BAR STAR NOTES

TAXATION
VER. 2010.06.12
copyrighted 2010

Prepared by Prof. Abelardo T. Domondon

(AB (Econ), BSC (Acctg), LLB, MA (Econ),
LLM, DCL (Cand.). Lawyer-CPA-Customs Broker,
Management Consultant, Professor of Law and
Pre-Bar Reviewer)

How to use the BAR STAR NOTES.

The BAR STAR NOTES in the form of questions
and answers as well as textual discussion were
specially prepared by Prof. Domondon for the
exclusive use of Bar Reviewees who attended
his 2010 Lectures on TAXATION held at the
University of the Philippines. Included in the
presentation are doctrines contained in Supreme
Court decisions up to April 2010.
The purpose of the BAR STAR NOTES is
to provide the Bar Reviewee with a handy review
material which serves as memory-joggers for the
September 12, 2010 Bar Examinations in Taxation.
The author tries to second guess what would be
included in the Bar Exams using statistical
analysis. The actual Bar questions may not be
formulated in the same manner as the BAR STAR
NOTES. However, the doctrines tested in the Bar
would in all probability be included in these Notes.
If pressed for time, the author suggests that
the reader should focus his attention on the
following:

Nice to know

Should know

Must know and master

It is further suggested that the reader should
merely browse those without stars.

WARNING:
These materials are copyrighted and/or
based on the writers books on Taxation and future
revisions. It is prohibited to reproduce any part of
these Notes in any form or any means, electronic
or mechanical, including photocopying without the
written permission of the author. Unauthorized
users shall not be prosecuted but SHALL BE
SUBJECT TO THE LAW OF KARMA SUCH
THAT THEY WILL NEVER PASS THE BAR OR
WOULD BE UNHAPPY IN LIFE for stealing the
intellectual property of the author.

THE BEST OF LUCK

AND ADVANCE
CONGRATULATIONS

TAXATION
GENERAL PRINCIPLES OF
TAXATION
TAXATION, IN GENERAL
1.
State briefly and concisely the
nature of taxation.
Alternatively, define
taxation.
SUGGESTED ANSWER: The inherent power
of the sovereign exercised through the legislature
to impose burdens upon subjects and objects
within its jurisdiction for the purpose of raising
revenues to carry out the legitimate objects of
government.

2. What is the nature of the States

power to tax ? Explain briefly.
SUGGESTED ANSWER: The nature of the
states power to tax is two-fold. It is both an
inherent power and a legislative power.
It is inherent in nature being an
attribute of sovereignty.
This is so, because
without the taxes, the states existence would be
imperiled. There is thus, no need for a
constitutional grant for the state to exercise this
power.
It is a legislative
power because it involves the promulgation of
rules. Taxation is a set of rules, how much is the
tax to be paid, who pays the tax, to whom it should
be paid, and when the tax should be paid.

3.
What is the underlying theory of
taxation ? Explain briefly.
SUGGESTED ANSWER:
Taxes are the
lifeblood of the nation.
Without revenue
raised from taxation, the government will not
survive, resulting in detriment to society. Without
taxes, the government would be paralyzed for lack
of motive power to activate and operate it.
(Commissioner of Internal Revenue v. Algue, Inc. et al.,
158 SCRA 8, 16-17)

4. Marshall said that, the power to

tax involves the power to destroy. On the
other hand, Holmes stated that the power
to tax is not the power to destroy while
the court sits.
Reconcile the statements.
In
the alternative, what are the implications
that flow from the above statements ?
SUGGESTED

ANSWERS: Marshalls view refers to a valid tax

while the Holmes view refers to an invalid tax.
a.
The
imposition of a valid tax could not be judicially
restrained merely because it would prejudice
taxpayers property.
b.
An
illegal tax could be judicially declared invalid
and should not work to prejudice a taxpayers
property.

5. Discuss briefly the basis/bases,

or rationale of taxation.
SUGGESTED ANSWER: a.
Reciprocal
duties of protection and support between the state
and its citizens and residents. Also called
symbiotic relation
between the state and its
citizens.
b.
Jurisdiction by the state over
persons and property within its territory.

6. Discuss
comprehensively
the
purposes of taxation.

briefly
objectives

but
or

SUGGESTED ANSWER: The purposes or

objectives of taxation are the following:
a.

The primary purpose:

1)

Revenue purpose.
b.
The secondary purposes
1)

Sumptuary

or

regulatory
2)

purpose.

Compensatory purpose.
3)
To implement the
power of eminent domain.

7. Distinguish a tax from a license

fee.

SUGGESTED ANSWER:
The
following are the distinctions:
a.
Purpose: Tax imposed for revenue while
license fee for regulation. Tax for general public
purposes while license fee for regulatory purposes
only.
b.
Basis:
Tax imposed under
power of taxation while license fee under police
power.
c.
Amount: In taxation, no
limit as to amount while license fee limited to cost
of the license and the expenses of police
surveillance and regulation.
d.
Time of payment:
Taxes normally
paid after commencement of business while
license fee before.
e.
Effect
of payment: Failure to pay a tax does not make
the business illegal while failure to pay license fee
makes business illegal.
f.
Surrender:
Taxes, being the lifeblood of the state, cannot be
surrendered except for lawful consideration while a
license fee may be surrendered with or without
consideration. (Cooley on Taxation, pp. 1137-1138;
Pacific Commercial Company v. Romualdez, et al., 49
Phil. 924)

8. How may the power to tax be

utilized to carry out the social justice
program of our government ?
SUGGESTED ANSWER:
The
compensatory purpose of taxation is to implement
the social justice provisions of the constitution
through the progressive system of taxation, which
would result to equal distribution of wealth, etc.
Progressive income taxes alleviate the
margin between rich and poor. (Southern Cross
Cement
Corporation
v.
Cement
Manufacturers
Association of the Philippines, et al., G. R. No. 158540,
August 3, 2005)

In recent years, the increasing social

challenges of the times expanded the scope of the
state activity, and taxation has become a tool to
realize social justice and the equitable distribution
of wealth, economic progress and the protection of
local industries as well as public welfare and
similar objectives.
(Batangas Power Corporation v.
Batangas City, et al., G. R. No. 152675, and companion
case, April 28, 2004 citing National Power Corporation v.
City of Cabanatuan, G. R. No. 149110, April 9, 2003)

9.

Explain the sumptuary purpose

of taxation.
SUGGESTED ANSWER: The sumptuary
purpose of taxation is to promote the general
welfare and to protect the health, safety or morals of
the inhabitants. It is in the joint exercise of the power
of taxation and police power where regulatory taxes
are collected.
Taxation may be made the implement of the
states police power. The motivation behind many
taxation measures is the implementation of police
power goals. [Southern Cross Cement Corporation v.
Cement Manufacturers Association of the Philippines, et
al., G. R. No. 158540, August 3, 2005) The reader

should note that the August 3, 2005 Southern Cross

case is the decision on the motion for
reconsideration of the July 8, 2004 Southern Cross
decision.
The so-called sin taxes on alcohol and
tobacco
manufacturers
help
dissuade the
consumers from excessive intake of these
potentially harmful products. (Southern Cross Cement
Corporation v. Cement Manufacturers Association of the
Philippines, et al., G. R. No. 158540, August 3, 2005)

10.
Taxation
distinguished
from
police power. Taxation is distinguishable from
police power as to the means employed to
implement these public goals. Those doctrines that
are unique to taxation arose from peculiar
considerations such as those especially punitive
effects (Southern Cross Cement Corporation v.
Cement Manufacturers Association of the
Philippines, et al., G. R. No. 158540, August 3,
2005) as the power to tax involves the power to
destroy and the belief that taxes are lifeblood of the
state. (Ibid.) taxes being the lifeblood of the
government, their prompt and certain availability is
of the essence.
These considerations necessitated the
evolution of taxation as a distinct legal concept from
police power. (Ibid.)

11. How the power of taxation may

be used to implement power of eminent
domain.
Tax measures are but enforced
contributions exacted on pain of penal sanctions
and clearly imposed for public purpose. In most
recent years, the power to tax has indeed become a
most effective tool to realize social justice, public
welfare, and the equitable distribution of wealth.
(Commissioner of Internal Revenue v. Central Luzon Drug
Corporation, G.R. No. 159647, April 16, 2005)

Establishments granting the 20% senior

citizens discount may claim the discounts granted
to senior citizens as tax deduction based on the
net cost of the goods sold or services rendered:
Provided, That the cost of the discount shall be
allowed as deduction from gross income for the
same taxable year that the discount is granted.
Provided, further, That the total amount of the
claimed tax deduction net of value added tax if
applicable, shall be included in their gross sales
receipts for tax purposes and shall be subject to
proper documentation and to the provisions of the
National Internal Revenue Code, as amended.

d.
That either the person or property
of taxes guarantees against injustice to individuals,
especially by way or notice and opportunity for
hearing be provided.
e.
The tax must not impinge on the
inherent and Constitutional limitations on the power
of taxation.

15. What are

the classes or kinds of taxes according to
the subject matter or object ?
SUGGESTED ANSWER:
a.
Personal, poll or capitalization imposed on
all residents, whether citizen or not. Example
Community Tax.
b.
Property Imposed on property.
Example Real property tax.
c.
Excise imposed upon the
performance
of
an act, the enjoyment of a
privilege or the engaging in an occupation.
Example income tax, estate tax.

[M.E. Holding Corporation v. Court of Appeals, et al., G.R.

No. 160193, March 3, 2008 citing Expanded Senior
Citizens Act of 2003, Sec. 4 (a)]

16. What are the kinds of taxes

classified as to who bears the burden ?
Explain each briefly.

12.
What are the three basic
principles of a sound tax system? Explain
each briefly.

SUGGESTED ANSWER: Based on the

possibility of shifting the incidence of taxation, or
as to who shall bear the burden of taxation, taxes
may be classified into:
a.
Direct taxes. Those that are extracted
from the very person who, it is intended or desired,
should pay them (Commissioner of Internal Revenue v.

SUGGESTED ANSWER: The canons of a

sound tax system, also known as the
characteristics or, principles of a sound tax system,
are used as a criteria in order to determine whether
a tax system is able to meet the purposes or
objectives of taxation. They are:
a.
Fiscal adequacy.
b.
Administrative feasibility.
c.
Theoretical justice.

13. What are the elements or

characteristics of a tax ? SUGGESTED

ANSWER:
a.
b.
c.
d.
exercise of
e.
f.
g.
h.

Enforced contribution.
Generally payable in money.
Proportionate in character.
Levied on persons, property or
a right or privilege.
Levied by the state having jurisdiction.
Levied by the legislature.
Levied for a public purpose.
Paid at regular periods or intervals.

14. State the requisites of a valid tax.

SUGGESTED ANSWER:
a.
A
valid tax should be within the jurisdiction of the
taxing authority .
b.
That the assessment and collection of
certain kinds (The same as the inherent limitations
of the power of taxation) should be for a public
purpose.
c.
The rule of taxation should be uniform.

Philippine Long Distance Telephone Company, G. R. No.

140230, December 15, 2005); they are impositions for

which a taxpayer is directly liable on the

transaction or business he is engaged in,
(Commissioner of Internal Revenue v. Philippine Long
Distance Telephone Company, supra)
which liability

cannot be shifted or transferred to another.

Example income tax, estate tax, donors tax, etc.
b.
Indirect taxes are those that are
demanded in the first instance, from, or are paid
by, one person in the expectation and intention that
he can shift the burden to (Commissioner of Internal
Revenue v. Philippine Long Distance Telephone
Company, supra) to someone else not as a tax but

as part of the purchase price. (Commissioner, of

Internal
Revenue
v.
American
Express
International, Inc. (Philippine Branch), G. R. No.
152609, June 29, 2005 citing various cases and
authorities) Example value added tax (VAT),
documentary stamp tax, excise tax, percentage
tax, etc.

17. Silkair (Singapore) PTE, Ltd., an

international carrier, purchased aviation
gas from Petron Corporation, which it uses
for its operations. It now claims for refund
or tax credit for the excise taxes it paid
claiming that it is exempt from the payment
of excise taxes under the provisions of Sec.
135 of the NIRC of 1997 which provides that

petroleum products are exempt from excise

taxes when sold to Exempt entities or agencies
covered by tax treaties, conventions, and other
international agreements for their use and consumption:
Provided, however, That the country of said foreign
international carrier or exempt entities or agencies
exempts from similar taxes petroleum products sold to
Philippine carriers, entities or agencies

Silkair further anchors its claim on

Article 4(2) of the Air Transport Agreement
between the Government of the Republic of
the Philippines and the Government of the
Republic of Singapore (Air Transport
Agreement between RP and Singapore)
which reads: Fuel, lubricants, spare parts, regular
equipment and aircraft stores introduced into, or taken on
board aircraft in the territory of one Contracting party by,
or on behalf of, a designated airline of the other
Contracting Party and intended solely for use in the
operation of the agreed services shall, with the exception
of charges corresponding to the service performed, be
exempt from the same customs duties, inspection fees
and other duties or taxes imposed in the territories of the
first Contracting Party , even when these supplies are to
be used on the parts of the journey performed over the
territory of the Contracting Party in which they are
introduced into or taken on board. The materials referred
to above may be required to be kept under customs
supervision and control.

Silkair likewise argues that it is exempt

from indirect taxes because the Air
Transport Agreement between RP and
Singapore grants exemption from the same
customs duties, inspection fees and other
duties or taxes imposed in the territory of
the first Contracting Party. It invokes
Maceda v. Macaraig, Jr., G.R. No. 88291,
May 31, 1991, 197 SCRA 771.which upheld
the claim for tax credit or refund by the
National Power Corporation (NPC) on the
ground that the NPC is exempt even from
the payment of indirect taxes.
Is Silkair entitled to the tax refund or
credit it seeks ? Reason out your answer.
SUGGESTED ANSWER:
Silkair is not
entitled to tax refund or credit for the following
reasons:
a.
The excise tax on aviation fuel is an
indirect tax. The proper party to question, or seek a
refund of, an indirect tax is the statutory taxpayer,
the person on whom the tax is imposed by law and
who paid the same even if he shifts the burden
thereof to another. (Philippine Geothermal, Inc. v.
Commissioner of Internal Revenue, G.R. No. 154028,
July 29, 2005, 465 SCRA 308, 317-318)
The NIRC

provides that the excise tax should be paid by the

manufacturer or producer before removal of
domestic products from place of production. Thus,
Petron Corporation, not Silkair, is the statutory
taxpayer which is entitled to claim a refund based
on Section 135 of the NIRC of 1997 and Article 4(2)
of the Air Transport Agreement between RP and
Singapore.
Even if Petron Corporation passed on to
Silkair the burden of the tax, the additional amount

billed to Silkair for jet fuel is not a tax but part of the
price which Silkair had to pay as a purchaser.
[Philippine Acetylene Co., Inc. v. Commissioner of Internal
Revenue, 127 Phil. 461, 470 (1967)]

b. Silkair could not seek refuge under

Maceda v. Macaraig, Jr., G.R. No. 88291, May 31,
1991, 197 SCRA 771.which upheld the claim for tax
credit or refund by the National Power Corporation
(NPC) on the ground that the NPC is exempt even
from the payment of indirect taxes.
In Commissioner of Internal Revenue v.
Philippine Long Distance Telephone Company, G.R.
No. 140230, December 15, 2005, 478 SCRA 61 the
Supreme Court clarified the ruling in Maceda v.
Macaraig, Jr., viz: It may be so that in Maceda vs.
Macaraig, Jr., the Court held that an exemption
from all taxes granted to the National Power
Corporation (NPC) under its charter includes both
direct and indirect taxes.
An exemption from all taxes excludes
indirect taxes, unless the exempting statute, like
NPCs charter, is so couched as to include indirect
tax from the exemption. The amendment under
Republic Act No. 6395 enumerated the details
covered by NPCs exemption. Subsequently, P.D.
380, made even more specific the details of the
exemption of NPC to cover, among others, both
direct and indirect taxes on all petroleum products
used in its operation. Presidential Decree No. 938
[NPCs amended charter] amended the tax
exemption by simplifying the same law in general
terms. It succinctly exempts NPC from all forms of
taxes, duties, fees The use of the phrase all
forms of taxes demonstrates the intention of the
law to give NPC all the tax exemptions it has been
enjoying before.
The exemption granted under Section 135
(b) of the NIRC of 1997 and Article 4(2) of the Air
Transport Agreement between RP and Singapore
cannot, without a clear showing of legislative intent,
be construed as including indirect taxes. Statutes
granting tax exemptions must be construed in
strictissimi juris against the taxpayer and liberally in
favor of the taxing authority, and if an exemption is
found to exist, it must not be enlarged by
construction.
(Silkair (Singapore) PTE, Ltd., v.
Commissioner of Internal Revenue, G.R. No. 173594,
February 6, 2008)

18.
What
are
the different kinds of taxes classified as to
purpose ?
SUGGESTED ANSWER:
a.
General, fiscal or
revenue imposed for the purpose of raising
public funds for the service of the government.
b.
Special or regulatory
imposed primarily for the regulation of useful or
non-useful
occupation
or
enterprises
and
secondarily only for the raising of public funds.

LIMITATIONS OR RESTRICTIONS ON
THE POWER

1.
Purpose for the limitations on the
power of taxation.
The inherent and constitutional limitations to the
power of taxation are safeguards which would
prevent abuse in the exercise of this otherwise
unlimited and plenary power.
The limitations also serve as a standard to
measure the validity of a tax law or the act of a
taxing authority. A violation of the limitations serves
to invalidate a tax law or act in the exercise of the
power to tax.

INHERENT LIMITATIONS
1. What are the inherent limitations
on the power of taxation ?
SUGGESTED ANSWERS:
a.
Public purpose.
The revenues
collected from taxation should be devoted to a
public purpose.
b.
No improper delegation of legislative
authority to tax. Only the legislature can exercise
the power of taxes unless the same is delegated to
some other governmental body by the constitution
or through a law which does not violate any
provision of the constitution.
c.
Territoriality. The taxing power should
be exercised only within territorial boundaries of the
taxing authority.
d.
Recognition
of
government
exemptions; and
e.
Observance of the principle of comity.
Comity is the respect accorded by nations to each
other because they are equals. On the other hand
taxation is an act of sovereign. Thus, the power
should be imposed upon equals out of respect.
Some authorities include no double taxation.

2. What are the principles to

consider in the determination of whether
tax revenues are devoted for a public
purpose ?
SUGGESTED ANSWER:
a.
The tax revenues are for a public
purpose if utilized for the benefit of the community
in general. An alternative meaning is that tax
proceeds should be utilized only to attain the
objectives of government.
b.
Inequalities resulting from the singling
out of one particular class for taxation or
exemption infringe no constitutional limitation.
REASON: It is inherent in the power to tax
that the legislature is free to select the subjects of
taxation.
BASIS: The lifeblood theory.
c.
An individual taxpayer need not
derive direct benefits from the tax.
REASON: The paramount consideration is
the welfare of the greater portion of the population.
d.
A tax may be imposed, not so much
for revenue purposes, but under police power for
the general welfare of the community. This would
still be for a public purpose.
e.
Public purpose continually expanding.
Areas formerly left to private initiative now lose

their boundaries and may be undertaken by the

government if it is to meet the increasing social
challenges of the times.
f.
Tax revenue must not be used
for purely private purposes or for the exclusive
benefit of private persons.
g. Private persons may be benefited but
such benefit should be merely incidental as its
main object is the benefit of the community in
general.
h. Determined at the time of enactment
of tax law and not at the time of implementation.
i.
There is a presumption of public
purpose even if the tax law does not specifically
provide for its purpose. (Santos & Co., v. Municipality
of Meycauayan, et al., 94 Phil. 1047)

j. Public use is no longer confined to the

traditional notion of use by the public but held
synonymous with public interest, public benefit,
public
welfare,
and
public
convenience .
(Commissioner of Internal Revenue v. Central Luzon
Drug Corporation, G.R. No. 159647, April 16, 2005)

3. A law was enacted imposing a tax

on manufacturers of coconut oil, the
proceeds of which are to be used
exclusively for
the
protection
and
promotion of the coconut industry, namely,
to improve the working conditions in
coconut mills and to conduct research on
the use of coconut oil for motor fuel. Some
of the manufacturers of coconut oil
challenge the validity of the law,
contending that the tax is to be used for a
private purpose, and therefore, the law
violates the rule that public revenues shall
not be appropriated for anything but a
public purpose. Decide with reason.
SUGGESTED ANSWER: The levy is for a
public purpose. It cannot be denied that the
coconut industry is one of the major industries
supporting the national economy. It is, therefore,
the states concern to make it a strong and secure
source not only of the livelihood of the significant
segment of the population, but also of export
earnings, the sustained growth of which is one of
the imperatives of economic growth. (Philippine
Coconut Producers Federation, Inc. (Cocofed v.
Presidential Commission on Good Government, 178
SCRA 236, 252)

4. Requisites
for
taxpayers,
concerned citizens, voters or legislators to
have locus standi to sue.
a.
In general, the case should involve
constitutional issues. (David, et al., v. President Gloria
Macapagal-Arroyo, etc., et al., G. R. No. 171396, May 3,
2006)

b.
showing:

For taxpayers, there must be a

1)
That tax money is being
extracted and spent in
violation
of
specific
constitutional protections against abuses
of
legislative power. (Flast v. Cohen, 392 U.S.
83)

2)
deflected to any

That public money is being

improper
purpose (Pascual v.
Secretary of Public Works, 110
Phil. 33)
or a
claim of illegal disbursement of public
funds or that the tax
measure
is
unconstitutional. (David, supra)
3)
A taxpayer is allowed to sue
where there is a
claim that public funds are
illegally disbursed, or that public money is being
deflected to any improper purpose, or that
there is a wastage of
public
funds
through the enforcement of
an invalid or
unconstitutional law. (Abaya v. Ebdane, G. R.
No. 167919, February
14, 2007; Garcia v.
Enriquez, Jr. G.R. No. 112655 December 9, 1993,
Minute Resolution)
A taxpayers suit is properly brought
only when there
is
an exercise of the
spending or taxing power of
Congress.
(Automotive Industry Workers Alliance
(AIWA),etc., et al., v. Romulo,
etc. ,et al., G.
R. No. 157509,
January
18,
2005
citing
Gonzales v. Narvasa, G. R. No. 140835,
August 14, 2000, 337 SCRA
733, 741)

c. For voters, there must be a showing

of obvious interest in the validity of the election law
in question.
d. For concerned citizens, there must be
a showing that the issues raised are of
transcendental importance which must be settled
early.
e. For legislators, there must be a claim
that the official action complained of infringes upon
their prerogatives as legislators. (David, et al., v.
President Gloria Macapagal-Arroyo, etc., et al., G.
R. No. 171396, May 3, 2006)

5. Only those directly affected

have locus standi to impugn the alleged
encroachment by the executive department
into the legislative domain of Congress.
a. Only those who shall be directly
affected by such executive encroachment, such as
for example employees who would find themselves
subject to disciplinary powers that may be imposed
under the questioned Executive Order as they
have a direct and specific interest in raising the
substantive issue therein (Automotive Industry
Workers Alliance (AIWA),etc., et al., v. Romulo, etc.
,et al., G. R. No. 157509, January 18, 2005) or
employees who are going to be demoted,
transferred or otherwise affected by any personnel
action subject o the rule on exhaustion of
administrative remedies.
b. Moreover, and if at all, only Congress,
can claim any injury from the alleged executive
encroachment of the legislative function to amend,
modify and/or repeal laws. (Automotive Industry
Workers Alliance (AIWA),etc., et al., supra, citing
Gonzales v. Narvasa, G. R. No. 140835, August
14,2000, 337 SCRA 733, 741)

6.
Locus standi being merely a
matter of procedure, have been waived in
certain instances where a party who is not

personally injured may be allowed to bring

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

7. The VAT law provides that, the

President, upon the recommendation of the
Secretary of Finance, shall, effective
January 1, 2006, raise the rate of valueadded tax to twelve percent (12%) after any
of the following conditions have been
satisfied. (i) value-added tax collection as
a percentage of Gross Domestic Product
(GDP) of the previous year exceeds two and
four-fifth percent (2 4/5%) or (ii) national
government deficit as a percentage of GDP
of the previous year exceeds one and onehalf percent (1 %).
Was there an invalid delegation of
legislative power ?
SUGGESTED ANSWER: No. There is no
undue delegation of legislative power but only of the
discretion as to the execution of the law. This is
constitutionally permissible.
Congress does not abdicate its functions or
unduly delegate power when it describes what job
must be done, who must do it, and what is the scope
of his authority. In the above case the Secretary of
Finance becomes merely the agent of the legislative
department, to determine and declare the even
upon which its expressed will takes place. The
President cannot set aside the findings of the
Secretary of Finance, who is not under the
conditions acting as the execute alter ego or
subordinate. . [Abakada Guro Party List (etc.) v.
Ermita, etc., et al., G. R. No. 168056, September 1,
2005 and companion cases citing various cases]]

8. Instances of proper delegation:

When taxing power could be delegated:
Exceptions to the rule on non-delegation:
a. Delegation of tariff powers by Congress
to the President under the flexible tariff clause,
Section 28 (2), Article VI of the Constitution .
b. Delegation of emergency powers to the
President under Section 23 (2) of Article VI of the
Constitution.
c. The delegation to the President of the
Philippines to enter into executive agreements, and

to ratify treaties which may contain tax exemption

provisions subject to the concurrence by the
Senate in the ratification made by the President.
d. Delegation to the people at large.
e.
Delegation to administrative bodies
[Abakada Guro Party List (Formerly AASJS), etc.,
v, Ermita, et al., G. R. No.168056, September 1,
2005], which is referred to as subordinate
legislation.
In this instance, there is a requirement that
the law is complete in all aspects so what is
delegated is merely the implementation of the law
or there exists sufficiently determinate standards to
guide the delegate and prevent a total transference
of the taxing power.

9.
Paradigm shift from exclusive
Congressional power to direct grant of
taxing power to local legislative bodies. The
power to tax is no longer vested exclusively on
Congress; local legislative bodies are now given
direct authority to levy taxes, fees and other charges
pursuant to Article X, section 5 of the 1987
Constitution. (Batangas Power Corporation v. Batangas
City, et al. G. R. No. 152675, and companion case, April
28, 2004 citing National Power Corporation v. City of
Cabanatuan, G. R. No. 149110, April 9, 2003)

Local government legislation, is not

regarded as a transfer of general legislative power,
but rather as the grant of authority to prescribe
local regulations, according to immemorial
practice, subject, of course, to the interposition of
the superior in cases of necessity. (People v. Vera,
65 Phil. 56)

10. Taxing power of the local

government is limited. The taxing power of
local governments is limited in the sense that
Congress can enact legislation granting tax
exemptions.
While the system of local government
taxation has changed with the onset of the 1987
Constitution, the power of local government units
to tax is still limited.
While the power to tax by local governments
may be exercised by local legislative bodies, no
longer merely by virtue of a valid delegation as
before, but pursuant to direct authority conferred by
Section 5, Article X of the Constitution, the basic
doctrine on local taxation remains essentially the
same, the power to tax is [still] primarily vested in
the Congress. (Quezon City, et al., v. ABS-CBN
Broadcasting Corporation, G. R. No. 166408, October 6,
2008 citing City Government of Quezon City, et al. v.
Bayan Telecommunications, Inc., G.R. No. 162015,
March 6, 2006, 484 SCRA 169 in turn referring to
Mactan Cebu International Airport Authority, v. Marcos,
G.R. No. 120082, September 11, 1996, 261 SCRA 667,
680)

11. Further amplification by Bernas

of the local governments power to tax.
What is the effect of Section 5 on the fiscal
position of municipal corporations? Section 5 does
not change the doctrine that municipal corporations
do not possess inherent powers of taxation. What

it does is to confer municipal corporations a

general power to levy taxes and otherwise create
sources of revenue. They no longer have to wait
for a statutory grant of these powers. The power of
the legislative authority relative to the fiscal powers
of local governments has been reduced to the
authority to impose limitations on municipal
powers.
Moreover, these limitations must be
consistent with the basic policy of local autonomy.
The important legal effect of Section 5 is thus to
reverse the principle that doubts are resolved
against municipal corporations. Henceforth, in
interpreting statutory provisions on municipal fiscal
powers, doubts will be resolved in favor of
municipal corporations. It is understood, however,
that taxes imposed by local government must be
for a public purpose, uniform within a locality, must
not be confiscatory, and must be within the
jurisdiction of the local unit to pass. (Quezon City, et
al., v. ABS-CBN Broadcasting Corporation, G. R. No.
166408, October 6, 2008 citing City Government of
Quezon City, et al. v. Bayan Telecommunications, Inc.,
G.R. No. 162015, March 6, 2006, 484 SCRA 169)

12. Reconciliation of the local

governments authority to tax and the
Congressional general taxing power.
Congress has the inherent power to tax, which
includes the power to grant tax exemptions. On
the other hand, the power of local governments,
such as provinces and cities for example Quezon
City, to tax is prescribed by Section 151 in relation
to Section 137 of the LGC which expressly
provides that notwithstanding any exemption
granted by any law or other special law, the City or
a province may impose a franchise tax. It must be
noted that Section 137 of the LGC does not
prohibit grant of future exemptions.
The Supreme Court in a series of cases has
sustained the power of Congress to grant tax
exemptions over and above the power of the local
governments delegated power to tax. (Quezon City,
et al., v. ABS-CBN Broadcasting Corporation, G. R. No.
166408, October 6, 2008 citing City Government of
Quezon City, et al. v. Bayan Telecommunications, Inc.,
G.R. No. 162015, March 6, 2006, 484 SCRA 16)

Indeed, the grant of taxing powers to local

government units under the Constitution and the
LGC does not affect the power of Congress to
grant exemptions to certain persons, pursuant to a
declared national policy. The legal effect of the
constitutional grant to local governments simply
means that in interpreting statutory provisions on
municipal taxing powers, doubts must be resolved
in favor of municipal corporations. [Ibid., referring to
Philippine Long Distance Telephone Company, Inc.
(PLDT) vs. City of Davao]

13. General principles of income

taxation in the Philippines or the source
rule of income taxation as provided in the
NIRC of 1997.
a. A citizen of the Philippines residing
therein is taxable on all income derived from
sources within and without the Philippines;

b.
A nonresident citizen is taxable only
on income derived from sources within the
Philippines;
c.
An individual citizen of the
Philippines who is working and deriving income
abroad as an overseas contract worker is taxable
only on income from sources within the
Philippines: Provided, That a seaman who is a
citizen of the Philippines and who receives
compensation for services rendered abroad as a
member of the complement of a vessel engaged
exclusively in international trade shall be treated as
an overseas contract worker;
d.
An alien individual, whether a
resident or not of the Philippines, is taxable only
on income derived from sources within the
Philippines;
e. A domestic corporation is taxable on all
income derived from sources within and without
the Philippines; and
f. A foreign corporation, whether engaged
or not in trade or business in the Philippines, is
taxable only on income derived from sources
within the Philippines. (Sec. 23, NIRC of 1997,
emphasis supplied)

14. Juliane a non-resident alien

appointed as a commission agent by a
domestic
corporation
with
a
sales
commission of 10% all sales actually
concluded and collected through her
efforts. The local company withheld the
amount of P107,000 from her sales
commission and remitted the same to the
BIR.
She filed a claim for refund alleging
that her sales commission is not taxable
because the same was a compensation for
her services rendered in Germany and
therefore considered as income from
sources outside the Philippines.
Is her contention correct ?
SUGGESTED ANSWER:
Yes.
The
important factor which determines the source of
income of personal services is not the residence of
the payor, or the place where the contract for
service is entered into, or the place of payment, but
the place where the services were actually
performed.
Since the activity of securing the sales were
in Germany, then the income did not originate from
sources from within the Philippines. (Commissioner
of Internal Revenue v. Baier-Nickel, G. R. No. 153793,
August 29, 2006)

15. Ensite, Ltd.. is a Canadian

corporation not doing business in the
Philippines. It holds 40% of the shares of
Philippine Stamping Plant, Inc.,., a
Philippine company while the 60% is owned
by Fred Corporation, a Filipino-owned
Philippine corporation. Ensite Co. also
owns 100% of the shares of Susanto Co.,

an Indonesian company which has a duly

licensed Philippine branch. Due to
worldwide restructuring of the Ensite Ltd.,.
group, Ensite Ltd.,. decided to sell all its
shares in Philippine Stamping Plant, Inc.
and Susanto Co. The negotiations for the
buy-out and the signing of the Agreement
of Sale were all done in the Philippines.
The Agreement provides that the purchase
price will be paid to Ensite Ltds bank
account in the U.S. and that title to the
Philippine Stamping Plant, Inc.
and
Susanto Co. shall be transferred to General
Co., in Toronto Canada where stock
certificates will be delivered. General Co.
seeks your advice as to whether or not it
will subject the payments of the purchase
price to withholding tax.
Explain your
advice.
SUGGESTED ANSWER: The
payments of the purchase price will be subject to
withholding tax. Considering that all the activities
(sales) occurred within the Philippines, the income
is considered as income from within, subject to
Philippine income taxation. Ensite, Ltd. being a
foreign corporation is to be taxed on its income
derived from sources within the Philippines.

16.
Ensite,
Ltd.
is
a
Canadian
corporation, which has a duly licensed
Philippine branch engage in trading
activities in the Philippines. Ensite, Ltd..
also invested directly in 40% of the shares
of stock of Philippine Stamping Plant, Inc..,
a Philippine corporation. These shares are
booked in the Head Office of Ensite, Ltd..
and are not reflected as assets of the
Philippine branch.
In 2009, Philippine
Stamping Plant, Inc.. declared dividends to
its stockholders.
Before remitting the
dividends to Ensite Ltd.,., Philippine
Stamping Plant, Inc. Co. seeks your advice
as to whether it will subject the remittance
to withholding tax. There is no need to
discuss WT rates, if applicable. Focus your
discussion on what is the issue.

SUGGESTED
ANSWER: Philippine Stamping Plant, Inc.. should
subject the remittance to withholding tax.. Since
Philippine Stamping Plant. is a Philippine
corporation, its shares of stock have obtained a
business situs in the Philippines, hence the
dividends are considered as income from within.
Ensite. Ltd., being a foreign corporation, should be
subject to tax on its income from within.

17. Philippine Stamping Plant, Inc.,

a Philippine corporation, has an executive
Larry who is a Filipino citizen. Philippine
Stamping Plant, Inc,. has a subsidiary in
Malaysia (Kuala Lumpur Manufacturing,

Inc.) and will assign Larry for an indefinite

period to work full time for Kuala Lumpur
Manufacturing, Inc.. Larry will bring his
family to reside in Malaysia and will lease
out his residence in the Philippines. The
salary of Larry will be shouldered 50% by
Philippine Stamping Plant, Inc.. while the
other 50% plus housing, cost of living and
educational
allowances
of
Larrys
dependents will be shouldered by Kuala
Lumpur Manufacturing, Inc..
Philippine
Stamping Plant, Inc.. will credit the 50% of
Larrys salary to his Philippine bank
account. Larry will sign the contract of
employment in the Philippines. He will also
be receiving rental income for the lease of
his Philippine residence.
Are
these salaries, allowances and rentals
subject to Philippine income tax? Explain
briefly.
SUGGESTED ANSWER: The salaries and
allowances of Larry, being derived from labor or
personal services rendered outside of the
Philippines is considered as income from without.
Since Larry is an OCW, then he is to be taxed only
on his income derived from within the Philippines
such as the rentals on his Philippine residence, and
not on his income from without.

18. Obama Airlines, Inc., a foreign

airline company which does not maintain
any flight to and from the Philippines sold
air tickets in the Philippines, through a
general sales agent, relating to the carriage
of passengers and cargo between two
points, both outside the Philippines.
a.
Is Obama, Inc., subject to income
taxes on the sale of the tickets ?
SUGGESTED ANSWER: Yes. The source
of income which is taxable is that activity which
produced the income. The sale of tickets in the
Philippines is the activity that determines whether
such income is taxable in the Philippines.
The tickets exchanged hands here and
payments for fares were also made here in
Philippine currency. The situs of the source of
payments is the Philippines. the flow of wealth
proceeded from and occurred, within the Philippine
territory, enjoying the protection accorded by the
Philippine Government. In consideration of such
protection, the flow of wealth should share the
burden
of
supporting
the
government.
[Commissioner of Internal Revenue v. British
Overseas Airways Corporation (BOAC), 149 SCRA
395]
Off-line air carriers having general sales
agents in the Philippines are engaged in or doing
business in the Philippines and their income from
sales of passage documents here is income from
within the Philippines. Thus, the off-line air carrier
liable for the 32% (now 30%) tax on its taxable
income. [South African Airways v. Commissioner of

Internal Revenue, G.R. No. 180356, February 16, 2010

citing Commissioner of Internal Revenue v. British
Overseas Airways Corporation (British Overseas
Airways), No. L-65773-74, April 30, 1987, 149 SCRA
395]

b.
Supposing that Obama, Inc.,
sells tickets outside of the Philippines for
passengers it carry from Gold City, South
Africa to the Philippines but returns to
South Africa without any cargo or
passengers. Would it then be subject to any
Philippine tax on such sales ?
SUGGESTED ANSWER: It would not be
subject to any tax. It is not subject to any income
tax because the activity which generated the income
(the sale of the tickets) was performed outside of
the Philippines.
It is not subject to the carriers tax based on
gross Philippine billings because there were no lifts
that originated from the Philippines.
Gross
Philippine Billings refers to the amount of gross
revenue derived from carriage of persons, excess
baggage, cargo and mail originating from the
Philippines in a continuous and uninterrupted flight,
irrespective of the place of sale or issue and the
place of payment of the ticket or passage
document. [NIRC of 1997, Sec. 28(A)(3)(a)]

c.
Would your answer be the same
if Obama, Inc. sold tickets outside of the
Philippines for travelers who are going to
picked up by Obama, Inc., planes from the
Diosdado Macapagal Intl. Airport at Clark,
Angeles, Pampanga, bound for Nairobi,
Kenya ? Reason out your answer.
SUGGESTED ANSWER: No more. This
time Obama, Inc., would be subject to the carriers
tax based on Gross Philippine Billings. (GPB).
Gross Philippine Billings refers to the
amount of gross revenue derived from carriage of
persons, excess baggage, cargo and mail
originating from the Philippines in a continuous and
uninterrupted flight, irrespective of the place of sale
or issue and the place of payment of the ticket or
passage document. [NIRC of 1997, Sec. 28(A)(3)
(a)]
The place of sale is irrelevant; as long as
the uplifts of passengers and cargo occur from the
Philippines, income is included in GPB. (South
African Airways v. Commissioner of Internal Revenue,
G.R. No. 180356, February 16, 2010)

19. No improper delegation of

legislative authority to tax. The power to tax
is inherent in the State, such power being
inherently legislative, based on the principle that
taxes are a grant of the people who are taxed, and
the grant must be made by the immediate
representatives of the people; and where the
people have laid the power, there it must remain
and be exercised. (Commissioner of Internal Revenue
v. Fortune Tobacco Corporation, G. R. Nos. 167274-75,
July 21, 2008)

CONSTITUTIONAL LIMITATIONS

10

1.
Constitutional limitations on the
power of taxation . The general or indirect
constitutional limitations as well as the specific or
direct constitutional limitations.

2.
The general or indirect
constitutional limitations on the power of
taxation are:
a.
Due process clause;
b.
Equal protection clause;
c.
Freedom of the press;
d.
Religious freedom;
e.
No taking of private property without
just compensation;
f.
Non-impairment clause;
g.
Law-making process:
1)
Bill should embrace only one
subject
expressed in the title thereof;
2)
Three (3) readings on three
separate days;
3)
Printed copies in final form
distributed three
(3) days before passage.
h.
Presidential power to grant reprieves,
commutations and pardons and remittal of fines and
forfeiture after conviction by final judgment.

3.
The
specific
constitutional limitation.

or

direct

a.
No imprisonment for non-payment of a
poll tax;
b.
Taxation shall be uniform and
equitable;
c.
Congress shall evolve a progressive
system of taxation;
d.
All appropriation, revenue or tariff bills
shall originate exclusively in the House of
Representatives, but the Senate may propose and
concur with amendments;
e. The President shall have the power to veto
any particular item or items in an appropriation,
revenue, or tariff bill, but the veto shall not affect the
item or items to which he does not object;
f.
Delegated power of the President to
impose tariff rates, import and export quotas,
tonnage and wharfage dues:
1)
Delegation by Congress
2)
through a law
3)
subject to Congressional limits
and restrictions
4)
within the framework of national
development program.
g.
Tax
exemption
of
charitable
institutions, churches, parsonages and convents
appurtenant thereto, mosques, and all lands,
buildings and improvements of all kinds actually,
directly and exclusively used for religious, charitable
or educational purposes;
h.
No tax exemption without the
concurrence of majority vote of all members of
Congress;
i.
No use of public money or property for
religious purposes except if priest is assigned to the
armed forces, penal institutions, government
orphanage or leprosarium;

j.
Money collected on tax levied for a
special purpose to be used only for such purpose,
balance if any, to general funds;
k.
The Supreme Court's power to review
judgments or orders of lower courts in all cases
involving the legality of any tax, impose,
assessment or toll or the legality of any penalty
imposed in relation to the above;
l.
Authority of local government units to
create their own sources of revenue, to levy taxes,
fees and other charges subject to guidelines and
limitations imposed by Congress consistent with the
basic policy of local autonomy;
m.
Automatic
release
of
local
government's just share in national taxes;
n.
Tax exemption of all revenues and
assets of non-stock, non-profit educational
institutions used actually, directly and exclusively for
educational purposes;
o. Tax exemption of all revenues and assets
of proprietary or cooperative educational institutions
subject to limitations provided by law including
restrictions on dividends and provisions for
reinvestment of profits;
p.
Tax exemption of grants, endowments,
donations or contributions used actually, directly and
exclusively for educational purposes subject to
conditions prescribed by law.

5.
Equal protection of the law
clause
is
subject
to
reasonable
classification. If the groupings are characterized
by substantial distinctions that make real
differences, one class may be treated and regulated
differently from another. The classification must
also be germane to the purpose of the law and must
apply to all those belonging to the same class. (Tiu,
et al., v. Court of Appeals, et al., G.R. No. 127410,
January 20, 1999)

6. Requisites
for
valid
classification. All that is required of a valid
classification is that it be reasonable, which means
that a.
the classification should be based on
substantial distinctions which make for real
differences,
b.
that it must be germane to the
purpose of the law;
c.
that it must not be limited to existing
conditions only; and
d.
that it must apply equally to each
member of the class.
The standard is satisfied if the classification
or distinction is based on a reasonable foundation
or rational basis and is not palpably arbitrary.
[ABAKADA Guro Party List, etc., v. Purisima, etc., et al.,
G. R. No. 166715, August 14, 2008]

7.
Equal protection does not
demand absolute equality. It merely requires
that all persons shall be treated alike, under like
circumstances and conditions, both as to the
privileges conferred and liabilities enforced.
(Santos v. People, et al, G. R. No. 173176, August 26,
2008)

It is imperative to duly establish that the one

invoking equal protection and the person to which
she is being compared were indeed similarly
situated, i.e., that they committed identical acts for
which they were charged with the violation of the
same provisions of the NIRC; and that they
presented similar arguments and evidence in their
defense - yet, they were treated differently.

11

government objectives. (Craig v. Boren, 429 U.S.

190)
Thus, a state law granting a property tax
exemption to widows, but not widowers, has been
held valid for it furthers the state policy of
cushioning the financial impact of spousal loss
upon the sex for whom that loss usually imposes a
heavier burden. (Kahn v. Shevin, 416 U.S. 351)

(Santos, supra)

8.
Tests to determine validity of
classification.
The United States Supreme
Court has established different tests to determine
the validity of a classification and compliance with
the equal protection clause. The recognized tests
are:
a.
The traditional (or rational basis) test.
b.
The strict scrutiny (or compelling
interest) test.
c.
The intermediate level of scrutiny (or
quasi-suspect class) test.

9.
The traditional (or rational basis)
test used in order to determine the validity
of classification. The classification is valid if it
is rationally related to a constitutionally permissible
state interest.
The complainant must prove that the
classification is invidous, wholly arbitrary, or
capricious, otherwise the classification is
presumed to be valid. (Lindsley v. Natural Carboinic
Gas Co., 220 U.S. 61; McGowan v. Maryland, 366 U.S.
420; United States Railroad Retirement Board v. Fritz,
449 U.S. 166)

10. The
strict
scrutiny
(or
compelling interest) test used in order to
determine the validity of the classification.
Government
regulation
that
intentionally
discriminates against a suspect class such as
racial or ethnic minorities, is subject to strict
scrutiny and considered to violate the equal
protection clause unless found necessary to
promote a compelling state interest.
A classification is necessary when it is
narrowly drawn so that no alternative, less
burdensome means is available to accomplish the
state interest.
Thus, it was held that denial of free public
education to the children of illegal aliens imposes
an enormous and lasting burden based on a status
over which the children have no control is violative
of equal protection because there is no showing
that such denial furthers a substantial state goal.
(Plyler v. Doe, 457 U.S. 202)

11. The
intermediate
level
of
scrutiny (or quasi-suspect class) test used
in order to determine the validity of he
classification. Classification based on gender or
legitimacy are not suspect, but neither are they
judged by the traditional or rational basis test.
Intentional discriminations against members
of a quasi-suspect class violate equal protection
unless they are substantially related to important

12. Equality and uniformity of

taxation may mean the same as equal
protection. In such a case, the terms would mean
that all subjects and objects of taxation which are
similarly situated shall be subject to the same
burdens and granted the same privileges without
any discrimination whatsoever.

13. It is inherent in the power to tax

that the State be free to select the subjects
of taxation, and it has been repeatedly held that,
"inequalities which result from a singling out of one
particular class of taxation, or exemption, infringe no
constitutional limitation." (Commissioner of Internal
Revenue, et al., v. Santos, et al., 277 SCRA 617)

9. Benjie is a law-abiding citizen

who pays his real estate taxes promptly.
Due to a series of typhoons and adverse
economic conditions, an ordinance is
passed by Soliman City granting a 50%
discount for payment of unpaid real estate
taxes for the preceding year and the
condonation of all penalties on fines
resulting from the late payment.
Arguing that the ordinance rewards
delinquent tax payers and discriminates
against prompt ones, Benjie demands that
he be refunded an amount equivalent to
one-half of the real property taxes he paid.
The municipal attorney rendered an
opinion that Benjie cannot be reimbursed
because the ordinance did not provide for
such reimbursement. Benjie files suit to
declare the ordinance void on the ground
that it is a class legislation. Will his suit
prosper ? Explain your answer briefly.
SUGGESTED ANSWER: No. There is no
class legislation because there is no violation of the
equal protection suit. There is a valid classification
between those who already paid their taxes and
those who have not. Furthermore, the taxing
authority has the prerogative to select the subjects
and objects of taxation, including granting a 50%
discount in the payment of unpaid real estate
taxes, and the condonation of all penalties on fines
resulting from late payment.

10. The
rewards law to tax
collectors
does not violate equal
protection.
The equal protection clause
recognizes a valid classification, that is, a
classification that has a reasonable foundation or
rational basis and not arbitrary. With respect to RA

9335, its expressed public policy is the

optimization of the revenue-generation capability
and collection of the BIR and the BOC. Since the
subject of the law is the revenue- generation
capability and collection of the BIR and the BOC,
the incentives and/or sanctions provided in the law
should logically pertain to the said agencies.
Moreover, the law concerns only the BIR and the
BOC because they have the common distinct
primary function of generating revenues for the
national government through the collection of
taxes, customs duties, fees and charges.
Indubitably, such substantial distinction is
germane and intimately related to the purpose of
the law. Hence, the classification and treatment
accorded to the BIR and the BOC under RA 9335
fully satisfy the demands of equal protection.
(ABAKADA Guro Party List, etc., v. Purisima, etc., et al.,
G. R. No. 166715, August 14, 2008)

11. The prosecution of one guilty

person while others equally guilty are not
prosecuted, however, is not, by itself, a
denial of the equal protection of the laws.
Where the official action purports to be in
conformity to the statutory classification, an
erroneous or mistaken performance of the statutory
duty, although a violation of the statute, is not
without more a denial of the equal protection of the
laws.
The unlawful administration by officers of a
statute fair on its face, resulting in its unequal
application to those who are entitled to be treated
alike, is not a denial of equal protection unless
there is shown to be present in it an element of
intentional or purposeful discrimination. This may
appear on the face of the action taken with respect
to a particular class or person, or it may only be
shown by extrinsic evidence showing a
discriminatory design over another not to be
inferred from the action itself.
(Santos v. People, et al, G. R. No. 173176, August 26,
2008)

12. Equal protection should not be

used to protect commission of crime . While
all persons accused of crime are to be treated on a
basis of equality before the law, it does not follow
that they are to be protected in the commission of
crime. It would be unconscionable, for instance, to
excuse a defendant guilty of murder because
others have murdered with impunity.
Likewise, if the failure of prosecutors to
enforce the criminal laws as to some persons
should be converted into a defense for others
charged with crime, the result would be that the
trial of the district attorney for nonfeasance would
become an issue in the trial of many persons
charged with heinous crimes and the enforcement
of law would suffer a complete breakdown. (Santos
v. People, et al, G. R. No. 173176, August 26, 2008)

13. Illustration of double taxation in

local taxation. there is indeed double taxation if
Coca-Cola is subjected to the taxes under both

12

Sections 14 and 21 of Tax Ordinance No. 7794,

since these are being imposed: (1) on the same
subject matter the privilege of doing business in
the City of Manila; (2) for the same purpose to
make persons conducting business within the City
of Manila contribute to city revenues; (3) by the
same taxing authority City of Manila; (4) within
the same taxing jurisdiction within the territorial
jurisdiction of the City of Manila; (5) for the same
taxing periods per calendar year; and (6) of the
same kind or character a local business tax
imposed on gross sales or receipts of the business.
(The City of Manila, et al., v. Coca-Cola Bottlers
Philippines, Inc., G. R. No. 181845, August 4, 2009)

14. A lawful tax on a new subject, or

an increased tax on an old one, does not
interfere with a contract or impairs its
obligation, within the meaning of the
constitution. (Tolentino v. Secretary of Finance, et al.,
and companion cases, 235 SCRA 630)

15. The withdrawal of a tax

exemption should not be construed as
prohibiting future grants of exemption from
all taxes.
(Philippine Long Distance Telephone
Company, Inc., v. City of Davao, et al., etc., G. R. No.
143867, August 22, 2001)

16. Tax exemptions in franchises

are always subject to withdrawal.
A
legislative franchise is granted with the express
condition that it is subject to amendment,
alteration, or repeal. (1987 Constitution, Art. XII, Sec.
11)

It is enough to say that the parties to a

contract cannot, through the exercise of prophetic
discernment, fetter the exercise of the taxing power
of the State. For not only are existing laws read
into contracts in order to fix obligations as between
parties, but the reservation of essential attributes of
sovereign power is also read into contracts as a
basic postulate of the legal order. The policy of
protecting
contracts
against
impairment
presupposes the maintenance of a government
which retains adequate authority to secure the
peace and good order of society. (Smart
Communications, Inc. v. The City of Davao, etc., et al.,
G. R. No. 155491, September 16, 2008)
NOTES AND COMMENTS: Philippine Long
Distance Telephone Company, Inc., v. City of Davao, et
al., etc., G. R. No. 143867, August 22, 2001 made the
observation that since Smarts franchise was granted after
the effectivity of the Local Government Code that its tax
exemption privilege was reinstated. However, Smart
Communications, Inc. v. The City of Davao, etc., et al.,
G. R. No. 155491, September 16, 2008 is explicit in its
holding that Smart is not entitled to a tax exemption.

17. When withdrawal of a tax

exemption impairs the obligation of
contracts. The Contract Clause has never been
thought as a limitation on the exercise of the
States power of taxation save only where a tax
exemption has been granted for a valid
consideration. (Smart Communications, Inc. v. The City

of Davao, etc., et al., G. R. No. 155491, September 16,

2008) citing Tolentino v. Secretary of Finance, G. R. No.
115455, August 25, 1994, 235 SCRA 630, 685) The

author opines that since practically all franchises

granted to telecommunications companies are
similarly worded that the above doctrine finds
application to the others)

18.
The primary reason for the
withdrawal of tax exemption privileges
granted to government owned and
controlled corporations and all other units of
government was that such privilege resulted to
serious tax base erosion and distortions in the tax
treatment of similarly situated enterprises, hence
resulting in the need for these entities to share in the
requirements of development, fiscal or otherwise, by
paying the taxes and other charges due them.
(Philippine Ports Authority v.
109791, July 14, 2003)

City of Iloilo, G. R. No.

19. National
Power
Corporation
(NPC) is of the insistence that it is not
subject to the payment of franchises taxes
imposed by the Province of Isabela because
all of its shares are owned by the Republic
of the Philippines.
It is thus, an
instrumentality of the National Government
which is exempt from local taxation. As such
it is not a private corporation engaged in
business enjoying franchise
Is such contention meritorious ?
SUGGESTED ANSWER: No.
Philippine
Long Distance Telephone Company, Inc., v. City of
Davao, et al., etc., G. R. No. 143867, August 22,
2001, upheld the authority of the City of Davao, a
local government unit, to impose and collect a local
franchise tax because the Local Government Code
has withdrawn all tax exemptions previously enjoyed
by all persons and authorized local government
units to impose a tax on business enjoying a
franchise tax notwithstanding the grant of tax
exemption to them.

20. In lieu of all taxes in the

franchise of ABS-CBN does not exempt it
from local franchise taxes. It does not
expressly provide what kind of taxes ABS-CBN is
exempted from.
It is not clear whether the
exemption would include both local, whether
municipal, city or provincial, and national tax.
Whether the in lieu of all taxes provision would
include exemption from local tax is not
unequivocal.
The right to exemption from local franchise
tax must be clearly established and cannot be
made out of inference or implications but must be
laid beyond reasonable doubt.
Verily, the
uncertainty in the in lieu of all taxes provision
should be construed against ABS-CBN. ABS-CBN
has the burden to prove that it is in fact covered by
the exemption so claimed but has failed to do so .
(Quezon City, et al., v. ABS-CBN Broadcasting
Corporation, G. R. No. 166408, October 6, 2008)

13

NOTES AND COMMENTS: This is practically

the same holding in an earlier case involving another
telecommunications company Smart Communications,
Inc. v. The City of Davao, etc., et al., G. R. No. 155491,
September 16, 2008. The author opines that since
practically all franchises granted to telecommunications
companies are similarly worded that the above doctrine
finds application to the others.)

21. In lieu of all taxes refers to

national internal revenue taxes and not to
local taxes. The in lieu of all taxes clause
applies only to national internal revenue taxes and
not to local taxes. As appropriately pointed out in
the separate opinion of Justice Antonio T. Carpio in
a similar case involving a demand for exemption
from local franchise taxes:
[T]he "in lieu of all taxes" clause in Smart's
franchise refers only to taxes, other than income
tax, imposed under the National Internal Revenue
Code. The "in lieu of all taxes" clause does not
apply to local taxes. The proviso in the first
paragraph of Section 9 of Smart's franchise states
that the grantee shall "continue to be liable for
income taxes payable under Title II of the National
Internal Revenue Code." Also, the second
paragraph of Section 9 speaks of tax returns filed
and taxes paid to the "Commissioner of Internal
Revenue or his duly authorized representative in
accordance with the National Internal Revenue
Code." Moreover, the same paragraph declares
that the tax returns "shall be subject to audit by the
Bureau of Internal Revenue." Nothing is mentioned
in Section 9 about local taxes. The clear intent is
for the "in lieu of all taxes" clause to apply only to
taxes under the National Internal Revenue Code
and not to local taxes. Even with respect to
national internal revenue taxes, the "in lieu of all
taxes" clause does not apply to income tax.
If Congress intended the "in lieu of all taxes"
clause in Smart's franchise to also apply to local
taxes, Congress would have expressly mentioned
the exemption from municipal and provincial taxes.
Congress could have used the language in Section
9(b) of Clavecilla's old franchise, as follows:
x x x in lieu of any and all taxes of any kind,
nature or description levied, established or
collected by any authority whatsoever, municipal,
provincial or national, from which the grantee is
hereby expressly exempted, x x x. (Emphasis
supplied).

However, Congress did not expressly

exempt Smart from local taxes. Congress used the
"in lieu of all taxes" clause only in reference to
national internal revenue taxes. The only
interpretation, under the rule on strict construction
of tax exemptions, is that the "in lieu of all taxes"
clause in Smart's franchise refers only to national
and not to local taxes. [Smart Communications, Inc.
v. The City of Davao, etc., et al., G. R. No. 155491,
September 16, 2008 citing Philippine Long Distance
Telephone Company, Inc. v. City of Davao, 447 Phil. 571,
594 (2003)]
NOTES AND COMMENTS:
The author
opines that the above finds application to all
telecommunications companies.

14

22. The in lieu of all taxes clause

in the franchise of ABS-CBN has become
functus officio with the abolition of the
franchise tax on broadcasting companies
with yearly gross receipts exceeding Ten
Million Pesos. The clause in lieu of all taxes
does not pertain to VAT or any other tax. It cannot
apply when what is paid is a tax other than a
franchise tax. Since the franchise tax on the
broadcasting companies with yearly gross receipts
exceeding ten million pesos has been abolished,
the in lieu of all taxes clause has now become
functus officio, rendered inoperative. (Quezon City,
et al., v. ABS-CBN Broadcasting Corporation, G. R. No.
166408, October 6, 2008)
NOTES AND COMMENTS: This is practically
the same holding in an earlier case involving another
telecommunications company. Smart Communications,
Inc. v. The City of Davao, etc., et al., G. R. No. 155491,
September 16, 2008. The author opines that since
practically all franchises granted to telecommunications
companies are similarly worded that the above doctrine
finds application to the others.)

23.
Double taxation in its
generic sense, this means taxing the same
subject or object twice during the same
taxable period. In its particular sense, it may
mean direct duplicate taxation, which is prohibited
under the constitution because it violates the
concept of equal protection, uniformity and
equitableness of taxation.
Indirect duplicate
taxation is not anathematized by the above
constitutional limitations.

24.

Elements
duplicate taxation:

of

direct

a.

Same
1)
Subject or object is taxed twice
2)
by the same taxing authority
3)
for the same taxing purpose
4)
during the same taxable period
b. Taxing all of the subjects or objects for
the first time without taxing all of them for the
second time.
If any of the elements are absent then there
is indirect duplicate taxation which is not prohibited
by the constitution.
NOTES AND COMMENTS:
a.
Presence of the 2nd element violates the
equal protection clause. If only the 1st element is
present, taxing the same subject or object twice, by the
same taxing authority, etc., there is no violation of the
equal protection clause because all subjects and objects
that are similarly situated are subject to the same burdens
and granted the same privileges without any
discrimination whatsoever,
The presence of the 2nd element, taxing all of the
subjects and objects for the first time, without taxing all
for the second time, results to discrimination among
subjects and objects that are similarly situated, hence
violative of the equal protection clause.

25. Double taxation a valid defense

against the legality of a tax measure if the
double taxation is direct duplicate taxation,
because it would violate the equal protection clause
of the constitution.

26. When an item of income is taxed

in the Philippines and the same income is
taxed in another country, this would be
known as international juridical double
taxation which is the imposition of comparable
taxes in two or more states on the same taxpayer in
respect of the same subject matter and for identical
grounds. (Commissioner of Internal Revenue v. S.C.
Johnson and Son, Inc., et al., G.R. No. 127105, June 25,
1999)

27. Methods for avoiding double

taxation (indirect duplicate taxation).
a.
Tax treaties which exempts foreign
nationals from local taxation and local nationals
from foreign taxation under the principle of
reciprocity.
b.
Tax credits where foreign taxes are
allowed as deductions from local taxes that are due
to be paid.
c.
Allowing foreign taxes as a deduction
from gross income.

28. Tax credit generally refers to an

amount that is subtracted directly from ones total
tax liability, an allowance against the tax itself, or a
deduction from what is owned.
A tax credit reduces the tax due, including
whenever applicable the income tax that is
determined after applying the corresponding tax
rates to taxable income. (Commissioner of Internal
Revenue v. Central Luzon Drug Corporation, G. R. No.
159647, April 15, 2005)

29. A tax deduction is defined as a

subtraction fro income for tax purposes, or an
amount that is allowed by law to reduce income
prior to the application of the tax rate to compute the
amount of tax which is due.
A tax deduction reduces the income that is
subject to tax in order to arrive at taxable income.
(Commissioner of Internal Revenue v. Central Luzon Drug
Corporation, G. R. No. 159647, April 15, 2005)

30.

The petitioners allege that the RVAT law is constitutional because the
Bicameral Conference Committed has
exceeded its authority in including
provisions which were never included in the
versions of both the House and Senate such
as inserting the stand-by authority to the
President to increase the VAT from 10% to
12%; deleting entirely the no pass-on
provisions found in both the House and
Senate Bills; inserting the provision
imposing a 70% limit on the amount of input
tax to be credited against the output tax;
and including the amendments introduced
only by Senate Bill No. 1950 regarding other
kinds of taxes in addition to the value-added
tax. Thus, there was a violation of the
constitutional mandate that revenue bills

15

shall originate exclusively from the House of

Representatives.
Are the contentions of such weight as
to constitute grave abuse of discretion
which may invalidate the law ? Explain
briefly.
SUGGESTED ANSWER: No. There was no
grave abuse of discretion because all the changes
and modifications made by the Bicameral
Conference Committee were germane to subjects of
the provisions referred to it for reconciliation.
The Bicameral Conference Committee
merely exercised the judicially recognized longstanding legislative practice of giving said
conference
committee
ample
latitude
for
compromising differences between the Senate and
the House. [Abakada Guro Party List (etc.) v. Ermita,
etc., et al., G. R. No. 168056, September 1, 2005 and
companion cases]

31. The VAT while regressive is NOT

violative of the mandate to evolve a
progressive system of taxation. Do you
agree ? The mandate to Congress is not to
prescribe but to evolve a progressive system of
taxation. Otherwise, sales taxes which perhaps are
the oldest form of indirect taxes, would have been
prohibited with the proclamation of the constitutional
provision.
Sales taxes are also regressive. .
[Abakada Guro Party List (etc.) v. Ermita, etc., et al., G.
R. No. 168056, September 1, 2005 and companion cases
citing Tolentino v. Secretary of Finance, et al., G. R. No.
115455, August 25, 1994, 235 SCRA 630]

32. All revenues and assets of nonstock, non-profit educational institutions

that are actually, directly and exclusively
used for educational purposes shall be
exempt from taxation.
33. Revenues
and
assets
of
proprietary
educational
institutions,
including those which are cooperatively
owned, may be entitled to exemptions
subject to limitations provided by law
including restrictions on dividends and
provisions for reinvestments. There is no law
at the present which grants exemptions, other the
exemptions granted to cooperatives.

OTHER CONCEPTS
1. Distinguish tax from debt.
TAX

DEBT

Basis

based on law

based on
contract or
judgment

Failure to
Pay

may result in
imprisonment

no
imprisonment

Mode of
Payment

generally
payable in

payable in
money,

money

property or
service

Assignability

not
assignable

assignable

Payment

unless it
becomes a debt
is not subject to
compensation
or set-off

may be a
subject

Interest

does not draw

interest unless
delinquent

draws interest if
stipulated or
delayed

Authority

imposed by
public authority

can be imposed
by private
individuals

Prescription

Prescriptive
periods for tax
under NIRC

debt under the

Civil Code

WARNING:
Do not use the above
arrangement in answering Bar questions.

2.
Compensation takes place by
operation of law, where the local government and
the taxpayer are in their own right reciprocally
debtors and creditors of each other, and that the
debts are both due and demandable, in
consequence of Articles 1278 and 1279 of the Civil
Code. (Domingo v. Garlitos, 8 SCRA 443)

3. May there be compensation or

set-off between a national tax and a debt ?
Reason out your answer.
SUGGESTED ANSWER: As a general rule,
there could be no compensation or set-off between
a tax and a debt for the following reasons:
a.

Lifeblood theory.

b.
Taxes are not contractual obligations but
arise out of a duty to, and are the positive acts of
government, to the making and enforcing of which
the personal consent of the individual taxpayer is
not required. (Republic v. Mambulao Lumber Co., 4
SCRA 622)
c.
Taxes
cannot be the subject of compensation because the
government and taxpayer are not mutually
creditors and debtors of each other and a claim for
taxes is not such a debt, demand, contract or
judgment as is allowed to be set-off.
Thus, it is correct to say that the offsetting
of a taxpayers tax refund with its alleged tax
deficiency is unavailing under Art. 1279 of the Civil
Code. (South African Airways v. Commissioner of
Internal Revenue, G.R. No. 180356, February 16, 2010
reiterating Caltex Philippines, Inc. v. Commission on
Audit, which applied Francia v. Intermediate Appellate
Court)

4. Exceptions: When set-off or

compensation allowed for local taxes.

a.
Where both claims already become overdue
and demandable as well as fully liquidated.
Compensation takes place by operation of law
under Art. 1200 in relation to Arts. 1279 and 1290
all of the Civil Code. (Domingo v. Garlitos, 8 SCRA
443)
b.
Compensation takes place by operation of
law, where the government and the taxpayer are in
their own right reciprocally debtors and creditors of
each other, and that the debts are both due and
demandable. This is in consequence of Article
1278 and 1279 of the Civil Code. (Domingo v.
Garlitos, 8 SCRA 443)

c.
,The Supreme Court
upheld the validity of a set-off between the
taxpayer and the government. In both cases, the
claims of the taxpayers therein were certain and
liquidated. The claims were certain since there
were no doubts or disputes as to their refundability.
In fact, the government admitted the fact of overpayment.
(Commissioner of
Internal Revenue
v. Esso Standard Eastern, Inc., 172 SCRA 364)

d.
In case of a tax overpayment,
the BIRs obligation to refund or off-set arises from
the moment the tax was paid. REASON: Solutio
indebeti. (Commissioner of Internal Revenue v. Esso
Standard Eastern, Inc 172 SCRA 364)

e.
While judgment should be
rendered in favor of Republic for unpaid taxes,
judgment ought at the same time to issue for
Sampaguita Pictures commanding payment to the
latter by the Republic of the value of the backpay
certificates which the Republic received. (Republic
v. Ericta, 172 SCRA 623)

5. Gilbert obtained a judgment

for a sum of money against the municipality
of Camiling. The judgment has become
final although execution has not issued.
Upon receiving an assessment for
municipal sales taxes from the Municipal
Treasurer, Gilbert executed a partial
assignment of his judgment sufficient to
cover the assessment in favor of the
Municipality. May the Municipal Treasurer
validly accept the assignment? Why?
SUGGESTED ANSWER: Yes. The parties
in this case are mutually debtors and creditors of
each other, and since both of the claims became
overdue, demandable and fully liquidated,
compensation takes place by operation of law.
Such was the holding in Domingo v. Garlitos, 8
SCRA 443, a case decided by the Supreme Court
whose factual antecedents are similar to the
problem.

6.
In case of
doubt, tax laws must be construed strictly
against the State and liberally in favor of the
taxpayer because taxes, as burdens which must
be endured by the taxpayer, should not be
presumed to go beyond what the law expressly and
clearly declares. (Lincoln Philippine Life Insurance

16

Company, Inc., etc., v. Court of Appeals, et al., 293 SCRA

92, 99)

7.
Interpretation in the imposition
of taxes, is not the similar doctrine as that
applied to tax exemptions. The rule in the
interpretation of tax laws is that a statute will not be
construed as imposing a tax unless it does so
clearly, expressly, and unambiguously.
A tax
cannot be imposed without clear and express
words for that purpose. Accordingly, the general
rule of requiring adherence to the letter in
construing statutes applies with peculiar strictness
to tax laws and the provisions of a taxing act are
not to be extended by implication. In answering the
question of who is subject to tax statutes, it is basic
that in case of doubt, such statutes are to be
construed most strongly against the government
and in favor of the subjects or citizens because
burdens are not to be imposed nor presumed to be
imposed beyond what statutes expressly and
clearly import. [Commissioner of Internal Revenue v.
Fortune Tobacco Corporation, G. R. Nos. 167274-75,
July 21, 2008 citing CIR v. Court of Appeals, 338 Phil.
322, 330-331 (1997)] As burdens, taxes should not

be unduly exacted nor assumed beyond the plain

meaning of the tax laws. (Ibid., citing CIR v.
Philippine American Accident Insurance Company, Inc.,
G.R. No. 141658, March 18, 2005, 453 SCRA 668)

8.
Strict interpretation of tax
exemption laws. Taxes are what civilized people
pay for civilized society. They are the lifeblood of
the nation. Thus, statutes granting tax exemptions
are construed stricissimi juris against the taxpayer
and liberally in favor of the taxing authority. A
claim of tax exemption must be clearly shown and
based on language in law too plain to be mistaken.
Otherwise stated, taxation is the rule, exemption is
the exception. (Quezon City, et al., v. ABS-CBN
Broadcasting Corporation, G. R. No. 166408, October 6,
2008 citing Mactan Cebu International Airport Authority
v. Marcos, G.R. No. 120082, September 11, 1996, 261
SCRA 667, 680) The burden of proof rests upon the

party claiming the exemption to prove that it is in

fact covered by the exemption so claimed. (Quezon
City, supra citing Agpalo, R.E., Statutory Construction,
2003 ed., p. 301)

9.
Rationale for strict interpretation
of tax exemption laws. The basis for the rule
on strict construction to statutory provisions
granting tax exemptions or deductions is to
minimize differential treatment and foster
impartiality, fairness and equality of treatment
among taxpayers. (Quezon City, et al., v. ABS-CBN
Broadcasting Corporation, G. R. No. 166408, October 6,
2008) He who claims an exemption from his share

of common burden must justify his claim that the

legislature
intended
to
exempt
him
by
unmistakable terms. For exemptions from taxation
are not favored in law, nor are they presumed.
They must be expressed in the clearest and most
unambiguous language and not left to mere
implications. It has been held that exemptions are
never presumed the burden is on the claimant to
establish clearly his right to exemption and cannot

be made out of inference or implications but must

be laid beyond reasonable doubt. In other words,
since taxation is the rule and exemption the
exception, the intention to make an exemption
ought to be expressed in clear and unambiguous
terms. (Quezon City, supra citing Agpalo, R.E.,
Statutory Construction, 2003 ed., p. 302)

10. Why are tax exemptions are

strictly construed against the taxpayer and
liberally in favor of the State ?
SUGGESTED ANSWER:
Taxes are
necessary for the continued existence of the State.

11. In case of a tax overpayment,

where the BIRs obligation to refund or setoff arises from the moment the tax was paid
under the principle of solutio indebeti.
(Commissioner of Internal Revenue v. Esso Standard
Eastern, Inc, 172 SRCA 364)

12. But note Nestle Phil. v. Court of

Appeals, et al., G.R. No. 134114, July 6, 2001
which held that in order for the rule on solutio
indebeti to apply it is an essential condition that the
petitioner must first show that its payment of the
customs duties was in excess of what was required
by the law at the time the subject 16 importations of
milk and milk products were made. Unless shown
otherwise, the disputable presumption of regularity
of performance of duty lies in favor of the Collector
of Customs.

13. Strict interpretation of a tax

refund that partakes of the nature of a tax
does not apply to tax refund based on
erroneous payment or where there is no
law that authorizes collection of the tax.
There is parity between tax refund and tax
exemption only when the former is based either on
a tax exemption statute or a tax refund statute.
(Commissioner of Internal Revenue v. Fortune Tobacco
Corporation, G. R. Nos. 167274-75, July 21, 2008)

Tax refunds (or tax credits), on the other

hand, are not founded principally on legislative
grace but on the legal principle which underlies all
quasi-contracts abhorring a persons unjust
enrichment
at the expense of
another.
[Commissioner, supra citing Ramie Textiles, Inc. v. Hon.
Mathay, Sr., 178 Phil. 482 (1979); Puyat & Sons v. City
of Manila, et al., 117 Phil. 985 (1963)]

The dynamic of erroneous payment of tax

fits to a tee the prototypic quasi-contract, solutio
indebiti, which covers not only mistake in fact but
also mistake in law. (Commissioner, supra citing CIVIL
CODE, Arts. 2142, 2154 and 2155)

The Government is not exempt from the

application of solutio indebiti. (Commissioner, supra
citing Commissioner of Internal Revenue v. Firemans
Fund Insurance Co., G.R. No. L-30644, 9 March 1987,
148 SCRA 315, 324-325; Ramie Textiles, Inc. v. Mathay,
supra; Gonzales Puyat & Sons v. City of Manila, supra)

Indeed, the taxpayer expects fair dealing

from the Government, and the latter has the duty
to refund without any unreasonable delay what it
has erroneously collected. (Commissioner, supra
citing Commissioner

of Internal Revenue

v. Tokyo

17

Shipping Co., supra at 338) If the State expects its

taxpayers to observe fairness and honesty in

paying their taxes, it must hold itself against the
same standard in refunding excess (or erroneous)
payments of such taxes. It should not unjustly
enrich itself at the expense of taxpayers.
[Commissioner, supra citing AB Leasing and Finance
Corporation v. Commissioner of Internal Revenue, 453
Phil. 297 in turn citing BPI-Family Savings Bank, Inc. v.
Court of Appeals, 330 SCRA 507, 510, 518 (2000)] And

so, given its essence, a claim for tax refund

necessitates only preponderance of evidence for its
approbation like in any other ordinary civil case.
(Commissioner, supra)

14. Tax refunds premised upon a

tax exemption strictly construed,
Tax
exemption is a result of legislative grace. And he
who claims an exemption from the burden of
taxation must justify his claim by showing that the
legislature intended to exempt him by words too
plain to be mistaken. [Commissioner of Internal
Revenue v. Fortune Tobacco Corporation, G. R. Nos.
167274-75, July 21, 2008 citing Surigao Consolidated
Mining Co. Inc. v. Commissioner of Internal Revenue
and Court of Tax Appeals, 119 Phil. 33, 37 (1963)]

The rule is that tax exemptions must be

strictly construed such that the exemption will not
be held to be conferred unless the terms under
which it is granted clearly and distinctly show that
such was the intention. [Commissioner, supra citing
Phil. Acetylene Co. v. Commission of Internal Revenue,
et al., 127 Phil. 461, 472 (1967); Manila Electric
Company v. Vera, G.R. No. L-29987, 22 October 1975,
67 SCRA 351, 357-358; Surigao Consolidated Mining
Co. Inc. v. Commissioner of Internal Revenue, supra]

A claim for tax refund may be based on

statutes granting tax exemption or tax refund. In
such case, the rule of strict interpretation against
the taxpayer is applicable as the claim for refund
partakes of the nature of an exemption, a
legislative grace, which cannot be allowed unless
granted in the most explicit and categorical
language.
The taxpayer must show that the
legislature intended to exempt him from the tax by
words too plain to be mistaken. [Commissioner,
supra with a note to see Surigao Consolidated Mining
Co. Inc. v. CIR, supra at 732-733; Philex Mining Corp. v.
Commissioner of Internal Revenue, 365 Phil. 572, 579
(1999); Davao Gulf Lumber Corp. v. Commissioner of
Internal Revenue, 354 Phil. 891-892 (1998); .
Commissioner of Internal Revenue v. Tokyo Shipping
Co., Ltd., 314 Phil. 220, 228 (1995)]

15.
Effect of a BIR reversal of a
previous ruling interpreting a law as
exempting a taxpayer. A reversal of a BIR ruling
favorable to a taxpayer would not necessarily create
a perpetual exemption in his favor, for after all the
government is never estopped from collecting taxes
because of mistakes or errors on the part of its
agents. (Lincoln Philippine Life Insurance Company, Inc.,
etc., v. Court of Appeals, et al., 293 SCRA 92, 99)

16. A tax amnesty is a general pardon or

intentional overlooking by the State of its authority to

impose penalties on persons otherwise guilty of

evasion or violation of a revenue or a tax law.
It partakes of an absolute waiver by the
government of its right to collect what is due it and
to give tax evaders who wish to relent a chance to
start with a clean slate. A tax amnesty, much like a
tax exemption, is never favored nor presumed in
law. The grant of a tax amnesty, similar to a tax
exemption, must be construed strictly against the
taxpayer and liberally in favor of the taxing
authority. (Philippine Banking Corporation, etc., v.
Commissioner of Internal Revenue, G. R. No. 170574,
January 30, 2009)

17.

The purpose of tax amnesty is to

a.
give tax evaders who wish to relent a
chance to start a clean slate, and to
b. give the government a chance to collect
uncollected tax from
tax evaders without
having to go through the tedious process of a tax
case. (Banas, Jr. v. Court of Appeals, et al., G.R. No.
102967, February 10, 2000)

18. Tax amnesty distinguished from

tax exemption.
a.
Tax amnesty is an immunity from all
criminal, civil and administrative liabilities arising
from nonpayment of taxes (People v. Castaneda,
G.R. No. L-46881, September 15, 1988) WHILE a
tax exemption is an immunity from civil liability only.
It is an immunity or privilege, a freedom from a
charge or burden to which others are subjected.
(Florer v. Sheridan, 137 Ind. 28, 36 NE 365)
b.
Tax amnesty applies only to past tax
periods,
hence
of
retroactive
application
(Castaneda, supra) WHILE tax exemption has
prospective application.

19.

Tax avoidance is the use of legally

permissible means to reduce the tax while tax

evasion is the use of illegal means to escape the
payment of taxes.

20. Tax evasion connotes the

integration of three factors:
a.
The end to be achieved, i.e., the
payment of less than that known by the taxpayer to
be legally due, or the non-payment of tax when it is
shown that a tax is due;
b.
an accompanying state of mind which
is described as being evil on bad faith, willful, or
deliberate and not accidental; and
c.
a course of action or failure of action
which is unlawful. (Commissioner of Internal Revenue
v. The Estate of Benigno P. Toda, Jr., , etc., G. R. No.
147188, September 14, 2004)

21.

Tax
distinguished from tax evasion.

avoidance

a.
Tax avoidance is legal while tax
evasion is illegal.
b.
The objective of tax avoidance in most
instances is merely to reduce the tax that is due
while is tax evasion the object is to entirely escape
the payment of taxes.

18

c.
Tax evasion warrants the imposition of
civil, administrative and criminal penalties while tax
avoidance does not.

22. Tax sparing is a provision in some

tax treaties which provides that the state of
residence allows as credit the amount that would
have been paid, as if no reduction has been made.
(Vogel, Klaus on Double Taxation Conventions, Third
Edition, p.1255 cited in Segarra, Venice H, Tax Treaties:
Trick or treat ?, Philippine Daily Inquirer, December 6,
2002, p. C5)

There may be instances where a particular

income is exempt from taxation in order to
encourage foreign investments which may lead to
economic development. If the tax credit method is
used, there would be no more tax to credit since
there is no more tax to credit as a result of the tax
exemption. Consequently, when the tax method
credit method is applied to these items of income,
such incentives are siphoned off since, in effect,
the tax benefits are cancelled out. (Ibid.) Thus, the
need for the tax sparing provision.

NATIONAL INTERNAL REVENUE

CODE
ORGANIZATION AND FUNCTIONS OF THE
BUREAU OF INTERNAL REVENUE
1.
Rep. Act No. 1405, the Bank
Deposits Secrecy Law prohibits inquiry into
bank deposits. As exceptions to Rep. Act
No. 1405, the Commissioner of Internal
Revenue is only authorized to inquire into
the bank deposits of:
a.
a decedent to determine his gross
estate; and
b.
any taxpayer who has filed an
application for compromise of his tax liability by
reason of financial incapacity to pay his tax liability.
[Sec. 5 (F), NIRC of 1997]
c.
A taxpayer who authorizes the
Commissioner to inquire into his bank deposits.

2.
Purpose of the NIRC of 1997.
Revenue generation has undoubtedly been
a major consideration in the passage of the
Tax Code. (Commissioner of Internal Revenue v.
Fortune Tobacco Corporation, G. R. Nos. 167274-75,
July 21, 2008)

3.
Purpose
of shift from ad valorem system to specific
tax system in taxation of cigarettes. The
shift from the ad valorem system to the specific tax
system is likewise meant to promote fair
competition among the players in the industries
concerned, to ensure an equitable distribution of
the tax burden and to simplify tax administration by
classifying cigarettes, among others, into high,
medium and low-priced based on their net retail
price and accordingly graduating tax rates.

(Commissioner of Internal Revenue v. Fortune Tobacco

Corporation, G. R. Nos. 167274-75, July 21, 2008)

TAX ON INCOME
1.
The Tax Code has included
under the term corporation partnerships,
no matter how created or organized, joint-stock
companies,
joint
accounts
(cuentas
en
participacion),
associations,
or
insurance
companies. [Sec. 24 now Sec. 24 (B) of the NIRC
of 1997]
2.
In Evangelista v. Collector, 102 Phil.
140, the Supreme Court held citing Mertens that the
term partnership includes a syndicate, group,
pool, joint venture or other unincorporated
organization, through or by means of which any
business, financial operation, or venture is carried
on.

3. Certain business organizations

do not fall under the category of
corporations under the Tax Code, and
therefore not subject to tax as corporations, include:
a. General professional partnerships;
b. Joint venture or consortium formed for
the purpose of undertaking construction projects
engaging in petroleum, coal, geothermal, and other
energy operations, pursuant to an operation or
consortium agreement under a service contract with
the Government. [1st sentence, Sec. 22 (B), BIRC
of 1997]

4.

Co-heirs who own inherited

properties which produce income should
not automatically be considered as partners
of an unregistered corporation subject to
income tax for the following reasons:
a. The sharing of gross returns does not of
itself establish a partnership, whether or not the
persons sharing them have a joint or common right
or interest in any property from which the returns are
derived. There must be an unmistakable intention
to form a partnership or joint venture. (Obillos, Jr. v.
Commissioner of Internal Revenue, 139 SCRA 436)

b. There is no contribution or investment

of additional capital to increase or expand the
inherited properties, merely continuing the
dedication of the property to the use to which it had
been put by their forebears. (Ibid.)
c. Persons who contribute property or
funds to a common enterprise and agree to share
the gross returns of that enterprise in proportion to
their contribution, but who severally retain the title to
their respective contribution, are not thereby
rendered partners. They have no common stock
capital, and no community of interest as principal
proprietors in the business itself from which the
proceeds were derived. (Elements of the Law of
Partnership by Floyd R. Mechem, 2 nd Ed., Sec. 83, p. 74
cited in Pascual v. Commissioner of Internal Revenue, 166
SCRA 560)

19

5. The common ownership of

property does not itself create a partnership
between the owners, though they may use it for
purpose of making gains, and they may, without
becoming partners, are among themselves as to the
management and use of such property and the
application of the proceeds therefrom.. (Spurlock v,.
Wilson, 142 S.W. 363, 160 No. App. 14, cited in
Pascual v. Commissioner of Internal Revenue, 166
SCRA 560)

6.
The income from the rental of the
house, bought from the earnings of coowned properties, shall be treated as the
income of an unregistered partnership to be
taxable as a corporation because of the clear
intention of the brothers to join together in a venture
for making money out of rentals.

7.
Income is gain derived and severed
from capital, from labor or from both combined. For
example, to tax a stock dividend would be to tax a
capital increase rather than the income.
(Commissioner of Internal Revenue v. Court of
Appeals, et al., G.R. No. 108576, January 20, 1999)
8.
The term taxable income means
the pertinent items of gross income specified in the
Tax Code, less the deductions and/or personal and
additional exemptions, if any, authorized for such
types of income by the Tax Code or other special
laws. (Sec. 31, NIRC of 1997)
9.
The cancellation and forgiveness
of indebtedness may amount to (a) payment of
income; (b) gift; or to a (c) capital transaction
depending upon the circumstances.

10. If an individual performs services

for a creditor who, in consideration thereof,
cancels the debt, it is income to the extent of
the amount realized by the debtor as compensation
for his services.

11. An insolvent debtor does not

realize taxable income from the cancellation
or forgiveness. (Commissioner v. Simmons Gin
Co., 43 Fd 327 CCA 10th)

12. The insolvent debtor realizes

income resulting from the cancellation or
forgiveness of indebtedness when he
becomes solvent. (Lakeland Grocery Co., v.
Commissioner 36 BTA (F) 289)

13. If a creditor merely desires to

benefit a debtor and without any
consideration therefor cancels the amount
of the debt it is a gift from the creditor to the
debtor and need not be included in the
latters income.

20

14.
If a corporation to which a
stockholder is indebted forgives the debt,
the transaction has the effect of payment of
a dividend. (Sec. 50, Rev. Regs. No. 2)

20. Payment for services, other than

compensation income, is considered as
having been earned at the place where the
activity or service was performed.

15. Members of cooperatives not

subject to tax on the interest earned from their
deposits with the cooperative. No less than our

21. A non-resident alien, who has

stayed in the Philippines for an aggregate
period of more than 180 days during any
calendar year, shall be considered as a
non-resident alien doing business in the
Philippines. Consequently, he shall be subject to

Constitution guarantees the protection of cooperatives.

Section 15, Article XII of the Constitution considers
cooperatives as instruments for social justice and
economic development. At the same time, Section 10
of Article II of the Constitution declares that it is a policy
of the State to promote social justice in all phases of
national development. In relation thereto, Section 2 of
Article XIII of the Constitution states that the promotion
of social justice shall include the commitment to create
economic opportunities based on freedom of initiative
and self-reliance. Bearing in mind the foregoing
provisions, we find that an interpretation exempting the
members of cooperatives from the imposition of the
final tax under Section 24(B)(1) of the NIRC (tax on
interest earned by deposits) is more in keeping with the
letter and spirit of our Constitution.
(Dumaguete
Cathedral Credit Coopertive [DCCC)] etc., v.
Commissioner of Internal Revenue, G. R. No. 182722,
January
22,
2010)

In closing, cooperatives, including their

members, deserve a preferential tax treatment because
of the vital role they play in the attainment of economic
development and social justice. Thus, although taxes
are the lifeblood of the government, the States power to
tax must give way to foster the creation and growth of
cooperatives. To borrow the words of Justice Isagani A.
Cruz: The power of taxation, while indispensable, is not
absolute and may be subordinated to the demands of
social justice. (Ibid., citing Commissioner of Internal
Revenue v. American Express International,
(Philippine Branch), 500 Phil. 586 (2005).

Inc.

16. The Global system of income

taxation is a system employed where the tax
system views indifferently the tax base and
generally treats in common all categories of taxable
income of the individual. (Tan v. del Rosario, Jr., 237
SCRA 324, 331)

17. The Schedular system of income

taxation is a system employed where the income
tax treatment varies and is made to depend on the
kind or category of taxable income of the taxpayer.
(Tan v. del Rosario, Jr., 237 SCRA 324, 331)

18.
Under the National Internal
Revenue Code the global system is
applicable to taxable corporations and the
schedular to individuals.
19. Compensation
income
is
considered as having been earned in the
place where the service was rendered and
not considered as sourced from the place of origin
of the money.

income tax on his income derived from sources

from within the Philippines. [Sec. 25 (A) (1), NIRC]
He is allowed to avail of the itemized
deductions including the personal and additional
exemptions subject to the rule on reciprocity.

22.
What are considered as de
minimis benefits not subject to withholding
tax on compensation income of both
managerial and rank and file employees ?
SUGGESTED ANSWER:
a.
Monetized unused vacation leave
credits of employees not exceeding ten (10) days
during the year;
b.
Medical cash allowance to dependents
of employees not exceeding P750.00 per employee
per semester or P125 per month;
c.
Rice subsidy of P1,000.00 or one (1)
sack of 50-kg. rice per month amounting to not more
than P1,000.00;
d. Uniforms and clothing allowance not
exceeding P3,000.00 per annum;
e.
Actual yearly medical benefits not
exceeding P10,000.00 per annum;
f.
Laundry allowance not exceeding P300
per month;
g.
Employees achievement awards, e.g.
for length of service or safety achievement, which
must be in the form of a tangible persona property
other than cash or gift certificate, with an annual
monetary value not exceeding P10,000.00 received
by an employee under an established written plan
which does not discriminate in favor of highly paid
employees;
h.
Gifts given during Christmas and major
anniversary celebrations not exceeding P5,000 per
employee per annum;
i.
Flowers, fruits, books, or similar items
given to employees under special circumstances,
e.g. on account of illness, marriage, birth of a baby,
etc.; and
j.
Daily meal allowance for overtime
work not exceeding twenty five percent (25%) of the
basic minimum wage.
The amount of de minimis
benefits
conforming to the ceiling herein prescribed shall not
be considered in determining the P30,000 ceiling of
other benefits provided under Section 32 (B)(7)(e)
of the Code. However, if the employer pays more
than the ceiling prescribed by these regulations, the
excess shall be taxable to the employee receiving
the benefits only if such excess is beyond the
P30,000.00 ceiling, provided, further, that any

amount given by the employer as benefits to its

employees, whether classified as de minimis
benefits or fringe benefits, shall constitute as
deductible expense upon such employer. [Sec.
2.78.1 (A) (3), Rev. Regs. 2-98 as amended by Rev.
Regs. No. 8-2000]

23. Income subject to final tax

refers to an income collected through the
withholding tax system. The payor of the
income withholds the tax and remits it to the
government as a final settlement of the income tax
as a final settlement of the income tax due on said
income. The recipient is no longer required to
include the income subjected to a final tax as part of
his gross income in his income tax return.

24.
Distinguish
from deductions.

exclusions

SUGGESTED ANSWER:
a.
Exclusions from gross income refer to
a flow of wealth to the taxpayer which are not
treated as part of gross income for purposes of
computing the taxpayers taxable income, due to the
following reasons: (1) It is exempted by the
fundamental law; (2) It is exempted by statute; and
(3) It does not come within the definition of income
(Sec. 61, Rev. Regs. No. 2) WHILE deductions are
the amounts which the law allows to be subtracted
from gross income in order to arrive at net income.
b.
Exclusions pertain to the computation
of gross income WHILE deductions pertain to the
computation of net income.
c.
Exclusions are something received or
earned by the taxpayer which do not form part of
gross income WHILE deductions are something
spent or paid in earning gross income.
An example of an exclusion from gross
income are life insurance proceeds, and an example
of a deduction are losses.

25.

What

are excluded from

gross income ?
SUGGESTED ANSWER:
a.
Proceeds of life insurance policies paid
to the heirs or beneficiaries upon the death of the
insured whether in a single sum or otherwise.
b.
Amounts received by the insured as a
return of premiums paid by him under life insurance,
endowment or annuity contracts either during the
term, or at maturity of the term mentioned in the
contract, or upon surrender of the contract.
c.
Value of property acquired by gift,
bequest, devise, or descent.
d. Amounts received, through accident or
health insurance or Workmens Compensation Acts
as compensation for personal injuries or sickness,
plus the amounts of any damages received on
whether by suit or agreement on account of such
injuries or sickness.
e.
Income of any kind to the extent
required by any treaty obligation binding upon the
Government of the Philippines.
f.
Retirement benefits received under
Republic Act No. 7641. Retirement received from

21

reasonable private benefit plan after compliance

with certain conditions.
Amounts received for
beyond control separation. Foreign social security,
retirement gratuities, pensions, etc. USVA benefits,
SSS benefits and GSIS benefits.

26.
What are the conditions for
excluding retirement benefits from gross
income, hence tax-exempt ?
SUGGESTED ANSWER:
a.
Retirement benefits received under
Republic Act No. 7641 and those received by
officials and employees of private firms, whether
individual or corporate, in accordance with the
employers reasonable private benefit plan approved
by the BIR.
b.
Retiring official or employee
1)
In the service of the same
employer for at least ten (10) years;
2)
Not less than fifty (50) years of
age at time of retirement;
3)
Availed of the benefit of
exclusion only once. [Sec. 32 (B) (6) (a),
NIRC of 1997] The retiring official or
employee should not have previously availed
of the privilege under the retirement plan of
the same or another employer. [1 st par., Sec.
2.78 (B) (1), Rev. Regs. No. 2-98]

27.
What kind of separation
(retirement) pay is excluded from gross
income, hence tax-exempt ?
SUGGESTED ANSWER:
a.
Any amount received by an official,
employee or by his heirs,
b.
From the employer
c.
As a consequence of separation of
such official or employee from the service of the
employer because of
1)
Death,
sickness or
other
physical disability; or
2)
For any cause beyond the
control of said official or employee [Sec. 32
(B) (6) (b), NIRC of 1997], such as
retrenchment, redundancy and cessation of
business. [1st par., Sec. 2.78 (B), (1) (b),
Rev. Regs. No. 2-98]

28. What
are
the
Itemized
deductions from gross income and who may
avail of them ?
a.
Ordinary and necessary trade,
business or professional expenses.
b. The amount of interest paid or
incurred within a taxable year on indebtedness in
connection with the taxpayers profession, trade or
business.
Resident citizens, resident alien individuals
and nonresident alien individuals who are engaged
in trade and business, on their gross incomes other
from compensation income are allowed to deduct
these expenses. Domestic corporations, estates
and trusts may also deduct this expense.
Nonresident citizens and foreign corporations on

their gross incomes from within may also deduct this

expense.
Nonresident alien individuals not engaged in
trade or business in the Philippines are not allowed
to deduct this expense.
c. Taxes paid or incurred within the taxable
year in connection with the taxpayers profession.
Resident citizens, resident alien individuals
and nonresident alien individuals who are engaged
in trade and business, on their gross incomes other
from compensation income are allowed to deduct
these expenses. Domestic corporations, estates
and trusts may also deduct this expense.
Nonresident citizens and foreign corporations on
their gross incomes from within may also deduct this
expense.
Nonresident alien individuals not engaged in
trade or business in the Philippines are not allowed
to deduct this expense.
d. Ordinary losses, losses from
casualty, theft or embezzlement; and net operating
losses.
Resident citizens, resident alien individuals
and nonresident alien individuals who are engaged
in trade and business, on their gross incomes other
from compensation income are allowed to deduct
these expenses. Domestic corporations, estates
and trusts may also deduct this expense.
Nonresident citizens and foreign corporations on
their gross incomes from within may also deduct this
expense.
Nonresident alien individuals not engaged in
trade or business in the Philippines are not allowed
to deduct this expense.
e.
Bad debts due to the taxpayer,
actually ascertained to be worthless and charged off
within the taxable year, connected with profession,
trade or business, not sustained between related
parties.
Resident citizens, resident alien individuals
and nonresident alien individuals who are engaged
in trade and business, on their gross incomes other
from compensation income are allowed to deduct
these expenses. Domestic corporations, estates
and trusts may also deduct this expense.
Nonresident citizens and foreign corporations on
their gross incomes from within may also deduct this
expense.
Nonresident alien individuals not engaged in
trade or business in the Philippines are not allowed
to deduct this expense.
f.
Depreciation
or
a
reasonable
allowance for the exhaustion, wear and tear
(including reasonable allowance for obsolescence)
of property used in trade or business.
Resident citizens, resident alien individuals
and nonresident alien individuals who are engaged
in trade and business, on their gross incomes other
from compensation income are allowed to deduct
these expenses. Domestic corporations, estates
and trusts may also deduct this expense.
Nonresident citizens and foreign corporations on
their gross incomes from within may also deduct this
expense.

22

Nonresident alien individuals not engaged in

trade or business in the Philippines are not allowed
to deduct this expense.
g. Depletion or deduction arising from
the exhaustion of a non-replaceable asset, usually a
natural resource.
Resident citizens, resident alien individuals
and nonresident alien individuals who are engaged
in trade and business, on their gross incomes other
from compensation income are allowed to deduct
these expenses. Domestic corporations, estates
and trusts may also deduct this expense.
Nonresident citizens and foreign corporations on
their gross incomes from within may also deduct this
expense.
Nonresident alien individuals not engaged in
trade or business in the Philippines are not allowed
to deduct this expense.
h. Charitable and other contributions.
Resident citizens, resident alien individuals and
nonresident alien individuals who are engaged in
trade and business, on their gross incomes other
from compensation income are allowed to deduct
these expenses. Domestic corporations, estates
and trusts may also deduct this expense.
Nonresident citizens and foreign corporations on
their gross incomes from within may also deduct this
expense.
Nonresident alien individuals not engaged in
trade or business in the Philippines are not allowed
to deduct this expense.
i.
Research
and
development
expenditures treated as deferred expenses paid or
incurred by the taxpayer in connection with his
trade, business or profession, not deducted as
expenses and chargeable to capital account but not
chargeable to property of a character which is
subject to depreciation or depletion.
Resident citizens, resident alien individuals
and nonresident alien individuals who are engaged
in trade and business, on their gross incomes other
from compensation income are allowed to deduct
these expenses. Domestic corporations, estates
and trusts may also deduct this expense.
Nonresident citizens and foreign corporations on
their gross incomes from within may also deduct this
expense.
Nonresident alien individuals not engaged in
trade or business in the Philippines are not allowed
to deduct this expense.
j.
Contributions
to pension trusts.
Resident citizens, resident alien individuals and
nonresident alien individuals who are engaged in
trade and business, on their gross incomes other
from compensation income are allowed to deduct
these expenses. Domestic corporations, estates
and trusts may also deduct this expense.
Nonresident citizens and foreign corporations on
their gross incomes from within may also deduct this
expense.
Nonresident alien individuals not engaged in
trade or business in the Philippines are not allowed
to deduct this expense.
k. Insurance premiums for health and
hospitalization. Resident citizens, resident alien
individuals and nonresident alien individuals who

are engaged in trade and business, on their gross

incomes other from compensation income are
allowed to deduct these expenses. Nonresident
citizens and nonresident alien individual engaged in
trade or business in the Philippine on their gross
incomes from within may also deduct these
premiums.
Nonresident alien individuals not engaged in
trade or business in the Philippines are not allowed
to deduct these premiums.
l. Personal and additional exemptions.
Resident citizens, and resident alien on their gross
incomes and from compensation income are
allowed to deduct these premiums. Nonresident
citizens on their gross incomes from within may also
deduct this expense. Nonresident alien individuals
engaged in trade or business in the Philippines are
allowed to deduct these exemptions under
reciprocity.
Nonresident alien individuals not engaged in
trade or business in the Philippines are not allowed
to deduct this expense.

29. Distinguish ordinary expenses

from capital expenditures.
SUGGESTED
ANSWER:
Ordinary
expenses are those which are common to incur in
the trade or business of the taxpayer WHILE capital
expenditures are those incurred to improve assets
and benefits for more than one taxable year.
Ordinary expenses are usually incurred during a
taxable year and benefits such taxable year.
Necessary expenses are those which are
appropriate or helpful to the business.

30.
What are the requisites for
the deductibility of business expenses ?
SUGGESTED ANSWER: The following are
the requisites for deductibility of business expenses:
a.
Compliance with the business test:
1)
Must be ordinary and necessary;
2)
Must be paid or incurred within
the taxable year;
3)
Must be paid or incurred in
carrying on a
trade or business.
4)
Must not be bribes, kickbacks or
other illegal expenditures
b. Compliance with the substantiation test.
Proof by evidence or records of the deductions
allowed by law including compliance with the
business test.

31.
What are the requisites for
the deductibility of ordinary and necessary
trade, business, or professional expenses,
like expenses paid for legal and auditing
services ?
SUGGESTED ANSWER:
a.
the expense must be ordinary and
necessary;
b.
it must have been paid or incurred
during the taxable year dependent upon the method
of accounting upon the basis of which the net
income is computed.

23

c.
it must be supported by receipts,
records or other pertinent papers. (Commissioner of
Internal Revenue v, Isabela cultural Corporation, G.
R. No. 172231, February 12, 2007)

32.
TMG Corporation is
issuing the accrual method of accounting.
In 2005 XYZ Law Firm and ABC Auditing
Firm rendered various services which were
billed by these firms only during the
following year 2006. Since the bills for legal
and auditing services were received only in
2006 and paid in the same year, TMG
deducted the same from its 2006 gross
income.
The BIR disallowed the
deduction ?
Who is correct, TMG or BIR ? Explain.
SUGGESTED ANSWER: The BIR is correct.
TMG should have deducted the professional and
legal fees in the year they were incurred in 2005 and
not in 2006 because at the time the services were
rendered in 2005, there was already an obligation to
pay them. (Commissioner of Internal Revenue v,
Isabela Cultural Corporation, G. R. No. 172231,
February 12, 2007)
NOTES AND COMMENTS:
a.
Accounting
methods
for
tax
purposes comprise a set of rules for determining
when and how to report income and deductions.
(Commissioner of Internal Revenue v, Isabela
cultural Corporation, G. R. No. 172231, February 12,
2007)
The two (2) principal accounting methods for
recognition of income are the (a) accrual method;
and the (b) cash method.
b.
Recognition
of
income
and
expenses under the accrual method of
accounting. Amounts of income accrue where the
right to receive them becomes fixed, where there is
created an enforceable liability. Liabilities, are
incurred when fixed and determinable in nature
without regard to indeterminacy merely of time of
payment.. (Commissioner of Internal Revenue v,
Isabela cultural Corporation, G. R. No. 172231,
February 12, 2007)
The accrual of income and expense is
permitted when the all-events test has been met.
(Ibid.)
c.
All-events test. This test requires:
1)
fixing of a right to income or
liability to pay; and
2)
the availability of the reasonable
accurate determination of such income or
liability.
The test does not demand that the amount of
such income or liability be known absolutely, only
that a taxpayer has at his disposal the information
necessary to compute the amount with reasonable
accuracy.
The all-events test is satisfied where
computation remains uncertain; if its basis is
unchangeable, the test is
satisfied where a
computation may be unknown, but is not as much as
unknowable, within the taxable year. The amount of

liability does not have to be determined exactly,; it

must be determined with reasonable accuracy
implies something less than an exact or completely
accurate amount.
The propriety of an accrual must be judged
by the fact that a taxpayer knew, or could
reasonably be expected to have known, at the
closing of its books for the taxable year. Accrual
method of accounting presents largely a question of
fact; such that the taxpayer bears the burden of
proof of establishing the accrual of an item of
income or deduction. (Commissioner of Internal
Revenue v, Isabela cultural Corporation, G. R. No.
172231, February 12, 2007)
d. Under the cash method income is to
be construed as income for tax purposes only upon
actual receipt of the cash payment. It is also
referred to as the cash receipts and disbursements
method
because
both
the
receipt
and
disbursements are considered. Thus, income is
recognized only upon actual receipt of the cash
payment but no deductions are allowed from the
cash income unless actually disbursed through an
actual payment in cash.

33. The fringe benefits tax is a final

withholding tax imposed on the grossed-up
monetary value of fringe benefits furnished, granted
or paid by the employer to the employee, except
rank and file employees. [1st par., Sec. 2.33 (A), Rev.
Regs. No. 3-98]

34. What is meant by fringe

benefit for purposes of taxation ?
SUGGESTED ANSWER: For purposes of
taxation, fringe benefit means any good, service, or
other benefit furnished or granted in cash or in kind
by an employer to an individual employee (except
rank and file employees), such as but not limited to:
a.
Housing;
b.
Expense account;
c.
Vehicle of any kind;
d.
Household personnel, such as maid,
driver and others;
e.
Interest on loan at less than market
rate to the extent of the difference between the
market rate and actual rate granted;
f.
Membership fees, dues and other
expenses borne by the employer for the employee
in social and athletic clubs or other similar
organizations;
g.
Expenses for foreign travel;
h.
Holiday and vacation expenses;
i.
Educational
assistance
to
the
employee or his dependents; and
j.
Life or health insurance and other nonlife insurance premiums or similar amounts in
excess of what the law allows. [Sec. 33 (B), NIRC of
1997; 1st par., Sec. 2.33 (B), Rev. Regs. No. 3-98]

35. Fringe benefits that

subject to the fringe benefits tax:

are

not

a.
When the fringe benefit is required by
the nature of, or necessary to the trade, business or
profession of the employer; or

24

b.
When the fringe benefit is for the
convenience or advantage of the employer. [Sec.
32(A), NIRC of 1997; 1st par., Sec. 2.33 (A), Rev.
Regs. No. 3-98]
c.
Fringe benefits which are authorized
and exempted from income tax under the Tax Code
or under any special law;
d.
Contributions of the employer for the
benefit of the employee to retirement, insurance and
hospitalization benefit plans;
e.
Benefits given to the rank and file
employees, whether granted under a collective
bargaining agreement or not; and
f.
De minimis benefits as defined in the
rules and regulations to be promulgated by the
Secretary of Finance upon recommendation of the
Commissioner of Internal Revenue. [1st par., Sec. 32
(C), NIRC of 1997; Sec. 2.33 (C), Rev. Regs. No. 3-98]

36. De minimis benefits are

facilities and privileges (such as entertainment,
medical services, or so-called courtesy discounts
on purchases), furnished or offered by an employer
to his employees. They are not considered as
compensation subject to income tax and
consequently to withholding tax, if such facilities are
offered or furnished by the employer merely as a
means of promoting the health, goodwill,
contentment, or efficiency of his employees. [Sec.
2.78,1 (A) (3), Rev. Regs. 2-98 as amended by Rev.
Regs. No. 8-2000]

37. Preferred shares are considered

capital regardless of the conditions under
which such shares are issued and dividends
or interests paid thereon are not allowed
as deductions from the gross income of
corporations. (Revenue Memorandum Circular No.
17-71)

38. Bad debts are those which result

from the worthlessness or uncollectibility, in whole or
in part, of amounts due the taxpayer by others,
arising from money lent or from uncollectible
amounts of income from goods sold or services
rendered. (Sec. 2.a, Rev. Regs. 5-99)
39.

Who are related parties ?

SUGGESTED ANSWER: The following are

related parties:
a.
Members of the same family. The
family of an individual shall include only his brothers
and sisters (whether by the whole or half-blood),
spouse, ancestors, and lineal descendants;
b.
An individual and a corporation more
than fifty percent (50%) in value of the outstanding
stock of which is owned, directly or indirectly, by or
for such individual;
c.
Two corporations more than fifty
percent (50%) in value of the outstanding stock of
which is owned, directly or indirectly, by or for the
same individual;
d.
A grantor and a fiduciary of any trust;
or

e.
The fiduciary of a trust and the
fiduciary of another trust if the same person is a
grantor with respect to each trust; or
f.
A fiduciary of a trust and a beneficiary
of such. [Sec. 36 (B), NIRC of 1997]

40. What are the requisites for valid

deduction of bad debts from gross income ?
SUGGESTED ANSWER:
a. There must be an existing indebtedness
due to the taxpayer which must be valid and legally
demandable;
b. The same must be connected with the
taxpayers trade, business or practice of profession;
c. The same must not be sustained in a
transaction entered into between related parties;
d. The same must be actually charged off the
books of accounts of the taxpayer as of the end of
the taxable year; and
e. The
debt
must
be
actually
ascertained to be worthless and uncollectible during
the taxable year;
f. The debts are uncollectible despite diligent
effort exerted by the taxpayer. [Sec. 34 (E) (1),
NIRC of 1997; Sec. 3, Rev. Regs. No. 5-99
reiterated in Rev. Regs. No. 25-2002; Philippine
Refining Corporation v. Court of Appeals, et al., 256
SCRA 667]
g. Must have been reported as receivables in
the income tax return of the current or prior years.
(Sec. 103, Rev. Regs. No. 2)
:

41. What is the tax benefit rule ?

SUGGESTED ANSWER: The tax benefit
rule posits that the recovery of bad debts previously
allowed as deduction in the preceding year or years
shall be included as part of the taxpayers gross
income in the year of such recovery to the extent of
the income tax benefit of said deduction.
NOTES AND COMMENTS:
a.
If in the year the taxpayer claimed
deduction of bad debts written-off, he realized a
reduction of the income tax due from him on
account of the said deduction, his subsequent
recovery thereof from his debtor shall be treated as
a receipt of realized taxable income. (Sec. 4, Rev.
Regs. 5-99)

b.
If the said taxpayer did not benefit from
the deduction of the said bad debt written-off
because it did not result to any reduction of his
income tax in the year of such deduction (i.e. where
the result of his business operation was a net loss
even without deduction of the bad debts written-off),
then his subsequent recovery thereof shall be
treated as a mere recovery or a return of capital,
hence, not treated as receipt of realized taxable
income. (Sec. 4, Rev. Regs. 5-99)

42. Depreciation
is
the
gradual
diminution in the useful value of tangible property
resulting from ordinary wear and tear and from
normal obsolescence. The term is also applied to
amortization of the value of intangible assets the
use of which in the trade or business is definitely
limited in duration.

25

43. The methods of depreciation are

the following:
a.
Straight line method;
b.
Declining balance method;
c.
Sum of years digits method; and
d.
Any other method prescribed by the
Secretary of Finance upon the recommendation of
the Commissioner of Internal Revenue:
1)
Apportionment to units of
production;
2)
Hours of productive use;
3)
Revaluation method; and
4)
Sinking fund method.

44. What are personal and additional

exemptions ?
SUGGESTED ANSWER: These are the
theoretical persona, living and family expenses of
an individual allowed to be deducted from the gross
or net income of an individual taxpayer.
These are arbitrary amounts which have been
calculated by our lawmakers to be roughly
equivalent to the minimum of subsistence, taking
into account the personal status and additional
qualified dependents of the taxpayer. They are fixed
amounts in the sense that the amounts have been
predetermined by our lawmakers and until our
lawmakers make new adjustments on these
personal exemptions, the amounts allowed to be
deducted by a taxpayer are fixed as predetermined
by Congress. [Pansacola v. Commissioner of Internal
Revenue, G. R. No. 159991, November 16, 2006 citing
Madrigal and Paterno v. Rafferty and Concepcion, 38 Phil.
414, 418 (1918)]

45. What is the amount allowed as

basic personal exemption ?
SUGGESTED ANSWER: There shall be
allowed a basic personal exemption amounting to
Fifty thousand pesos (P50,000) for each individual
taxpayer.
In the case of married individuals where only
one of the spouse is deriving gross income, only
such spouse shall be allowed the personal
exemption. [Sec. 35 (A), NIRC of 1997 as amended by
Rep. Act No. 9504; Sec. 2.79 (I) (1) (a), Rev. Regs. No.
2-98 as amended by Rev. Regs. No. 10-2008]

NOTES AND COMMENTS: It is clear from

Rep. Act No. 9504 that each of the spouses may
claim the P50,000.00. Thus, the total familial basic
personal exemption for spouses is P100,000.00.
Furthermore, the distinctions between the
concepts of single, married and head of the family
for purpose of availing of the basic personal
exemption has already been eliminated by Rep.
Act No. 9504.

45.
What are the amounts of
additional exemptions ?
SUGGESTED ANSWER: An individual,
a.
whether single or married,
b.
shall be allowed an additional
exemption of Twenty-Five Thousand Pesos
(P25,000.00)

c.
for each qualified dependent child,
d.
provided that the total number of
dependents for which additional exemptions may
be claimed
1)
shall not exceed four (4)
dependents. [1st par., Sec. 2.79 (I) (1) (b), Rev.
Regs. No. 2-98 as amended by Rev. Regs. No.
10-2008, arrangement and numbering supplied;
Sec. 35 (B), NIRC of 1997 as amended by Rep.
Act No. 9504]

NOTES AND COMMENTS:

a.
It is clear that under the amendment,
single individuals may now claim for the additional
exemptions. Furthermore, the concept of head of
a family does not find application anymore.
b.
A dependent means
a.
a legitimate, illegitimate or legally
adopted child
b.
chiefly dependent upon and living with
the taxpayer
c.
if such dependent is
1)
not more than twenty-one (21)
years of age,
2)
unmarried and
3)
not gainfully employed or
d.
if such dependent,
1)
regardless of age
2)
is incapable of self-support
3)
because of mental or physical
defect. [2nd par., Sec. 2.79 (I) (1) (b), Rev.
Regs. No. 2-98 as amended by Rev. Regs. No.
10-2008, arrangement and numbering supplied;
Sec. 35 (b), NIRC of 1997, as amended by Rep.
Act No. 9504]

c.
It is to be noted that under the NIRC
of 1997, as amended by Rep. Act No. 9504, only
qualified dependent children are considered for
additional exemptions. Grandparents, parents, as
well, as brothers or sisters, and other collateral
relatives are not qualified dependents to be
claimed as additional exemptions.
However, if they are senior citizens they may
qualify as additional exemptions under the Senior
Citizens Law but not under the NIRC of 1997, as
amended by Rep. Act No. 9504.
Senior citizen shall be treated as dependents
provided for in the National Internal Revenue
Code, as amended, and as such, individual
taxpayers caring for them, be they relatives or not
shall be accorded the privileges granted by the
Code insofar as having dependents are concerned.
[last par. Sec. 5 (a), Rep. Act No. 7432, as amended by
Rep. Act 9257, The Expanded Senior Citizens Act of
2003]

47. Capital assets shall refer to all real

properties held by a taxpayer, whether or not
connected with his trade or business, and which are
not included among the real properties considered
as ordinary assets. (Sec. 2.a, Rev. Regs. No. 7-2003)
The term capital assets means property
held by the taxpayer (whether or not connected with
his trade or business), BUT DOES NOT INCLUDE:
a. Stock in trade of the taxpayer, or
b. Other property of a kind which would
properly be
included in the inventory of the

26

taxpayer if on hand at the close of the taxable year,

or
c. Property held by the taxpayer primarily
for sale to customers in the ordinary course of his
trade or business, or
d. Property used in the trade or business, of a
character which is subject to the allowance for
depreciation; or real property used in the trade or
business of the taxpayer. [Sec. 39 (A) (1), NIRC of
1997, capitalized words, numbering and arrangement
supplied; Sec. 2.a, Rev. Regs. No. 7-2003]

48.

Examples of capital assets:

a.
Stock and securities held by taxpayers
other than dealers in securities;
b.
Jewelry not used for trade and
business;
c.
Residential houses and lands owned
and used as such;
d.
Automobiles not used in trade and
business;
e.
Paintings,
sculptures,
stamp
collections, objects of arts which are not used in
trade or business;
f.
Inherited large tracts of agricultural
land which were subdivided pursuant to the
government mandate under land reform, then sold
to tenants. (Roxas v. Court of Tax Appeals, etc. L25043, April 26, 1968)
g. Real property used by an exempt
corporation in its exempt operations, such as a
corporation included in the enumeration of Section
30 of the Code, shall not be considered used for
business purposes, and therefore considered as
capital asset. (last sentence, 3rd par., Sec. 3.b,
Rev. Regs. No. 7-2003)
h. Real
property,
whether
single
detached, townhouse, or condominium unit, not
used in trade or business as evidenced by a
certification from the Barangay Chairman or from
the head of administration, in case of condominium
unit, townhouse or apartment, and as validated from
the existing available records of the Bureau of
Internal Revenue, owned by an individual engaged
in business, shall be treated as capital asset. (last
par., Sec. 3.b., Rev. Regs. No. 7-2003)

49. Ordinary assets shall refer to all

real properties specifically excluded from
the definition of capital assets, namely:
a. Stock in trade of a taxpayer or other real
property of a kind which would properly be included
in the inventory of a taxpayer if on hand at the close
of the taxable year; or
b. Real property held by the taxpayer
primarily for sale to customers in the ordinary course
of his trade or business; or
c. Real property used in trade or business
(i.e. buildings and/or improvements), of a character
which is subject to the allowance for depreciation; or
d. Real property used in trade or business of
the taxpayer. (Sec. 2. b, Rev. Regs. No. 7-2003)

50.. Examples of ordinary assets

hence not capital assets:

a.
The machinery and equipment of a
manufacturing concern subject to depreciation;
b. The tractors, trailers and trucks of a
hauling company;
c. The condominium building owned by a
realty company the units of which are for rent or for
sale;
d.
The wood, paint, varnish, nails, glue,
etc. which are the raw materials of a furniture
factory;
e.
Inherited parcels of land of substantial
areas located in the heart of Metro Manila, which
were subdivided into smaller lots then sold on
installment basis after introducing comparatively
valuable improvements not for the purpose of
simply liquidating the estate but to make them more
saleable ; the employment of an attorney-in-fact for
the purpose of developing, managing, administering
and selling the lots; sales made with frequency and
continuity; annual sales income from the sales was
considerable; and the heir was not a stranger to the
real estate business. (Tuazon, Jr. v. Lingad, 58
SCRA 170)
f. Inherited agricultural property improved
by introduction of good roads, concrete gutters,
drainage and lighting systems converts the property
to an ordinary asset. The property forms part of the
stock in trade of the owner, hence an ordinary asset.
This is so, as the owner is now engaged in the
business of subdividing real estate. (Calasanz v.
Commissioner of Internal Revenue, 144 SCRA at p. 672)

51. Tax treatment of real properties

that have been transferred. Real properties
classified as capital or ordinary asset in the hands of
the seller/transferor may change their character in
the hands of the buyer/transferee. The classification
of such property in the hands of the buyer/transferee
shall be determined in accordance with the following
rules:
a.
Real property transferred through
succession or donation to the heir or donee who is
not engaged in the real estate business with respect
to the real property inherited or donated, and who
does not subsequently use such property in trade or
business, shall be considered as a capital asset in
the hands of the heir or donee.
b. Real property received as dividend by
stockholders who are not engaged in the real estate
business and who not subsequently use such real
property in trade or business shall be treated as
capital assets in the hands of the recipient even if
the corporation which declared the real property
dividend is engaged in real estate business.
c.
The real property received in an
exchange shall be treated as ordinary asset in the
hands of the transferee in the case of a tax-free
exchange by taxpayer not engaged in real estate
business to a taxpayer who is engaged in real estate
business, or to a taxpayer who, even if not engaged
in real estate business, will use in business the
property received in the exchange. (Sec. 3.f., Rev.
Regs. No. 7-2003)

27

52. The tax is imposed upon

capital gains presumed to have been
realized from the sale, exchange, or other
disposition of real property located in the
Philippines, classified as capital assets.
[Sec. 24 (D) (1`), NIRC of 1997] Revenue Regulations

No. 7-2003 has defined real property as having the

same meaning attributed to that term under Article
415 of Republic Act No. 386, otherwise known as
the Civil Code of the Philippines. (Sec. 2.c, Rev.
Regs. No. 7-2003)

53. Transactions covered by the

presumed capital gains tax on real property:
a.
sale,
b.
exchange,
c.
or other disposition, including pacto de
retro sales and other forms of conditional sales.
[Sec. 24 (D) (1), NIRC of 1997, numbering and
arrangement supplied]
d. Sale, exchange, or other disposition
includes taking by the government through
condemnation proceedings. (Gutierrez v. Court of Tax
Appeals, et al., 101 Phil. 713; Gonzales v. Court of Tax
Appeals, et al., 121 Phil. 861)

54. In case the mortgagor exercises

his right of redemption within one (1) year from
the issuance of the certificate of sale, in a
foreclosure of mortgage sale of real property, no
capital gains tax shall be imposed because no
capital gains has been derived by the mortgagor and
no sale or transfer of real property was realized.
[Sec. 3 (1), Rev. Regs. No. 4-99]

55. In case of non-redemption of the

property sold upon a foreclosure of mortgage
sale, the presumed capital gains tax shall be
imposed, based on the bid price of the highest
bidder but only upon the expiration of the one year
period of redemption provided for under Sec. 6 of
Act No. 3135, as amended by Act No. 4118, and
shall be paid within thirty (30) days from the
expiration of the said one-year redemption period.
[Sec. 3 (2), Rev. Regs. No. 4-99]

56. The basis for the final presumed

capital gains tax of six per cent (6%) is
whichever is the higher of the
a. gross selling price, or
b.
the current fair market value as
determined below:
1) the fair market value or real
properties located in each zone or area as
determined by the Commissioner of Internal
Revenue after consultation with competent
appraisers both from the private and public
sectors; or
2) the fair market value as shown
in the schedule of values of the Provincial
and City Assessors. [Sec. 24 (D) (1) in
relation to Sec. 6 (E), both of the NIRC of 1997]

It does not matter whether there was an

actual gain or loss because the tax is a presumed

capital gains tax. It is the transaction that is taxed

not the gain.

57. Holding period not applied to the

taxation of the presumed capital gains derived from
the sale of real property considered as capital
assets.

58. The tax liability, of individual

taxpayers (not corporate), if any, on gains
from sales or other dispositions of real
property, classified as capital assets, to the
government or any of its political subdivisions or
agencies or to government owned or controlled
corporations shall be determined, at the option of
the taxpayer, by including the proceeds as part of
gross income to be subjected to the allowable
deductions and/or personal and additional
exemptions, then to the schedular tax [Sec. 24 (D)
(1), in relation to Sec. 24 (A) (1), both of the NIRC of
1997] or the final presumed capital gains tax of six
percent (6%). [Sec. 24 (D) (1) in relation to Sec. 6
(E), both of the NIRC of 1997]

59. The seller of the real property,

classified as a capital asset, pays the
presumed capital gains tax whether:
a.

an individual [Sec. 24 (D) (1), NIRC of

1997];
1)

Citizen, whether resident or not

[Ibid.];
2) Resident alien [Ibid.];
3) Nonresident alien engaged in trade
or business in the Philippines [Sec. 25 (A)
(3) in relation to Sec. 24 (D) (1), both of the
NIRC of 1997];
4) Nonresident alien not engaged in
trade or business in the Philippines [Sec. 25
(B) in relation to Sec. 24 (D) (1), both of the
NIRC of 1997];
b. an estate or trust (Ibid.);
c. a domestic corporation. [Sec. 27 (D) (5),
NIRC of 1997]

60. Excepted from the payment of

the presumed capital gains tax are those
presumed to have been realized from the
disposition by natural persons of their
principal place of residence
a.
the proceeds of which is fully utilized in
acquiring or constructing a new principal residence;
b.
within eighteen (18) calendar months
from the date of sale or disposition
c.
the BIR Commissioner shall have been
duly notified by the taxpayer within thirty (30) days
from the date of sale or disposition through a
prescribed return of his intention to avail of the tax
exemption; and
d.
the said tax exemption can only be
availed of once every ten (10) years. [Sec. 24 (D)
(2), NIRC of 1997]

and

61. MBC was incorporated in 1961

engaged in commercial banking

28

operations since 1987. On May 22, 1987, it

ceased operations that year by reason of
insolvency and its assets and liabilities were
placed under the charge of a governmentappointed receiver. On June 23, 1999, the
BSP authorized MBC to operate as a thrift
bank.
In 2000, It filed its tax return for the
year 1999 paying the amount of P33 million
computed in accordance with the minimum
corporate income tax (MCIT). It sought the
BIRs ruling on whether it is entitled to the
four (4) year grace period for paying on the
basis of MCIT reckoned from 1999. BIR
then ruled that cessation of business
activities as a result of being placed under
involuntary receivership may be an
economic reason for suspending the
imposition of the MCIT.
As a result of the ruling MBC filed an
application for refund of the P33 million.
Due to the BIRs inaction, MBC filed a
petition for review with the CTA.
The CTA denied the petition on the
ground that MBC is not a newly organized
corporation. In a volte facie the BIR now
maintains that MBC should pay the MCIT
beginning January 1, 1998 as it did not
close its business operations in 1987 but
merely suspended the same. Even if placed
under receivership, the corporate existence
was never affected. Thus, it falls under the
category of an existing corporation
recommencing its banking operations.
Should the refund be granted ?
SUGGESTED ANSWER: Yes. The MCIT
shall be imposed beginning in the fourth taxable
year immediately following the year in which the
corporation commenced its business operations.
[Sec. 27 (E) (1), NIRC of 1997]
The date of commencement of operations of
a thrift bank is the date it was registered with the
SEC or the date when the Certificate of Authority to
Operate was issued to it by the Monetary Board,
whichever comes later. (Sec. 6, Rev. Regs. No. 495)
Clearly then. MBC is entitled to the grace
period of four years from June 23, 1999 when it was
authorized by the BSP to operate as a thrift bank
before the MCIT should be applied to it. (Manila
Banking Corporation v. Commissioner of Internal
Revenue, G. R. No. 168118, August 26, 2006)
NOTES AND COMMENTS:
a.
The MCIT and when should be
imposed and the four (4) year grace period. A
minimum corporate income tax of two percent (2%)
of the gross income as of the end of the taxable
year, as defined herein, is hereby imposed on a
corporation taxable under this Title, beginning on the
fourth taxable year immediately following the year in
which such corporation commenced its business
operations, when the minimum corporate income

tax is greater than the tax computed under

Subsection (A) of this section for the taxable year.
[Sec. 27 (E) (1), NIRC of 1997]
b.
Period when a corporation becomes
subject to the MCIT.
(5) Specific rules for
determining the period when a corporation becomes
subject to the MCIT (minimum corporate income
tax) For purposes of the MCIT, the taxable year in
which business operations commenced shall be the
year in which the domestic corporation registered
with the Bureau of Internal Revenue (BIR).
Firms which were registered with BIR in 1994
and earlier years shall be covered by the MCIT
beginning January 1, 1998. x x x (Rev. Regs. No.
9-98)
Manila Banking Corporation v. Commissioner
of Internal Revenue, G. R. No. 168118, August 26,
2006 did not apply Rev. Regs. No. 9-98 because
Rev. Regs. No. 4-95 specifically refers to thrift
banks.)
c.
Purpose of the four (4) year grace
period. The intent of Congress relative to the MCIT
is to grant a four (43) year suspension of tax
payment to newly organized corporations.
Corporations still starting their business operations
have to stabilize their venture in order to obtain a
stronghold in the industry. It does not come as a
surprise then when many companies reported losses
in their initial years of operations.
Thus, in order to allow new corporations to
grow and develop at the initial stages of their
operations, the lawmaking body saw the need to
provide a grace period of four years from their
registration before they pay their minimum corporate
income tax.
(Manila Banking Corporation v.
Commissioner of Internal Revenue, G. R. No.
168118, August 26, 2006)

ESTATE TAXES
1. In determining the gross estate
of a decedent, are his properties abroad to
be included, and more particularly, what
constitutes gross estate ?
SUGGESTED ANSWER:
Yes, if the
decedent is a Filipino citizen or a resident alien.
The gross estate of a Filipino citizen or a
resident alien comprises all his real property,
wherever situated; all his personal property,
tangible, intangible or mixed, wherever situated, to
the extent of his interest existing therein at the time
of his death.
The gross estate of a non-resident alien
comprises all his real property, situated in the
Philippines; all his personal property, tangible,
intangible or mixed, situated in the Philippines, to
the extent of his interest existing therein at the time
of his death.

2.
William Smith, an American
citizen, was a permanent resident of the
Philippines. He died in San Francisco,
California. He left 10,000 shares of San
Miguel Corporation, a condominium unit

29

at the Twin Towers Building at Pasig,

Metro Manila and a house and lot in
Miami, Florida.
What assets shall be included in the
Estate Tax Return to be filed with the BIR ?
SUGGESTED ANSWER: All of the assets
should be included in the Estate Tax Return to be
filed with the BIR.
Smith, an American citizen and a permanent
resident of the Philippines is considered, for
Philippine estate tax purposes, a resident alien.
Consequently, the assets to be included in the
Estate Tax Return to be filed with the BIR should
be all property, real or personal, tangible, intangible
or mixed, wherever situated, to the extent of the
interest that Smith has at the time of his death.
Thus, all of the properties enumerated in the
problem irrespective of where they are situated
are includible in the gross estate of Smith.

3. Proceeds of life insurance

includible in a decedents gross estate.
a.
The decedent takes the insurance
policy on his own life
1) The amounts are receivable by
a)
the decedents estate,
b)
his executor, or
c)
administrator irrespective
of whether or not the
insured
retained
the power of revocation, OR
2)
The amounts are receivable by
any beneficiary
designated in the
policy of insurance as revocable beneficiary.
[Sec. 85 (E), NIRC of 1997]

b.
One, other than the decedent takes
the insurance policy on the life of the decedent
1)
The amounts are receivable by
a)
the decedents estate,
b)
his executor, or
c)
administrator
2)
irrespective of whether or not
the insured retained the
power
of
revocation.

4. Proceeds of life insurance NOT

included in a decedents gross estate.
a.
The decedent takes the insurance
policy on his own life, and
b.
the proceeds are receivable by a
beneficiary designated as irrevocable . [Sec. 85 (E),
NIRC of 1997)
NOTES AND COMMENTS: The beneficiary must
not be the decedents estate, executor or administrator,
because the proceeds are includible as part of gross
estate whether or not the decedent retained the power of
revocation. (Ibid.)

c.
Where the insurance was NOT taken
by the decedent upon his own life and the
beneficiary is not the decedents estate, his
executor or administrator.

4.
Items deductible from the gross
estate of a resident or nonresident Filipino
decedent or resident alien decedent:

a.
Expenses,
losses,
claims,
indebtedness and taxes;
b.
Property previously taxed;
c.
Transfers for public use;
d.
The Family Home up to a value not
exceeding P1 million;
e.
Standard deduction of P1 million;
f.
Medical expenses not exceeding
P500,000.00;
g.
Amount of exempt retirement received
by the heirs under Rep. Act Mo. 4917;
h.
Net share of the surviving spouse in
the conjugal partnership.

5.
There
is
no
transfer
in
contemplation of death if there is no
showing that the transferor retained for his life or

30

was transferred to him by gift within the same

period prior to his death;
60% of the value if the prior decedent died
more than two years but not more than three years
prior to the death of the decedent, or if the property
was transferred to him by gift within the same
period prior to his death;
40% of the value if the prior decedent died
more than three years but not more than four years
prior to the death of the decedent, or if the property
was transferred to him by gift within the same
period prior to his death; and
20% of the value if the prior decedent died
more than four years but not more than five years
prior to the death of the decedent, or if the property
was transferred to him by gift within the same
period prior to his death. [Sec. 86 (A) (2) and (B) (2),

for any period which does not in fact end before his
death: (1) the possession or enjoyment of, or the
right to the income from the property, or (2) the
right, either alone or in conjunction with any person,
to designate the person who shall possess or enjoy
the property or the income therefrom. [Sec. 85 (B),
NIRC of 1997]

NIRC of 1997, numbering, arrangement and underlining

supplied]

6. Vanishing deduction (deduction

for property previously taxed), defined. The

issues which are not against the property of the

decedent, or a claim against the estate as such, but
is against the interest or property right which the
heir, legatee, devisee, etc. has in the property
formerly held by the decedent.
The notices of levy were regularly issued
within the prescriptive period.
The tax assessment having become final,
executory and enforceable, the same can no longer
be contested by means of a disguised protest.
(Marcos, II v. Court of Appeals, et al., 273 SCRA
47)

deduction allowed from the gross estates of

citizens, resident aliens and nonresident estates for
properties which were previously subject to donors
or estate taxes.
The deduction is called a
vanishing deduction because the deduction allowed
diminishes over a period of five (5) years.
It is also known as a deduction for property
previously taxed.

7. Vanishing deduction (property

previously taxed) allowed as a deduction
from the gross estate of a Filipino citizen,
whether resident or not, of a resident alien
decedent, or of a nonresident alien
decedent.
a.
An amount equal to the value
specified below of
b.
Any property forming a part of the
gross estate situated in the Philippines
c
Of any person who died within five
years prior to the death of the decedent, or
transferred to the decedent by gift within five years
prior to his death,
d.
Where
such property can be
identified as having been received by the decedent
from the donor by gift, or from such prior decedent
by gift, bequest, devise, or inheritance, or
e.
Which can be identified as having
been acquired in exchange for property so
received:
100% of the value if the prior decedent died
within one year prior to the death of the decedent,
or if the property was transferred to him by gift
within the same period prior to his death;
80% of the value if the prior decedent died
more than one year but not more than two years
prior to the death of the decedent, or if the property

8. The approval of the court sitting

in probate, or as a settlement tribunal over
the estate of the deceased is not a
mandatory requirement for the collection of
the estate. The probate court is determining

DONORS TAXES

1. What is the donors tax rate if the

donee is a stranger ?
SUGGESTED ANSWER:
When
the
donee or beneficiary is a stranger, the tax payable
by the donor shall be 30% of the net gifts.

2. For purposes of the donors tax

who is a stranger ?
SUGGESTED ANSWER: A stranger is a is
person who is not a:
a.
Brother, sister (whether by whole or
half-blood), spouse, ancestor and lineal descendant;
or
b.
Relative by consanguinity in the
collateral line within the fourth degree of
relationship. [Sec. 99 (B), NIRC of 1997]
NOTES AND COMMENTS: All relatives by
affinity, irrespective of the degree, are considered as
strangers.

3.
What
donations ?

is

the

tax

base

for

SUGGESTED ANSWER: The net gifts made

during the calendar year. [Sec. 99 (A), NIRC of 1997]

31

4.
For purposes of the donors tax,
what is meant by net gifts ?
SUGGESTED ANSWER: The net economic
benefit from the transfer that accrues to the donee.
Accordingly, if a mortgaged property is transferred
as a gift, but imposing upon the donee the
obligation to pay the mortgage liability, then the net
gift is measured by deducting from the fair market
value of the property the amount of the mortgage
assumed. (last par., Sec. 11, Rev. Regs.No.2-2003)

5.
How are gifts of personal
property to be valued for donors tax
purposes ?
SUGGESTED ANSWER: The market value
of the personal property at the time of the gift shall
be considered the amount of the gift. (Sec. 102,
NIRC of 1997)

6.
What is the valuation of donated
real property for donors tax purposes ?
SUGGESTED ANSWER: The real property
shall be appraised at its fair market value as of the
time of the gift.
However, the appraised value of the real
property at the time of the gift shall be whichever is
the higher of:
a.
the fair market value as determined by
the Commissioner of Internal Revenue (zonal
valuation) or
b.
the fair market value as shown in the
schedule of values fixed by the Provincial and City
Assessors. [Sec. 102, in relation to Sec. 88 (B) both of
the NIRC of 1997]

7. A died leaving as his only heirs,

his surviving spouse B, and three minor
children, X, Y and Z. Since B does not want
to participate in the distribution of the
estate, she renounced her hereditary share
in the estate.
a.
Is the renunciation subject to
donors tax ? Explain.
SUGGESTED ANSWER: No. The general
renunciation by an heir, including the surviving
spouse, as in the case B, of her share in the
hereditary estate left by the decedent is not subject
to donors tax. (4th par., Sec. 11, Rev. Regs. No. 22003)
This is so because the general renunciation
by B was not specifically and categorically done in
favor of identified heir/s to the exclusion or
disadvantage of the other co-heirs in the hereditary
estate.

b.
Supposing that instead of a
general renunciation, B renounced her
hereditary share in As estate to X who is a
special child, would your answer be the
same ? Explain.
SUGGESTED ANSWER: My answer would
be different. The renunciation in favor of X would
be subject to donors tax.
This is so because the renunciation was
specifically and categorically done in favor of X

and identified heir to the exclusion or disadvantage

of Y and Z, the other co-heirs in the hereditary
estate. (4th par., Sec. 11, Rev. Regs. No. 2-2003)

8. Give some donations that are

exempt from donors tax.
SUGGESTED ANSWER:
a.
The first P100,000.00 net donation
during a calendar year is exempt from donors tax
[Sec. 99 (A), NIRC of 1997] made by a resident or
non resident;
b.
The donation by a resident or nonresident of a prize to an athlete in an international
sports tournament held abroad and sanctioned by
the national sports association is exempt from
donors tax (Sec. 1, Rep. Act No. 7549)
c.
Political contributions made by a
resident or non-resident individual if registered with
the COMELEC irrespective of whether donated to a
political party or individual.
However, the Corporation Code prohibits
corporations from making political contributions.
(Corp. Code, Title IV, Sec. 36.9)
d.
Dowries or gifts made on account
of marriage and before its celebration or within one
year thereafter by residents who are parents to
each of their legitimate, recognized natural, or
adopted children to the extent of the first ten
thousand pesos (P10,000.00);
e.
Gifts made by residents or nonresidents to or for the use of the National
Government or any entity created by any of its

agencies which is not conducted for profit, or

to any political subdivisions of the said
Government;
f.
Gifts made by residents or non
residents in favor of an educational and/or
charitable, religious, cultural or social welfare
corporation, institution, foundation, trust or
philanthropic organization or research institution or
organization: Provided, however, That not more
than thirty percent (30%) of said gifts shall be used
by such donee for administration purposes. [Sec.
101 (A), NIRC of 1997, numbering and
arrangement supplied]
g.
Gifts made by non-resident aliens
outside of the Philippines to Philippine residents are
exempt from donors taxes because taxation is
basically territorial. The transaction, which should
have been subject to tax was made by non-resident
aliens and took place outside of the Philippines.

9. What is the concept of donation

or gift splitting ? Illustrate.
SUGGESTED ANSWER: Donation or gift
splitting is spreading the gift over numerous
calendar years in order to avail of lower donors
taxes.
In 2008 Leon was thinking of donating a
P200,000.00 to Miklos, his first cousin. The
P200,000.00 is the totality of the net gifts for 2008.
If he donated the P200,000.00 in 2008 the first
P100,000 would be exempt and the remaining
P50,000.00 would be subject to donors tax

If Leon spreads the P200,000 donation over

two (2) calendar years, donating P100,000.00 on
December 30, 2008 and the remaining
P100,000.00 on January 1, 2009 the transaction
would be exempt from donors tax. This is so
even if the donation is separated only by two days
because the basis is the calendar year. Leon
would be enjoying the exemption for the first
P100,000.00 net gifts for each calendar year.

10.
A, who is engaged in the car
buy and sell business sold to B P7
million Jaguar for only P4 million. The
proper VAT on the sale was paid. If you are
the BIR examiner assigned to review the
sale, would you issue a tax assessment on
the transaction ? Explain your answer
briefly.
SUGGESTED ANSWER:
Donors taxes
would be due on the insufficiency of consideration.
Where property, other than real property that
has been subjected to the final capital gains tax, is
transferred for less than an adequate and full
consideration in money or moneys worth, then the
amount by which the fair market value of the
property at the time of the execution of the
Contract to Sell or execution of the Deed of Sale
which is not preceded by a Contract to Sell
exceeded the value of the agreed or actual
consideration or selling price shall be deemed a
gift, and shall be included in computing the amount
of gifts made during the calendar year. (5th par.,
Sec. 11, Rev. Regs. No. 2-2003)

VALUE-ADDED TAXES (VAT)

WARNING !!! Approximately 10% of the
total questions asked in the Bar Examination are
sourced from VAT and its concepts. This area is
probably the most difficult area to forecast because
there are no statistically perceived patterns. The
author has retained the Stars System for VAT.
Considering the limited period of time, the reader is
advised to focus on areas marked with stars and
just browse the unmarked areas.

1. Value-added tax (VAT) is a tax

which is imposed only on the increase in the worth,
merit or importance of goods, properties or
services, and not on the total value of the goods or
services being sold or rendered.
2.
Nature of VAT. VAT is an
indirect tax that may be shifted or passed on to the
buyer, transferee or lessee of the goods, properties
or services. As such, it should be understood not
in the context of the person or entity that is
primarily, directly liable for its payment, but in
terms of its nature as a tax on consumption .
[Commissioner of Internal Revenue v. Seagate
Technology (Philippines), G. R. No. 153866, February
11, 2005 citing various authorities}

VAT is a percentage tax imposed on any

person whether or not a franchise grantee, who in
the course of trade or business, sells, barters,

32

exchanges, leases, goods or properties, renders

services. It is also levied on every importation of
goods whether or not in the course of trade or
business. The tax base of the VAT is limited only
to the value added to such goods, properties, or
services by the seller, transferor or lessor. Further,
the VAT is an indirect tax and can be passed on to
the buyer.
(Quezon City, et al., v. ABS-CBN
Broadcasting Corporation, G. R. No. 166408, October 6,
2008)

3. Effect of exemptions from VAT

which is an indirect tax. If a special law
merely exempts a party as a seller from its direct
liability for payment of the VAT, but does not relieve
the same party as a purchaser from its indirect
burden of the VAT shifted to it by its VAT-registered
suppliers, the purchase transaction is not exempt.
REASON: The VAT is a tax on consumption,
the amount of which may be shifted or passed on
by the seller to the purchaser of the goods,
properties or services. [Commissioner of Internal
Revenue v. Seagate Technology (Philippines), G. R. No.
153866, February 11, 2005)

4.
Illustration
of
effects
of
exemptions from VAT which is an indirect
tax.
A VAT exempt seller sells to a non-VAT
exempt purchaser. The purchaser is subject to VAT
because the VAT is merely added as part of the
purchase price and not as a tax because the
burden is merely shifted. The seller is still exempt
because it could pass on the burden of paying the
tax to the purchaser.

5.
The
VAT
is
a
tax
on
consumption. Meaning of consumption as
used under the VAT system. Consumption is
"the use of a thing in a way that thereby exhausts
it."
Applied to services, the term means the
performance or "successful completion of a
contractual duty, usually resulting in the performer's
release from any past or future liability x x x"
Unlike goods, services cannot be physically used in
or bound for a specific place when their destination
is determined. Instead, there can only be a
"predetermined end of a course" when determining
the service "location or position x x x for legal
purposes." [Commissioner of Internal Revenue v.
Placer Dome Technical Services (Phils.), Inc. G. R. No.
164365, June 8, 2007]

6.
Illustration of the meaning of
consumption as used under the VAT
system. For example the services rendered by a
local firm to its foreign client are performed or
successfully completed upon its sending to a
foreign client the drafts and bills it has gathered
from service establishments here. Its services,
having been performed in the Philippines, are
therefore also consumed in the Philippines. Such
facilitation service has no physical existence, yet
takes place upon rendition, and therefore upon
consumption, in the Philippines. [Commissioner of

Internal Revenue v. Placer Dome Technical Services

(Phils.), Inc. G. R. No. 164365, June 8, 2007]

7. Who are liable for the valueadded tax.

a.
Any person who, in the course of his
trade or business,
1)
Sells, barters, exchanges or
leases goods
or
properties,
or
2)
renders services, and
b.
any person who imports goods xxx
However, in the case of importation of
taxable goods, the importer, whether an individual
or corporation and whether or not made in the
course of his trade or business, shall be liable to
VAT xxx .
(Rev. Regs. No. 16-2005,Sec. 4.105-1,
paraphrasing supplied)

8.

Various

VAT

methods

and

systems.
a.
Cost deduction method. This is a
single-stage tax which is payable only by the
original sellers.
(Abakada Guro Party List (etc.) v.
Ermita, etc., et al., G. R. No. 168056, September 1,
2005 and companion cases) This was subsequently

modified and a mixture of cost deduction method

and tax credit method was used to determine the
value-added tax payable. (Ibid.)
b.
Tax credit method. This method
relies on invoices, an entity can credit against or
subtract from the VAT charged on its sales or
outputs the VAT paid on its purchases, inputs and
imports. [Commissioner of Internal Revenue v.
Seagate Technology (Philippines), G. R. No.
153866, February 11, 2005]
If at the end of a taxable period, the output
taxes charged by a seller are equal to the input
taxes passed on by the suppliers, no payment is
required. It is when the output taxes exceed the
input taxes that the excess has to be paid.
If however, the input taxes exceed the output
taxes, the excess shall be carried over to the
succeeding quarter or quarters. Should the input
taxes result from zero-rated or effectively zerorated transactions or from acquisition of capital
goods, any excess over the output taxes shall
instead be refunded to the taxpayer or credited
against other internal revenue taxes. (Ibid.)

9.
How the VAT is imposed on the
increase in worth, merit or improvement of
the goods or services. The VAT utilizes the
concept of the output and input taxes.
Output VAT less Input VAT = VAT due on the
increase in worth, merit or improvement f the
goods or services.

10. The right to credit the input tax

be limited by legislation because it is a
mere creation of law. Prior to the enactment of
multi-stage sales taxation, the sales taxes paid at
every level of distribution are not recoverable from
the taxes payable. With the advent of Executive
Order No. 273 imposing a 10% multi-stage tax on

33

all sales, it was only then that the crediting of the

input tax paid on purchase or importation of goods
and services by VAT-registered persons against the
output tax was established. This continued with the
Expanded VAT Law (R.A. No. 7716), and The Tax
Reform Act of 1997 (R.A. No. 8424). The right to
credit input tax as against the output tax is clearly a
privilege created by law, a privilege that also the
law can limit. It should be stressed that a person
has no vested right in statutory privileges.
(ABAKADA Guro Party List, etc. et al. vs. Ermita, G.R.
No. 168207, October 15, 2005, and companion cases,
on the motion for reconsideration)

11.
Output tax is the value-added
tax due on the sale or lease or taxable goods,
properties or services by any VAT-registered
person.
12.
Input tax is the value-added
tax due on or paid by a VAT-registered person on
importation of good or local purchases of goods or
services, including lease or use of properties, in the
course of his trade or business. (Rev. Regs. No.
4.110-1, 1st par.)

13.

Included in the input tax.

a.
the transitional input tax and
b.
the presumptive input tax xxx.
It includes
c.
input taxes which can be directly
attributed to transactions subject to the VAT plus a
ratable portion of any input tax which cannot be
directly attributed to either the taxable or exempt
activity. (Rev. Regs. No. 4.110-1, 1 st par., 2nd
sentence,. And 2nd par., paraphrasing, arrangement
and numbering supplied )

14. Concept of transitional input tax

credits on beginning inventories. Taxpayers
who become VAT-registered persons upon
exceeding the minimum turnover of P1,500,000.00
in any 12-month period, or who voluntarily register
even if their turnover does not exceed
P1,500,000.00 (except franchise grantees of radio
and television broadcasting whose threshold is
P10,000,000.00) shall be entitled to a transitional
input tax on the inventory on hand as of the
effectivity of their VAT registration, on the following:
a.
goods purchased for resale in their
present condition;
b.
materials purchased for further
processing, but which have not yet undergone
processing;
c.
goods which have been manufactured
by the taxpayer;
d.
goods in process for sale; or
e.
goods and supplies for use in the
course of the taxpayers trade or business as a
VAT-registered person. [Rev. Regs. No. 16-2005,
Sec.4.111-1, (a), 1st par., arrangement and numbering
supplied]

15. Concept of presumptive input

tax credits. Persons or firms engaged in the
processing of sardines, mackerel, and milk, and in

manufacturing refined sugar, cooking oil and

packed noodle-based instant meals, shall be
allowed a presumptive input tax, creditable against
the output tax, equivalent to four percent (4%) of
the gross value in money of their purchases of
primary agricultural products which are used as
inputs to their production.
As used in this paragraph, the term
processing shall mean pasteurization, canning and
activities which through physical or chemical
process alter the exterior texture or form or inner
substance of a product in such a manner as to
prepare it for special use to which it could not have
been put in its original form or condition. [Rev.
Regs. No. 16-2005, Sec.4.111-1, (b)]

16. The VAT registration fee does

NOT violate religious freedom. The VAT
registration fee imposed on non-VAT enterprises
which includes among others, religious sects which
sells and distributes religious literature is not
violative of religious freedom, although a fixed
amount is not imposed for the exercise of a
privilege but only for the purpose of defraying part
of the cost of registration.
The registration fee is thus more of an
administrative fee, one not imposed on the
exercise of a privilege, much less a constitutional
right. (Tolentino v. Secretary of Finance, et al., and
companion cases, 235 SCRA 630)

17. Interpretation of the term In the

Course of Trade or Business as used in
the VAT system. The term "doing business" or
course of business conveys the idea of business
being done, not from time to time, but all the time.
It does not include isolated transactions.
(Commissioner of Internal Revenue v. Magsaysay Lines,
Inc., et al., G. R. No. 146984, July 28, 2006)

18.
Pursuant to a government
program of privatization, NDC, a VATregistered entity created for the purpose of
selling real property, decided to sell to
private enterprise all of its shares in its
wholly-owned subsidiary the National
Marine Corporation (NMC). The NDC
decided to sell in one lot its NMC shares
and five (5) of its ships, which are 3,700
DWT Tween-Decker, "Kloeckner" type
vessels. The vessels were constructed for
the NDC between 1981 and 1984, then
initially leased to Luzon Stevedoring
Company, also its wholly-owned subsidiary.
Subsequently, the vessels were transferred
and leased, on a bareboat basis, to the
NMC.
The NMC shares and the vessels
were offered for public bidding. Among the
stipulated terms and conditions for the
public auction was that the winning bidder
was to pay "a value added tax of 10% on
the value of the vessels."
Magsaysay
Lines, Inc., offered to buy the shares and

34

the vessels for P168,000,000.00. The bid

was made by Magsaysay Lines, purportedly
for a new company still to be formed
composed of itself, Baliwag Navigation,
Inc., and FIM Limited of the Marden Group
based in Hongkong . The bid was approved
by the Committee on Privatization, and a
Notice of Award was issued to Magsaysay
Lines.
Is the sale
subject to VAT ?
SUGGESTED ANSWER: No. The term
"carrying on business" does not mean the
performance of a single disconnected act, but
means conducting, prosecuting and continuing
business by performing progressively all the acts
normally incident thereof; while "doing business"
conveys the idea of business being done, not from
time to time, but all the time. "Course of
business" is what is usually done in the
management of trade or business.
"Course of
business" or "doing business" connotes regularity
of activity. In the instant case, the sale was an
isolated transaction.
The sale which
was involuntary and made pursuant to the declared
policy of Government for privatization could no
longer be repeated or carried on with regularity. It
should be emphasized that the normal VATregistered activity of NDC is leasing personal
property.
This finding is confirmed by the
Revised Charter of the NDC which bears no
indication that the NDC was created for the primary
purpose of selling real property. (Commissioner of
Internal Revenue v. Magsaysay Lines, Inc., et al., G. R.
No. 146984, July 28, 2006)

19.
Under the Value Added Tax
(VAT), the tax is imposed on sales, barter,
or exchange or goods and services. The
VAT is
also
imposed
on
certain
transactions deemed sales
which
include:
a.
Transfer,
use
or
consumption
not in the course of business or
properties originally intended for sale or for use in
the course of business. xxx
b.

Distribution or transfer to:

1)
Shareholders or investors as
share in the profits of the VAT- registered
person; xxx or
2)
Creditors in payment of debt or
obligation
c. Consignment of goods if actual sale
is not made within sixty (60) days following the
date such goods were consigned.
Consigned
goods returned by the consignee within the 60-day
period are not deemed sold.
d.
Retirement from or cessation of
business, with respect to all goods on hand,
1)
whether capital goods, stock-intrade, supplies or materials as of the date
of such retirement, or cessation,
2)
whether or not the business is
continued by the new owner or successor.

xxx

35

16-2005, Sec. 4.106-3, 1st par.)

and
below
where
the
instrument
of
sale/transfer/disposition was executed on or after
November 1, 2005, provided, That not later than
January 31, 2009 and every three (3) years
thereafter, the amounts stated herein shall be
adjusted to its present value using the Consumer
Price Index, as published by the National Statistics
Office (NSO); provided, further, that such
adjustment shall be published through revenue
regulations to be issued not later than March 31 of
each year.
If two or more adjacent residential lots are
sold or disposed in favor of one buyer, for the
purpose of utilizing the lots as one residential lot,
the sale shall be exempt from VAT only if the
aggregate value of the lots do not exceed
P1,500,000.00. Adjacent residential lots, although
covered by separate titles and/or separate tax
declarations, when sold or disposed of to one and
the same buyer, whether covered by one or
separate Deed of Conveyance, shall be presumed
as a sale of one residential lot. [Rev. Regs. No.
4.109-1 (B), (p), paraphrasing and numbering
supplied]

Thus, capital transactions of individuals are

not subject to VAT. Only real estate dealers are
subject to VAT.

24.
VAT on services and lease of
properties.

[Rev. Regs. No. 16-2005, Sec. 4.106-7,

paraphrasing, arrangement and numbering
supplied]

20. Transactions
considered
retirement or cessation of business
deemed sale subject to VAT.
a. Change of ownership of the business.
There is change in the ownership of the business
where a single proprietorship incorporates; or
1) the proprietor of a single
proprietorship sells his entire business.
b.
Dissolution of a partnership and
creation of a new partnership which takes over the
business. [Rev. Regs. No. 16-2005, Sec. 4.106-7
(a), (4) paraphrasing, arrangement and numbering
supplied]

21. Sale of or lease of real

properties subject to VAT. Sale of real
properties primarily for sale to customers or held
for lease in the ordinary course of trade or business
of the seller shall be subject to VAT. (Rev. Regs. No.

22.
On
September 4, 2009, XYZ, Inc., a domestic
corporation engaged in the real estate
business,
sold
a
building
for
P10,000,000.00. Is the sale subject to the
value-added tax (VAT)? If so, how much?
Explain.
SUGGESTED ANSWER: Yes. 12% on the
gross selling price because the sale was made in
the ordinary course of trade of business of X, a
domestic corporation engaged in the real estate
business.

23.
The following sales of real
properties are exempt from VAT, namely:
a.
Sale of real properties not primarily
held for sale to customers or held for lease in the
ordinary course of trade or business;
b.
Sale of real properties utilized for
low-cost housing as defined by RA No. 7279,
otherwise known as the Urban and Development
Housing Act of 1992 and other related laws, such
as RA No. 7835 and RA No. 8763.
xxx
xxx
xxx
c.
Sale of real properties utilized for
socialized housing as defined under RA No. 7279,
and other related laws wherein the price ceiling per
unit is P225,000.00 or as may from time to time be
determined by the HUDCC and the NEDA and
other related laws.
xxx
xxx
xxx
d.
Sale of residential lot valued at One
Million
Five
Hundred
Thousand
Pesos
(P1,500,000.00) and below, or house & lot and
other residential dwellings valued at Two Million
Give Hundred Thousand Pesos (P2,500,000.00)

a.
There shall be levied, assessed, and
collected,
b.
a value-added tax equivalent to
twelve percent (12%) of gross receipts
c.
derived from the sale or exchange of
services,
1)
including the use or lease of
properties. [NIRC of
1997, Sec. 108 (A), as
amended by R.A. No. 9337, arrangement and
numbering supplied]

25.
defined.

Sale or exchange of services,

The term sale or exchange of

services means the performance of all kinds of
services in the Philippines for others for a fee,
remuneration or consideration, whether in kind or in
cash, including those performed or rendered by the
following:
a.
construction
and
service
contractors;
b.
stock, real estate, commercial, customs and
immigration brokers;
c.
lessors of property, whether personal or real;
d.
persons engaged
in warehousing services
e. lessors or distributors of cinematographic
films;
f.
persons engaged
in milling, processing, manufacturing or repacking
goods for others;
g.
proprietors, operators or
keepers of hotels, motels, rest-houses, pension
houses, inns, resorts; theaters, and movie houses;
h.
proprietors or operators of
restaurants, refreshment parlors, cafes and other
eating places, including clubs and caterers;
i.
dealers in securities;
j.

lending investors;
k.
transportation
contractors on their transport of goods or cargoes,
including persons who transport goods or cargoes
for hire and other domestic common carriers by
land relative to their transport of goods or cargoes;
l.
common carriers by air and sea
relative to their transport of passengers, goods or
cargoes from one place in the Philippines to
another place in the Philippines;
m.
sales
of
electricity
by
generation
companies,
transmission, and/or
distribution companies;
n. franchise grantees of electric utilities,
telephone and telegraph, radio and television
broadcasting and all other franchise grantees
except franchise grantees of radio and/or television
broadcasting whose annual gross receipts of the
preceding year do not exceed Ten Million Pesos
(P10,000,000.00), and franchise grantees of gas
and water utilities;
o.
nonlife insurance companies (except their crop
insurances), including surety, fidelity, indemnity and
bonding companies; and
p.
similar
services
regardless of whether or not the performance
thereof calls for the exercise or use of the physical
or mental faculties. [NIRC of 1997, Sec. 108 (A), as
amended by R.A. No. 9337; Rev. Regs. No. 16-2005,
Sec. 4,108-2, 1st par., arrangement and numbering
supplied]

26. Also included in the phrase

sale or exchange of services.
a.
The lease or the use of or the right or
privilege to use any copyright, patent, design or
model, plan, secret formula or process, goodwill,
trademark, trade brand or other like property or
right;
b.
The lease or the use of, or the right
to use any industrial, commercial or scientific
equipment;
c.
The supply of scientific, technical,
industrial or commercial knowledge or information;
d.
The supply of any assistance that is
ancillary and subsidiary to and is furnished as a
means of enabling the application or enjoyment of
any such property, or right as is mentioned in
subparagraph (2) hereof or any such knowledge or
information as is mentioned in subparagraph (3)
hereof; or
e.
The supply of services by a nonresident person or his employee in connection with
the use of property or rights belonging to, or the
installation or operation of any brand, machinery or
other apparatus purchased from such non-resident
person;
f.
The
supply of technical advice,
assistance or services rendered in connection with
technical management or administration of any
scientific, industrial or commercial undertaking,
venture, project of scheme;

36

g.
The lease of motion picture films,
film tapes and discs;
h.
The lease or the use of or the right
to use radio, television, satellite transmission and
cable television time. (Rev. Regs. No. 16-2005, Sec.
4.108-2, 2nd par.)

27.
or Properties.

Zero-rated Sales of Goods

A zero-rated sale of goods or

properties by a sale by a VAT-registered person is a
taxable transaction for VAT purposes but the sale
does not result in any output tax.
However, the input tax on the purchases of
goods, properties or services related to such zerorated sale shall be available as tax credit or refund
in accordance with Rev. Regulations No. 16-2005.
(Rev. Regs. No. 16-2005, 1st par.)

28.

Concept

of

VAT

zero-

rating. The tax rate is set at zero. When applied

to the tax base, such rate obviously results in no
tax chargeable against the purchaser. The seller of
such transactions charges no output tax, but can
claim a refund or a tax credit certificate for the VAT
previously charged by suppliers. [Commissioner of
Internal
Revenue
v. Seagate
Technology
(Philippines), G. R. No. 153866, February 11, 2005]
Under a zero-rating scheme, the sale or
exchange of a particular service is completely
freed from the VAT, because the seller is entitled to
recover, by way of a refund or as an input tax
credit, the tax that is included in the cost of
purchases attributable to the sale or exchange.
The tax paid or withheld is not deducted from the
tax base. (Commissioner, of Internal Revenue v.
American Express International, Inc. (Philippine Branch),
G. R. No. 152609, June 29, 2005 citing various cases)

29. Situs of taxation of zero-rated

VAT services such as facilitating the
collection of receivables from credit card
members situated in the Philippines and
payment to service establishments in the
Philippines. The place where the service is
rendered determines the jurisdiction to impose the
VAT
Performed in the Philippines, the service is
necessarily subject to its jurisdiction for the State
necessarily has to have a substantial connection
to it in order to enforce a zero rate. The place of
payment is immaterial much less is the place
where the output of the service will be further or
ultimately used.
This is so because the law neither makes a
qualification nor adds a condition in determining
the tax situs of a zero-rated service. (Commissioner
of Internal Revenue v. American Express International,
Inc. (Philipppine Branch), G. R. No. 152609, June 29,
2005)

30.

Destination principle under

the VAT System. As a general rule, the VAT
system uses the destination principle as a basis for
the jurisdictional reach of the tax.

Goods and services are taxed only in the

country where they are consumed. Thus, exports
are zero-rated, while imports are taxed.
This is also known as the Cross Border
Doctrine.

31. Exception
to
the
destination principle. The law clearly provides
for an exception to the destination principle; that is,
for a zero percent VAT rate for services that are
performed in the Philippines, "paid for in
acceptable foreign currency and accounted for in
accordance with the rules and regulations of the
[BSP]."

32.

Rationale for zero-rating of

exports. The Philippine VAT system adheres to

the Cross Border Doctrine, according to which, no
VAT shall be imposed to form part of the cost of
goods destined for consumption outside of the
territorial border of the taxing authority.
[Commissioner of Internal Revenue v. Toshiba
Information Equipment (Phils.), Inc., G. R.. No. 150154,
August 9, 2005] The Cross Border Doctrine is also

known as the destination principle.

Hence, actual or
constructive export of goods and services from the
Philippines to a foreign country must be zero-rated
for VAT; while, those destined for use or
consumption within the Philippines shall be
imposed the twelve percent (12%) VAT.

33.
Zero-rated
sale
distinguished from exempt transactions:
a.
A zero-rated sale is a taxable
transaction but does not result in an output tax
WHILE an exempt transaction is not subject to the
output tax.
b.
The input tax on the purchases of a
VAT registered person who has zero-rated sales
may be allowed as tax credits or refunded WHILE
the seller in an exempt transaction is not entitled to
any input tax on his purchases despite the issuance
of a VAT invoice or receipt.
c.
Persons engaged in transactions
which are zero rated being subject to VAT are
required to register WHILE registration is optional
for VAT-exempt persons.

37

35. Sale of gold to the Central Bank

considered as export sales. As export sales,
the sale of gold to the Central Bank is zero-rated,
hence, no tax is chargeable to it as purchaser.
Zero rating is primarily intended to be enjoyed by
the seller, which charges no output VAT but can
claim a refund of or a tax credit certificate for the
input VAT previously charged to it by suppliers.
(Commissioner of Internal Revenue v. Manila Mining
Corporation, G.R. No. 153204, August 31, 2005)

36. Sales to ecozone, such as

PEZA, considered export-sale. Notably, while
an ecozone is geographically within the Philippines,
it is deemed a separate customs territory and is
regarded in law as foreign soil. Sales by suppliers
from outside the borders of the ecozone to this
separate customs territory are deemed as exports
and treated as export sales. These sales are zerorated or subject to a tax rate of zero percent.
(Commissioner of Internal Revenue v. Sekisui Jushi
Philippines, Inc., G. R. No. 149671, July 21, 2006 citing
various authorities)

37. Ecozone,
defined.
An
ECOZONE or a Special Economic Zone has been
described as
[S]elected areas with highly
developed or which have the potential to be
developed into agro-industrial, industrial, tourist,
recreational, commercial, banking, investment and
financial centers whose metes and bounds are
fixed or delimited by Presidential Proclamations.
An ECOZONE may contain any or all of the
following: industrial estates (IEs), export processing
zones
(EPZs),
free
trade
zones
and
tourist/recreational centers.
The
national
territory of the Philippines outside of the
proclaimed borders of the ECOZONE shall be
referred to as the Customs Territory. [Commissioner
of Internal Revenue v. Toshiba Information Equipment
(Phils.), Inc., G. R.. No. 150154, August 9, 2005]

38.
Zero-rated sale of service,
defined. A zero-rated sale of service (by a VATregistered person) is a taxable transaction for VAT
purposes, but shall not result in any output tax.
However, the input tax on purchases of goods,
properties or services related to such zero-rated
sale shall be available as tax credit or refund in
accordance with Rev. Regs. No. 16-2005. [Rev.

Zero-rated sales by VATregistered persons. The following sales by

Regs. No. 16-2005, Sec.

italics supplied)

VAT-registered persons shall be subject to zero

percent (0%) rate:
a.
Export sales;
b.
Considered export sales under
Executive Order No. 224;
c.
Foreign currency denominated sale;
and
d.
Sales to persons or entities deemed
tax-exempt under special law or international
agreement. (Rev. Regs. No. 16-2005, Sec. 4.106-5, 2 nd

39.
Service
performed
by
American Express in facilitating the
collection of receivables from credit card
members situated in the Philippines and
payment to service establishments in the
Philippines in behalf of its Hong-Kong
based client is subject to VAT but zerorated. This is so because it meets all the

34.

par., paraphrasing supplied)

Sec. 4.108-5 (a), words in

requirements for VAT imposition, as follows:

a.
It regularly renders in the Philippines
the service of facilitating the collection and
payment of receivables belonging to a foreign

company that is a clearly separate and distinct

entity.
b.
Such service is commercial in nature;
carried on over a sustained period of time; on a
significant scale with a reasonable degree of
frequency; and not at random, fortuitous, or
attenuated.
c.
For this service, it definitely receives
consideration in foreign currency that is accounted
for in conformity with law.
d.
It is not an entity exempt under any of
our
laws
or
international
agreements.
(Commissioner, of Internal Revenue v. American
Express International, Inc. (Philippine Branch), G. R. No.
152609, June 29, 2005)

40. While the service performed by

American Express is subject to VAT it is
zero-rated, and BIR Revenue Regulations
that alter the legal requirements for zerorating are ultra vires and invalid. The VAT
system uses the destination principle which posits
that the goods and services are taxed only in the
country where they are consumed,
However, the law itself provides for clear
exceptions under which the supply of services shall
be zero-rated, among which are the following:
a.
The service is performed in the
Philippines;
b.
The services are within the categories
provided for under the Tax Code; and
c.
It is paid for in acceptable foreign
currency of the Bangko Sentral ng Pilipinas.
American Express renders assistance to its
foreign clients by receiving the bills of service
establishments located in the country and
forwarding them to their clients abroad. The
services are performed or successfully completed
upon send to its foreign clients the drafts and bills it
has gathered from service establishments here, Its
services, having been performed in the Philippines
are therefore also consumed in the Philippines.
Thus, its services are exempt from the destination
principle and are zero-rated.
The BIR could not change the law.
[Commissioner, of Internal Revenue v. American Express
International, Inc. (Philippine Branch), G. R. No. 152609,
June 29, 2005]

41.
A foreign Consortium
composed of BWSC-Denmark, Mitsui
Engineering and Shipbuilding Ltd., and
Mitsui and Co., Ltd., which entered into a
contract with NAPOCOR for the operation
and maintenance of two power barges
appointed
BWSC-Denmark
as
its
coordination manager.
BWSCMI was
established as the subcontractor to
perform the actual work in the Philippines.
The
Consortium
paid
BWSCMI
in
acceptable
foreign
exchange
and
accounted for in accordance with the rules
and regulations of the BSP.

38

Through a February 14, 1995 ruling

the BIR declared that BWSCMI may choose
to register as a VAT persons subject to VAT
at zero rate. For 1996, it filed the proper
VAT returns showing zero rating.
On
December 29, 1997, believing that it is
covered by Rev. Regs. 5-96, dated February
20, 1996, BWSCMI paid 10% output VAT for
the period April-December 1996, through
the Voluntary Assessment Program (VAP).
On January 7, 1999, BWSCMI was
able to obtain a Ruling from the BIR
reconfirming that it is subject to VAT at
zero-rating. On this basis, BWSCMI applied
for a refund of the output VAT it paid.
a.
Is BWSCMI subject to the 10%
VAT or is it zero rated ?
SUGGESTED ANSWER: Yes. BWSCMI is
not zero rated and is subject to the 10% VAT. It is
rendering service for the Consortium which is not
doing business in the Philippines. Zero-rating finds
application only where the recipient of the services
are other persons doing business outside of the
Philippines. BWSCMI provides services to the
Consortium which by virtue of its contract with
NAPOCOR is doing business within the
Philippines. (Commissioner of Internal Revenue v.
Burmeister and Wain Scandinavian Contractor
Mindanao, Inc., G. R. No. 153205, January 22,
2007)

b.
Could it obtain a refund of the
VAT it paid through the VAP ? Explain.
SUGGESTED ANSWER: Yes. BWSCMI is
entitled to refund of the 10% output VAT it paid the
based on the non-retroactivity of the prejudicial
revocation of the BIR Rulings which held that its
services
are subject to 0% VAT and which
BWSCMI invoked in applying for refund of the
output VAT. (Commissioner of Internal Revenue v.
Burmeister and Wain Scandinavian Contractor
Mindanao, Inc., supra)

NOTES AND COMMENTS:

a.
Do not confuse the BWSCMI
case with the American Express case.
American Express International, Inc. (Philippine
Branch)] is a VAT-registered person that facilitates
the collection and payment of receivables
belonging to its non-resident foreign client
[American Express International, Inc. (Hongkong
Branch)], for which it gets paid in acceptable
foreign currency inwardly remitted and accounted
for in accordance with BSP rules and regulations.
(Commissioner of Internal Revenue v. Burmeister
and Wain Scandinavian Contractor Mindanao, Inc.,
G. R. No. 153205, January 22, 2007)

42.

What
are
VAT-Exempt
transactions ? SUGGESTED ANSWER:

The sale of goods or properties and/or services

and the use or lease of properties that is
b. not subject to VAT (output tax) and
c.
the seller is not allowed any tax
credit on VAT (input tax) purchases.

The person making the exempt sale of

goods, properties or services shall not bill any
output tax to his customers because the said
transaction is not subject to VAT. [Rev. Regs. No.
16-2005, Sec. 4.109-1 (A), arrangement and numbering
supplied]

43.VAT-exempt
transactions
distinguished from VAT-exempt entities.
a.
An exempt transaction, on the one
hand, involves goods or services which, by their
nature, are specifically listed in and expressly
exempted from the VAT under the Tax Code,
without regard to the tax status VAT-exempt or
not of the party to the transaction.
An exempt party, on the other hand, is a
person or entity granted VAT exemption under the
Tax Code, a special law or an international
agreement to which the Philippines is a signatory,
and by virtue of which its taxable transactions
become exempt from VAT. [Commissioner of Internal
Revenue v. Toshiba Information Equipment (Phils.), Inc.,
G. R. No. 150154, August 9, 2005]

b.
An exempt transaction shall not be the
subject of any billing for output VAT but it shall not
also be allowed any input tax credits WHILE an
exempt party being zero-rated is allowed to claim
input tax credits.

44. Transactions are exempt from

VAT. (Subject to the election by a VAT-registered
person not to be subject to the value-added tax),
the following shall be exempt from VAT:
(A) Sale or importation of agricultural and
marine food products in their original state,
livestock and poultry of a kind generally used as, or
yielding
or producing
foods for
human
consumption; and breeding stock and genetic
materials therefor.
Livestock shall include cows, bulls and
calves, pigs, sheep, goats and rabbits. Poultry
shall include fowls, ducks, geese and turkey,
Livestock or poultry does not include fighting
cocks, race horses, zoo animals and other animals
generally considered as pets.
Marine food products shall include fish and
crustaceans, such as, but not limited to, eels, trout,
lobster, shrimps, prawns, oysters, mussels and
clams.
Meat, fruit, fish, vegetables and other
agricultural and marine food Products classified
under this paragraph shall be considered in their
original state even if they have undergone the
simple processes of preparation or preservation for
the market, such as freezing, drying, salting,
broiling, roasting, smoking or stripping, including
those using advanced technological means of
packaging, such as shrink wrapping in plastics,
vacuum packing, tetra-pack, and other similar
packaging methods. Polished and/or husked rice,
corn grits, raw cane sugar and molasses, ordinary
salt, and copra shall be considered in their original
state.

39

Sugar whose content of sucrose by weight,

in the dry state, has a polarimeter reading of 99.5o
and above are presumed to be refined sugar.
Cane sugar produced from the following
shall be presumed, for internal revenue purposes,
to be refined sugar:
(1)
product of a refining process,
(2)
products of a sugar refinery, or
(3)
product of a production line of a
sugar mill accredited by the BIR to be producing
sugar with polarimeter reading of 99.5o and above,
and for which the quedanissued therefor, and
verified by the Sugar Regulatory Administration,
identifies the same to be of a polarimeter reading
of 99.5o and above.
Bagasse is not included in the exemption
provided for under this section.
(B)
Sale or importation of fertilizers;
seeds, seedlings and fingerlings; fish, prawn,
livestock and poultry feeds, including ingredients,
whether locally produced or imported, used in the
manufacture of finished feeds (except specialty
feeds for race horses, fighting cocks, aquarium
fish, zoo animals and other animals generally
considered as pets);
Specialty feeds refers to non-agricultural
feeds or food for race horses, fighting cocks,
aquarium fish, zoo animals and other animals
generally considered as pets.
(C) Importation of personal and household
effects belonging to the residents of the Philippines
returning from abroad and nonresident citizens
coming to resettle in the Philippines: Provided,
That such goods are exempt from customs duties
under the Tariff and Customs Code of the
Philippines;
(D) Importation
of
professional
instruments and implements, wearing apparel,
domestic animals, and personal household effects
(except any vehicle, vessel, aircraft, machinery,
other goods for use in the manufacture and
merchandise of any kind in commercial quantity)
belonging to persons coming to settle in the
Philippines, for their own use and not for sale,
barter or exchange, accompanying such persons,
or arriving within ninety (90) days before or after
their arrival, upon the production of evidence
satisfactory to the Commissioner of Internal
Revenue, that such persons are actually coming to
settle in the Philippines and that the change of
residence is bona fide;
(E) Services subject to percentage tax under
Title V of the Tax Code, as enumerated below:
(1)
Sale or lease of goods or
properties or the performance of services
of non-VAT-registered persons, other than
the transactions mentioned in paragraphs
(A) to (U) of Sec. 109 (1) of the Tax Code,
the annual sales and/or receipts of which
does not exceed the amount of One
Million Five Hundred thousand Pesos
(P1,500,000.00), Provided, That not later
than January 31, 2009 and every three (3)
years thereafter, the amount herein stated
shall be adjusted to its present value using
the Consumer Price Index, as published by

the National Statistics Office (NSO). (Sec.

116, Tax Code)
(2)
Services rendered by domestic
common carriers by land for the transport
of passengers and keepers of garages.
(Sec. 117)
(3)
Services
rendered
by
international air/shipping carriers. (Sec.
118)
(4)
Service rendered by franchise
grantees of radio and/or television
broadcasting whose annual gross receipts
of the preceding year do not exceed Ten
Million Pesos (P10,000,000.00) and by
franchises of gas and water utilities. (Sec.
119)
(5)
Service rendered for overseas
dispatch
message
or
conversation
originating from the Philippines. (Sc. 120)
(6)
Services rendered by any
person, company or corporation (except
purely
cooperative
companies
or
associations ) doing life insurance business
of any sort in the Philippines. (Sec. 123)
(7)
Services rendered by fire,
marine or miscellaneous insurance agents
of foreign insurance companies. (Sec.
124)
(8)
Services of proprietors, lessees
or operators of cockpits, cabarets, night or
day clubs, boxing exhibitions professional
basketball games, jai-Alai and race tracks.
(Sec. 125). and
(9)
Receipts on sale, barter or
exchange of shares of stock listed and
traded through the local stock exchange or
through initial public offering. (Sec. 127)
(F)
Services by agricultural contract
growers and milling for others of palay into rice,
corn into grits and sugar cane into raw sugar;
Agricultural contract growers refers to
those persons producing for others poultry,
livestock or other agricultural and marine food
products in their original state.
(G) Medical,
dental,
hospital
and
veterinary services except those rendered by
professionals;
Laboratory services are exempted. If the
hospital or clinic operates a pharmacy or drug
store, the sale of drugs and medicine is subject to
VAT.
(H) Educational services rendered by
private educational institutions, duly accredited by
the Department of Education (DEPED), the
Commission on Higher Education (CHED), the
Technical Education And Skills Development
Authority (TESDA) and those rendered by
government educational institutions;
Educational services shall refer to
academic, technical or vocational education
provided by private educational institutions duly
accredited by the DepED, the CHED and TESDA
and those rendered by government educational
institutions and it does not include seminars, inservice training, review classes and other similar
services rendered by persons who are not

40

accredited by the DepED, the CHED and/or the

TESDA.
(I)
Services rendered by individuals
pursuant to an employer-employee relationship;
(J)
Services rendered by regional or area
headquarters established in the Philippines by
multinational corporations which act as supervisory,
communications and coordinating centers for their
affiliates, subsidiaries or branches in the AsiaPacific Region and do not earn or derive income
from the Philippines;
(K)
Transactions which are exempt under
international agreements to which the Philippines is
a signatory or under special laws, except those
under Presidential Decree No. 529 Petroleum
Exploration Concessionaires under the Petroleum
Act of 1949; and;
(L)
Sales by agricultural cooperatives
duly registered with the Cooperative Development
Authority (CDA) to their members as well as sale
of their produce, whether in its original state or
processed form, to non-members; their importation
of direct farm inputs, machineries and equipment,
including spare parts thereof, to be used directly
and exclusively in the production and/or processing
of their produce;
(M) Gross receipts from lending activities
by credit or multi-purpose cooperatives duly
registered and in good standing with the
Cooperative Development Authority;
(N) Sales by non-agricultural, non-electric
and non-credit cooperatives duly registered with
the Cooperative Development Authority: Provided,
That the share capital contribution of each member
does not exceed Fifteen thousand pesos (P15,000)
and regardless of the aggregate capital and net
surplus ratably distributed among the members;
Importation by non-agricultural, non-electric
and non-credit cooperatives of machineries and
equipment, including spare parts thereof, to be
used by them are subject to VAT.
(O) Export sales by persons who are not
VAT-registered;
(P)
Sale of real properties not primarily
held for sale to customers or held for lease in the
ordinary course of trade or business, or real
property utilized for low-cost and socialized
housing as defined by Republic Act No. 7279,
otherwise known as the Urban Development and
Housing Act of 1992, and other related laws, such
as RA No. 7835 and RA No. 8765, residential lot
valued at One million five hundred thousand pesos
(P 1,500,000) and below, house and lot, and other
residential dwellings valued at Two million five
hundred thousand pesos (P 2,500,000) and below:
Provided, That not later than January 31, 2009 and
every three (3) years thereafter, the amounts
herein stated shall be adjusted to their present
values using the Consumer Price Index, as
published by the National Statistics Office (NSO);
(Q) Lease of a residential unit with a
monthly rental not exceeding Ten thousand pesos
(P 10,000) Provided, That not later than January
31, 2009 and every three (3) years thereafter, the
amount herein stated shall be adjusted to its

present value using the Consumer Price Index as

published by the National Statistics Office (NSO);
(R) Sale,
importation,
printing
or
publication of books and any newspaper,
magazine, review or bulletin which appears at
regular intervals with fixed prices for subscription
and sale and which is not devoted principally to the
publication of paid advertisements;
(S)
Sale, importation or lease of
passenger or cargo vessels and aircraft, including
engine, equipment and spare parts thereof for
domestic or international transport operations;
Provided, that the exemption from VAT on the
importation and local purchase of passenger and/or
cargo vessels shall be limited to those of one
hundred fifty (150) tons and above, including
engine and spare parts of said vessels; Provided,
further, that the vessels be imported shall comply
with the age limit requirement, at the time of
acquisition counted from the date of the vessels
original commissioning, as follows:
(i)
for
passenger and/or cargo vessels, the age limit is
fifteen years (15) years old, (ii) for tankers, the
age limit is ten (10) years old, and (iii) For highspeed passenger cars, the age limit is five (5)
years old, Provided, finally, that exemption shall be
subject to the provisions of section 4 of Republic
Act No. 9295, otherwise known as The Domestic
Shipping Development Act of 2004.
(T)
Importation of fuel, goods and
supplies by persons engaged in international
shipping or air transport operations; Provided, that
the said fuel, goods and supplies shall be used
exclusively or shall pertain to the transport of
goods and/or passenger from a port in the
Philippines directly to a foreign port without
stopping at any other port in the Philippines;
provided, further, that if any portion of such fuel,
goods or supplies is used for purposes other than
that mentioned in this paragraph, such portion of
fuel, goods and supplies shall be subject to 10%
VAT (now 12%);
(U) Services of banks, non-bank financial
intermediaries performing quasi-banking functions,
and other non-bank financial intermediaries; and
(V)
Sale or lease of goods or
properties or the performance of services other
than the transactions mentioned in the preceding
paragraphs, the gross annual sales and/or receipts
do not exceed the amount of One million five
hundred thousand pesos (P1,500,000): Provided,
That not later than January 31, 2009 and every
three (3) years thereafter, the amount herein stated
shall be adjusted to its present value using the
Consumer Price Index as published by the National
Statistics Office (NSO).
For purposes of the threshold of
P1,500,000.00, the husband and wife shall be
cnsidered separate taxpayers.
However, the
aggregation rule for each taxpayer shall apply. For
instance, if a profesional, aside from the practice
ofhis profession, also derives revenue from other
lines of business which are otherwise subject to
VAT, the same shall be combined for purposes of
determining whether the threshold has been

41

exceeded. Thus, the VAT-exempt sales shall to be

icluded in determining the threshold. [NIRC of 1997,
Sec. 109 (1), as amended by R. A. No. 9337; words in
italics from Rev. Regs. No. 16-2005, Sec. 4.109-1 (B),
words in parentheses supplied]

45.
Tax to be paid by persons
exempt from VAT.
a.
Any person, whose sales or receipts
are exempt under Sec. 109 (1) (V) of the Tax Code,
(V) Sale or lease of goods or
properties or the performance of services
other than the transactions mentioned in
the preceding paragraphs, the gross annual
sales and/or receipts do not exceed the
amount of One million five hundred
thousand pesos (P1,500,000): Provided,
That not later than January 31, 2009 and
every three (3) years thereafter, the
amount herein stated shall be adjusted to
its present value using the Consumer Price
Index as published by the National
Statistics Office (NSO), from the payment
of VAT and
b.
who is not a VAT-registered person
c.
shall pay a tax equivalent to three
percent (3%) of his gross monthly sales or receipts;
Provided, that cooperatives shall be exempt
from the three (3%) gross receipts tax herein
imposed.
(Rev. Regs. No. 16-2005, Sec. 4.116-1,
arrangement, numbering and words in italics supplied)

RETURNS AND

WITHHOLDING

1.
Income tax returns being public
documents, until controverted by competent
evidence, are competent evidence, are prima facie
correct with respect to the entries therein. (Ropali
Trading v. NLRC, et al., 296 SCRA 309, 317)

2.
Individuals required to file an
income tax return.
a.
Every Filipino citizen residing in the
Philippines;
b.
Every Filipino citizen residing outside
the Philippines on his income from sources within
the Philippines;
c.
Every alien residing in the Philippines
on income derived from sources within the
Philippines; and
d.
Every nonresident alien engaged in
trade or business or in the exercise of profession in
the Philippines. [Sec. 51 (A) (1), NIRC of 1997]

3.
Married individuals who are
earning purely compensation income
allowed to file separate returns.
4.
Married individuals, whether
citizens, resident or non-resident aliens,
who do not derive income purely from
compensation shall file a consolidated
return for the taxable year to include the
income of both spouses, but where it is

impracticable for the spouses to file one return, each

spouse may file a separate return of income but the
returns so filed shall be consolidated by the Bureau
for purposes of verification. [Section 51 (D) of the
NIRC of 1997]

42

further, That the holiday pay, overtime pay, night

shift differential pay and hazard pay received by
such minimum wage earners shall likewise be
exempt from income tax. [Sec. 51 (A) (2), NIRC of 1997
in relation to Sec. 22 (HH), both as amended by Rep. Act.
9504]

5.
Computation of income tax for
married
individuals whether
citizens,
resident or non-resident aliens, who do not
derive income purely from compensation
required file a consolidated return for the
taxable year but could not do so. For married

8.
An individual who is not required
to file an income tax return may
nevertheless be required to file an
information return. [Sec. 51 (A) (3), NIRC of 1997]

individuals, the husband and wife, subject to no. 2,

supra,, shall compute separately their individual
income tax based on their respective total taxable
income: Provided, that if any income cannot be
definitely attributed to or identified as income
exclusively earned or realized by either of the
spouses, the same shall be divided equally
between the spouses for the purpose of
determining their respective taxable income. [2nd to

are required to be filed for the first three quarters,

then a final adjustment return is filed covering the
total taxable income for the whole taxable year, be it
calendar or fiscal.

the last par., Sec. 24 (A) (2), NIRC of 1997 as amended

by Rep. Act No. 9504]

6.
Individuals who are not required
to file an income tax return.
a.
An individual whose gross income
does not exceed his total personal and additional
exemptions for dependents, Provided, That a citizen
of the Philippines and any alien individual engaged
in business or practice of profession within the
Philippines shall file an income tax return regardless
of the amount of gross income [Sec. 51 (A) (2), NIRC
of 1997]

b.
An individual with respect to pure
compensation income, derived from such sources
within the Philippines, the income tax on which has
been correctly withheld: Provided, That an
individual deriving compensation concurrently from
two or more employers at any time during the
taxable year shall file an income tax return [Sec. 51
(A) (2), NIRC of 1997, as amended by Rep. Act No. 9504,
paraphrasing supplied]

c.
An individual whose sole income has
been subject to final withholding tax;
d.
A minimum wage earner (is a worker
in the private sector paid the statutory minimum
wage, or is an employee in the public sector with
compensation income of not more than the
statutory minimum wage in the non-agricultural
sector where he/she is assigned), an individual who
is exempt from income tax pursuant to the
provisions of the Tax Code and other laws, general
or special. [Sec. 51 (A) (2), NIRC of 1997 in relation to
Sec. 22 (HH), both as amended by Rep. Act. 9504]

7.
Minimum wage earners are
exempt from income taxation. That minimum
wage earners (is a worker in the private sector
paid the statutory minimum wage, or is an
employee in the public sector with compensation
income of not more than the statutory minimum
wage in the non-agricultural sector where he/she is
assigned) shall be exempt from the payment of
income tax on their taxable income: Provided,

9.
A corporation files its income tax
return and pays its income tax four (4) times
during a single taxable year. Quarterly returns

10. An individual earning from the

practice of his profession or who engages in
trade or business files his income tax return
and pays his income tax four (4) times
during a single taxable year . Quarterly returns
are required to be filed for the first three quarters,
then an annual income tax return is filed covering
the total taxable income for the whole of the
previous calendar year.

11. The purpose of the above four

(4) times a year requirement is to make
available sufficient funds to meet the
budgetary requirements, on a quarterly basis
thereby increasing government liquidity. It also
eases hardships on the part of individuals who are
required to make this four time return. Thus, the
taxpayer does not have to raise large sums of
money in order to pay the tax.

12. An individual earning purely

compensation income files only one annual
income tax return covering the total taxable
compensation income for the whole of the previous
calendar year.

13. Under the withholding tax

system, taxes imposed or prescribed by the
NIRC of 1997 are to be deducted and
withheld by the payors from payments made
to payees for the former to pay directly to
the Bureau of Internal Revenue. It is also
known as collection of the tax at source.

14. A withholding agent is explicitly

made personally liable under the Tax Code
for the payment of the tax required to be
withheld, in order to compel the withholding agent
to withhold the tax under any and all circumstances.
In effect, the responsibility for the collection of the
tax as well as the payment thereof is concentrated
upon the person over whom the Government has
jurisdiction.
(Filipinas Synthetic Fiber Corporation v.

Court of Appeals, et al., G.R. Nos. 118498 & 124377,

October 12, 1999)
The system facilitates tax

collection and reduces tax evasion.

15. The two (2) types of withholding

at source are the 1) final withholding tax;
and 2) creditable withholding tax.
16. Under the final withholding tax
system the amount of income tax withheld
by the withholding agent is constituted as a
full and final payment of the income due
from the payee on the said income. [1st
sentence, 1st par., Sec. 2.57 (A), Rev. Regs. No. 2-98]

The liability for payment of the tax rests

primarily on the payor or the withholding agent..
Thus, in case of his failure to withhold the tax or in
case of under withholding, the deficiency tax shall
be collected from the payor withholding agent. The
payee is not required to file an income tax return for
the particular income.

17. Under the creditable withholding

tax system, taxes withheld on certain
income payments are intended to equal or
at least approximate the tax due from the
payee on the said income.
The income
recipient is still required to file an income tax return
and/or pay the difference between the tax withheld
and the tax due on the income . [1st and 2nd sentences,
Sec. 257(B), Rev. Regs. No. 2-98]

18. The two kinds of creditable

withholding taxes are (a) taxes withheld on
income payments covered by the expanded
withholding tax; and (b)
taxes withheld on
compensation income.

19. Payments to the following are

exempt from the requirement of withholding
or when no withholding taxes required:
a.
National
Government
and
its
instrumentalities including provincial, city, or
municipal governments;
b.
Persons enjoying exemption from
payment of income taxes pursuant to the provisions
of any law, general or special, such as but not
limited to the following:
1)
Sales of real property by a
corporation which is registered with and
certified by the HLURB or HUDCC as
engaged in socialized housing project where
the selling price of the house and lot or only
the lot does not exceed P180,000.00 in Metro
Manila and other highly urbanized areas and
P150,000.00 in other areas or such adjusted
amount of selling price for socialized housing
as may later be determined and adopted by
the HLURB;
2) Corporations registered with the
Board of
Investments and enjoying
exemptions from income under the Omnibus
Investment Code of 1997;

43

3)
Corporations
exempt
from
income tax under Sec. 30, of the Tax Code,
like the SSS, GSIS, the PCSO, etc.
However, income payments arising from any
activity which is conducted for profit or
income derived from real or personal property
shall be subject to a withholding tax. (Sec.
57.5, Rev. Regs. No. 2-98)

20. For tax amnesty purposes, the

withholding agent is not a taxpayer . He is
made to pay the tax where he fails to withhold as a
penalty and not because the tax is due from him.
(Commissioner of Internal Revenue v. Court of Appeals, et
al., G.R. No. 108576, January 20, 1999, the Anscor case)

PENALTIES, INTERESTS AND

SURCHARGES
1.
Surtaxes or surcharges, also known as
the civil penalties, are the amounts imposed in
addition to the tax required.
They are in the nature of penalties and shall
be collected at the same time, in the same manner,
and as part of the tax. [Sec.248 (A), NIRC of 1997]
2.
What are the two (2) kinds of civil
penalties ?
SUGGESTED ANSWER:
a.
the 25% surcharge for late filing or late
payment [Sec. 248 (A), NIRC of 1997] (also known
as the delinquency surcharge), and
b.
the 50% willful neglect or fraud
surcharge. [Sec. 248 (B), Ibid.]

3.

Define deficiency income tax.

SUGGESTED ANSWER: Deficiency income

tax is the amount by which the tax imposed under
the NIRC of 1997 exceeds the amount shown as the
tax due by the taxpayer upon his return. [Sec. 56
(B) (1), NIRC of 1997]

4.
Deficiency interest, defined. The
interest assessed and collected on any unpaid
amount of tax at the rate of 20% per annum or such
higher rate as may be prescribed by regulations,
from the date prescribed for payment until the
amount is fully paid. [Sec. 249 (A) (B), NIRC of
1997]
5.
Delinquency interest, defined.
The interest assessed and collected on the unpaid
amount until fully paid where there is failure on the
part of the taxpayer to pay the amount die on any
return required to be filed; or the amount of the tax
due for which no return is required; or a deficiency
tax, or any surcharge or interest thereon, on the date
appearing in the notice and demand by the
Commissioner of Internal Revenue. [Sec.249 (c),
NIRC of 1997]
6.
After resolving the issues the BIR
Commissioner reduced the assessment.
Was it proper to impose delinquency

44

interest despite the

assessment ? Why ?

reduction

of

the

SUGGESTED ANSWER: Yes. The intention

of the law is to discourage delay in the payment of
taxes due to the State and in this sense the
surcharge and interest charged are not penal but
compensatory in nature they are compensation to
the State for the delay in payment, or for the
concomitant tuse of the funds by the taxpayer
beyond the date he is supposed to have paid them
to the State.
(Bank of the Philippine Islands v.
Commissioner of Internal Revenue, G. R. No. 137002,
July 27, 2006)

7.
Compromise penalty is the amount
agreed upon between the taxpayer and the
Government to be paid as a penalty in cases of a
compromise.
8.
As a result of divergent rulings
on whether it is subject to tax or not, the
taxpayer was not able to pay his taxes on
time. Imposed surcharges and interests for
such delay, the taxpayer not invokes good
faith with the BIR countering by saying that
good faith is not a valid defense for violation
of a special law. Furthermore, the BIR
further raises the defense that the
government is not bound by the errors of its
agents. Who is correct ?
SUGGESTED ANSWER: The taxpayer is
correct. The settled rule is that good faith and honest
belief that one is not subject to tax on the basis of
previous interpretation of government agencies
tasked to implement the tax, are sufficient
justification to delete the imposition of surcharges.
(Michel J. Lhuillier Pawnshop, Inc. v. Commissioner of
Internal Revenue, G. R. No. 166786, September 11,
2006)

REPUBLIC ACT NO. 1125,

CREATING THE COURT OF TAX
APPEALS INCLUDING
JURISDICTION OF THE CTA, AS
AMENDED
COURT OF TAX APPEALS, IN GENERAL
1. Discuss the role of the judiciary
in taxation.
SUGGESTED ANSWER: The
role of the judiciary is to be the sympathetic or
vigilant court which would check injustices or
abuses of the legislative and administrative agents
of the State in their exercise of the power of
taxation.

2.
What is the nature and
composition of the Court of Tax Appeals ?
SUGGESTED ANSWER: The Court of Tax
Appeals is the special tax court created under
Republic Act No. 1125, as amended, and is
composed of a Presiding Justice and eight (8)

Associate
divisions.

Justices,

organized

into

three

(3)

3.
What are the purposes for the
creation of the Court of Tax Appeals ?
SUGGESTED ANSWER:
a.
To prevent delay in the disposition of
tax cases by the then Courts of First Instance (now
RTCs), in view of the backlog of civil, criminal, and
cadastral cases accumulating in the dockets of such
courts; and
b.
To have a body with special knowledge
which ordinary Judges of the then Courts of First
Instance (now RTCs), are not likely to possess, thus
providing for an adequate remedy for a speedy
determination of tax cases. (Ursal v. Court of Tax
Appeals, et al., 101 Phil. 209)

4. Jurisdiction of the Court of Tax

Appeals.
a.
Exclusive appellate jurisdiction to
review by appeal, as herein provided:
1.
Decisions of the Commissioner of
Internal Revenue in cases involving disputed
assessments, refunds of internal revenue taxes,
fees or other charges, penalties, in relation thereto,
or other matters arising under the National Internal
Revenue Code or other laws administered by the
Bureau of Internal Revenue; (DIVISION)
2.
Inaction by the Commissioner of
Internal Revenue in cases involving disputed
assessments, refunds or internal revenue taxes,
fees or other charges, penalties in relation thereto,
or other matter arising under the National Internal
Revenue Code or other laws administered by the
Bureau of Internal Revenue, where the National
Internal Revenue Code provides a specific period of
action, in which case the inaction shall be deemed a
denial; (The inaction on refunds in two years from
the time tax was paid. Thus, if the prescriptive
period of two years is about to expire, the taxpayer
should interpose a petition for review with the CTA
DIVISION)
3.
Decisions, orders or resolutions of the
Regional Trial Courts in local tax cases originally
decided or resolved by them in the exercise of their
original or appellate jurisdiction;
(If original
DIVISION; if appellate EN BANC)
4.
Decisions of the Commissioner of
Customs in cases involving liability for customs
duties, fees or other money charges, seizure,
detention or release of property affected, fines,
forfeitures or other penalties in relation thereto, or
other matters arising under the Customs Law or
other laws administered by the Bureau of Customs;
(DIVISION)
5.
Decisions of the Central Board of
Assessment Appeals in the exercise of its appellate
jurisdiction over cases involving the assessment and
taxation of real property originally decided by the
provincial or city board of assessment appeals; (EN
BANC)
6.
Decisions of the Secretary of Finance
on customs cases elevated to him automatically for

review from decisions of the Commissioner of

Customs which are adverse to the Government
under Section 2315 of the Tariff and Customs Code;
(This has reference to forfeiture cases where the
decision is to release the seized articles
DIVISION)
7.
Decisions of the Secretary of Trade
and Industry, in case of nonagricultural product,
commodity or article, and the Secretary of
Agriculture in the case of agricultural product,
commodity or article, involving dumping and
countervailing duties under Section 301 and 302,
respectively, of the Tariff and Customs Code, and
safeguard measures under Republic Act No. 8800,
where either party may appeal the decision to
impose or not to impose said duties. (DIVISION)
b.
Jurisdiction over cases involving
criminal offenses as herein provided:
1.
Exclusive original jurisdiction over
all criminal cases arising from violations of the
National Internal Revenue Code or Tariff and
Customs Code and other laws administered by the
Bureau of Internal Revenue or the Bureau of
Customs: Provided, however, That offenses or
felonies mentioned in this paragraph where the
principal amount of taxes and fees, exclusive of
charges and penalties claimed, is less than One
million pesos (P1,000,000.00) or where there is no
specified amount claimed shall be tried by the
regular Courts and the jurisdiction of the CTA shall
be appellate. Any provision of law or the Rules of
Court to the contrary notwithstanding, the criminal
action and the corresponding civil action for the
recovery of civil liability for taxes and penalties shall
at all times be simultaneously instituted with, and
jointly determined in the same proceeding by the
CTA, the filing of the criminal action being deemed
to necessarily carry with it the filing of the civil
action, and no right to reserve the filing of such civil
action separately from the civil action will be
recognized.
2.
Exclusive appellate jurisdiction in
criminal offenses:
a)
Over
appeals
from
the
judgments, resolutions or orders of the Regional
Trial Courts in tax cases originally decided by them,
in
their respective territorial jurisdiction.
b)
Over petitions for review of the
judgments, resolutions
or orders of the Regional
Trial Courts in the exercise of their appellate
jurisdiction over tax cases originally decided
by the Metropolitan Trial Courts, Municipal Trial
Courts and Municipal Circuit Trial Courts in
their
respective jurisdiction.
c.
Jurisdiction over tax collection
cases:
1.
Exclusive original jurisdiction in tax
collection cases involving final and executory
assessments for taxes, fees, charges and penalties:
Provided, however, That collection cases where the
principal amount of taxes and fees, exclusive of
charges and penalties, claimed is less than One
million pesos (P1,000,000) shall be tried by the
proper Municipal Trial Court, Metropolitan Trial Court
and Regional Trial Court.

45

2.
Exclusive appellate jurisdiction in tax
collection cases:
a)
Over appeals from judgments,
resolutions, or orders of the Regional Trial Courts
in tax collection cases originally decided by them,
in their respective territorial jurisdiction.
b)
Over petitions for review of the
judgments, resolutions
or orders of the Regional
Trial Courts in the exercise of their appellate
jurisdiction over tax collection cases originally
decided by the
Metropolitan
Trial
Courts,
Municipal Trial Courts and Municipal Circuit Trial
Courts, in their respective jurisdiction. (Sec. 7, R. A.
No. 1125,
as amended by R. A. No. 9282, emphasis
and words in parentheses
supplied)

The petition for review to be filed with

the CTA en banc as the mode for appealing
a decision, resolution, or order of the CTA
Division, under Section 18 of Republic Act
No. 1125, as amended, is not a totally new
remedy, unique to the CTA, with a special
application or use therein. To the contrary, the
CTA merely adopts the procedure for petitions for
review and appeals long established and practiced
in other Philippine courts. Accordingly, doctrines,
principles, rules, and precedents laid down in
jurisprudence by this Court as regards petitions for
review and appeals in courts of general jurisdiction
should likewise bind the CTA, and it cannot depart
therefrom. (Santos v. People, et al, G. R. No. 173176,
August 26, 2008)

5. It is the Regional Trial Court that

has jurisdiction to rule upon the
constitutionality of a tax law or a regulation
issued by the taxing authorities. Where what
is assailed is the validity or constitutionality of a
law, or a rule or regulation issued by the
administrative agency in the performance of its
quasi-legislative function, the regular courts have
jurisdiction to pass upon the same.
The
determination of whether a specific rule or set of
rules issued by an administrative agency
contravenes the law or the constitution is within the
jurisdiction of the regular courts.
Indeed, the Constitution vests the power of
judicial review or the power to declare a law, treaty,
international or executive agreement, presidential
decree, order, instruction, ordinance, or regulation
in the courts, including the regional trial courts.
This is within the scope of judicial power, which
includes the authority of the courts to determine in
an appropriate action the validity of the acts of the
political departments. Judicial power includes the
duty of the courts of justice to settle actual
controversies involving rights which are legally
demandable and enforceable, and to determine
whether or not there has been a grave abuse of
discretion amounting to lack or excess of
jurisdiction on the part of any branch or
instrumentality of the Government.
(British
American Tobacco v. Camacho et al., G. R. No. 163583,
August 20, 2008 with an intervenor)

NOTES AND COMMENTS:

The above
doctrine supersedes Asia International Auctioneers,

Inc., etc et al., .v. Parayno, Jr., etc.,, et al., G. R. No.

103445, December 18, 2007 which ruled that it is
the Court of Tax Appeals that has jurisdiction relative
to matters involving the constitutionality of
regulations issued by the BIR. The reason was that
this falls under the concept of decisions of the BIR
Commissioner on other matter arising under the
provisions of laws administered by the Commission.
Issuance of revenue regulations are authorized
under the NIRC.
British American Tobacco reversed Asia
International Auctioneers upon the concept of the
judiciarys expanded power.

6.
Instances where the Court of Tax
Appeals would have jurisdiction even if
there is no decision of the Commissioner of
Customs:
a.
Decisions of the Secretary of Trade
and Industry or the Secretary of Agriculture in antidumping and countervailing duty cases are
appealable to the Court of Tax Appeals within thirty
(30) days from receipt of such decisions.
b. In case of automatic review by the
Secretary of Finance in seizure or forfeiture cases
where the value of the importation exceeds P5
million or where the decision of the Collector of
Customs which fully or partially releases the
shipment seized is affirmed by the Commissioner of
Customs.
c. In case of automatic review by the
Secretary of Finance of a decision of a Collector of
Customs acting favorably upon a customs protest.

ASSESSMENT OF INTERNAL REVENUE

TAXES
1. Outline of tax remedies of a
taxpayer and the government relative to
ASSESSMENT of internal revenue taxes.
a. The taxpayer files his tax return.
b. A Letter of Authority is issued
authorizing BIR examiner to audit or examine the
tax return and determines whether the full and
complete taxes have been paid.
c. If the examiner is satisfied that the tax
return is truly reflective of the taxable transaction
and all taxes have been paid, the process ends.
However, if the examiner is not satisfied that the tax
return is truly reflective of the taxable transaction
and that the taxes have not been fully paid, a Notice
of Informal Conference is issued inviting the
taxpayer to explain why he should not be subject to
additional taxes.
d. If the taxpayer attends the informal
conference and the examiner is satisfied with the
explanation of the taxpayer, the process is again
ended.
If the taxpayer ignores the invitation to the
informal conference, or if the examiner is not
satisfied with taxpayers explanation,, and he
believes that proper taxes should be assessed, the
Commissioner of Internal Revenue or his duly
authorized representative shall then notify the
taxpayer of the findings in the form of a pre-

46

assessment notice. The pre-assessment notice

requires the taxpayer to explain within fifteen (15)
days from receipt why no notice of assessment and
letter of demand for additional taxes should be
directed to him.
e.
If the Commissioner is satisfied with
the explanation of the taxpayer, then the process is
again ended.
If the taxpayer ignores the pre-assessment
notice by not responding or his explanations are not
accepted by the Commissioner, then a notice of
assessment and a letter of demand is issued.
The notice of assessment must be issued
by the Commissioner to the taxpayer within a period
of three (3) years from the time the tax return was
filed or should have been filed whichever is the later
of the two events. Where the taxpayer did not file a
tax return or where the tax return filed is false or
fraudulent, then the Commissioner has a period of
ten (10) years from discovery of the failure to file a
tax return or from discovery of the fraud within
which to issue an assessment notice. The running
of the above prescriptive periods may however be
suspended under certain instances.
The notice of assessment must be issued
within the prescriptive period and must contain the
facts, law and jurisprudence relied upon by the
Commissioner. Otherwise it would not be valid.
f.
The taxpayer should then file an
administrative protest by filing a request for
reconsideration or reinvestigation within thirty (30)
days from receipt of the assessment notice.
The taxpayer could not immediately
interpose an appeal to the Court of Tax Appeals
because there is no decision yet of the
Commissioner that could be the subject of a review.
To be valid the administrative protest must
be filed within the prescriptive period, must show the
error of the Bureau of Internal Revenue and the
correct computations supported by a statement of
facts, and the law and jurisprudence relied upon by
the taxpayer. There is no need to pay under protest.
If the protest was not seasonably filed the
assessment becomes final and collectible and the
Bureau of Internal Revenue could use its
administrative and judicial remedies in collecting the
tax.
g. Within sixty (60) days from filing of the
protest, all relevant supporting documents shall be
submitted, otherwise the assessment shall become
final and collectible and the BIR could use its
administrative and judicial remedies to collect the
tax.
Once an assessment has become final and
collectible, not even the BIR Commissioner could
change the same. Thus, the taxpayer could not pay
the tax, then apply for a refund, and if denied appeal
the same to the Court of Tax Appeals.
h. If the protest is denied in whole or in
part, or is not acted upon within one hundred eighty
(180) days from the submission of documents, the
taxpayer adversely affected by the decision or
inaction may appeal to the Court of Tax Appeals
within thirty (30) days from receipt of the adverse
decision, or from the lapse of the one hundred
eighty (180-) day period, with an application for the

issuance of a writ of preliminary injunction to enjoin

the BIR from collecting the tax subject of the appeal.
If the taxpayer fails to so appeal, the
denial of the Commissioner or the inaction of the
Commissioner would result to the notice of
assessment becoming final and collectible and the
BIR could then utilize its administrative and judicial
remedies to collect the tax.
i.
A decision of a division of the Court of
Tax Appeals adverse to the taxpayer or the
government may be the subject of a motion for
reconsideration or new trial, a denial of which is
appealable to the Court of Tax Appeals en banc by
means of a petition for review.
The Court of Tax Appeals, has a period of
twelve (12) months from submission of the case for
decision within which to decide.
j.
If the decision of the Court of Tax
Appeals en banc affirms the denial of the protest by
the Commissioner or the assessment in case of
failure by the Commissioner to decide the taxpayer
must file a petition for review on certiorari with the
Supreme Court within fifteen (15) days from notice
of the judgment on questions of law. An extension
of thirty (30) days may for justifiable reasons be
granted. If the taxpayer does not so appeal, the
decision of the Court of Tax Appeals would become
final and this has the effect of making the
assessment also final and collectible. The BIR
could then use its administrative and judicial
remedies to collect the tax.

2.
The word assessment when
used in connection with taxation, may have
more than one meaning. More commonly the
word assessment means the official valuation of a
taxpayers property for purpose of taxation. The
above definition of assessment finds application
under tariff and customs taxation as well as local
government taxation.
For real property taxation, there may be a
special meaning to the burdens that are
imposed upon real properties that have been
benefited by a public works expenditure of a
local government. It is sometimes called a special
assessment or a special levy. (Commissioner of

47

an assessment by the tax authority to create the tax

liability.
The Tax Code follows the pay-as-you-file
system of taxation under which the taxpayer
computes his own tax liability, prepares the return,
and pays the tax as he files the return. The pay-asyou-file system is a self-assessing tax return.
Internal revenue taxes are self-assessing.
(Dissent of J. Carpio in Philippine National Oil Company v.
Court of Appeals, et al., G. R. No. 109976, April 26, 2005
and companion case)

A clear example of a self-assessed tax is the

annual income tax, which the taxpayer himself
computes and pays without the intervention of any
assessment by the BIR. The annual income tax
becomes due and payable without need of any prior
assessment by the BIR. The BIR may or may not
investigate or audit the annual income tax return
filed by the taxpayer. The taxpayers liability for the
income tax does not depend on whether or not the
BIR conducts such subsequent investigation or
audit.
However, if the taxing authority is first
required to investigate, and after such investigation
to issue the tax assessment that creates the tax
liability, then the tax is no longer self-assessed.
(Ibid.)

5. Sec. 6 (B) of the NIRC of 1997

allows the BIR to make or amend a tax
return from his own knowledge or obtained
through testimony or otherwise. Thus, the
Commissioner of Internal Revenue investigates any
circumstance which led him to believe that the
taxpayer had taxable income larger than that
reported. Necessarily, this inquiry would have to be
outside of the books because they supported the
return as filed. He may take the sworn testimony of
the taxpayer, he may take the testimony of third
parties; he may examine and subpoena, if
necessary, traders and brokers accounts and books
and the taxpayers books of accounts.
The
Commissioner is not bound to follow any set of
patterns. The existence of unreported income may
be shown by any particular proof that is available in
the circumstances of the particular situation.

Internal Revenue v. Pascor Realty and Development

Corporation, et al., G.R. No. 128315, June 29, 1999)

(Commissioner of Internal Revenue v. Hantex Trading

Co., Inc. G. R. No. 136975, March 31, 2005)

For internal revenue taxation assessment

as laying a tax. The ultimate purpose of an
assessment to such a connection is to ascertain the
amount that each taxpayer is to pay. (Ibid.)

6.
General rule:
When the
Commissioner of Internal Revenue may rely
on estimates. The rule is that in the absence of

3.
An assessment is a notice duly
sent to the taxpayer which is deemed made
only when the BIR releases, mails or sends
such notice to the taxpayer . (Commissioner of
Internal Revenue v. Pascor Realty and Development
Corporation, et al., G.R. No. 128315, June 29, 1999)

4.

Self-assessed tax, defined. A tax

that the taxpayer himself assesses or computes and

pays to the taxing authority. It is a tax that selfassessed by the taxpayer without the intervention of

accounting records of a taxpayer, his tax liability

may be determined by estimation. The petitioner
(Commissioner of Internal Revenue) is not required
to compute such tax liabilities with mathematical
exactness. Approximation in the calculation of taxes
due is justified.
To hold otherwise would be
tantamount to holding that skillful concealment is an
invincible barrier to proof. (Commissioner of Internal
Revenue v. Hantex Trading Co., Inc. G. R. No. 136975,
March 31, 2005)

However, the rule does not apply where the

estimation is arrived at arbitrarily and capriciously.
(Ibid.)

48

7.
Meaning of "best evidence
obtainable" under Sec. 6 (B), NIRC of 1997. This
means that the original documents must be
produced. If it could not be produced, secondary
evidence must be adduced. (Hantex Trading Co., Inc.
v. Commissioner of Internal Revenue, CA - G.R. SP No.
47172, September 30, 1998)

8. The following are the general

methods developed by the Bureau of
Internal Revenue for reconstructing a
taxpayers income where the records do not
show the true income or where no return was filed or
what was filed was a false and fraudulent return
(a) Percentage method;
(b) Net worth method.;
(c) Bank deposit method;
(d) Cash expenditure method;
(e) Unit and value method;
(f) Third party information or access to
records method;
(g) Surveillance and assessment method.
(Chapter XIII. Indirect Approach to Investigation,
Handbook on Audit Procedures and Techniques
Volume I, pp. 68-74)

9. Third party information or access

to records method. The BIR may require third
parties, public or private to supply information to the
BIR, and thus, obtain on a regular basis from any
person other than the person whose internal
revenue tax liability is subject to audit or
investigation, or from any office or officer of the
national and local governments, government
agencies and instrumentalities including the Bangko
Sentral ng Pilipinas and government-owned or
controlled corporations, any information such as, but
not limited to, costs and volume of production,
receipts or sales and gross incomes of taxpayers,
and the names , addresses, and financial
statements of corporations, mutual fund companies,
insurance
companies,
regional
operating
headquarters or multinational companies, joint
accounts, associations, joint ventures or consortia
and registered partnerships, and their members;
xxx [Sec. 5 (B), NIRC of 1997)

10. A pre-assessment notice is a

letter sent by the Bureau of Internal Revenue to a
taxpayer asking him to explain within a period of
fifteen (15) days from receipt why he should not be
the subject of an assessment notice. It is part of the
due process rights of a taxpayer.
As a general rule, the BIR could not issue an
assessment notice without first issuing a preassessment notice because it is part of the due
process rights of a taxpayer to be given notice in the
form of a pre-assessment notice, and for him to
explain why he should not be the subject of an
assessment notice.

11.
Instances where a preassessment notice is not required before a
notice of assessment is sent to the taxpayer.

a. When the finding for any deficiency tax is

the result of mathematical error in the computation
of the tax as appearing on the face of the return; or
b. When a discrepancy has been determined
between the tax withheld and the amount actually
remitted by the withholding agent; or
c. When a taxpayer opted to claim a refund
or tax credit of excess creditable withholding tax for
a taxable period was determined to have carried
over and automatically applied the same amount
claimed against the estimated tax liabilities for the
taxable quarter or quarters of the succeeding table
year; or
d. When the excess tax due on excisable
articles has not been paid; or
e. When an article locally purchased or
imported by an exempt person, such as, but not
limited to vehicles, capital equipment, machineries
and spare parts, has been sold, trade or transferred
to non-exempt persons. (Sec. 228, NIRC of 1997)

12.
Prescriptive periods for
making assessments of internal revenue
taxes.
a. Three (3) years from the last day within
which to file a return or when the return was actually
filed, whichever is later (Sec. 203, NIRC of 1997). The
CIR has three (3) years from the date of actual
filing of the tax return to assess a national internal
revenue tax or to commence court proceedings for
the collection thereof without an assessment.
[Bank of Philippine Islands (Formerly Far East Bank and
Trust Company) v. Commissioner of Internal Revenue,
G. R. No. 174942, March 7, 2008]

b. ten years from discovery of the failure

to file the tax return or discovery of falsity or fraud in
the return [Sec. 222 (a), NIRC of 1997[ ; or
c. within the period agreed upon between
the government and the taxpayer where there is a
waiver of the prescriptive period for assessment
(Sec. 222 (b), NIRC of 1997).

13.
taxation.

Purpose of period of limitations in

For the purpose of safeguarding

taxpayers from any unreasonable examination,
investigation or assessment, our tax law provides a
statute of limitations in the collection of taxes.
[Commissioner of Internal Revenue v. B.F. Goodrich Phils,
Inc., (now Sime Darby International Tire Co., Inc.), et al.,
G.R. No. 104171, February 24, 1999, 303 SCRA 546;
Philippine Journalists, Inc. v. Commissioner of Internal
Revenue, G. R. No. 162852, December 16, 2004], as well

as their assessments.
The law prescribing a limitation of actions for
the collection of the income tax is beneficial both to
the Government and to its citizens; to the
Government because tax officers would be obliged
to act promptly in the making of assessment, and to
citizens because after the lapse of the period of
prescription citizens would have a feeling of security
against unscrupulous tax agents who will always
find an excuse to inspect the books of taxpayers,
not to determine the latters real liability, but to take
advantage of every opportunity to molest peaceful,
law-abiding citizens. Without such a legal defense
taxpayers would furthermore be under obligation to

always keep their books and keep them open for

inspection subject to harassment by unscrupulous
tax agents. The law on prescription being a remedial
measure should be interpreted in a way conducive
to bringing about the beneficent purpose of affording
protection to the taxpayer within the contemplation
of the Commission which recommend the approval
of the law. [Bank of Philippine Islands (Formerly Far
East Bank and Trust Company) v. Commissioner of
Internal Revenue, G. R. No. 174942, March 7, 2008]

This mandate governs the question of

prescription of the governments right to assess
internal revenue taxes primarily to safeguard the
interests of taxpayers from unreasonable
investigation. Accordingly, the government must
assess internal revenue taxes on time so as not to
extend indefinitely the period of assessment and
deprive the taxpayer of the assurance that it will no
longer be subjected to further investigation for
taxes after the expiration of reasonable period of
time.
(Commissioner of Internal Revenue v. FMF
Development Corporation, G. R. No. 167765, June 30,
2008 citing Philippine Journalists, Inc. v. Commissioner
of Internal Revenue G.R. No. 162852, December 16,
2004, 447 SCRA 214, 225)

14.
Unreasonable
investigation
contemplates cases where the period for
assessment extends indefinitely because this
deprives the taxpayer of the assurance that it will
not longer be subjected to further investigation for
taxes after the expiration of a reasonable period of
time. (Philippine Journalists, Inc. v. Commissioner of
Internal Revenue, G. R. No. 162852, December 16, 2004
with note to see Republic v. Ablaza, 108 Phil. 1105. 1108)

Laws on prescription should be liberally

construed in favor of the taxpayer. Reason: for the
purpose of safeguarding taxpayers from an
unreasonable
examination,
investigation
or
assessment, our tax laws provide a statute of
limitation on the collection of taxes. Thus, the law on
prescription, being a remedial measure, should be
liberally construed in order to afford such protection,
As a corollary, the exceptions to the law on
prescription should perforce be strictly construed.
[Philippine Journalists, Inc. v. Commissioner of Internal
Revenue, G. R. No. 162852, December 16, 2004 citing
Commissioner of Internal Revenue v. B.F. Goodrich Phils,
Inc (now Sime Darby International Tire Co., Inc.),., et al.,
G.R. No. 104171, February 24, 1999, 303 SCRA 546]

The prescriptive period was precisely

intended to give the taxpayers peace of mind.
(Commissioner of Internal Revenue v. B.F. Goodrich
Phils., Inc., et al., G.R. No. 104171, February 24, 1999)

15.

A jeopardy assessment is a

delinquency tax assessment which was assessed

without the benefit of complete or partial audit by an
authorized revenue officer, who has reason to
believe that the assessment and collection of a
deficiency tax will be jeopardized by delay because
of the taxpayers failure to comply with the audit and
investigation requirements to present his books of
accounts and/or pertinent records, or to substantiate
all or any of the deductions, exemptions, or credits
claimed in his return. [Sec. 3.1 (a), Rev. Regs. No.
6-2000)

49

Jeopardy assessment is an indication of the

doubtful validity of the assessment, hence it may be
subject to a compromise. [Sec. 3.1 (a), Rev. Regs.
No. 6-2000]

16.
Requisites
for
Formal
Letter of Demand and Assessment Notice .
The formal letter of demand and assessment
notice shall be issued by the Commissioner or his
duly authorized representative.
The letter of
demand calling for payment of the taxpayers
deficiency tax or taxes shall state the facts, the law,
rules and regulations, or jurisprudence on which
the assessment is based, otherwise, the formal
letter of demand and assessment notice shall be
void. The same shall be sent to the taxpayer only
by registered mail or by personal delivery.

17. What are the requirements for

the validity of a formal letter of demand and
assessment notice ?
SUGGESTED ANSWER:
a. There must have been previously issued
a pre-assessment notice until excepted;
b. It must have been issued prior to the
prescriptive period; and
c. The letter of demand calling for payment
of the taxpayers deficiency tax or taxes shall state
the facts, the law, rules and regulations, or
jurisprudence on which the assessment is based,
otherwise, the formal letter of demand and
assessment notice shall be void. (Sec. 3.1.4, Rev.
Regs. No. 12-99)

18. What are the reasons for

presumption of correctness of assessments
?
SUGGESTED ANSWER:
a.
Lifeblood theory
b.
Presumption
of

regularity

(Commissioner of Internal Revenue v. Hantex Trading

Co., Inc., G, R. No. 136975, March 31, 2005) in the
performance of public functions. (Commissioner of
Internal Revenue v. Tuazon, Inc., 173 SCRA 397)

have

c.
The likelihood that the taxpayer will
access to the relevant information

[Commissioner of Internal Revenue, supra citing United

States v. Rexach, 482 F.2d 10 (1973). The certiorari was
denied by the United States Supreme Court on November
19, 1973]

d.
The desirability of bolstering the
record-keeping requirements of the NIRC. (Ibid.)

19. Give instances where prima facie

correctness of a tax assessment does not
apply.
SUGGESTED ANSWER: The prima facie
correctness of a tax assessment does not apply
upon proof that an assessment is utterly without
foundation, meaning it is arbitrary and capricious.
Where the BIR has come out with a naked
assessment i.e., without any foundation character,
the determination of the tax due is without rational
basis. [Commissioner of Internal Revenue v. Hantex
Trading Co., Inc., G, R. No. 136975, March 31, 2005

citing United States v. Janis, 49 L. Ed. 2d 1046 (1976);

428 US 433 (1976)]
In such a situation, the

determination of the Commissioner contained in a

deficiency notice disappears. [Commissioner of
Internal Revenue, supra citing a U.S. Court of Appeals
ruling, in Clark and Clark v. Commissioner of Internal
Revenue, 266 F. 2d 698 (1959)]
Hence, the

determination by the CTA must rest on all the

evidence introduced and its ultimate determination
must find support in credible evidence.
[Commissioner of Internal Revenue, supra]

20.

What are the instances that

suspends the running of the prescriptive
periods (Statute of Limitations) within which
to make an assessment and the beginning
of distraint or levy or of a proceeding in
court for the collection, in respect of any tax
deficiencies?
SUGGESTED ANSWER:
a.
When the Commissioner is prohibited
from making the assessment, or beginning distraint,
or levy or proceeding in court and for sixty (60) days
thereafter;
b.
When the taxpayer requests for and is
granted a reinvestigation by the commissioner;
c.
When the taxpayer could not be
located in the address given by him in the return
filed upon which the tax is being assessed or
collected;
d.
When the warrant of distraint and levy
is duly served upon the taxpayer, his authorized
representative, or a member of his household with
sufficient discretion, and no property could be
located; and
e.
When the taxpayer is out of the
Philippines.
NOTES AND COMMENTS:
The holding in Commissioner of Internal
Revenue v. Court of Appeals, et al., G.R. No.
115712, February 25, 1999 (Carnation case) that the
waiver of the period for assessment must be in
writing and have the written consent of the BIR
Commissioner is still doctrinal because of the
provisions of Sec. 223, NIRC of 1997 which
provides for the suspension of the prescriptive
period:

21.
Under RMO No. 20-90,
which implements Sections 203 and 222
(b), the following procedures should be
followed for a valid waiver of the
prescriptive period for an assessment:
a.
The waiver must be in the
proper form;
b.
The
waiver shall be signed by the taxpayer himself or
his duly authorized representative. In the case of a
corporation, the waiver must be signed by any of
its responsible officials.
Soon
after the waiver is signed by the taxpayer, the
Commissioner of Internal Revenue or the revenue
official authorized by him, as hereinafter provided,

50

shall sign the waiver indicating that the Bureau has

accepted and agreed to the waiver. The date of
such acceptance by the Bureau should be
indicated. Both the date of execution by the
taxpayer and date of acceptance by the Bureau
should be before the expiration of the period of
prescription or before the lapse of the period
agreed upon in case a subsequent agreement is
executed.
c.
The
following
revenue officials are authorized to sign the waiver.
A.

In

the

National Office
xxxx
3.
Commissioner
For
involving more than P1M
In the Regional Offices

tax

cases
B.

1.
The
Revenue District Officer with respect to tax
cases still pending investigation and the
period to assess is
about
to
prescribe
regardless of amount.
xxxx
d.
The waiver must
be executed in three (3) copies, the original copy
to be attached to the docket of the case, the
second copy for the taxpayer and the third copy
for the Office accepting the waiver. The fact of
receipt by the taxpayer of his/her file copy shall
be indicated in the original copy.
d.
The
foregoing procedures shall be strictly followed.
Any revenue official found not to have complied
with this Order resulting in prescription of the right
to assess/collect shall be administratively dealt
with. (Renumbering and emphasis supplied.)
If the above are not followed there is no
valid waiver and prescription would run.
(Commissioner of Internal Revenue v. FMF Development
Corporation, G. R. No. 167765, June 30, 2008 citing
Philippine Journalists, Inc. v. Commissioner of Internal
Revenue G.R. No. 162852, December 16, 2004, 447
SCRA 214, 228-229)

22. The procedures in RMO No. 2090 are NOT merely directory and that the
execution of a waiver is a renunciation of a
taxpayers
right to invoke prescription.
RMO No. 20-90 must be strictly followed. A
waiver of the statute of limitations under the NIRC,
to a certain extent being a derogation of the
taxpayers right to security against prolonged and
unscrupulous investigations, must be carefully and
strictly construed. The waiver of the statute of
limitations does not mean that the taxpayer
relinquishes the right to invoke prescription
unequivocally, particularly where the language of the
document is equivocal.
Thus a waiver becomes unlimited in time,
and invalid, because it did not specify a definite
date, agreed upon between the BIR and the
taxpayer, within which the former may assess and
collect taxes. It also would have no binding effect
on the taxpayer if there was no consent by the

Commissioner. On this basis, no implied consent

can be presumed, nor can it be contended that the
concurrence to such waiver is a mere formality.
(Commissioner of Internal Revenue v. FMF Development
Corporation, G. R. No. 167765, June 30, 2008 citing
Philippine Journalists, Inc. v. Commissioner of Internal
Revenue G.R. No. 162852, December 16, 2004, 447
SCRA 214, 229 in turn citing Id. at 229, citing
Commissioner of Internal Revenue v. Court of Appeals,
G.R. No. 115712, February 25, 1999, 303 SCRA 614,
620-622.)

23. BIR cannot rely on its invocation

of the rule that the government cannot be
estopped by the mistakes of its revenue
officers in the enforcement of RMO No. 20-90
because the law on prescription should be interpreted
in a way conducive to bringing about the beneficent
purpose of affording protection to the taxpayer within
the contemplation of the Commission which
recommended the approval of the law. To the
Government, its tax officers are obliged to act
promptly in the making of assessment so that
taxpayers, after the lapse of the period of
prescription, would have a feeling of security against
unscrupulous tax agents who will always try to find an
excuse to inspect the books of taxpayers, not to
determine the latters real liability, but to take
advantage of a possible opportunity to harass even
law-abiding businessmen.
Without such legal
defense, taxpayers would be open season to
harassment
by
unscrupulous
tax
agents.
[Commissioner of Internal Revenue v. FMF Development
Corporation, G. R. No. 167765, June 30, 2008 citing
Republic of the Phils. v. Ablaza, 108 Phil. 1105, 1108
(1960)]

24.
The signatures of both the
Commissioner and the taxpayer, are
required for a waiver of the prescriptive
period, thus a unilateral waiver on the part of the
taxpayer does not suspend the prescriptive period.
[Commissioner of Internal Revenue v. Court of Appeals, et
al., G.R. No. 115712, February 25, 1999 (Carnation case)]

47. The act of requesting a

reinvestigation alone does not suspend the
running of the prescriptive period. The
request for reinvestigation must be granted
by the CIR. The Supreme Court declared that
the burden of proof that the request for
reinvestigation had been actually granted shall be
on the Commissioner of Internal Revenue. Such
grant may be expressed in its communications with
the taxpayer or implied from the action of the
Commissioner or his authorized representative in
response to the request for reinvestigation. [Bank
of Philippine Islands (Formerly Far East Bank and Trust
Company) v. Commissioner of Internal Revenue, G. R.
No. 174942, March 7, 2008]

PROTESTING INTERNAL REVENUE TAX

ASSESSMENTS

51

1. What is the presumption that flows

from a taxpayers failure to protest an
assessment ?
SUGGESTED ANSWER: Tax assessments
by tax examiners are presumed correct and made in
good faith. The taxpayer has the duty to prove
otherwise.
In the absence of proof of any
irregularities in the performance of duties, an
assessment duly made by a Bureau of Internal
Revenue examiner and approved by his superior
officers will not be disturbed. All presumptions are in
favor of the correctness of tax assessments.
(Commissioner of Internal Revenue v. Bank of Philippine
Islands., G, R. No. 134062, April 17, 2007 citing Sy Po v.
Court of Appeals, G. R. No. L-81446, 18 August 1988,
164 SCRA 524, 530, citations omitted)

2. What are the two ways of

protesting an assessment notice for an
internal revenue tax ? Alternatively, what are
the two types of protests ? Explain briefly.
SUGGESTED ANSWER:
a.
Request for reconsideration which
refers to a plea for re-evaluation of an assessment
on the basis of existing records without need of
additional evidence. It may involve both a question
of fact or of law or both.
b.
Request for reinvestigation which
refers to a plea for re-evaluation of an assessment
on the basis of newly-discovered evidence or
additional evidence that a taxpayer intends to
present in the investigation. It may also involve a
question of fact or law or both. (Commissioner of
Internal Revenue v. Philippine Global Communication, Inc.,
G. R. No. 167146, October 31, 2006 citing Rev. Regs. No.
12-85)

3. What is that type of protest that

suspends the running of the statute of
limitations for the beginning of distraint or
levy or a proceeding in court for collection ?
Why ?
SUGGESTED ANSWER: It is that type of
protest when the taxpayer requests for a
reinvestigation
which
is
granted
by the
Commissioner (Sec. 223, NIRC of 1997), that
suspends the running of the statute of limitations for
collection of the tax.
(Commissioner of Internal
Revenue v. Philippine Global Communication, Inc., G. R.
No. 167146, October 31, 2006 citing Sec. 271, now Sec.
223, NIRC of 1997) When a taxpayer demands a

reinvestigation, the time employed in reinvestigation

should be deducted from the total period of
limitation. [Commissioner of Internal Revenue, supra
citing Republic v. Lopez, 117 Phil. 575, 578; 7 SCRA 566,
568-569 (1963)]

Undoubtedly, a reinvestigation, which entails

the reception and evaluation of additional evidence,
will take more time than a reconsideration of a tax
assessment which will be limited to the evidence
already at hand; this justifies why the former can
suspend the running of the statute of limitations on
collection of the assessed tax, while the latter
cannot. (Commissioner of Internal Revenue v. Philippine
Global Communication, Inc., G. R. No. 167146, October
31, 2006 citing Bank of Philippine Islands v. Commissioner

of Internal Revenue, G. R. No. 139736, 17 October 2005,

473 SCRA 205, 230-231)

4. What are the requirements for

the validity of a taxpayers protest ?
SUGGESTED ANSWER:
a.
It must be filed within the reglementary
period of thirty (30) days from receipt of the notice
of assessment.
b.
The taxpayer must not only show the
errors of the Bureau of Internal Revenue but also
the correct computation through
1)
A statement of the facts, the
applicable law, rules and regulations, or
jurisprudence on which the taxpayers protest
is based,
2)
If there are several issues
involved in the disputed assessment and the
taxpayer fails to state the facts, the applicable
law, rules and regulations, or jurisprudence in
support of his protest against some of the
several issues on which the assessment is
based, the same shall be considered
undisputed issue or issues, in which case, the
taxpayer shall be required to pay the
corresponding deficiency tax or taxes
attributable thereto. (Sec. 3.1.5, Rev. Regs.
12-99)
c.
Within sixty (60) days from filing of the
protest, the taxpayer shall submit all relevant
supporting documents. [4th par., Sec. 228 (e), NIRC of
1997]

5.
Relevant
supporting
documents, defined.
The term relevant
supporting documents should be understood as
those documents necessary to support the legal
basis in disputing a tax assessment as determined
by the taxpayer. The BIR can only inform the
taxpayer to submit additional documents.
The BIR cannot demand what type of
supporting documents should be submitted.
Otherwise, a taxpayer will be at the mercy of the
BIR, which may require the production of
documents that a taxpayer cannot submit.
(Commissioner of Internal Revenue v. First Express
Pawnshop Company, Inc., G. R. 172045-46, June 16, 2009)

JUDICIAL
REMEDIES
INVOLVING
PROTESTED ASSESSMENTS
1. Acts of BIR Commissioner that
may be considered as denial of a protest
which serve as basis for appeal to the Court
of Tax Appeals.
a.
Filing by the BIR of a civil suit for
collection of the deficiency tax is considered a
denial of the request for reconsideration.
(Commissioner of Internal Revenue v. Union Shipping
Corporation, 185 SCRA 547)

b.
An indication to the taxpayer by the
Commissioner in clear and unequivocal language
of his final denial not the issuance of the warrant of
distraint and levy. What is the subject of the appeal
is the final decision not the warrant of distraint. (Ibid.)

52

c.
A BIR demand letter sent to the
taxpayer after his protest of the assessment notice
is considered as the final decision of the
Commissioner on the protest. (Surigao Electric Co.,
Inc. v. Court of Tax Appeals, et al., 57 SCRA 523)

d.
A letter of the BIR Commissioner
reiterating to a taxpayer his previous demand to pay
an assessment is considered a denial of the request
for reconsideration or protest and is appealable to
the Court of Tax Appeals. (Commissioner v. Ayala
Securities Corporation, 70 SCRA 204)

e.
Final notice before seizure considered
as commissioners decision of taxpayers request for
reconsideration who received no other response.
Commissioner of Internal Revenue v. Isabela
Cultural Corporation, G.R. No. 135210, July 11,
2001 held that not only is the Notice the only
response received: its content and tenor supports
the theory that it was the CIRs final act regarding
the request for reconsideration. The very title
expressly indicated that it was a final notice prior to
seizure of property. The letter itself clearly stated
that the taxpayer was being given this LAST
OPPORTUNITY to pay; otherwise, its properties
would be subjected to distraint and levy.

2. The taxpayer seasonably protested

the
assessment
issued
by
the
Commissioner of Internal Revenue. During
the pendency of the protest the CIR issued a
warrant of distraint and levy to collect the
taxes subject of the protest.
As counsel what advice shall you give
the taxpayer. Explain briefly your answer.
SUGGESTED ANSWER:
The taxpayer
should appeal, by way of a petition for review, to
the Court of Tax Appeals not on the ground of the
denial of the protest but on other matter arising
under the provisions of the National Internal
Revenue Code. The actual issuance of a warrant of
distraint and levy in certain cases cannot be
considered a final decision on a disputed
assessment.
To be a valid decision on a disputed
assessment, the decision of the Commissioner or
his duly authorized representative shall (a) state the
facts, the applicable law, rules and regulations, or
jurisprudence on which such decision is based,
otherwise, the decision shall be void, in which case
the same shall not be considered a decision on the
disputed assessment; and (b) that the same is his
final decision. (Sec. 3.1.6, Rev. Regs. 12-99)
These conditions are not complied with by the mere
issuance of a warrant of distraint and levy.
(Commissioner of Internal Revenue v. Union Shipping
Corp., 185 SCRA 547)

Furthermore, a motion for the suspension of

the collection of the tax may be filed together with
the petition for review (Sec. 3, Rule 10, RRCTA
effective December 15, 2005) because the collection of
the tax may jeopardize the interest of the taxpayer.

3.
As a general rule, there must
always be a decision of the Commissioner
of Internal Revenue or Commissioner of

53

Customs before the Court of Tax Appeals,

would have jurisdiction. If there is no such
decision, the petition would be dismissed for lack of
jurisdiction unless the case falls under any of the
following exceptions.

4.
Instances where the Court of
Tax Appeals would have jurisdiction even if
there is no decision yet by the
Commissioner of Internal Revenue:
a. Where the Commissioner has not acted
on the disputed assessment after a period of 180
days from submission of complete supporting
documents, the taxpayer has a period of 30 days
from the expiration of the 180 day period within
which to appeal to the Court of Tax Appeals. (last
par., Sec. 228 (e), NIRC of 1997; Commissioner of
Internal Revenue v. Isabela Cultural Corporation, G.R. No.
135210, July 11, 2001)

b. Where the Commissioner has not acted

on an application for refund or credit and the two
year period from the time of payment is about to
expire, the taxpayer has to file his appeal with the
Court of Tax Appeals before the expiration of two
years from the time the tax was paid.
It is disheartening enough to a taxpayer to
be kept waiting for an indefinite period for the
ruling,. It would make matters more exasperating
for the taxpayer if the doors of justice would be
closed for such a relief until after the Commissioner,
would have, at his personal convenience, given his
go signal. (Commissioner of Customs, et al, v. Court of
Tax Appeals, et al., G.R. No. 82618, March 16, 1989,
unrep.)

5. The characteristic of a BIR denial

of a protest such as would enable the
taxpayer to appeal the same to the Court of
Tax Appeals. The Commissioner of Internal
Revenue should always indicate to the taxpayer in
clear and unequivocal language whenever his action
on an assessment questioned by a taxpayer
constitutes his final determination on the disputed
assessment.
On the basis of his statement indubitably
showing that the Commissioners communicated
action is his final decision on the contested
assessment, the aggrieved taxpayer would then be
able to take recourse to the tax court at the
opportune time. Without needless difficulty, the
taxpayer would be able to determine when his right
to appeal to the tax court accrues. (Commissioner of
Internal Revenue v. Bank of the Philippines Islands, G. R.
No. 134062, April 17, 2007)

COLLECTION OF INTERNAL REVENUE

TAXES
1.
General rule: Collection of taxes
is imprescriptible. While this may be so, statutes
may provide for periods of prescription,

2.
Why is the collection of taxes
imprescriptible ?
SUGGESTED ANSWER:

a.
As a general rule, revenue laws are not
intended to be liberally construed, and exemptions
are not given retroactive application, considering
that taxes are the lifeblood of the government and in
Holmes memorable metaphor, the price we pay for
civilization, tax laws must be faithfully and strictly
implemented. (Commissioner of Internal Revenue v.
Acosta, etc.,G. R. No. 154068, August 3, 2007)
However, statutes may provide for prescriptive
periods for the collection of particular kinds of taxes.

b.
Tax laws, unlike remedial laws, are not
to be applied retroactively. Revenue laws are
substantive laws and their application must not be
equated with remedial laws. (Acosta, supra)

3.
What is the prescriptive period
for collecting internal revenue taxes ?
SUGGESTED ANSWER: There are four (4)
prescriptive periods for the collection of an internal
revenue tax:
a.
Collection upon a false or fraudulent
return or no return without assessment. In case of a
false or fraudulent return with the intent to evade tax
or of failure to file a return, a proceeding in court for
the collection of such tax may be filed without
assessment, at any time within ten (10) years after
the discovery of the falsity, fraud or omission. [Sec.
222 (a), NIRC of 1997]

b.
Collection upon a false or fraudulent
return or no return with assessment. Any internal
revenue tax which has been assessed (because the
return is false or fraudulent with intent to evade tax
or of failure to fail a return), within a period of ten
(10) years from discovery of the falsity, fraud or
omission may be collected by distraint or levy or
by a proceeding in court within five (5) years
following the assessment of the tax. [Sec. 222
(c), in relation to Sec. 222 (a) NIRC of 1997, emphasis
supplied]

c.
Collection
upon
an
extended
assessment. Where a tax has been assessed with
the period agreed upon between the Commissioner
and the taxpayer in writing (which should initially be
within three (3) years from the time the return was
filed or should have been filed), or any extensions
before the expiration of the period agreed upon, the
tax may be collected by distraint or levy or by a
proceeding in court within the period agreed
upon in writing before the expiration of the five
(5) year period. The period so agreed upon may be
extended by subsequent written agreements made
before the expiration of the period previously agreed
upon. [Sec. 222 (d), in relation to Secs. 222 (b) and
203, NIRC of 1997, emphasis supplied]

d.
Collection upon a return that is not
false or fraudulent, or where the assessment is not
an extended assessment. Except as provided in
Section 222, internal revenue taxes shall be
assessed within three (3) years after the last day
prescribed by law for the filing of the return, and no
proceeding in court without assessment for the
collection of such taxes shall be begun after the
expiration of such period; Provided, That in case
where a return is filed beyond the period prescribed
by law, the three (3) year period shall be computed
from the day the return was filed. For purposes of

this Section, a return filed before the last day

prescribed by law for the filing thereof shall be
considered filed on such last day. (Sec. 203, NIRC of
1997, emphasis supplied)

When the BIR validly issues an assessment

within the three (3)-year period, it has another three
(3) years within which to collect the tax due by
distraint, levy, or court proceeding.
The
assessment of the tax is deemed made and the
three (3)-year period for collection of the assessed
tax begins to run on the date the assessment
notice had been released, mailed or sent to the
taxpayer. [Bank of Philippine Islands (Formerly Far
East Bank and Trust Company) v. Commissioner of
Internal Revenue, G. R. No. 174942, March 7, 2008
citing BPI v. Commissioner of Internal Revenue, G.R.
No. 139736, 17 October 2005, 473 SCRA 205, 222-223]

NOTES AND COMMENTS:

a.
Both the former Sec. 269, NIRC of
1977 and Sec.222 of NIRC of 1997 do not refer
to a regular return. It is clear that in enacting
Sec. 222, entitled Exceptions as to the period of
limitation of assessment and collection of taxes,
the NIRC of 1997 has eliminated sub-paragraph c of
the former Sec. 269 of the NIRC, also entitled
Exceptions as to the period of limitation of
assessment and collection of taxes. Said Sec. 269
(c), reads Any internal revenue tax which has been
assessed within the period of limitation aboveprescribed may be collected by distraint or levy or
by a proceeding in court within three years following
the assessment of the tax.
A perusal of Sec. 222 of the NIRC is clear
that it covers only three scenarios only. 1) No
assessment was made upon a false or fraudulent
return or omission to file a return;
2)
an
assessment was made upon a false or fraudulent
return or omission to file a return; and 3) an
extended assessment issued within a period agreed
upon by the Commissioner and the taxpayer. The
same scenarios are those referred to in the former
Sec. 269 which provided for a prescriptive period for
collection of three (3) years.
It is clear therefore that neither Sec. 222 nor
the former Sec. 269 provide for an instance where
the assessment was made upon a regular return or
one that is not false or fraudulent, or that there was
an agreement to extend the period for assessment.
Resort should therefore be made to the three
(3) year period referred to in Sec. 203 of the NIRC
of 1997 which reads, Except as provided in
Section 222, internal revenue taxes shall be
assessed within three (3) years after the last day
prescribed by law for the filing of the return, and no
proceeding in court without assessment for the
collection of such taxes x x x (paraphrasing and
emphasis supplied)

4. What is a compromise ?
SUGGESTED ANSWER: A compromise is a
contract whereby the parties, by making reciprocal
concessions, avoid a litigation or put an end to one
already commenced. (Art. 2028, Civil Code)
A compromise penalty could not be
imposed by the BIR, if the taxpayer did not agree. A
compromise being, by its nature, mutual in essence

54

requires agreement. The payment made under

protest could only signify that there was no
agreement that had effectively been reached
between the parties. (Vda. de San Agustin, et al., v.
Commissioner of Internal Revenue, G. R. No. 138485,
September 10, 2001)

5.
What tax cases may be the
subject of a compromise ?
SUGGESTED ANSWER: The following
cases may, upon taxpayers compliance with the
basis for compromise, be the subject matter of
compromise settlement:
a. Delinquent accounts;
b. Cases under administrative protest
after issuance of the Final Assessment Notice to the
taxpayer which are still pending in the Regional
Offices, Revenue District Offices, Legal Service,
Large Taxpayer Service (LTS), Collection Service,
Enforcement Service and other offices in the
National Office;
c.
Civil tax cases being disputed before
the courts;
d.
Collection cases filed in courts;
e.
Criminal violations, other than those
already filed in court, or those involving criminal tax
fraud. (Sec. 2, Rev. Regs. No. 30-2002)

6. What tax cases could not be the

subject of compromise ?
SUGGESTED ANSWER:
a. Withholding tax cases unless the
applicant-taxpayer invokes provisions of law that
cast doubt on the taxpayers obligation to withhold.;
b. Criminal tax fraud cases, confirmed as
such by the Commissioner of Internal Revenue or
his duly authorized representative;
c. Criminal violations already filed in
court;
d. Delinquent
accounts
with
duly
approved schedule of installment payments;
e. Cases where
final
reports of
reinvestigation or reconsideration have been issued
resulting to reduction in the original assessment and
the taxpayer is agreeable to such decision by
signing the required agreement form for the
purpose. On the other hand, other protested cases
shall be handled by the Regional Evaluation Board
(REB) or the National Evaluation Board (NEB) on a
case to case basis;
f.
Cases which become final and
executory after final judgment of a court where
compromise is requested on the ground of doubtful
validity of the assessment; and
g. Estate tax cases where compromise is
requested on the ground of financial incapacity of
the taxpayer. (Sec. 2, Rev. Regs. No. 30-2002)

7. When may the Commissioner of

Internal Revenue compromise the payment
of any internal revenue tax ? Alternatively,
what are the grounds for a compromise, and
what are the amounts for which a
compromise may be entered into ?
SUGGESTED ANSWER:

a. A reasonable doubt as to the validity of

the claim against the taxpayer exists provided that
the minimum compromise entered into is equivalent
to forty percent (40%) of the basic tax; or
b. The financial position of the taxpayer
demonstrates a clear inability to pay the assessed
tax provided that the minimum compromise entered
into is equivalent to ten percent (10%) of the basic
assessed tax
In the above instances the Commissioner is
allowed to enter into a compromise only if the basic
tax involved does not exceed One million pesos
(P1,000,000.00), and the settlement offered is not
less than the prescribed percentages. [Sec. 204 (A),
NIRC of 1997]

In instances where the Commissioner is not

authorized, the compromise shall be subject to the
approval of the Evaluation Board composed of the
Commissioner
and
the
four
(4)
Deputy
Commissioners.

When is the Commissioner of

Internal Revenue authorized to abate or
cancel a tax liability ?:

8.

SUGGESTED ANSWER:
a. The tax or any portion thereof appears to
be unjustly or excessively assessed; or
b. The administration and collection costs
involved do not justify the collection of the amount
due. [Sec. 204 (B), NIRC of 1997]

9.
The collection of a tax may not
be suspended. Only the Court of Tax Appeals
may issue an order suspending the collection of a
tax.

10. As a general rule, No court shall

have the authority to grant an injunction to
restrain the collection of any national
internal revenue tax, fee or charge. (Sec.
218, NIRC)

No appeal taken to the CTA from the

decision of the Commissioner of Internal Revenue
or the Commissioner of Customs or the Regional
Trial Court, provincial, city or municipal treasurer or
the Secretary of Finance, the Secretary of Trade
and Industry and Secretary of Agriculture, as the
case may be shall suspend the payment, levy,
distraint, and/or sale of any property of the taxpayer
for the satisfaction of his tax liability as provided by
existing law: Provided, however, That when in the
opinion of the Court the collection by the
aforementioned
government
agencies
may
jeopardize the interest of the Government and/or the
taxpayer the Court at any stage of the proceeding
may suspend the said collection and require the
taxpayer either to deposit the amount claimed or to
file a surety bond for not more than double the
amount with the Court. (Sec. 11, Rep. Act No. 1125,
as amended by Sec. 9, Rep. Act No. 9282 )

The Supreme Court may enjoin the collection

of taxes under its general judicial power but it should
be apparent that the source of the power is not
statutory but constitutional.

55

11. What is the procedure

suspension of collection of taxes ?

for

SUGGESTED ANSWER:
Where the
collection of the amount of the taxpayers liability,
sought by means of a demand for payment, by
levy, distraint or sale of property of the taxpayer, or
by whatever means, as provided under existing
laws, may jeopardize the interest of the
government or the taxpayer, an interested party
may file a motion for the suspension of the
collection of the tax liability (Sec. 1, Rule 10, RRCTA
effective December 15, 2005) with the Court of Tax
Appeals.
The motion for suspension of the collection
of the tax may be filed together with the petition for
review or with the answer, or in a separate motion
filed by the interested party at any stage of the
proceedings. (Sec. 3, Rule 10, RRCTA effective
December 15, 2005)

REFUND
TAXES

OF

INTERNAL

REVENUE

1. What are the grounds for refund

or credit of internal revenue taxes ?
SUGGESTED ANSWER: The grounds for
refund or credit or internal revenue taxes are the
following:
a.
The tax was illegally collected. There
is no law that authorizes the collection of the tax.
b.
The tax was excessively collected.
There is a law that authorizes the collection of a tax
but the tax collected was more than what the law
allows.
c.
The tax was paid through a mistaken
belief that the taxpayer should pay the tax (solution
indebeti)

2. What are the three (3) conditions

for the grant of a claim for refund of
creditable withholding tax ?
SUGGESTED ANSWER:
a.
The claim
is filed
with the
Commissioner of Internal Revenue within the twoyear period from the date of the payment of the tax.
b.
It is shown on the return of the
recipient that the income payment received was
declared as part of the gross income; and
c.
The fact of withholding is established
by a copy of a statement duly issued by the payee
showing the amount paid and the amount of tax
withheld therefrom.
(Banco Filipino Savings and
Mortgage Bank v. Court of Appeals, et al., G. R. No.
155682, March 27, 2007)

NOTES AND COMMENTS:

a.
Proof of fact of withholding. Sec.
10. Claim for tax credit or refund. (a) Claims for
Tax Credit or Refund of Income tax deducted and
withheld on income payments shall be given due
course only when it is shown on the return that the
income payment received has been declared as part
of the gross income and the fact of withholding is
established by a copy of the Withholding Tax
Statement duly issued by the payor to the payee
showing the amount paid and the amount of the tax

withheld therefrom xxx (Rev. Regs. No. 6-85, as

amended)
The document which may be accepted as
evidence of the third condition, that is, the fact of
withholding, must emanate from the payor itself, and
not merely from the payee, and must indicate the
name of the payor, the income payment basis of the
tax withheld, the amount of the tax withheld and the
nature of the tax paid. (Banco Filipino Savings and
Mortgage Bank v. Court of Appeals, et al., G. R. No.
155682, March 27, 2007)

3.
What should be established by a
taxpayer for the grant of a tax refund ?
Why ?
SUGGESTED ANSWER: A taxpayer needs
to establish not only that the refund is justified under
the law, but also the correct amount that should be
refunded.
If the latter requisite cannot be ascertained
with particularity, there is cause to deny the refund,
or allow it only to the extent of the sum that is
actually proven as due.
Tax refunds partake of the nature of tax
exemptions and are thus construed strictissimi juris
against the person claiming the exemption. The
burden in proving the claim for refund necessarily
falls on the taxpayer. (Far East Bank Trust and
Company, etc., v. Commissioner of Internal Revenue , et

56

It is only when the return, covering the

whole year, is filed that the taxpayer will be able to
ascertain whether a tax is still due or refund can be
claimed based on the adjusted and audited figures.
(Bank of the Philippine Islands v. Commissioner of Internal
Revenue, G.R. No. 144653, August 28, 2001)

7. What is solutio
applied to tax cases ?

indebeti

as

SUGGESTED ANSWER:
Under the
principle of solutio indebiti provided in Art. 2154,
Civil Code, If something is received when there is
no right to demand it, and it was unduly delivered
through mistake, the obligation to return it arises.
The BIR received something when there [was] no
right to demand it, and thus, it has the obligation
to return it. [State Land Investment Corporation v.
Commissioner of Internal Revenue, G. R. No.
171956, January 18, 2008citing Citibank, N. A. v.
Court of Appeals and Commissioner of Internal
Revenue, G.R. No. 107434, October 10, 1997, 280
SCRA 459, in turn citing Ramie Textiles, Inc. v.
Mathay, Sr., 89 SCRA 586 (1979)]. It is an ancient
principle that no one, not even the state, shall
enrich oneself at the expense of another. Indeed,
simple justice requires the speedy refund of the
wrongly held taxes. (Ibid.)

al., G. R. No. 138919, May 2, 2006)

4.

What is The legal remedy under

the NIRC of 1997 at the judicial level with
respect to refund or recovery of tax
erroneously or illegally collected ?
SUGGESTED ANSWER: Filing of a suit or
proceeding with the Court of Tax Appeals
a.
before the expiration of two (2) years
from the date of payment of the tax regardless of
any supervening cause that may arise after payment
(2nd par., Sec. 229, NIRC of 1997) , or
b.
within thirty (30) days from receipt of
the denial by the Commissioner of the application
for refund or credit. (Sec. 11, R.A. No. 1125)

56. What are the reasons for requiring

the filing of an administrative application for
refund or credit with the BSUGGESTED

8.
Why is it necessary to file an
administrative claim for refund with the BIR,
before filing a case with the Court of Tax
Appeals ?

5. The two (2) year period and the

thirty (30) day period should be applied on a
whichever comes first basis. Thus, if the 30
days is within the 2 years, the 30 days applies, if the
2 year period is about to lapse but there is no
decision yet by the Commissioner which would
trigger the 30-day period, the taxpayer should file an
appeal, despite the absence of a decision.
(Commissioners, etc. v. Court of Tax Appeals, et al., G. R.
No. 82618, March 16, 1989, unrep.)

6.
Where the taxpayer is a
corporation the two year prescriptive period
from date of payment for refund of income
taxes should be the date when the
corporation filed its final adjustment return
not on the date when the taxes were paid on a
quarterly basis. (Philippine Bank of Communications v.
Commissioner of Internal Revenue, et al., G.R. No.
112024, January 28, 1999)

a.
opportunity

to

To afford the Commissioner an

correct his errors or that of

subordinate officers.

(Gonzales v. Court of Tax

Appeals, et al., 14 SCRA79)

b. To notify the Government that such

taxes have been questioned and the notice should
be borne in mind in estimating the revenue available
for expenditures.

57

SUGGESTED ANSWER: Yes. The failure to first

file a written claim for refund or credit is not fatal to
a petition for review involving a disputed
assessment where an assessment was disputed but
the protest was

denied by the Bureau of Internal Revenue.

To hold that the taxpayer has now lost the right to
appeal from the ruling on the disputed assessment
and require him to file a claim for a refund of the
taxes paid as a condition precedent to his right to
appeal, would in effect require of him to go through
a useless and needless ceremony that would only
delay the disposition of the case, for the
Commissioner would certainly disallow the claim for
refund in the same way as he disallowed the protest
against the assessment. The law, should not be
interpreted as to result in absurdities . (vda. de San
Agustin., etc., v. Commissioner of Internal Revenue, G.R.
No. 138485, September 10, 2001 citing Roman Catholic
Archbishop of Cebu v. Collector of Internal Revenue, 4
SCRA 279) NOTE: Reconciliation between above

two numbers (8 and 9). An application for refund

or credit under Sec. 229 of the NIRC of 1997 is
required where the case filed before the CTA is a
refund case, which is not premised upon a disputed
assessment. There is no need for a prior application
for refund or credit, if the refund is merely a
consequence of the resolution of the BIRs denial of
a protested assessment.

Who could apply for a tax refund or

credit ?

10. Who could apply for a refund

or credit ?
SUGGESTED ANSWER: The person who
paid the tax may apply for a refund or credit.
A withholding tax agent may also apply for a
refund. In a sense, he is also a taxpayer because
the tax may be collected from him if he does not
withhold.

11.
What is the nature of the
taxpayers remedy of either to ask for a
refund of excess tax payments or to apply
the same in payment of succeeding taxable
periods taxes ?

SUGGESTED ANSWER: Sec. 69 of the

1977 NIRC (now Sec. 76 of the NIRC of 1997)
provides that any excess of the total quarterly
payments over the actual income tax computed in
the adjustment or final corporate income tax return,
shall either (a) be refunded to the corporation, or (b)
may be credited against the estimated quarterly
income tax liabilities for the quarters of the
succeeding taxable year. To ease the administration
of tax collection, these remedies are in the
alternative and the choice of one precludes the
other. Since the Bank has chosen the tax credit
approach it cannot anymore avail of the tax refund.
(Philippine
Bank
of
Communications
v.
Commissioner of Internal Revenue, et al., G.R. No.
112024, January 28, 1999)
NOTES AND COMMENTS:
a.
The choice, is given to the taxpayer,
whether to claim for refund under Sec. 76 or
have its excess taxes applied as tax credit for the
succeeding taxable year, such election is not final.
Prior verification and approval by the Commissioner
of Internal Revenue is required. The availment of
the remedy of tax credit is not absolute and
mandatory. It does not confer an absolute right on
the part of the taxpayer to avail of the tax credit
scheme if it so chooses. Neither does it impose a
duty on the part of the government to sit back and
allow an important facet of tax collection to be at the
sole control and discretion of the taxpayer. (Paseo
Realty & Development Corporation v. Court of
Appeals, et al., G. R. No. 119286, October 13, 2004)

12. What is the irrevocability rule

in claims for refund and what is the rationale
behind this ?
SUGGESTED ANSWER:
A corporation
entitled to a tax credit or refund of the excess
estimated quarterly income taxes paid has two
options: (1) to carry over the excess credit or (2) to
apply for the issuance of a tax credit certificate or
to claim a cash refund. If the option to carry over
the excess credit is exercised, the same shall be
irrevocable for that taxable period.
In exercising its option, the corporation must
signify in its annual corporate adjustment return (by
marking the option box provided in the BIR form)
its intention either to carry over the excess credit or
to claim a refund. To facilitate tax collection, these
remedies are in the alternative and the choice of
one precludes the other. [Systra Philippines, Inc., v.
Commissioner of Internal Revenue, G. R. No. 176290,
September 21, 2007 citing Philippine Bank of
Communications v. Commissioner of Internal Revenue,
361 Phil. 916 (1999)]

This is known as the irrevocability rule and

is embodied in the last sentence of Section 76 of
the Tax Code. The phrase such option shall be
considered irrevocable for that taxable period
means that the option to carry over the excess tax
credits of a particular taxable year can no longer be
revoked.
The rule prevents a taxpayer from claiming
twice the excess quarterly taxes paid: (1) as
automatic credit against taxes for the taxable
quarters of the succeeding years for which no tax

58

credit certificate has been issued and (2) as a tax

credit either for which a tax credit certificate will be
issued or which will be claimed for cash refund.
(Systra Philippines, Inc., supra citing De Leon, Hector,
THE NATIONAL INTERNAL REVENUE CODE, Seventh
Edition, 2000, p. 430)

13. In the year 2000 Systra derived

excess tax credits and exercised the option
to carry them over as tax credits for the
next taxable year. However, the tax due for
the next taxable year is lower than excess
tax credits. It now applies for a refund of
the unapplied tax credits. May its refund
be granted ? If the refund is denied, does
Systra lose the unapplied tax credits ?
Explain briefly your answer.
SUGGESTED ANSWER: Systras claim for
refund should be denied. Once the carry over
option was made, actually or constructively, it
became forever irrevocable regardless of whether
the excess tax credits were actually or fully utilized
Under Section 76 of the Tax Code, a claim for
refund of such excess credits can no longer be
made. The excess credits will only be applied
against income tax due for the taxable quarters of
the succeeding taxable years.
Despite the denial of its claim for refund,
Systra does not lose the unapplied tax credits. The
amount will not be forfeited in favor of the
government but will remain in the taxpayers
account. Petitioner may claim and carry it over in
the succeeding taxable years, creditable against
future income tax liabilities until fully utilized.
(Systra Philippines, Inc., v. Commissioner of Internal
Revenue, G. R. No. 176290, September 21, 2007 citing
Philam Asset Management, Inc. v. Commissioner of
Internal Revenue, G.R. Nos. 156637/162004, 14
December 2005, 477 SCRA 761)

Supposing in the above problem that

Systra permanent ceased operations, what
happens to the unapplied credits ?
SUGGESTED ANSWER:
Where, the
corporation permanently ceases its operations
before full utilization of the tax credits it opted to
carry over, it may then be allowed to claim the
refund of the remaining tax credits. In such a case,
the remaining tax credits can no longer be carried
over and the irrevocability rule ceases to apply.
Cessante ratione legis, cessat ipse lex. (Footnote
no. 23, Systra Philippines, Inc., v. Commissioner of
Internal Revenue, G. R. No. 176290, September
21, 2007)
NOTES AND COMMENTS: The holding in
State
Land
Investment
Corporation
v.
Commissioner of Internal Revenue, G. R. No.
171956, January 18, 2008 that the taxpayer is
entitled to a refund because during the succeeding
year there was no tax due against which the excess
tax credits may be applied is not doctrinal. This is
so because it interpreted the provisions of then
Sec. 69 of the NIRC, which did not provide for the
irrevocability rule now contained in Sec. 76 of the
NIRC of 1997.

59

14. A simultaneous filing of the

application with the BIR for refund/credit
and the institution of the court suit with the
CTA is allowed. There is no need to wait for a BIR
denial. REASONS:
a. The positive requirement of Section 230
NIRC (now Sec. 229, NIRC of 1997);
b.
The doctrine that delay of the
Commissioner in rendering decision does not extend
the peremptory period fixed by the statute;
c. The law fixed the same period two years
for filing a claim for refund with the Commissioner
under Sec. 204, par. 3, NIRC (now Sec. 204 [C],
NIRC of 1997), and for filing suit in court under Sec.
230, NIRC (now Sec. 229, NIRC of 1997), unlike in
protests of assessments under Sec. 229 (now Sec.
228, NIRC of 1997), which fixed the period (thirty
days from receipt of decision) for appealing to the
court, thus clearly implying that the prior decision of
the Commissioner is necessary to take cognizance
of the case. (Commissioner of Internal Revenue v. Bank
of Philippine Islands, etc. et al., CA-G.R. SP No. 34102,
September 9, 1994; Gibbs v. Collector of Internal
Revenue, et al., 107 Phil, 232; Johnston Lumber Co. v.
CTA, 101 Phil. 151)

15. The grant of a refund is founded

on the assumption that the tax return is
valid, i.e. that the facts stated therein are true and
correct. (Commissioner of Internal Revenue v.
Court of Tax Appeals, G. R. No. 106611, July 21,
1994, 234 SCRA 348) Without the tax return it
would be virtually impossible to determine whether
the proper taxes have been assessed and paid.
After all, it is axiomatic that a claimant has the
burden of proof to establish the factual basis of his
or her claim for tax credit or refund. Tax refunds,
like tax exemptions, are construed strictly against
the taxpayer. (Paseo Realty & Development Corporation
v. Court of Appeals, et al., G. R. No. 119286, October 13,
2004)

However, in BPI-Family Savings Bank v.

Court of Appeals, 386 Phil. 719; 326 SCRA 641
(2000), refund was granted, despite the failure to
present the tax return, because other evidence was
presented to prove that the overpaid taxes were not
applied. (Ibid.)

16. Discuss the difference between

tax refund and tax credit..
SUGGESTED ANSWER:
There are
unmistakable formal and practical differences
between the two modes. Formally, a tax refund
requires a physical return of the sum erroneously
paid by the taxpayer, while a tax credit involves the
application of the reimbursable amount against any
sum that may be due and collectible from the
taxpayer.
On the practical side, the taxpayer to whom
the tax is refunded would have the option, among
others, to invest for profit the returned sum, an
option not proximately available if the taxpayer
chooses instead to receive a tax credit.
(Commissioner of Customs v. Philippine Phosphate
Fertilizer Corporation, G. R. No. 144440, September 1,
2004)

NOTES AND COMMENTS: It may be that

there is no essential difference between a tax refund
and a tax credit since both are moves of recovering
taxes erroneously or illegally paid to the
government. (Commissioner of Customs v. Philippine
Phosphate Fertilizer Corporation, G. R. No. 144440,
September 1, 2004)

17. A bank-trustee of employee

trusts filed an application for the refund of
taxes withheld on the interest incomes of
the investments made of the funds of the
employees trusts. Instead of presenting
separate accounts for interest incomes
made of these investments, the banktrustee instead presented witness to
establish that it would next to impossible to
single out the specific transactions
involving the employees trust funds from
the totality of all interest income from its
total investments. On the above basis will
the application for refund prosper ?
SUGGESTED ANSWER:
No.
The
application for refund will not prosper.
The bank-trustee needs to establish not only
that the refund is justified under the law (which is
so because incomes of employees trusts are tax
exempt), but also the correct amount that should
be refunded.
Tax refunds partake of the nature of tax
exemptions and are thus construed strictissimi juris
against the person or entity claiming the
exemption. The burden in proving the amount to
be refunded necessarily falls on the bank-trustee,
and there is an apparent failure to do so.
A necessary consequence of the special
exemption enjoyed alone by employees trusts
would be a necessary segregation in the
accounting of such income, interest or otherwise,
earned from those trusts from that earned by the
other clients of the bank-trustee. (Far East Bank
and Trust Company, etc., v. Commissioner, etc., et
al., G.R. No. 138919, May 2, 2006) The amounts
that are the exempt earnings of the employees
trust has not been shown as they have been
commingled with the interest income of the other
clients of the bank-trustee.

18. CTA Circular No. 1-95 clearly

requires that photocopies of the receipts or
invoices
must
be
pre-marked
and
submitted to the CTA to verify the
correctness of the summary listing and the
CPA certification. CTA Circular No. 1-95, issued
on 25 January 1995, reads:
1.
The party who desires to introduce as
evidence such voluminous documents must
present: (a) Summary containing the total amount/s
of the tax account or tax paid for the period
involved and a chronological or numerical list of
the numbers, dates and amounts covered by the
invoices or receipts; and (b) a Certification of an
independent Certified Public Accountant attesting
to the correctness of the contents of the summary

after making an examination and evaluation of the

voluminous receipts and invoices. Such summary
and certification must properly be identified by a
competent witness from the accounting firm.
2. The method of individual presentation of
each and every receipt or invoice or other
documents for marking, identification and
comparison with the originals thereof need not be
done before the Court or the Commissioner
anymore after the introduction of the summary and
CPA certification. It is enough that the receipts,
invoices and other documents covering the
said accounts or payments must be pre-marked
by the party concerned and submitted to the
Court in order to be made accessible to the
adverse party whenever he/she desires to
check and verify the correctness of the
summary and CPA certification. However, the
originals of the said receipts, invoices or
documents should be ready for verification and
comparison in case doubt on the authenticity of the
particular documents presented is raised during the
hearing of the case. (Emphasis supplied)

19. Manila Electric Company a

grantee of a legislative franchise under Act
No. 484, as amended by Republic Act No.
4159 and Presidential Decree No. 551, 1[3]
had been paying a 2% franchise tax based
on its gross receipts, in lieu of all other
taxes and assessments of whatever nature.
Upon the effectivity of Executive Order No.
72 on February 10, 1987, however,
respondent became subject to the payment
of regular corporate income tax.
For the last quarter ending December
31, 1987, respondent filed on April 15, 1988
its tentative income tax reflecting a
refundable amount of P101,897,741, but
only P77,931,812 was applied as tax credit
for the succeeding taxable year 1988.
Acting on a yearly routinary Letter of
Authority No. 0018064 NA dated June 27,
1988 issued by petitioner, directing the
investigation of tax liabilities of respondent
for taxable year 1987, an investigation was
conducted by Revenue Officer Frederick
Capitan which showed that respondent was
liable for 1. deficiency income tax in the
amount of P2,340,902.52; and 2. deficiency
franchise
tax
in
the
amount
of
P2,838,335.84.
On April 17, 1989, respondent filed an
amended final corporate Income Tax
Return ending December 31, 1988
reflecting
a
refundable
amount
of
P107,649,729.
Respondent thus filed on March 30,
1990 a letter-claim for refund or credit in
the amount of P107,649,729 representing
1

60

overpaid income taxes for the years 1987

and 1988.
Petitioner not having acted on its
request, respondent filed on April 6, 1990 a
judicial claim for refund or credit with the
Court of Tax Appeals.
It is gathered that respondent paid the
deficiency franchise tax in the amount of
P2,838,335.84. It protested the payment of
the alleged deficiency income tax and
claimed as an alternative remedy the
deduction thereof from its claim for refund
or credit.
The Court of Tax Appeals granted the
P107,649,729 claim for refund, or in the
alternative for the BIR to issue a tax credit.
Is the Court of Tax Appeals correct ?
SUGGESTED ANSWER: Yes. Section 69
of the National Internal Revenue Code of 1986,
now Sec. 76 provides, if the sum of the quarterly
tax payments made during a taxable year is not
equal to the total tax due on the entire taxable
income of that year as shown in its final adjustment
return, the corporation has the option to either: (a)
pay the excess tax still due, or (b) be refunded the
excess amount paid. The returns submitted are
merely pre-audited which consist mainly of
checking mathematical accuracy of the figures in
the return. After such checking, the purpose of
which being to insure prompt action on corporate
annual income tax returns showing refundable
amounts arising from overpaid quarterly income
taxes, (Revenue Memorandum Order No. 32-76
dated June 11, 1976) the refund or tax credit is
granted. (Commissioner of Internal Revenue v.
Manila Electric Company, G. R. No. 121666,
October 10, 2007)

TARIFF AND CUSTOMS LAWS

ORGANIZATION AND FUNCTIONS OF
THE BUREAU OF INTERNAL REVENUE
TARIFF AND CUSTOMS CODE
1. When does importation begin,
and why is it important to know whether
importation has already begun or not ?
SUGGESTED ANSWER:
Importation
begins when the conveying vessel or aircraft enters
the jurisdiction of the Philippines with intention to
unlade therein. (Sec. 1202, TCCP)
The jurisdiction of the Bureau of Customs to
enforce the provisions of the TCCP including seizure
and forfeiture also begins from the beginning of
importation. Thus, the Bureau of Customs obtains
jurisdiction over imported articles only after
importation has begun.

2.
When
is
importation
deemed terminated and why is it important

61

to know whether importation has already

ended?
SUGGESTED ANSWER:
Importation is
deemed terminated upon payment of the duties,
taxes and other charges due upon the agencies, or
secured to be paid, at the port of entry and the legal
permit for withdrawal shall have been granted.
In case the articles are free of duties, taxes
and other charges, until they have legally left the
jurisdiction of the customs. (Sec. 1202, TCCP) The
Bureau of Customs loses jurisdiction to enforce the
TCCP and to make seizures and forfeitures after
importation is deemed terminated.

3. The flexible tariff clause is a

provision in the Tariff and Customs Code,
which implements the constitutionally delegated
power to the Congress to further delegate to the
President of the Philippines, in the interest of
national economy, general welfare and/or national
security upon recommendation of the NEDA (a) to
increase, reduce or remove existing protective rates
of import duty, provided that, the increase should not
be higher than 100% ad valorem; (b) to establish
import quota or to ban imports of any commodity,
and (c) to impose additional duty on all imports not
exceeding 10% ad valorem, among others.

4.
Customs duties defined. Customs
duties is the name given to taxes on the importation
and exportation of commodities, the tariff or tax
assessed upon merchandise imported from, or
exported to, a foreign country. (Nestle Phils. v.
Court of Appeals, et al., G.R. No. 134114, July 6,
2001)
5.
Special customs duties are
additional import duties imposed on specific
kinds of imported articles under certain
conditions. The special customs duties under the
Tariff and Customs Code (TCCP) are the antidumping duty, the countervailing duty, the
discriminatory duty, and the marking duty, and under
the Safeguard Measures Act (SMA) additional tariffs
as safeguard measures.

6. The special customs duties are

imposed for the protection of consumers
and manufacturers, as well as Philippine
products.

7. Dumping duty is an additional

special duty amounting to the difference
between the export price and the normal
value of such product, commodity or article
(Sec. 301 (s) (1), TCC, as amended by Rep. Act No.
8752, Anti-Dumping Act of 1999.) imposed on the

importation of a product, commodity or article of

commerce into the Philippines at less than its
normal value when destined for domestic
consumption in the exporting country which is
causing or is threatening to cause material injury to
a domestic industry, or materially retarding the
establishment of a domestic industry producing the

like product. [Sec. 301 (s) (5), TCC, as amended by

Rep. Act No. 8752, Anti-Dumping Act of 1999]

8. When is the anti-dumping duty

imposed ?
SUGGESTED ANSWER: The anti-dumping
duty is imposed
a. Where a product, commodity or article of
commerce is exported into the Philippines at a price
less than its normal value when destined for
domestic consumption in the exporting country,
b. and such exportation is causing or is
threatening to cause material injury to a domestic
industry, or materially retards the establishment of a
domestic industry producing the like product. [Sec.
301 (a), TCC, as amended by Rep. Act No. 8752, AntiDumping Act of 1999]

9.
Normal value for purposes of
imposing the anti-dumping duty is the
comparable price at the date of sale of like product,
commodity, or article in the ordinary course of trade
when destined for consumption in the country of
export. [Sec. 301 (s) (3 ), TCC, as amended by
Rep. Act No. 8752, Anti-Dumping Act of 1999]

10. The imposing authority for the

anti-dumping duty is the Secretary of Trade
and Industry in the case of non-agricultural
product, commodity, or article or the
Secretary of Agriculture, in the case of
agricultural product, commodity or article,
after formal investigation and affirmative finding of
the Tariff Commission. [Sec. 301 (a), TCC, as amended
by Rep. Act No. 8752, Anti-Dumping Act of 1999]

11. Even when all the requirements

for the imposition have been fulfilled, the
decision on whether or not to impose a
definitive anti-dumping duty remains the
prerogative of the Tariff Commission. [Sec.
301 (a), TCC, as amended by Rep. Act No. 8752, AntiDumping Act of 1999] Thus, the cabinet secretaries

could not contravene the recommendation of the

Tariff Commission. They could not impose the antidumping duty or any special customs duty without
the favorable recommendation of the Tariff
Commission.

12. In the determination of whether to

impose the anti-dumping duty, the Tariff
Commission, may consider among others,
the effect of imposing an anti-dumping duty
on the welfare of the consumers and/or the
general public, and other related local
industries. (Sec. 301 (a), TCC, as amended by Rep.
Act No. 8752, Anti-Dumping Act of 1999)

13. The amount of anti-dumping duty

that may be imposed is the difference
between the export price and the normal
value of such product, commodity or article.
(Sec. 301 (s) (1), TCC, as amended by Rep. Act No.
8752, Anti-Dumping Act of 1999)

The anti-dumping duty shall be equal to the

margin of dumping on such product, commodity or
article thereafter imported to the Philippines under
similar circumstances, in addition to ordinary duties,
taxes and charges imposed by law on the imported
product, commodity or article.

14. What are countervailing duties

and when are they imposed ?
SUGGESTED ANSWER:
Countervailing
duties are additional customs duties imposed on any
product, commodity or article of commerce which is
granted directly or indirectly by the government in
the country of origin or exportation, any kind or form
of specific subsidy upon the production,
manufacture or exportation of such product
commodity or article, and the importation of such
subsidized product, commodity, or article has
caused or threatens to cause material injury to a
domestic industry or has materially retarded the
growth or prevents the establishment of a domestic
industry. (Sec. 302, TCCP as amended by Section
1, R.A. No. 8751)

15. The imposing authority for the

countervailing duties is the Secretary of
Trade and Industry in the case of nonagricultural product, commodity, or article
or the Secretary of Agriculture, in the case
of agricultural product, commodity or
article, after formal investigation and affirmative
finding of the Tariff Commission.
Even when all the requirements for the
imposition have been fulfilled, the decision on
whether or not to impose a definitive anti-dumping
duty remains the prerogative of the Tariff
Commission. (Sec. 301 (a), TCC, as amended by Rep.
Act No. 8752, Anti-Dumping Act of 1999)

16.
The countervailing duty is
equivalent to the value of the specific
subsidy.

17. Marking duties are the additional

customs duties imposed on foreign articles (or its
containers if the article itself cannot be marked), not
marked in any official language in the Philippines, in
a conspicuous place as legibly, indelibly and
permanently in such manner as to indicate to an
ultimate purchaser in the Philippines the name of
the country of origin.
18. The Commissioner of Customs
imposes the marking duty.
19. The marking duty is equivalent to
five percent (5%) ad valorem.

20. A discriminatory duty is a new

and additional customs duty imposed upon articles
wholly or in part the growth or product of, or
imported in a vessel, of any foreign country which
imposes, directly or indirectly, upon the disposition
or transportation in transit through or re-exportation

62

from such country of any article wholly or in part the

growth or product of the Philippines, any
unreasonable charge, exaction, regulation or
limitation which is not equally enforced upon like
articles of every foreign country, or discriminates
against the commerce of the Philippines, directly or
indirectly, by law or administrative regulation or
practice, by or in respect to any customs, tonnage,
or port duty, fee, charge, exaction, classification,
regulation, condition, restriction or prohibition, in
such manner as to place the commerce of the
Philippines at a disadvantage compared with the
commerce of any foreign country.

21. The President of the Philippines

imposes the discriminatory duties.

22.
Safeguard measures are
emergency measures, including tariffs, to protect
domestic industries and producers from increased
imports which inflict or could inflict serious injury on
them.
The CTA is vested with jurisdiction to review
decisions of the Secretary of Trade and Industry
imposing safeguard measures as provided under
Rep. Act No. 8800 the Safeguard Measures Act
(SMA). (Southern Cross Cement Corporation v. The
Philippine Cement Manufacturers Corp., et al., G. R. No.
158540, July 8, 2004)

The DTI Secretary cannot impose the

safeguard measures if the Tariff Commission does
not favorably recommend its imposition.

23. Imposing authority for safeguard

measures. The imposing authority for the
countervailing duties is the Secretary of
Trade and Industry in the case of nonagricultural product, commodity, or article
or the Secretary of Agriculture, in the case
of agricultural product, commodity or
article, after formal investigation and affirmative
finding of the Tariff Commission.

24. Safeguards measures that may

be imposed. Additional tariffs, import quotas or
banning of imports.

25. The basis of dutiable value of

merchandise that is subject to ad valorem
customs duties is the transaction value,
which shall be the price actually paid or payable for
the goods when sold for export to the Philippines,
adjusted by adding certain cost elements to the
extent that they are incurred by the buyer but are not
included in the price actually paid or payable for the
imported goods, and may include the following:
a.
Cost of containers and packing,
b.
Insurance, and
c.
Freight. (Sec. 201, TCC as amended
by Sec. 1, Rep. Act No. 9135)

26. The above transaction value is

the primary method of determining dutiable
value.
If the transaction value of the

63

imported article could not be determined

using the above, the following alternative
methods should be used one after the
other:
a.
b.
c.
d.
e.

Transaction value of identical goods

Transaction value of similar goods
Deductive method
Computed method
Fallback method

27. How and to whom should claims

for refund of customs duties be made ?
SUGGESTED ANSWER:
All claims for
refund of duties shall be made in writing and
forwarded to the Collector of Customs to whom such
duties are paid, who upon receipt of such claim,
shall verify the same by the records of his Office,
and if found to be correct and in accordance with
law, shall certify the same to the Commissioner of
Customs with his recommendation together with all
necessary papers and documents. Upon receipt by
the Commissioner of such certified claim he shall
cause the same to be paid if found correct. (Sec.
1708, TCC)

28.
What is mean by the term
entry in Customs Law ?
SUGGESTED ANSWER: It has a triple
meaning.
a.
the documents filed at the Customs
house;
b.
the submission and acceptance of the
documents; and
c.
Customs declaration forms or customs
entry forms required to be accomplished by
passengers of incoming vessels or passenger
planes as envisaged under Sec. 2505 of the TCCP
(Failure to declare baggage). (Jardeleza v. People,
G.R. No. 165265, February 6, 2006)

29. A flight stewardess arrived from

Singapore. Upon her arrival she was asked
whether she has anything to declare. She
answered none, and she submitted her
Customs Baggage Declaration Form
which she accomplished and signed with
nothing or written on the space for items to
be declared. When her hanger bag was
examined some pieces of jewelry were
found concealed within the lining of said
bag.
She was then convicted of violating of
Sec. 3601 of the Tariff and Customs Code
for unlawful importation which penalizes
any person who shall fraudulently import or
bring into the Philippines any article
contrary to law.
She now appeals claiming that lower
court erred n convicting her under Sec.
3601 when the facts alleged both in the
information and those shown by the
prosecution constitute the offense under

Sec. 2505 Failure to Declare Baggage, of

which she was acquitted. Is she correct ?
SUGGESTED ANSWER: No. Sec. 3601
does not define a crime. It merely provides, inter
alia, the administrative remedies which can be
resorted to by the Bureau of Customs when seizing
dutiable articles found the baggage of any person
arriving in the Philippines which is not included in
the accomplished baggage declaration submitted to
the customs authorities, and the administrative
penalties that such person must pay for the release
of such goods if not imported contrary to law.
Such
administrative
penalties
are
independent of the criminal liability for smuggling
that may be imposed under Sec. 3601, and other
provisions of the TCC which can only be determined
after the appropriate criminal proceedings,
prescinding from the outcome in any administrative
case that may have been filed and disposed of by
the customs authorities.
Indeed the second paragraph of Sec. 2505
provides that nothing shall prevent the bringing of a
criminal action against the offender for smuggling
under Section 3601. (Jardeleza v. People, G. R.
No. 165265, February 6, 2006)

30.
Payment is not a defense in
smuggling. When upon trial for violation of this
section, the defendant is shown to have possession
of the article in question, possession shall be
deemed sufficient evidence to authorize conviction,
unless the defendant shall explain the possession to
the satisfaction of the court: Provided, however,
That payment of the tax due after apprehension
shall not constitute a valid defense in any
prosecution under this section. (last par., Sec.
3601, TCC)

31.

How is smuggling committed ?

SUGGESTED ANSWER:
Smuggling is
committed by any person who:
a.
fraudulently imports or brings into the
country any article contrary to law;
b.
assists in so doing any article contrary
to law; or
c.
receives, conceals, buys, sells or in
any manner facilitates the transportation,
concealment or sale of such goods after
importation, knowing the same to have been
imported contrary to law. (Jardeleza v. People,
G.R. No. 165265, February 6, 2006 citing
Rodriguez v. Court of Appeals, G. R. No. 115218,
September 18, 1995, 248 SCRA 288, 296)
NOTES AND COMMENTS:
a.
Importation consists of bringing an
article into the country from the outside.
Importation begins when the conveying vessel or
aircraft enters the jurisdiction of the Philippines
with intention to unload therein.
b.
When unlawful importation is
complete. In the absence of a bona fide intent to
make entry and pay duties when the prohibited
article enters the Philippine territory. Importation is
complete when the taxable, dutiable commodity is
brought within the limits of the port of entry. Entry

through a custom house is not the essence of the

act.
(Jardeleza v. People, G.R. No. 165265,
February 6, 2006)

32. The Collector of Customs

sitting in seizure and forfeiture proceedings
has exclusive jurisdiction to hear and
determine all questions touching on the
seizure and forfeiture of dutiable goods.
RTCs are precluded from assuming
cognizance over such matters even through
petitions of certiorari, prohibition or
mandamus. (The Bureau of Customs, et al., v.
Ogario, et al., G.R. No. 138081, March 20, 2000)

What is the rationale for this doctrine ?

SUGGESTED ANSWER:
a.
Regional Trial Courts have no
jurisdiction to replevin a property which is subject to
seizure and forfeiture proceedings for violation of
the Tariff and Customs Code otherwise, actions for
forfeiture of property for violation of the Customs
laws could easily be undermined by the simple
device of replevin. (De la Fuente v. De Veyra, et al.,
120 SCRA 455)
b.
The doctrine of exclusive customs
jurisdiction over customs cases to the exclusion of
the RTCs is anchored upon the policy of placing no
unnecessary hindrance on the governments drive,
not only to prevent smuggling and other frauds upon
Customs,
c.
but more importantly, to render
effective and efficient the collection of import and
export duties due the State, which enables the
government to carry out the functions it has been
instituted to perform. (Jao, et al., v. Court of
Appeals, et al., and companion case, 249 SCRA 35,
43)
d.
The issuance by regular courts of writs
of preliminary injunction in seizure and forfeiture
proceedings before the Bureau of Customs may
arouse suspicion that the issuance or grant was for
consideration other than the strict merits of the case.
(Zuno v. Cabredo, 402 SCRA 75 [2003])
e. Under the doctrine of primary jurisdiction,
the Bureau of Customs has exclusive administrative
jurisdiction to conduct searches, seizures and
forfeitures of contraband without interference from
the courts. It could conduct searches and seizures
without need of a judicial warrant except if the
search is to be conducted in a dwelling place.
Where an administrative office has obtained
a technical expertise in a specific subject, even the
courts must defer to this expertise.
NOTES AND COMMENTS: The Bureau of
Customs could search and seize articles without
need of a judicial warrant unless the place to be
searched is a dwelling place. In such a case
customs requires a judicial warrant.

33. A claiming to be the owner of

a vessel which is the subject of customs
warrant of seizure and detention sought the
intercession of the RTC to restrain the
Bureau of Customs from interfering with

64

his property rights over the vessel. Would

the suit prosper?
SUGGESTED ANSWER: No. His remedy
was not with the RTC but with the CTA, as issues of
ownership of goods in the custody of customs
officials are within the power of the CTA to
determine.
The Collector of Customs has exclusive
jurisdiction over seizure and forfeiture proceedings
and trial courts are precluded from assuming
cognizance over such matters even through
petitions for certiorari, prohibition or mandamus.
(Commissioner of Customs v. Court of Appeals, et
al., G. R. Nos. 111202-05, January 31, 2006)

34. The customs authorities do not

have to prove to the satisfaction of the court
that the articles on board a vessel were
imported from abroad or are intended to be
shipped abroad before they may exercise
the power to effect customs searches,
seizures, or arrests provided by law and
continue with the administrative hearings.
(The Bureau of Customs, et al., v. Ogario, et al.,
G.R. No. 138081, March 20, 2000)

35. The Tariff and Customs Code allows

the Bureau of Customs to resort to the
administrative remedy of seizure, such as
by enforcing the tax lien on the imported
article when the imported articles could be
found and be subject to seizure and
forfeiture.
36. The Tariff and Customs Code allows
the Bureau of Customs to resort to the judicial
remedy of filing an action in court when the
imported articles could not anymore be
found.

37.

Section 2301 of the TCCP

states that seized articles may not be
released under bond if there is prima facie
evidence of fraud in their importation.
Commissioner of Customs v. Court of Tax Appeals,
et al., G. R. No. 171516-17, February 13, 2009
Section 2301. Warrant for Detention of
Property-Cash Bond. Upon making any seizure,
the Commissioner shall issue a warrant for the
detention of the property; and if the owner or
importer desires to secure the release of the
property for legitimate use, the Collector shall, with
the approval of the Commissioner of Customs,
surrender it upon the filing of a cash bond, in an
amount fixed by him, conditioned upon the
payment of the appraised value of the article
and/or any fine, expenses and costs which may be
adjudged in the case: Provided, That such
importation shall not be released under any
bond when there is prima facie evidence of
fraud in the importation of the article: Provided,
further, That articles the importation of which is
prohibited by law shall not be released under any

circumstances whatsoever: Provided, finally, That

nothing in this section shall be construed as
relieving the owner or importer from any criminal
liability which may arise from any violation of law
committed in connection with the importation of the
article. (emphasis supplied)

38. Instances where there is no right

of redemption of seized and forfeited
articles:
a.
There is fraud;
b.
The
importation
is
absolutely
prohibited, or
c.
The release of the property would be
contrary to law. (Transglobe International, Inc. v. Court of
Appeals, et al., G.R. No. 126634, January 25, 1999 )

39.
In Aznar v. Court of Tax Appeals, 58
SCRA 519, reiterated in Farolan, Jr. v. Court of Tax
appeals, et al., 217 SCRA 298, the Supreme Court
clarified that the fraud contemplated by law
must be actual and not constructive. It must
be intentional, consisting of deception, willfully and
deliberately done or resorted to in order to induce
another to give up some right.

40.
Requisites for forfeiture of
imported goods:
a.
Wrongful making by the owner,
importer, exporter or consignee of any declaration or
affidavit, or the wrongful making or delivery by the
same person of any invoice, letter or paper all
touching on the importation or exportation of
merchandise.
b.
the falsity of such declaration, affidavit,
invoice, letter or paper; and
c.
an intention on the part of the
importer/consignee to evade the payment of the
duties due. (Republic, etc., v. The Court of Appeals,
et al., G.R. No. 139050, October 2, 2001)

41. On January 7, 1989, the vessel

M/V Star Ace, coming from Singapore
laden with cargo, entered the Port of San
Fernando, La Union for needed repairs.
When the Bureau of Customs later became
suspicious that the vessels real purpose in
docking was to smuggle cargo into the
country, seizure proceedings were instituted
and subsequently two Warrants of Seizure
and Detention were issued for the vessel
and its cargo.
Cesar does not own the vessel or any
of its cargo but claimed a preferred maritime
lien. Cesar then brought several cases in
the RTC to enforce his lien. Would these
suits prosper ?
SUGGESTED ANSWER: No. The Bureau of
Customs having first obtained possession of the
vessel and its goods has obtained jurisdiction to the
exclusion of the trial courts.
When Cesar has impleaded the vessel as a
defendant to enforce his alleged maritime lien, in

65

the RTC, he brought an action in rem under the

Code of Commerce under which the vessel may be
attached and sold.
However, the basic operative fact is the
actual or constructive possession of the res by the
tribunal empowered by law to conduct the
proceedings. This means that to acquire jurisdiction
over the vessel, as a defendant, the trial court must
have obtained either actual or constructive
possession over it. Neither was accomplished by
the RTC as the vessel was already in the possession
of the Bureau of Customs. (Commissioner of
Customs v. Court of Appeals, et al., G. R. Nos.
111202-05, January 31, 2006)
NOTES AND COMMENTS:
a.
Forfeiture of seized goods in the
Bureau of Customs is in the nature of a
proceeding in rem, i.e. directed against the res or
imported goods and entails a determination of the
legality of their importation. In this proceeding, it is
in legal contemplation the property itself which
commits the violation and is treated as the offender,
without reference whatsoever to the character or
conduct of the owner.
The issue is limited to whether the imported
goods should be forfeited and disposed of in
accordance with law for violation of the Tariff and
Customs Code. .(Transglobe International, Inc. v.
Court of Appeals, et al., G.R. No. 126634, January
25, 1999)
Forfeiture of seized goods in the Bureau of
Customs is a proceeding against the goods and not
against the owner. (Asian Terminals, Inc. v. BautistaRicafort, G .R. No. 166901, October 27, 2006 citing
Transglobe)

42. The Collector of Customs upon

probable cause that the articles are
imported or exported, or are attempted to be
imported or exported, in violation of the
tariff and customs laws shall issue a warrant
of seizure. (Sec. 6, Title III, CAO No. 9-93)
If the search and seizure is to be conducted in
a dwelling place, then a search warrant should be
issued by the regular courts not the Bureau of
Customs.
There may be instances where no warrants
issued by the Bureau of Customs or the regular
courts is required, as in search and seizures of
motor vehicles and vessels.

43. Smuggled goods seized by virtue

of a court warrant should be surrendered to
the court that issued the warrant and not to
the Bureau of Customs because the goods are
in custodia legis.

44. Decisions of the Commissioner

of Customs in cases involving liability for
customs duties, fees or other money
charges that must be appealed to the
Court of Tax Appeals Division within thirty
(30) days from receipt specifically refer to his
decisions on administrative tax protest cases, as

stated in Section 2402 of the Tariff and Customs

Code of the Philippines (TCCP):
Section 2402. Review by
Court of Tax Appeals. The party
aggrieved by a ruling of the
Commissioner in any matter
brought
before
him
upon
protest or by his action or ruling in
any case of seizure may appeal to
the Court of Tax Appeals, in the
manner and within the period
prescribed by law and regulations.
Unless an appeal is made to the Court of Tax
Appeals in the manner and within the period
prescribed by laws and regulations, the action or
ruling of the Commissioner shall be
final
and
conclusive. [Emphasis supplied.] (Pilipinas Shell
Petroleum Corporation v. Commissioner of Customs, G.
R. No. 176380, June 18, 2009)

45. Administrative tax protest under

the Tariff and Customs Code (TCCP). A tax
protest case, under the TCCP, involves a protest of
the liquidation of import entries. (Pilipinas Shell
Petroleum Corporation v. Commissioner of Customs, G.
R. No. 176380, June 18, 2009)

46. Liquidation, defined. A liquidation

is the final computation and ascertainment by the
collector of the duties on imported merchandise,
based on official reports as to the quantity,
character, and value thereof, and the collectors
own finding as to the applicable rate of duty; it is
akin to an assessment of internal revenue taxes
under the National Internal Revenue Code where
the tax liability of the taxpayer is definitely
determined. (Pilipinas Shell Petroleum Corporation v.
Commissioner of Customs, G. R. No. 176380, June 18,
2009)

47. The following letters of demand

can not be considered as a liquidation or
an assessment of Shells import tax
liabilities that can be the subject of an
administrative tax protest proceeding
before the Commissioner of Customs
whose decision is appealable to the Court
of Tax Appeals:
a.
the One Stop Shop Inter-Agency Tax
Credit and Duty Drawback Center (the Center)
November 3 letter, signed by the Secretary of
Finance, informing it of the cancellation of the Tax
Credit Certificates (TCCs);
b.
the Commissioner of Customs
November 19 letter requiring Shell to replace the
amount equivalent to the amount of the cancelled
TCCs used by Shell; and
c.
the Commissioner of Customs
collection
letters,
issued
through
Deputy
Commissioner Atty. Valera, formally demanding the
amount covered by the cancelled TCCs.
None of these letters, however, can be
considered as a liquidation or an assessment of

66

Shells import tax liabilities that can be the subject

of an administrative tax protest proceeding before
the respondent whose decision is appealable to the
CTA. Shells import tax liabilities had long been
computed and ascertained in the original
assessments, and Shell paid these liabilities using
the TCCs transferred to it as payment.
It is even an error to consider the letters as a
reassessment because they refer to the same tax
liabilities on the same importations covered by the
original assessments. The letters merely reissued
the original assessments that were previously
settled by Shell with the use of the TCCs.
However, on account of the cancellation of the
TCCs, the tax liabilities of Shell under the original
assessments were considered unpaid; hence, the
letters and the actions for collection.
When Shell went to the CTA, the issues it
raised in its petition were all related to the fact and
efficacy of the payments made, specifically the
genuineness of the TCCs; the absence of due
process in the enforcement of the decision to
cancel the TCCs; the facts surrounding the fraud in
originally securing the TCCs; and the application of
estoppel.
These are payment and collection
issues, not tax protest issues within the CTAs
jurisdiction to rule upon.
Shell never protested the original
assessments of its tax liabilities and in fact settled
them using the TCCs. These original assessments,
therefore, have become final, incontestable, and
beyond any subsequent protest proceeding,
administrative or judicial, to rule upon.
To be very precise, Shells petition before
the CTA principally questioned the validity of the
cancellation of the TCCs a decision that was
made not by the Commissioner of Customs, but by
the Center. As the CTA has no jurisdiction over
decisions of the Center, Shells remedy against the
cancellation should have been a certiorari petition
before the regular courts, not a tax protest case
before the CTA. Records do not show that Shell
ever availed of this remedy.
Alternatively, as held in Shell v. Republic of
the Philippines, G.R. No. 161953, March 6, 2008,
547 SCRA 701, the appropriate forum for Shell
under the circumstances of this case should be at
the collection cases before the RTC where Shell
can put up the fact of its payment as a defense.
(Pilipinas
Shell
Petroleum
Corporation
v.
Commissioner of Customs, G. R. No. 176380, June
18, 2009)

48. A case becomes ripe for filing

with the Regional Trial Court (RTC), as a
collection matter after the finality of the
Commissioner of Customs assessment.
(Pilipinas Shell Petroleum Corporation v. Commissioner
of Customs, G. R. No. 176380, June 18, 2009 citing
Shell v. Republic of the Philippines, G.R. No. 161953,
March 6, 2008, 547 SCRA 701)

The assessment has long been final, and

this recognition of finality removes all perceived
hindrances, based on this case, to the continuation

of the collection suits.

A suit for the collection of internal revenue
taxes, where the assessment has already become
final and executory, the action to collect is akin to
an action to enforce the judgment. No inquiry can
be made therein as to the merits of the
In light of the conclusion that the present
case does not involve a decision of the
Commissioner of Customs on a matter brought to
him as a tax protest, Atty. Valeras lack of authority
to issue the collection letters and to institute the
collection suits is irrelevant. For this same reason,
the injunction against Atty. Valera cannot be
invoked to enjoin the collection of unpaid taxes due
from Shell. (Pilipinas Shell Petroleum Corporation
v. Commissioner of Customs, supra)

LOCAL GOVERNMENT TAXATION

1. The fundamental principles of
local taxation are:
a.
Uniformity;
b.
Taxes, fees, charges and other
impositions shall be equitable and based on ability
to pay, for public purposes, not unjust, excessive,
oppressive or confiscatory, not contrary to law,
public policy, national economic policy or in restraint
of trade;
c.
The levy and collection shall not be let
to any private person;
d.
Inures solely to the local government
unit levying the tax;
e.
The progressivity principle must be
observed.

2. A law which deprives local

government units of their power to tax
would be unconstitutional. The constitution has
delegated to local governments the power to levy
taxes, fees and other charges. This constitutional
delegation may only be removed by a constitutional
amendment.

3.
Under the now prevailing
Constitution, where there is neither a grant
nor prohibition by statute, the taxing power
of local governments must be deemed to
exist although Congress may provide
statutory limitations and guidelines in order to
safeguard the viability and self-sufficiency of local
government units by directly granting them general
and broad tax powers. (City Government of San
Pablo, Laguna, et al., v. Reyes, et al., G.R. No.
127708, March 25, 1999)

4.
The Local Government Code
explicitly authorizes provinces and cities,
notwithstanding any exemption granted by
any law or other special law to impose a
tax on businesses enjoying a franchise.
Indicative of the legislative intent to carry out the
constitutional mandate of vesting broad tax powers

67

to local government units, the Local Government

Code has withdrawn tax exemptions or incentives
theretofore enjoyed by certain entities. (City
Government of San Pablo, Laguna, et al., v. Reyes,
et al., G.R. No. 127708, March 25, 1999)

5.
Philippine
Long
Distance
Telephone Company, Inc., v. City of Davao,
et al., etc., G. R. No. 143867, August 22,
2001, upheld the authority of the City of Davao, a
local government unit, to impose and collect a local
franchise tax because the Local Government has
withdrawn all tax exemptions previously enjoyed by
all persons and authorized local government units to
impose a tax on business enjoying a franchise tax
notwithstanding the grant of tax exemption to them.

6.
paradigm
taxation.

Explain the concept of the

shift in local government

SUGGESTED ANSWER: Paradigm shift

from exclusive Congressional power to direct grant
of taxing power to local legislative bodies. The
power to tax is no longer vested exclusively on
Congress; local legislative bodies are now given
direct authority to levy taxes, fees and other charges
pursuant to Article X, section 5 of the 1987
Constitution.
(Batangas Power Corporation v.
Batangas City, et al. G. R. No. 152675, and
companion case, April 28, 2004 citing National
Power Corporation v. City of Cabanatuan, G. R. No.
149110, April 9, 2003)

7. The fundamental law did not intend

the direct grant to local government units to
be absolute and
unconditional, the
constitutional objective obviously is to ensure that,
while local government units are being strengthened
and made more autonomous, the legislature must
still see to it that:
a.
the taxpayer will not be over-burdened
or saddled with multiple and unreasonable
impositions;
b.
each local government unit will have
its fair share of available resources;
c.
the resources of the national
government will be unduly disturbed; and
d.
local taxation will be fair, uniform and
just. (Manila Electric Company v. Province of
Laguna, et al., G.R. No. 131359, May 5, 1999)

8.
Taxing power of the local
government is limited. The taxing power of
local governments is limited in the sense that
Congress can enact legislation granting tax
exemptions.
While the system of local government
taxation has changed with the onset of the 1987
Constitution, the power of local government units
to tax is still limited.
While the power to tax by local governments
may be exercised by local legislative bodies, no
longer merely be virtue of a valid delegation as
before, but pursuant to direct authority conferred by

Section 5, Article X of the Constitution, the basic

doctrine on local taxation remains essentially the
same, the power to tax is [still] primarily vested in
the Congress. (Quezon City, et al., v. ABS-CBN
Broadcasting Corporation, G. R. No. 166408, October 6,
2008 citing City Government of Quezon City, et al. v.
Bayan Telecommunications, Inc., G.R. No. 162015,
March 6, 2006, 484 SCRA 169 in turn referring to
Mactan Cebu International Airport Authority, v. Marcos,
G.R. No. 120082, September 11, 1996, 261 SCRA 667,
680)

9.
Further amplification by Bernas
of the local governments power to tax.
What is the effect of Section 5 on the fiscal
position of municipal corporations? Section 5 does
not change the doctrine that municipal corporations
do not possess inherent powers of taxation. What
it does is to confer municipal corporations a
general power to levy taxes and otherwise create
sources of revenue. They no longer have to wait
for a statutory grant of these powers. The power of
the legislative authority relative to the fiscal powers
of local governments has been reduced to the
authority to impose limitations on municipal
powers.
Moreover, these limitations must be
consistent with the basic policy of local autonomy.
The important legal effect of Section 5 is thus to
reverse the principle that doubts are resolved
against municipal corporations. Henceforth, in
interpreting statutory provisions on municipal fiscal
powers, doubts will be resolved in favor of
municipal corporations. It is understood, however,
that taxes imposed by local government must be
for a public purpose, uniform within a locality, must
not be confiscatory, and must be within the
jurisdiction of the local unit to pass. (Quezon City, et
al., v. ABS-CBN Broadcasting Corporation, G. R. No.
166408, October 6, 2008 citing City Government of
Quezon City, et al. v. Bayan Telecommunications, Inc.,
G.R. No. 162015, March 6, 2006, 484 SCRA 169)

10. Reconciliation of the local

governments authority to tax and the
Congressional general taxing power.
Congress has the inherent power to tax, which includes
the power to grant tax exemptions. On the other hand,
the power of local governments, such as provinces and
cities for example Quezon City, to tax is prescribed by
Section 151 in relation to Section 137 of the LGC which
expressly provides that notwithstanding any exemption
granted by any law or other special law, the City or a
province may impose a franchise tax. It must be noted
that Section 137 of the LGC does not prohibit grant of
future exemptions.

The Supreme Court in a series of cases has

sustained the power of Congress to grant tax
exemptions over and above the power of the local
governments delegated power to tax. (Quezon City,
et al., v. ABS-CBN Broadcasting Corporation, G. R. No.
166408, October 6, 2008 citing City Government of
Quezon City, et al. v. Bayan Telecommunications, Inc.,
G.R. No. 162015, March 6, 2006, 484 SCRA 16)

Indeed, the grant of taxing powers to local

government units under the Constitution and the
LGC does not affect the power of Congress to
grant exemptions to certain persons, pursuant to a
declared national policy. The legal effect of the

68

constitutional grant to local governments simply

means that in interpreting statutory provisions on
municipal taxing powers, doubts must be resolved
in favor of municipal corporations. [Ibid., referring
to Philippine Long Distance Telephone Company,
Inc. (PLDT) vs. City of Davao]

11. Professional tax may be

imposed by a province or city but not by a
municipality or barangay.
a.
Transaction taxed: Exercise or practice
of profession requiring government licensure
examination.
b.
Tax rate: In Accordance with a taxing
ordinance which should not exceed P300.00.
c.
Tax base: Reasonable classification by
the sanggunian.
d.
Exception: Payment to one province
or city no longer subject to any other national or
local tax, license or fee for the practice of such
profession in any part of the Philippine professionals
exclusively employed in the government.
e.
Date of payment:
or on before
January 31 or engaging in the profession.
f.
Place of payment: Province or city
where the professional practices his profession or
where he maintains his principal office in case he
practices his profession in several places.

12. Requirements: Any individual or

corporation employing a person subject to
professional tax shall require payment by that
person of the tax on his profession before
employment and annually thereafter.
Any person subject to the professional tax
shall write in deeds, receipts, prescriptions, reports,
books of account, plans and designs, surveys and
maps, as the case may be, the number of the official
receipt issued to him.
Exemption: Professionals exclusively
employed in the government shall be exempt from
payment. (Sec. 139, LGC)
NOTE: For the purpose of collecting the tax, the
provincial or city treasurer or his duly authorized
representative shall require from such professionals
their current annual registration cards issued by
competent authority before accepting payment of
their professional tax for the current year. The PRC
shall likewise require the professionals presentation
of proof of payment before registration of
professionals or renewal of their licenses. (last par.,
Art. 228, Rules and Regulations Implementing the
Local Government Code of 1991)
13. Who are the professionals who,
if they are in practice of their profession,
are subject to professional tax ?
SUGGESTED ANSWER: The professionals
subject to the professional tax are only those who
have passed the bar examinations, or any board or
other examinations conducted by the Professional
Regulation Commission (PRC). for example, a
lawyer who is also a Certified Public Accountant
(CPA) must pay the professional tax imposed on
lawyers and that fixed for CPAs, if he is to practice

both professions. [Sec. 238 (f), Rule XXX, Rules

and
Regulations
Implementing
the
Local
Government Code of 1991]

14. X City issued a notice of

assessment against ABC Condominium
Corporation for unpaid business taxes. The
Condominium Corporation is a duly
constituted condominium corporation in
accordance with the Condominium Act
which owns and holds title to the common
and limited common areas of the
condominium. Its membership comprises
the unit owners and is authorized under its
By-Laws to collect regular assessments
from its members for operating expenses,
capital expenditures on the common areas
and other special assessments as provided
for in the Master Deed with ?Declaration of
Restrictions of the Condominium.
ABC Condominium Corporation insists
that the X City Revenue Code and the Local
Government Code do not contain provisions
upon which the assessment could be based.
Resolve the controversy.
SUGGESTED ANSWER: ABC is correct.
Condominium corporations are generally exempt
from local business taxation under the Local
Government Code, irrespective of any local
ordinance that seeks to declare otherwise.
X City, is authorized under the Local
Government Code, to impose a tax on business,
which is defined under the Code as trade or
commercial activity regularly engaged in as a
means of livelihood or with a view to profit. By its
very nature a condominium corporation is not
engaged in business, and any profit that it derives is
merely incidental, hence it may not be subject to
business taxes. (Yamane , etc. v. BA Lepanto
Condominium Corporation, G. R. No. 154993,
October 25, 2005)

15. Authority of Local Government

Units (LGUs) such as the City of Manila to
impose business taxes. Section 143 of the
LGC, is the very source of the power of
municipalities and cities to impose a local business
tax, and to which any local business tax imposed
by cities or municipalities such as the City of
Manila must conform. It is apparent from a perusal
thereof that when a municipality or city has already
imposed a business tax on manufacturers, etc. of
liquors, distilled spirits, wines, and any other article
of commerce, pursuant to Section 143(a) of the
LGC, said municipality or city may no longer
subject the same manufacturers, etc. to a business
tax under Section 143(h) of the same Code.
Section 143(h) may be imposed only on
businesses that are subject to excise tax, VAT, or
percentage tax under the NIRC, and that are not
otherwise specified in preceding paragraphs.
In the same way, businesses such as respondents,
already subject to a local business tax under

69

Section 14 of Tax Ordinance No. 7794 [which is

based on Section 143(a) of the LGC], can no
longer be made liable for local business tax under
Section 21 of the same Tax Ordinance [which is
based on Section 143(h) of the LGC]. (The City of
Manila, et al., v. Coca-Cola Bottlers Philippines,
Inc., G. R. No. 181845, August 4, 2009)

REAL PROPERTY TAXATION

1.
The fundamental principles of
real property taxation are:
a.

Appraisal at current and fair market

value;
b.
Classification for assessment on the
basis of actual use;
c.
Assessment on the basis of uniform
classification;
d.
Appraisal, assessment, levy and
collection shall not be let to a private person;
e.
Appraisal and assessment shall be
equitable.
NOTES AND COMMENTS: Real properties
shall be appraised at the current and fair market
value prevailing in the locality where the property is
situated and classified for assessment purposes on
the basis of its actual use. (Allied Banking Corporation,
etc., v. Quezon City Government, et al., G. R. No.
154126, October 11, 2005)

2.
The reasonable market value is
determined by the assessor in the form of a
schedule of fair market values.
The schedule is then enacted by the local
sanggunian.

3.
Fair market value is the price at
which a property may be sold by a seller
who is not compelled to sell and bought by
a buyer who is not compelled to buy, taking
into consideration all uses to which the property is
adopted and might in reason be applied.
The criterion established by the statute
contemplates a hypothetical sale.
Hence, the
buyers need not be actual and existing purchasers.
(Allied Banking Corporation, etc., v. Quezon City
Government, et al., G. R. No. 154126, October 11,
2005 )
NOTES AND COMMENTS: In fixing the
value of real property, assessors have to consider all
the circumstances and elements of value and must
exercise prudent discretion in reaching conclusions.
(Allied Banking Corporation, etc., v. Quezon City
Government, et al., G. R. No. 154126, October 11,
2005)
Preparation of fair market values:
a.
The city or municipal assessor shall
prepare a schedule of fair market values for the
different classes of real property situated in their
respective Local Government Units for the
enactment of an ordinance by the sanggunian
concerned; and

b. The schedule of fair market values shall

be published in a newspaper of general circulation in
the province, city or municipality concerned or the
posting in the provincial capitol or other places as
required by law. (Lopez v. City of Manila, et al., G.R.
No. 127139, February 19, 1999)
Proposed fair market values of real
property in a local government unit as well as
the ordinance containing the schedule must be
published in full for three (3) consecutive days in a
newspaper of local circulation, where available,
within ten (10) days of its approval, and posted in at
lease two (2) prominent places in the provincial
capitol, city, municipal or barangay hall for a
minimum of three (3) consecutive weeks.
(Figuerres v. Court of Appeals, et al,. G.R. No.
119172, March 25, 1999)

4.
Approaches in estimating the fair
market value of real property for real
property tax purposes ?
a.
Sales Analysis Approach. The sales
price paid in actual market transactions is
considered by taking into account valid sales data
accumulated from among the Registrar of Deeds,
notaries public, appraisers, brokers, dealers, bank
officials, and various sources stated under the Local
Government Code.
b.
Income Capitalization Approach. The
value of an income-producing property is no more
than the return derived from it. An analysis of the
income produced is necessary in order to estimate
the sum which might be invested in the purchase of
the property.
c.
Reproduction cost approach is a formal
approach used exclusively n appraising man-made
improvements such as buildings and other
structures, based on such data as materials and
labor costs to reproduce a new replica of the
improvement.
The assessor uses any or all of these
approaches in analyzing the data gathered to arrive
at the estimated fair market value to be included in
the ordinance containing the schedule of fair market
values. (Allied Banking Corporation, etc., v. Quezon
City Government, et al., G. R. No. 154126, October
11, 2005 citing Local Assessment Regulations No. 192)

5.
An ordinance whereby the
parcels of land sold, ceded, transferred
and
conveyed
for
remuneratory
consideration after the effectivity of this
revision shall be subject to real estate tax
based on the actual amount reflected in the
deed of conveyance or the current
approved zonal valuation of the Bureau of
Internal Revenue prevailing at the time of
sale, cession, transfer and conveyance,
whichever is higher, as evidenced by the
certificate of payment of the capital gains
tax issued therefore is INVALID
being
contrary to public policy and for restraining trade for
the following reasons:

70

a.
It mandates an exclusive rule in
determining the fair market value and departs from
the established procedures such as the sales
analysis approach, the income capitalization
approach and the reproduction approach provided
under the rules implementing the statute. It unduly
interferes with the duties statutorily placed upon the
local assessor by completely dispensing with his
analysis and discretion which the Local Government
Code and the regulations require to be exercised.
An ordinance that contravenes any statute is ultra
vires and void.
b.
The consideration approach in the
ordinance is illegal since the appraisal, assessment,
levy and collection of real property tax shall not be
let to any private person, it will also completely
destroy the fundamental principle in real property
taxation that real property shall be classified,
valued and assessed on the basis of its actual use
regardless of where located, whoever owns it, and
whoever uses it. Allowing the parties to a private
sale to dictate the fair market value of the property
will dispense with the distinctions of actual use
stated in the Local Government Code and in the
regulations.
c.
The invalidity is not cured by the
prhase whichever is higher because an integral
part of that system still permits valuing real property
in disregard of its actual use.
d.
The ordinance would result to real
property assessments more than once every three
(3) years and that is not the congressional intent as
shown in the provisions of the Local Government
Code and the regulations. Consequently, the real
property tax burden should not be interpreted to
include those beyond what the Code or the
regulations expressly clearly state.
e.
The proviso would provide a chilling
effect on real property owners or administrators to
enter freely into contracts reflecting the increasing
value of real properties in accordance with
prevailing market conditions.
While the Local Government Code provides
that the assessment of real property shall not be
increased once every three (3) years, the
questioned proviso subjects the property to a higher
assessment every time a sales transaction is made.
Real property owners would therefore postpone
sales until after the lapse of the three (3) year
period, or if they do so within the said period they
shall be compelled to dispose of the property at a
price not exceeding the last prior conveyance in
order to avoid a higher tax assessment.
In the above two scenarios real property
owners are effectively prevented from obtaining the
best price possible for their properties and unduly
hampers the equitable distribution of wealth. (Allied
Banking Corporation, etc., v. Quezon City Government, et
al., G. R. No. 154126, October 11, 2005)

6. Examples of personal property

under the civil law that may be considered
as real property for purposes of taxes.
Personal property under the civil law may be
considered as real property for purposes of taxes

where the property is essential to the conduct of the

business.
a.
Underground tanks are essential to the
conduct of the business of a gasoline station without
which it would not be operational. (Caltex Phils., Inc.
v. Central Board of Assessment Appeals, et al., 114 SCRA
296)

b.
Light Rail Transit (LRT) improvements
such as buildings, carriageways, passenger
terminals stations, and similar structures do not form
part of the public roads since the former are
constructed over the latter in such a way that the
flow of vehicular traffic would not be impaired. The
carriageways and terminals serve a function
different from the public roads. Furthermore, they
are not open to use by the general public hence not
exempt from real property taxes. Even granting that
the national government owns the carriageways and
terminal stations, the property is not exempt
because their beneficial use has been granted to
LRTA a taxable entity. (Light Rail Transit Authority v.
Central Board of Assessment Appeals, et al., G. R. No.
127316, October 12, 2000)

c.
Barges on which were mounted gas
turbine power plants designated to generate
electrical power, the fuel oil barges which supplied
fuel oil to the power plant barges, and the accessory
equipment mounted on the barges were subject to
real property taxes.
Moreover, Article 415(9) of the Civil Code
provides that [d]ocks and structures which, though
floating, are intended by their nature and object to
remain at a fixed place on a river, lake or coast are
considered immovable property by destination being
intended by the owner for an industry or work which
may be carried on in a building or on a piece of land
and which tend directly to meet the needs of said
industry or work. (FELS Energy, Inc., v. Province of
Batangas, G. R. No. 168557, February 16, 2007 and
companion case)

7. Unpaid realty taxes attach to the

property and is chargeable against the
person who had actual or beneficial use and
possession of it regardless of whether or
not he is the owner. To impose the real property
tax on the subsequent owner which was neither the
owner not the beneficial user of the property during
the designated periods would not only be contrary to
law but also unjust.
Consequently, MERALCO the former
owner/user of the property was required to pay the
tax instead of the new owner NAPOCOR. (Manila
Electric Company v. Barlis, G.R. No. 114231, May 18,
2001)

NOTES AND COMMENTS: The above

May 18, 2001 decision was set aside by the
Supreme Court when it granted the petitioners
second motion for reconsideration on June 29,
2004. The author submits that the above ruling in
the May 18, 2001 decision is still valid, not on the
basis of the May 18, 2001 decision but in the light of
pronouncements of the Supreme Court in other
cases. Thus, do not cite the doctrine as emanating
from the May 18, 2001 decision.

71

8. Secretary of Justice can take

cognizance of a case involving the
constitutionality or legality of tax ordinances
where there are factual issues involved.
(Figuerres v. Court of Appeals, et al., G.R. No. 119172,
March 25, 1999)

Taxpayer files appeal to the Secretary

of Justice, within 30 days from effectivity
thereof. In case the Secretary decides the appeal,
a period also of 30 days is allowed for an aggrieved
party to go to court. But if the Secretary does not
act thereon, after the lapse of 60 days, a party could
already seek relief in court within 30 days from the
lapse of the 60 day period.
These three separate periods are clearly
given for compliance as a prerequisite before
seeking redress in a competent court.
Such
statutory periods are set to prevent delays as well as
enhance the orderly and speedy discharge of
judicial functions.
For this reason the courts
construe these provisions of statutes as mandatory.
(Reyes, et al., v. Court of Appeals, et al.,
118233, December 10, 1999)

G.R. No.

9.
Public hearings are mandatory
prior to approval of tax ordinance , but this
still requires the taxpayer to adduce evidence to
show that no public hearings ever took place.
(Reyes, et al., v. Court of Appeals, et al., G.R. No.
118233, December 10, 1999) Public hearings are

required to be conducted prior to the enactment of

an ordinance imposing real property taxes.
(Figuerres v. Court of Appeals, et al., G.R. No. 119172,
March 25, 1999)

10. The
concurrent
and
simultaneous remedies afforded local
government units in enforcing collection of
real property taxes:
a.
Distraint of personal property;
b.
Sale of delinquent real property, and
c.
Collection of real property tax through
ordinary court action.

11. Notice and publication, as well as

the legal requirements for a tax delinquency
sale, are mandatory, and the failure to comply
therewith can invalidate the sale. The prescribed
notices must be sent to comply with the
requirements of due process. (De Knecht, et al,. v.
Court of Appeals; De Knecht, et al., v. Honorable Sayo,
290 SCRA 223,236)

12. The reason behind the notice

requirement is that tax sales are
administrative proceedings which are in
personam in nature. (Puzon v. Abellera, 169 SCRA
789, 795; De Asis v. I.A.C., 169 SCRA 314)

13. FELS

Energy, Inc., had a

contract to supply NPC with the electricity
generated by FELS power barges. The
contract also stated that NPC shall be
responsible for all real estate taxes and

72

assessments.
FELS then received an
assessment of real property taxes on its
power barges from the Provincial Assessor
of Batangas.
If filed a motion for
reconsideration
with
the
Provincial
Assessor.
a.
Upon denial, FELS elevated the
matter to the Local Board of Assessment
Appeals (LBAA), where it raised the
following issues:
1)
Since NPC is tax-exempt
then FELs should also be tax-exempt
because of its contract with NPC.
2)
The power barges are not
real property subject to real property
taxes.
b.
Upon the other hand the Local
Treasurer insists that the assessment has
attained a state of finality hence the appeal
to the LBAA should be dismissed.
Rule on the conflicting contentions.

the latter instance, allusions of possible cover, illicit

trade-off cannot be avoided, and in fact can
conveniently take place. Such occasion for mischief
must be prevented and excised from our system.

SUGGESTED ANSWER:
a.
All the contentions of FELS are without

16. If the ground for the protest is

unreasonableness of the amounts collected
there is need to pay under protest and

merit:
1)
NPC is not the owner of the
power barges nor the operator of the power
barges. The tax exemption privilege granted
to NPC cannot be extended to FELS. the
covenant is between NPC and FELs and
does not bind a third person not privy to the
contract such as the Province of Batangas.
2)
The Supreme Court of New York
in Consolidated Edison Company of New
York, Inc., et al., v. The City of New York, et
al., 80 Misc. 2d 1065 (1975) cited in FELS
Energy, Inc., v. Province of Batangas, G. R.
No. 168557, February 16, 2007 and
companion case, held that barges on which
were mounted gas turbine power plants
designated to generate electrical power, the
fuel oil barges which supplied fuel oil to the
power plant barges, and the accessory
equipment mounted on the barges were
subject to real property taxes.
Moreover, Article 415(9) of the Civil
Code provides that [d]ocks and structures
which, though floating, are intended by their
nature and object to remain at a fixed place
on a river, lake or coast are considered
immovable property by destination being
intended by the owner for an industry or work
which may be carried on in a building or on a
piece of land and which tend directly to meet
the needs of said industry or work.
b.
The Treasurer is correct.
The
procedure do not allow a motion for reconsideration
to be filed with the Provincial Assessor.
To allow the procedure would indeed invite
corruption in the system of appraisal and
assessment. it conveniently courts a graft-prone
situation where values of real property ay be initially
set unreasonably high, and then subsequently
reduced upon the request of a property owner. In

(FELS Energy, Inc., v. Province of Batangas, G. R. No.

168557, February 16, 2007 and companion case)

14.
A special levy or special
assessment is an imposition by a province,
a city, a municipality within the Metropolitan
Manila Area, a municipality or a barangay
upon real property specially benefited by a public
works expenditure of the LGU to recover not more
than 60% of such expenditure.

15. If the ground for the protest is

validity of the real property tax ordinance
and not the unreasonableness of the amount
collected the tax must be paid under protest, and the
issue of legality may be raised to the proper courts
on certiorari without need of exhausting
administrative remedies.

administrative remedies must be resorted to before

recourse to the proper courts.

17.
Procedure for refund of real
property taxes based on unreasonableness
or excessiveness of amounts collected.
a.
Payment under protest at the time of
payment or within thirty (30) days thereafter, protest
being lodged to the provincial, city or in the case of
a municipality within the Metro Manila Area the
municipal treasurer.
b.
The treasurer has a period of sixty (60)
days from receipt of the protest within to decide.
c.
Within thirty (30) days from receipt of
treasurers decision or if the treasurer does not
decide, within thirty (30) days from the expiration of
the sixty (60) period for the treasurer to decide, the
taxpayer should file an appeal with the Local Board
of Assessment Appeals.
d.
The Local Board of Assessment
Appeals has 120 days from receipt of the appeal
within which to decide.
e.
The adverse decision of the Local
Board of Assessment Appeals should be appealed
within thirty (30) days from receipt to the Central
Board of Assessment Appeals.
f.
The adverse decision of the Central
Board of Assessment Appeals shall be appealed to
the Court of Tax Appeals (En Banc) by means of a
petition for review within thirty (30) days from receipt
of the adverse decision.
g.
The decision of the CTA may be the
subject of a motion for reconsideration or new trial
after which an appeal may be interposed by means
of a petition for review on certiorari directed to the
Supreme Court on pure questions of law within a
period of fifteen (15) days from receipt extendible
for a period of thirty (30) days.

73

18. The entitlement to a tax refund

does not necessarily call for the automatic
payment of the sum claimed. The amount of
the claim being a factual matter, it must still be
proven in the normal course and in accordance with
the administrative procedure for obtaining a refund
of real property taxes, as provided under the Local
Government Code. (Allied Banking Corporation, etc., v.
Quezon City Government, et al., G. R. No. 154126,
September 15, 2006)

NOTES AND COMMENTS: In the above

Allied Banking case, the Supreme Court provided
for the starting date of computing the two-year
prescriptive period within which to file the claim with
the Treasurer, which is from finality of the Decision.
The procedure to be followed is that shown below.

19. Procedure for refund of real

property taxes based on validity of the tax
measure or solutio indebeti.
a.
Payment under protest not required,
claim must be directed to the local treasurer, within
two (2) years from the date the taxpayer is entitled
to such reduction or readjustment, who must decide
within sixty (60) days from receipt.
b.
The denial by the local treasurer of the
protest would fall within the Regional Trial Courts
original jurisdiction, the review being the initial
judicial cognizance of the matter. Despite the
language of Section 195 of the Local Government
Code which states that the remedy of the taxpayer
whose protest is denied by the local treasurer is to
appeal with the court of competent jurisdiction,
labeling the said review as an exercise of appellate
jurisdiction is inappropriate since the denial of the
protest is not the judgment or order of a lower court,
but of a local government official. (Yamane , etc. v.
BA Lepanto Condominium Corporation, G. R. No.
154993, October 25, 2005)
c.
The decision of the Regional Trial
Court should be appealed by means of a petition for
review directed to the Court of Tax Appeals
(Division).
d.
The decision of the Court of Tax
Appeals (Division) may be the subject of a review by
the Court of Tax Appeals (en banc).
e.
The decision of the Court of Tax
Appeals (en banc) may be the subject of a petition
for review on certiorari on pure questions of law
directed to the Supreme Court.

20.
Charitable
institutions,
churches and parsonages or convents
appurtenant thereto, mosques, non-profit
cemeteries, and all lands, buildings and
improvements that are actually, directly and
exclusively used for religious, charitable or
educational purposes are exempt from
taxation. [Sec.28 (3) Article VI, 1987 Constitution]
21.

The
constitutional
tax
exemptions refer only to real property that
are actually, directly and exclusively used for
religious, charitable or educational purposes, and

that the only constitutionally recognized exemption

from taxation of revenues are those earned by nonprofit, non-stock educational institutions which are
actually, directly and exclusively used for
educational purposes. (Commissioner of Internal
Revenue v. Court of Appeals, et al., 298 SCRA 83)
The constitutional tax exemption covers
property taxes only. What is exempted is not the
institution itself, those exempted from real estate
taxes are lands, buildings and improvements
actually, directly and exclusively used for religious,
charitable or educational purposes. (Lung Center of
the Philippines v. Quezon City, et al., etc., G. R. No.
144104, June 29, 2004)

22. The 1935 Constitution stated that

the lands, buildings, and improvements are
used exclusively but the present
Constitution requires that the lands,
buildings and improvements are actually,
directly and exclusively used. The change
should not be ignored. Reliance on past decisions
would have sufficed were the words actually as
well as :directly are not added. There must be proof
therefore of the actual and direct use to be exempt
from taxation. (Lung Center of the Philippines v.
Quezon City, et al., etc., G. R. No. 144104, June 29,
2004)

23.
The actual, direct and
exclusive use of the property for charitable
purposes is the direct and immediate and
actual application of the property itself to the
purposes for which the charitable institution is
organized. It is not the use of the income from the
real property that is determinative of whether the
property is used for tax-exempt purposes.
If real property is used for one or more
commercial purposes, it is not exclusively used for
the exempted purpose but is subject to taxation,.
The words dominant use or principal use cannot
be substituted for the words used exclusively
without doing violence to the Constitution and the
law. Solely is synonymous with exclusively. (Lung
Center of the Philippines v. Quezon City, et al., etc., G. R.
No. 144104, June 29, 2004)

24. Portions of the land of a charitable

institution, such as a hospital, leased to
private entities as well as those parts of the
hospital leased to private individuals are not
exempt from real property taxes . On the other
hand, the portion of the land occupied by the
hospital and portions of the hospital used for its
patients, whether paying or non-paying, are exempt
from real property taxes. (Lung Center of the
Philippines v. Quezon City, et al., etc., G. R. No.
144104, June 29, 2004)

25.
As a general principle, a
charitable institution does not lose its
character as such and its exemption from
taxes simply because it derives income from
paying patients, whether out-patient, or

74

confined in the hospital, or receives

subsidies from the government. So long as
the money received is devoted or used altogether to
the charitable object which it is intended to achieve;
and no money inures to the private benefit of the
persons managing or operating the institution. (Lung
Center of the Philippines v. Quezon City, et al., etc., G. R.
No. 144104, June 29, 2004)

26.
Property that are exempt
from the payment of real property tax under
the Local Government Code.
a.
Real property owned by the Republic
of the Philippines or any of its political subdivisions
except when the beneficial use thereof has been
granted to a taxable person for a consideration or
otherwise;
b.
Charitable
institutions,
churches,
parsonages or convents appurtenant thereto,
mosques, non-profit or religious cemeteries, and all
lands, buildings and improvements actually, directly
and exclusively used for religious, charitable and
educational purposes;
c.
Machineries and equipment, actually,
directly and exclusively used by local water districts;
and government owned and controlled corporations
engaged in the supply and distribution of water and
generation and transmission of electric power;
d.
Real property owned by duly registered
cooperatives;
e.
Machinery and equipment used for
pollution control and environmental protection.

27. Manila
International
Airport
Authority (MIAA) it is not a government
owned or controlled corporation but an
instrumentality of the government that is
exempt from taxation.
It is not a stock corporation because its
capital is not divided into shares, neither is it a nonstock corporation because there are no members.
It is instead an instrumentality of the government
upon which the local governments are not allowed
to levy taxes, fees or other charges.
An instrumentality refers to any agency of
the National Government, not integrated within the
department framework vested with special
functions or jurisdiction by law, endowed with some
if not all corporate powers, administering special
funds, and enjoying operational autonomy, usually
through a charter. This term includes regulatory
agencies chartered institutions and governmentowned or controlled corporations. [Sec. 2 (10),
Introductory Provisions, Administrative Code of
1987] It is an instrumentality exercising not only
governmental but also corporate powers.
It
exercises governmental powers of eminent
domain, police power authority, and levying of fees
and charges.
Finally, the airport lands and buildings are
property owned by the government that are
devoted to public use and are properties of the
public domain. (Manila International Airport Authority v.
City of Pasay, et al., G. R. No. 163072, April 2, 2009)

28. A telecommunications company

was granted by Congress on July 20, 1992,
after
the
effectivity of the Local
Government Code on January 1, 1992, a
legislative franchise with tax exemption
privileges which partly reads, The grantee,
its successors or assigns shall be liable to
pay the same taxes on their real estate,
buildings and personal property, exclusive
of this franchise, as other persons or
corporations are now or hereafter may be
required by law to pay. This provision
existed in the companys franchise prior to
the effectivity of the Local Government
Code. A City then enacted an ordinance in
1993 imposing a real property on all real
properties located within the city limits, and
withdrawing all tax exemptions previously
granted. Among properties covered are
those owned by the company from which
the City is now collecting P43 million. The
properties of the company were then
scheduled by the City for sale at public
auction.
The company then filed a petition for
the issuance of a writ of prohibition
claiming exemption under its legislative
franchise. The City defended its position
raising the following:
a.
There was no exhaustion of
administrative remedies because the matter
should have first been filed before the
Local Board of Assessment Appeals;
b.
The companys properties are
exempt from tax under its franchise.
Resolve the issues raised.
SUGGESTED ANSWERS:
a.
There is no need to exhaust
administrative remedies as the appeal to the LBAA
is not a speedy and adequate remedy within the
law. This is so because the properties are already
scheduled for auction sale.
Furthermore one of the recognized
exceptions to the rule on exhaustion is that if the
issue is purely legal in character which is so in this
case.
b.
The properties are exempt from
taxation. The grant of taxing powers to local
governments under the Constitution and the Local
Government Code does not affect the power of
Congress to grant tax exemptions.
The term exclusive of this franchise is
interpreted to mean properties actually, directly and
exclusively
used
in
the
radio
or
telecommunications business. The subsequent
piece of legislation which reiterated the phrase
exclusive of this franchise found in the previous
tax exemption grant to the company is an express
and real intention on the part of Congress to once
against remove from the LGCs delegated taxing
power, all of the companys properties that are
actually, directly and exclusively used in the pursuit

of its franchise. (The City Government of Quezon

City, et al., v. Bayan Telecommunications, Inc., G.
R. No. 162015, March 6, 2006)

29.The owner operator of a BOT

and not the ultimate owner is subject to real
property taxes.
Consistent with the BOT
concept and as implemented, BPPC the ownermanager-operator of the project is the actual user
of its machineries and equipment.
BPPCs
ownership and use of the machineries and
equipment are actual, direct, and immediate, while
NAPOCORs is contingent and, at this stage of the
BOT Agreement, not sufficient to support its claim
for tax exemption. (National Power Corporation v.
Central Board of Assessment Appeals, et al., G, R. No.
171470, January 30, 2009)

ADVANCE
CONGRATULATIONS
AND SEE YOU IN
COURT

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