall be considered as agricultural bonafide
product in their original state 5. services subject to percentage tax
• Sugar whose content of sucrose by 6. services by agricultural contract growers
weight, in the dry state : parameter and milling for others of palay into rice, corn
reading of 99.5 and above are presumed into grits and sugar into raw sugar
to be refined sugar 7. medical, dental, hospital and veterinary
• Cane sugar produced from the following services, except those rendered by
shall be presumed to be refined sugar: professionals
o Product of a refining process • laboratory services are exempted
o Products of sugar refinery • if the hospital or clinic operates a
o Product of a production line of a pharmacy or drug store, the sale of
sugar mill accredited by the BIR drugs and merchandise is subject to
to be producing and/or capable VAT
of producing sugar with 8. Educational services rendered by private
polarmeter reading of 99.5 educational institutions duly accredited by
• Bagasse is not included in the exemption the DepED, CHED and TESDA and those
provided for under this section rendered by government educational
2. sale or importation of fertilizers, seeds, institutions
seedlings and fingerlings, fish, prawn, • Does not include seminars, in-
livestock and poultry feeds, including service training, review classes and
ingredients, whether locally produced or other similar services rendered by
imported, used in the manufacture of persons who are not accredited by
finished feeds (except specialty feeds for the DepED, the CHED and/or
race horses, fighting cocks, aquarium TESDA
fishes, zoo animals and other animals 9. Services rendered by individuals pursuant to
generally considered as pets) an employer-employee relationship
3. importation of personal and household 10. Services rendered by regional or area HQ
effects established in the RP by multinational
• belonging to residents of the corporations which act as supervisory,
Philippines returning from abroad communications and coordinating
and non-resident citizens coming to centers for their affiliates, subsidiaries or
resettle in the Philippines branches in the Asia Pacific Region and do
• such goods are exempt fro customs not earn or derive income from the RP
duties under the Tariff and Customs 11. Transactions which are exempt under
Code of the Philippines international agreements to which the RP is
4. Importation of professional instruments and a signatory
implements, wearing apparel, domestic 12. sales by agricultural cooperatives duly
animals, and personal household effects registered and in good standing with the
(except any vehicle, vessel, aircraft, CDA to their members, as well as sale for
machinery and other goods for use in the their produce, whether in its original state or
manufacture and merchandise of any processed form, to non-members
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• Belonging to persons coming to inputs, machineries and equipment,
settle in the Philippines including spare parts thereof, to be
• For their own use and not for sale, used directly and exclusively in the
barter or exchange, production and/or processing of
• Accompanying such persons or their produce
arriving within 90 days before or 13. Gross receipts from lending activities by
after their arrival credit or multi-purpose cooperatives duly
registered and in good standing with the

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14. Sales by non-agricultural, non-electric and units leased for not more than 10T)
non-credit cooperatives duly registered with exceeds 1.5M. Otherwise, subject to
and in good standing with the CDA 3% percentage tax
• Share capital contribution of each 18. Sale, importation, printing or publication of
member does not exceed 15,000 books and any newspaper, magazine,
and regardless of the aggregate review, or bulletin
capital and net surplus ratably • which appears at regular intervals
distributed among the members • with fixed prices for subscription and
• Importation of machineries and sale
equipment, including spare parts • which is not devoted principally to the
thereof, to be used by them are publication of paid advertisements
subject to VAT 19. Sale, importation, or lease of passenger or
15. Export sales by persons who are not VAT- cargo vessels and aircraft, including engine,
registered equipment and spare parts thereof for
16. The following sales of real properties are domestic or international transport
exempt from VAT: operations
• Not primarily held for sale to • Limited to 150 tons and above, including
customers or held for lease in the engine and spare parts of said vessels
ordinary course of trade or business • Comply with the age limit requirement,
• Sale of real properties utilized for at the time of acquisition counted from
low-cost housing the date of he vessel’s original
• A subdivision or a condominium commissioning
registered and licensed by the o Passenger/cargo vessel: 15
HLURB years old
• Undertaken by the gov’t or o Tankers: 10 years old
private developers o High-speed passenger crafts: 5
• Unit selling price ceiling: years old
• Utilized for socialized housing • Exemption shall be subject to the
• Price ceiling per unit: P225,000 provisions of “The Domestic Shipping
• Residential lot valued at 1.5M and Development Act”
below, or house and lot and other 20. Importation of fuel, goods and supplies by
residential dwellings valued at 2.5M persons engaged in international shipping or
and below air transport operations
• Instrument must be executed on • Shall be used exclusively or shall pertain
or after July 1, 2005 to the transport of goods and/or
• If two or more adjacent passengers from a port in the Philippines
residential lots are sold or directly to a foreign port without stopping
disposed in favor of one buyer, at any other port in the Philippines
for the purpose of utilizing the 21. Services of banks, non-bank financial
lots as one residential lot, the intermediaries performing quasi-banking
sale shall be exempt from VAT functions, and other non-bank financial
only if the aggregate value of intermediaries subject to percentage tax
the lots do not exceed 1.5M such as money changers and pawnshops
17. Lease of residential units 22. Sale or lease of goods or properties or the
• Monthly RENTAL: performance of services other than the
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P10,000are needed to see this picture. transaction mentioned in the preceding
• If the aggregate of such rentals of the paragraphs, the gross annual sales and/or
lessor during the year do not exceed receipts do not exceed 1.5M.
1.5M,: exempt from VAT but subject to • For purposes of the threshold of 1.5M,
3% percentage tax the husband and wife shall be
• GR from rentals exceeding 10T per considered separate taxpayer.
month per unit shall be subject to VAT if • The aggregation rule for each taxpayer
the aggregate annual GR from said shall apply
units only (not including the GR from

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A VAT-registered person may, elect that that the Requisites:

exemption shall not apply to his sales of goods or • A VAT-registered person purchases or
services or properties which is irrevocable for a imports capital goods (which are depreciable
period of 3 years. goods for income tax purposes)
• Aggregate acquisition cost of which
Credits for Input Tax (exclusive of VAT) in a calendar month
Input Tax exceed 1M
• The VAT due on or paid by a VAT-registered
person on importation of goods or local Manner of claiming input tax
purchases of goods, properties, or services, 1. estimated useful life of a capital good is 5
including lease or use of properties, in the years or more:
course of trade or business a. input tax spread evenly over a period
• Include the transitional and the presumptive of 60 months
input tax b. commenced in the calendar month
• Includes input taxes which can be directly when the capital good is acquired
attributed to transactions subject to the VAT 2. estimated useful life is less than 5 years:
plus a ratable portion of any input taxes a. input tax spread evenly on monthly
which cannot be directly attributed to either basis by the actual number of
the taxable or exempt activity months comprising the estimated
• Evidenced by a VAT invoice or official useful life of the capital good
receipt issued by a VAT-registered person b. commenced in the calendar month
1. Purchase or impartation of goods when the capital good is acquired
a) For sale ; or Aggregate acquisition cost does not exceed 1M:
b) For conversion into or intended to total input taxes will be allowable as credit against
form part of a finished product for output tax in the month of acquisition
sale, including packaging materials;
or Aggregate acquisition cost of a depreciable asset
c) For use as supplies I the course of in any calendar month: refers to the total price
business; or agreed upon for one or more assets acquired and not
d) For use as raw materials supplied in on the payments actually made during the calendar
the sale of services; or month.
e) For use in trade or business for
which deduction for depreciation or If the depreciable capital good is sold/transferred
amortization is allowed under the within the period of 5 years or prior to the
Tax Code exhaustion of the amortizable input tax thereon:
2. Purchase of real properties for which a entire unamortized input tax on the capital goods
VAT has actually been paid sold, can be claimed as input tax credit during the
3. Purchases of services in which a Vat has month or quarter when the sale or transfer was made
actually been paid; but subject to limitation
4. Transactions deemed sale
5. Transitional input tax Apportionment of Input Tax on Mixed
6. Presumptive input tax Transactions
7. Transitional input tax credits allowed A vat-registered person who is also engaged in
under the transitory and other provisions transactions not subject to VAT shall be allowed to
of these Regulations recognize input tax credit on transactions subject to
VAT as follows:
Persons who Can TIFF
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(Uncompressed) Input Tax Credit • all the input taxes that can be directly
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1. to the importer upon payment of VAT prior to attributed to transactions subject to VAT may
the release of goods from customs custody be recognized for input tax credit
2. To the purchaser of the domestic goods or o input taxes which are directly
properties upon consummation of the sale; or attributable to Vat taxable sales of
3. To the purchaser of services or the lessee or goods and services from the
licensee upon payment of the compensation, Government or any of its political
rental, royalty or fee subdivisions, instrumentalities or
agencies, including GOCC shall not
Claim for Input Tax on Depreciable Goods be credited against output taxes

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arising from sales to non-government A. Transitional Input Tax Credits on

entities Beginning Inventories (2%)
• if any input tax cannot be directly attributed to o Taxpayers who became VAT-registered
either a VAT taxable or VAT-exempt persons upon exceeding the minimum
transaction, the input tax shall be pro-rated to turnover of 1.5M in any 12-month period
the VAT taxable and VAT-exempt o Voluntarily register even if their turnover
transactions does not exceed 1.5M (except franchise
o only the ratable portion pertaining to grantees of radio and television
transactions subject to VAT may be broadcasting whose threshold is 10M.
recognized for input tax credit Entitled to a transitional input tax on the
¾ input tax attributable to VAT-exempt sales inventory on hand as of the effectivity of their
shall not be allowed as credit against the VAT registration
output tax but should be treated as part of 1. goods purchase for resale in their
CGS present condition;
¾ for persons engaged in both zero-rated 2. Materials purchased for further
sales and non-zero rated sales, the processing, but which have not yet
aggregate input taxes shall be allocated undergone processing;
ratably between the zero-rated sale and 3. goods which have been
non-zero-rated sale manufactured by the taxpayer;
4. goods in process for sale;
Determination of Input Tax Credit during a 5. goods and supplies for use in the
taxable month or quarter course of the taxpayer’s trade or
All creditable input taxes during the month or quarter business as a VAT-registered person
+ any amount of input taxes carried-over from TIT = 2% of the value of the beginning inventory on
preceding month/qtr hand or actual VAT paid on such goods, materials
- (claim for VAT refund or tax credit certificate) and supplies, whichever is higher
- (other adjustments – purchase returns or o such amount shall be creditable against the
allowances) output tax of VAT-registered person
- (input tax attributable to exempt sales) o value allowed for income tax purposes on
- (input tax attributable to sales subject to final VAT inventories shall be the basis for the
withholding) computation of the 2% TIT, excluding goods
Input Tax Credit that are exempt from VAT

Determination of the Output Tax and VAT payable

and Computation of VAT Payable or Excess Tax B. Presumptive Input Tax Credits (4%)
Credit Covered: Persons or firms engaged in the
Computation of output tax processing of sardines, mackerel, and milk and in
1. Goods or properties: Gross selling price x the manufacturing refined sugar, cooking oil and
VAT rate packed noodle-based instant meals
2. Sellers of service: Gross receipts x VAT Rate: 4% of the gross value in money of their
rate purchases of primary agricultural products which
are used as inputs to their production
VAT payable computation: Creditable: against the output tax
Output Tax Processing: pasteurization, canning and
- Input Tax activities which through physical or chemical
Vat payable process alter the exterior texture or form or inner
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Output) or Excess Input Tax prepare it for special use to which it could not
If at the end of any taxable quarter the output tax > have been put in its original form or condition
the input tax: the excess shall be paid by the VAT-
registered person Claims for Refund/Tax Credit Certificate of Input
Ex. Output tax 100 Tax
Input tax (80) 1. Zero-rated and Effectively Zero-rated Sales
VAT Payable 20 of goods, Properties or services

Transitional/Presumptive Input Tax Credits

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o Vat-registered person may apply for the • CIR shall grant a TCC/refund for
issuance of a TCC/refund of input tax creditable input taxes within 120 days
attributable to such sales from the date of submission of complete
o Input tax that may be subject of the claim documents in support of the application
shall exclude the portion of input tax that • Taxpayer may appeal to the CTA within
has been applied against the output tax 30 days from receipt of said denial
o Application should be filed within 2 • If no action on the claim for refund has
years after the close of the taxable been taken by the CIR after the 120 day
quarter when such sales were made period from the date of submission of the
o In case of zero-rated sales: the application with complete documents, the
payments for the sales must have been taxpayer ,may appeal to the CTA within
made in acceptable foreign currency duly 30 days from the laps of the 120-day
accounted for in accordance with the period
BSP rules and regulations 5. Manner of giving refund
o Taxpayer is engaged in both zero- • Refund shall be made upon warrants
rated or effectively zero-rated sales drawn by the CIR or by his duly
and in taxable or exempt transactions authorized representative without the
and the amount of creditable input tax necessity of being countersigned by the
due or paid cannot be directly and Chairman of COA
entirely attributed to any one of the • Refunds under this paragraph shall be
transactions: only the proportionate subject to post audit by the COA
share of input taxes allocated to zero-
rated or effectively zero-rated sales can COURT OF TAX APPEALS
be claimed for refund or issuance of a
TCC What is the new law governing the CTA?
o A person engaged in the transport of • RA 9282, an act expanding the jurisdiction of
passenger and cargo by air or sea the CTA, and elevating it to the level of the
vessels from the Philippines to a Court of Appeals
foreign country: input taxes shall be
allocated ratably between his zero-rated What is the composition of the CTA and how may
sales and non-zero-rated sales. the CTA rule?
2. Cancellation of VAT registration • CTA shall consist of a Presiding Justice and
Why: due to retirement from or cessation of five (5) Associate Justice
business, or due to changes in or cessation
• They may rule as follows:
of status under Sec 106(c) of the TAX Code
1. En banc
When: within 2 years from the date of
2. Sitting in 2 divisions, each division
with 3 justices each
What: apply for the issuance of a TCC for
any unused input tax which he may use in
What is the quorum?
payment of his other internal revenue taxes
• The affirmative votes of 4 Justices for
However: shall only be entitled to a refund if
sessions En Banc and 2 Justices for
he has no internal revenue tax liabilities
sessions of a Division shall be necessary for
against which the TCC may be utilized
he rendition of a decision or resolution
3. Where to file the claim for refund/TCC
o Filed with the appropriate BIR office (LTS • When the required quorum cannot be
or RDO) having jurisdiction over the constituted, the Presiding Justice shall
principal placeQuickTime™
of businessand a of the designate any Justice of other Divisions of
TIFF (Uncompressed) decompressor
taxpayer are needed to see this picture. the court to sit temporarily therein
o Direct exporters: may file their claim for
TCC with the One Stop Shop Center of What is the APPELLATE JURISDICTION OF THE
the DOF CTA?
o Filing of the claim with one office shall • The CTA shall exercise exclusive appellate
preclude the filing of the same claim with jurisdiction to review by appeal:
another office 1. Decisions of CIR
4. Period within which refund or TCC of input 2. Inaction of CIR
taxes shall be made

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3. Decisions of RTC on local tax b. Except: appeal by filing a petition for

cases review to En Banc in case of
4. Decisions of Commissioner of decisions of CBAA or RTC in the
Customs exercise of its appellate jurisdiction
5. Decisions of CBAA (on exercise of 2. In case the decision of the Division is
appellate jurisdiction over RPT tax adverse:
cases decided by LBAA) a. File MR with same Division within 15
6. Decisions of DOF on customs days from notice thereof
cases elevated to him on 3. In case resolution of Division on the MR or
automatic review due to adverse new trial is still adverse:
decision versus the government a. File petition for review with CTA En
7. Decisions of DTI (on non- Banc
agricultural products) and 4. IN case the decision of the CTA En Banc is
Department of Agriculture (on adverse, file a review on certiorari with the
agricultural products) involving SC pursuant to Rule 45 of Rules of Court
dumping and countervailing
duties Where can you appeal a decision of a local
assessment board?
Does the CTA have jurisdiction over criminal • To the Central Board of Assessment Appeals
cases? (CBAA) and not yet to the CTA.
• Yes, the CTA have jurisdiction over the • It is only after the CBAA has ruled that an
following cases involving criminal offenses: appeal may be made to the CTA
1. ORIGINAL - FOR CRIMINAL ACTS • In which case, the appeal shall be by petition
UNDER NIRC AND CUSTOMS for review to the CTA En Banc
• Over appeals from the decision of RTC in tax What is the rule on suspension of collection?
cases • General Rule: no injunction to restrain
1. Over petitions for review of the collection of taxes
decision of the RTC in the exercise • Exception: Under Section 9 of RA 9282,
of their appellate jurisdiction over tax suspension is allowed when the following
cases originally decided by the MTC conditions concur:
o It is an appeal to the CTA from a
Does the CTA have jurisdiction over tax decision of CIR, COC or the RTC,
collection cases? provincial, municipal treasurer, or the
• Yes, the CTA have jurisdiction over the Secretary of Finance, Secretary of
following cases involving tax collection: Trade and Industry or Secretary of
1. ORIGINAL – 1M OR ABOVE Agriculture, as the case may be; and
• Exclusive appellate jurisdiction in tax o In the opinion of the Court, the
collection cases: collection by the aforementioned
1. Over appeals from Decision of RTC government agencies may
in tax collection cases jeopardize the interest of the
2. Over petitions for review of the Government and/or taxpayer
decision of the RTC in the exercise In case of suspension, what is the taxpayer
of their appellate jurisdiction over tax required to do?
collection cases originally decided by • The taxpayer will be required to either
the MTC deposit the amount claimed or file a surety
QuickTime™ and a
TIFF (Uncompressed) decompressor bond for not more than double the amount
are needed to see this picture.
What is the Procedure? with the Court.
1. Appeal within 30 days from receipt of
decision or period of inaction of CIR, COC,
Secretary of Finance, Secretary of Trade and
Industry or Secretary of Agriculture, or the
CBAA or the RTC:
a. Generally, appeal will be to a PART VI - TARIFF AND CUSTOMS CODE

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1. TARRIF: Custom duties, toll or tribute 2. To establish import quota or to ban imports of
payable upon merchandise to gov’t. any commodity, as may be necessary and
2. CUSTOMS DUTIES: Tax assessed upon 3. To impose an additional duty on all imports
merchandise from or exported to a foreign not exceeding 10% ad valorem whenever
country (Garcia v. Executive Sec., 211 necessary.
SCRA 227 [1992])
modified by the President upon investigation FLEXIBLE TARIFF CLAUSE
by the Tariff Commission and 1. Conduct by the Tariff Commission of an
recommendation of the NEDA in the interest investigation in public hearing.
of national economy, general welfare and • The Commission shall also hear the
national security. views and recommendations of any
gov’t office agency or instrumentality
Dumping Countervailing Marking Discriminato • The NEDA thereafter submits its
Duty Duty Duty ry Duty recommendation to the President.
Imposing Sec. of Commissi President of 2. The power of the President to increase or
Authority finance oner of the decrease the rates of import duty within
Special Customs Philippines the abovementioned limits fixed in the
Committee Code shall include the modification in the
on Anti- form of duty.
Dumping • In such a case, the corresponding ad
(compose valorem or specific equivalents of the duty
d of Sec. with respect to the imports from the principal
of Finance competing foreign country for the most recent
as representative period shall be used as bases
Chairman; (Sec. 401, TCC)
DTI and 1. Arrastre charge
either the 2. Wharfage due- counterpart of license,
Sec. of charged not for the use of any wharf but
Agriculture for a special fund- Port Works Fund
if article in 3. Berthing fee
question is 4. Harbor fee
agri. 5. Tonnage due
Product or
the Sec. of Meaning and Scope of the Tariff and Customs
Labor if Laws
non-agri.) • Includes not only the provisions of the Tariff
and Customs Code (TCC) and regulations
pursuant thereto, but all other laws and
FLEXIBLE TARIFF CLAUSE regulations which are subject to the Bureau
The President may fix tariff rates import and export of Customs (BOC) or otherwise within its
quotas, etc. under TCC (See Sec. 28, Art. VI, jurisdiction.
Constitution and Sec 401, TCC) • As to its scope: tariff and custom laws extend
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1. To increase, reduce decompressor
TIFF (Uncompressed) or remove existing not only to the provisions of the TCC but to
are needed to see this picture.
protective rates of import duty (including any all other laws as well, the enforcement of
necessary change in classification) which is entrusted to BOC.
ƒ The existing rates may be increased
or decreased to any level on one or BUREAU OF CUSTOMS
several stages but in no case shall
the increased rate of import duty be FUNCTIONS:
higher than a maximum of 100% ad 1. Assessment and collection of the lawful revenues
valorem. from imported articles and all other dues, fees,
charges, fines and penalties accruing under the

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tariff and customs laws. ƒ In case the articles are free of duties, taxes
2. Prevention and suppression of smuggling and and other charges until they have legally left
other frauds upon the customs. the jurisdiction of customs (Sec. 1202)
3. Supervision and control over the entrance and
clearance of vessels and aircraft engaged in Intention to Unload
foreign commerce. • Even if not yet unloaded, and there is
4. Enforcement of tariff and customs laws, rules and unmanifested cargo forfeiture may take
regulations relating to the tariff and customs place because importation has already
administration. begun.
5. Supervision and control over the handling of
foreign mails arriving in the Phils. For the GOODS PROHIBITED FROM BEING IMPORTED
purpose of the collection of the lawful duty on 1. Absolutely prohibited
dutiable articles thus imported and prevention of a. Weapons of war
smuggling through the medium of such mails b. Immoral/obscene or insidious
6. Supervision and control all import and export articles
cargoes, landed or stored in piers, airports, c. Articles for treason
terminal facilities including container yards and d. Prohibited drugs/narcotics
freight stations for the protection of government e. Gambling paraphernalia/devices
revenue. f. Those prohibited under Special Laws
7. Exercise exclusive jurisdiction over seizure and (Sec 102 TCC)
forfeiture cases under the tariff and customs
laws. (Sec. 602) 2. Qualifiedly prohibited
o Where such conditions as to
JURISDICTION OF COLLECTOR OF CUSTOMS warrants a lawful importation do not
OVER IMPORTATION OF ARTICLES exist, the legal effects of the
1. Cause all articles for importation to be importation of qualifiedly prohibited
entered in the customhouse articles are the same as those
2. Cause all such articles to be appraised and absolutely prohibited articles.
classified (Auyong Hian v. CTA, 59 SCRA 110)
3. Assess and collect the duties, taxes and
other charges thereon Conditionally-free from tariff and customs duties
4. Hold possession of all imported articles until • Certain imported articles are exempt from
the duties, taxes and other charges are paid import taxes upon compliance with certain
thereon (Sec 1206) requirements. These are
1. Those provided for in Sec. 105 of the
1. All the seas within the jurisdiction of the 2. Those granted to government
Phils. agencies, GOCC with agreements
2. All coasts, ports, airports, harbors, bays, with foreign countries;
rivers and inland waters whether navigable or 3. Those given to international
not from the sea (1st par., Sec. 603) institutions entitled to exemption by
agreement or special law; and
APPLICATION OF THE TCC 4. Those that may be granted by the
ƒ Only after importation has begun but before President upon Neda’s
importation is terminated recommendation.
• Exempt articles under Sec. 105
TIFF (Uncompressed) decompressor •
BEGINNING are needed to see this picture.
Article Conditions
ƒ When the conveying vessel or aircraft enters Animals and plants • For scientific, experimental,
the jurisdiction of the Philippines with the
propagation, botanical,
intention to unload therein
breeding, zoological and
national defense purposes
ƒ Upon payment of the duties, taxes, and other
Aquatic products o caught or gathered by
charges due upon the articles, or secured to
vessels of Philippine registry
be paid at the port of entry and legal permit
o Not have landed in foreign
for withdrawal shall have been granted

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territory, or if landed, solely analogous personal or

for transshipment household effects,
Equipment used o Bond= 1 ½ x of ascertained excluding vehicles,
for the salvage of duties, taxes and charges watercraft, aircraft and
vessels or aircraft o Must be exported within 6 animals, purchased in
not available months foreign countries by
locally residents of the
Costs of repair o Phil must not have adequate Philippines which were
made in foreign facilities to make repair necessary, appropriate
country of Phil o Vessel was compelled by and normally used for
vessels or aircraft weather or casualty to go to a their comfort and
foreign port of repair convenience during
o Excludes value of article their stay abroad,
used for repair accompanying them on
Articles brought o to be re-exported upon their return or arriving
into the Philippines completion of the repair, within a reasonable
for repair, processing or reconditioning time which, barring
processing, or o Bond = 1 ½ x of ascertained unforeseen and
reconditioning duties, taxes and charges fortuitous events, in no
Trophies, prizes ( case shall exceed 60
medals, badges, days after the owner’s
cups) Those return, subject however
received as to the following
honorary provisions:
distinction 1. That the personal and
Samples in such o models not adopted for household effects shall
quantity and of practical use, and neither be in
such dimensions o samples not for sale commercial quantities
or constructions as o marked sample sale nor intended for barter,
to render them punishable by law sale or hire and that the
unsaleable or of o for purpose of introducing total dutiable value of
no appreciable new product which shall not exceed
commercial value, o imported by person duly P10,000
registered and identified to 2. That the returning
be engaged in that trade resident has not
o Importations authorized by previously availed of
Sec of Finance the privilege under this
Personal and o formally declared and section within 365 days
household effects listed before departure prior to his arrival
of returning Phil and identified under 3. That a 50% ad valorem
residents oath before the duty across the board
Collector of Customs shall be levied and
when exported from the collected on the
Phil by such returning personal and
residents upon their household effects in
departure therefrom or excess of P10,000
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TIFF (Uncompressed) their stay abroad
Wearing apparel, • arriving within a
are needed to see this picture.
o personal and articles of personal reasonable time, before
household effects adornment, toilet or after the owners,
including wearing articles, portable • in use of and necessary
apparel, articles of tools and and appropriate for the
personal adornment instruments, wear or use of such
(except luxury items) theatrical persons according to
toilet articles, costumes and their profession or
instruments related to similar personal position
one’s profession and effects • for the immediate

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Taxation Law Summer Reviewer

accompanying purposes of their by foreign country must grant

travelers or journey and their embassies, same privilege to Phil.
tourists in their present comfort and legations, agencies
baggage convenient. agencies of foreign
Personal and • Accompany them or gov’t
household effects, arrive at a reasonable Articles for Such privileges must be
vehicles of foreign time personal or family accorded in a special
consultants and • In quantities and kind use of members agreement between
experts hired or necessary and suitable and attaches of Phil and the foreign
rendering service to the profession, rank foreign embassies, country
to gov’t, including or position legations, consular Privilege may be granted
staff and families • For their own use, NOT officers and other only upon specific
for sale, barter, hire reps of foreign instructions of Sec. of
• Collector may require: gov’t Finance which will be
written commitment or given only upon request
bond of the DFA
Professional • In quantities and kind Articles donated to • Org not for profit
instruments, tools necessary and suitable or for account of • For free distribution to
of trade, wearing to the profession, rank relief organization the needy
apparel, domestic or position Containers, • Except those that are
animals, personal • For their own use, NOT holders and similar reusable for shipment
and household for sale, barter, hire receptacles or transportation of
effects belonging • Change of residence is goods
to persons coming bona fide Supplies of vessel • For use or consumption
to settle in the Phil • Privilege of free entry or aircraft of passengers on board
and OFW was never granted to • Any surplus or excess
them before or qualifies shall be dutiable
under LOI 105, 163, Articles and • Vessels must have
210 salvage after 2 been wrecked or
Articles used • Must file bond years from filing abandoned in Phil
exclusively for • Exported within 6 protest waters
public months Coffins or urns • Not exceed P10,000
entertainment; • Not exhibited for profit containing human
display in public • Otherwise, confiscation remains, bones
expos; exhibition +penalty ashes. Personal
or competition for and household
prizes; devices for effects of
projecting picture deceased except
Brought by foreign • Must file a bond vehicles
film producers for • Exported within 6 Economic,
making or months (unless technical,
recording motion extended by the vocational,
pictures on Collector for another 6 scientific,
location in Phil. months) philosophical,
• Principal actors are historical, and
Photographic and Filipinos
QuickTime™ and a cultural books and
cinematographic TIFFare(Uncompressed)
• to see
this picture. by importer publications
films, that the exposed films Phil articles Note that if a drawback or
undeveloped, are same films previously bounty was allowed to any Phil
exposed outside previously exported exported and article under this subsection,
Phil by resident returned without upon re-importation article shall
Filipinos or Phil. increasing value or be subject to duty equal to the
producing improved bounty or drawback
companies condition.
Importations used Reciprocity: such foreign Foreign articles

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previously exported from Phil • Cost of repair made on

exported when for repair and article shall pay 30% ad
returned after subsequently valorem
having been reimported
exported and Trailer chassis • Bond (1 ½ x) to cover 1
loaned for use imported by year
temporarily abroad shipping • Must be properly
solely for companies for identified and
exhibition handling registered with the LTO
containerized • Subject to customs
Foreign container cargo supervision fee
used in packing • Deposited in Customs
exported Phil zone when not in use
products • Upon expiration of
Articles and • Such articles are not period (1 year or as
supplies imported available locally in extended by
by and for use of reasonable quantity, Commissioner) duties
scheduled airlines quality and price and taxes shall be paid
operating under • Necessary or incidental Personal and • Car must have been
congressional to proper operations household effects purchased or ordered
franchise (including one car) before the mission or
Machineries, • Such articles are not officer or consulate received his
equipments, tools available locally in employee of DFA, order of recall
for production, reasonable quantity, attaché, staff • The value of personal
plants to convert quality and price assigned to Phil and household effects
mineral ores into • Necessary or incidental diplomatic mission shall not exceed 30% of
saleable form, to proper operations abroad, personnel his total salary.
spare parts, • Used in their agri and of Reparations
supplies, industrial operations Missions in Tokyo,
materials, AFP military
accessories, personnel in
explosives, SEATO, AFP
chemicals, transpo military personnel
and accorded
communications diplomatic rank on
facilities imported duty abroad
by and used by
new mines and old = returning from
mines regular
Aircrafts imported reassignment,
by agro industrial dies, resigns or
companies, spare retires
parts and
accessories Free from tariff and customs duties
Spare parts of • Brought to Phil as • Imported goods must be entered in the
vessels or aircraftsTIFF (Uncompressed)
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replacement or for
customhouse at their port of entry otherwise
of foreign registry are needed to see this picture.
emergency repair they shall be considered as contraband and the
engaged in foreign • Spare parts utilized to importer shall be liable for smuggling (sec
trade secure safety, 1201)
seaworthiness, or • Port of entry means a domestic port open to
airworthiness, enable it both foreign and coastwise trade including
to continue voyage or “airport of entry”. (Sec. 3514)
• All articles when imported from any country into
Articles for easy • Cannot be repaired the Philippines shall be subject to duty upon
identification locally

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Taxation Law Summer Reviewer

each importation, even though previously DUTIABLE IMPORTATION

exported from the Phils. except as otherwise ƒ Articles although previously exported from the
specifically provided for in the TCC or other Philippines, become dutiable from the entry of the
laws. (sec 1201) vessel or aircraft into the Philippine jurisdiction
until the payment of duties, taxes, and other
LIABILITY FOR CUSTOMS DUTIES charges and the issuance of the permit for the
General Rule: No exemptions from customs withdrawal of said goods from the custom
duties houses.
ƒ The provisions of general and special laws,
including those granting franchises, to the BASIS OF DUTIABLE VALUE (Sec. 201 TCC, as
contrary notwithstanding, there shall be no amended by RA 9135)
exemptions whatsoever from the payment of
customs duties (Sec. 105, last par.)
1. If provided under the TCC (e.g. conditionally-
free importation)
2. Exemptions granted to GOCCs with existing Sec. 201.
contracts, commitments, agreements or Method One. – Transaction Value. - The dutiable
obligations with foreign countries value of an imported article subject to an ad valorem
3. Exemptions of international institutions, rate of duty shall be the transaction value, which shall
associations or organizations pursuant to be the price actually paid or payable for the goods
agreements and special laws when sold for export to the Philippines, adjusted by
4. Exemptions granted by the President of the adding:
Phils. Upon recommendation of NEDA in the 1. The following to the extent that they are incurred
interest of national economic development. by the buyer but are not included in the price
(Sec. 1205) actually paid or payable for the imported goods:
• Commissions and brokerage fess (except buying
1. A personal debt due from the importer • Cost of containers;
which can be discharged only by payment in • C