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ii
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TABLE OF CONTENTS
TAXATION 1
I. GENERAL PRINCIPLES OF TAXATION .... 2
A. DEFINITION, CONCEPT AND PURPOSE OF
TAXATION ......................................................... 2
A.1. TAXATION .......................................................2
A.2. PURPOSE .......................................................2
B. NATURE AND CHARACTERISTICS OF
TAXATION ......................................................... 3
B.1 NATURE ...........................................................3
B.2 CHARACTERISTICS .........................................3
C. POWER OF TAXATION AS DISTINGUISHED
FROM POLICE POWER AND EMINENT DOMAIN
........................................................................... 4
E. PRINCIPLES OF A SOUND TAX SYSTEM ..... 6
F. SCOPE AND LIMITATIONS OF TAXATION ... 7
F.1. INHERENT LIMITATIONS................................ 7
F.2. CONSTITUTIONAL LIMITATIONS ................. 9
G. STAGES OR ASPECTS OF TAXATION .........15
H. DEFINITION, NATURE AND
CHARACTERISTICS OF TAXES ........................16
H.1 TAXES ............................................................ 16
I. REQUISITES OF A VALID TAX ......................16
J. TAX AS DISTINGUISHED FROM OTHER
FORMS OF EXACTIONS ...................................16
K. KINDS OF TAXES .........................................18
L. SITUS OF TAXATION ................................... 20
M. CONSTRUCTION AND INTERPRETATION
OF...................................................................... 21
M.1. TAX LAWS .................................................... 21
M.2. TAX EXEMPTION AND EXCLUSION ........... 21
M.3. TAX RULES AND REGULATIONS .............. 22
M.4. PENAL PROVISIONS OF TAX LAWS...........23
M.5. NON-RETROACTIVE APPLICATION OF TAX
LAWS TO TAXPAYERS ........................................23
N. SOURCES OF TAX LAWS ........................... 23
O. DOCTRINES IN TAXATION ......................... 24
O.1. PROSPECTIVITY OF TAX LAWS .................. 24
O.2. IMPRESCRIPTIBILITY OF TAXES................ 25
O.3. DOUBLE TAXATION.................................... 26
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O.4. POWER TO TAX INVOLVES POWER TO
DESTROY ............................................................ 27
O.5. ESCAPE FROM TAXATION ......................... 27
O.6. EXEMPTION FROM TAXATION .................. 29
O.7. DOCTRINE OF EQUITABLE RECOUPMENT 31
O.8. COMPENSATION AND SET-OFF ................. 31
O.9. COMPROMISE AND TAX AMNESTY ........... 31
O.10. TAXPAYER’S SUIT ..................................... 32
II. NATIONAL TAXATION ......................... 34
A. ORGANIZATION AND FUNCTIONS OF THE
BUREAU OF INTERNAL REVENUE ................ 34
A.1. RULE-MAKING AUTHORITY OF THE
SECRETARY OF FINANCE .................................. 34
A.2. JURISDICTION, POWER AND FUNCTIONS OF
THE COMMISSIONER OF INTERNAL REVENUE35
B. NATIONAL INTERNAL REVENUE CODE
(NIRC) OF 1997, AS AMENDED ...................... 36
B.1. INCOME TAXATION ..................................... 36
B.2. INCOME ....................................................... 43
B.3. GROSS INCOME .......................................... 47
B.4. DEDUCTIONS FROM GROSS INCOME ...... 70
C. INCOME TAX ON INDIVIDUALS ................. 88
C.1. INCOME TAX ON RESIDENT CITIZENS, NON-
RESIDENT CITIZENS AND RESIDENT ALIENS .. 88
C.2. INCOME TAX ON NON-RESIDENT ALIENS
ENGAGED IN TRADE OR BUSINESS ................. 94
C.3. INCOME TAX ON NON-RESIDENT ALIENS
NOT ENGAGED IN TRADE OR BUSINESS ......... 95
C.4. INDIVIDUAL TAXPAYERS EXEMPT FROM
INCOME TAX ....................................................... 96
D. INCOME TAX ON CORPORATIONS .......... 101
D.1. INCOME TAX ON DOMESTIC
CORPORATIONS AND RESIDENT FOREIGN
CORPORATIONS ............................................... 101
D.2. INCOME TAX ON NON-RESIDENT FOREIGN
CORPORATIONS .............................................. 108
D.3. INCOME TAX ON SPECIAL CORPORATIONS
........................................................................... 108
D.4. IMPROPERLY ACCUMULATED EARNINGS
TAX ......................................................................112
D.5 EXEMPTION FROM TAX ON CORPORATIONS
.............................................................................113
D.6. TAX ON GENERAL PARTNERSHIPS,
GENERAL PROFESSIONAL PARTNERSHIPS, CO-
 OWNERSHIPS, JOINT VENTURES AND
CONSORTIUMS .................................................. 114
E. FILING OF RETURNS AND PAYMENT OF
INCOME TAX .................................................. 116
E.1. DEFINITION OF A TAX RETURN AND
INFORMATION RETURN.................................... 116
E.2. PERIOD TO FILE INCOME TAX RETURN OF
INDIVIDUALS AND CORPORATIONS ................ 116
E.3. PERSONS LIABLE TO FILE INCOME TAX
RETURNS ........................................................... 117
E.4. WHERE TO FILE INCOME TAX RETURNS .. 118
E.5. PENALTIES FOR NON-FILING OF RETURNS
............................................................................ 118
F. WITHHOLDING OF TAXES ......................... 118
F.1. CONCEPT OF WITHHOLDING TAXES ......... 118
F.2. KINDS OF WITHHOLDING TAXES .............. 119
TAXATION 2
I. ESTATE TAX ......................................... 121
A. BASIC PRINCIPLES .................................... 121
B. DEFINITION ............................................... 121
C. NATURE ..................................................... 121
D. PURPOSE OR OBJECT .............................. 121
E. TIME AND TRANSFER OF PROPERTIES .. 121
F. CLASSIFICATION OF DECEDENT ..............122
F.1. CONCEPT OF RESIDENCE .......................... 122
F.2. RULE OF RECIPROCITY ............................. 123
G. GROSS ESTATE VIS-À-VIS NET ESTATE . 124
H. DETERMINATION OF GROSS ESTATE AND
NET ESTATE (AND COMPOSITION) ............. 124
VALUATION OF GROSS ESTATE (SEC 88) ...126
J. ITEMS TO BE INCLUDED IN GROSS ESTATE
........................................................................126
K. DEDUCTIONS FROM ESTATE ...................129
K.1. ORDINARY DEDUCTIONS .......................... 129
L. EXCLUSIONS FROM ESTATE ....................135
M. TAX CREDIT FOR ESTATE TAXES PAID IN A
FOREIGN COUNTRY ...................................... 137
N. FILING OF NOTICE OF DEATH ................. 140
O. ESTATE TAX RETURN .............................. 140
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II. DONOR’S TAX .................................... 144
A. BASIC PRINCIPLES .................................... 144
B. DEFINITION................................................ 144
C. NATURE ..................................................... 144
D. PURPOSE OR OBJECT .............................. 144
E. REQUISITES OF VALID DONATION .......... 144
F. TRANSFERS WHICH MAY BE CONSTITUTED
AS DONATION ............................................... 145
G. TRANSFER FOR LESS THAN ADEQUATE
AND FULL CONSIDERATION ........................ 145
H. CLASSIFICATION OF DONOR ................... 145
I. DETERMINATION OF GROSS GIFT
(INCLUDING COMPOSITION OF GROSS GIFT)
........................................................................ 146
J. VALUATION OF GIFTS MADE IN PROPERTY
........................................................................ 147
K. TAX CREDIT FOR DONOR’S TAXES PAID IN
A FOREIGN COUNTRY ...................................148
L. EXEMPTIONS OF GIFTS FROM DONOR’S
TAX ................................................................. 149
M. PERSON LIABLE ....................................... 149
N. TAX BASIS ................................................. 149
III. VALUE-ADDED TAX (VAT) .................157
A. CONCEPT ................................................... 157
B. CONSTITUTIONALITY OF VAT .................. 157
C. CHARACTERISTICS/ELEMENTS OF A VAT-
TAXABLE TRANSACTION .............................. 157
D. IMPACT OF TAX V. INCIDENT OF TAX ..... 158
E. TAX CREDIT METHOD ............................... 158
F. DESTINATION PRINCIPLE ......................... 159
G. PERSONS LIABLE ...................................... 159
H. VAT ON SALE OF GOODS OR PROPERTIES
........................................................................160
I. ZERO-RATED SALES OF GOODS OR
PROPERTIES, AND EFFECTIVELY ZERO-
RATED SALES OF GOODS OR PROPERTIES162
J. TRANSACTIONS DEEMED SALE (SEC. 106 (B)
........................................................................ 164
K. CHANGE OR CESSATION OF STATUS AS
VAT-REGISTERED PERSON (SEC 106[C]) .... 165
L. VAT ON IMPORTATION OF GOODS.......... 166
 M. VAT ON SALE OF SERVICE AND USE OR C.5. FEES AND CHARGES FOR REGULATION &
LEASE OF PROPERTIES ................................ 167 LICENSING ........................................................ 235

N. ZERO-RATED SALE OF SERVICES .......... 169 C.6. SITUS OF TAX COLLECTED ...................... 235

O. VAT EXEMPT TRANSACTIONS ................ 169 D. TAXING POWERS OF BARANGAYS ........ 236

Q. SOURCES OF INPUT TAX .......................... 176 E. COMMON REVENUE RAISING POWERS. 237

R. PERSONS WHO CAN AVAIL OF INPUT TAX F. COMMUNITY TAX ..................................... 238
CREDIT............................................................ 176 F.1. TAX PERIOD AND MANNER OF PAYMENT
...........................................................................240
S. DETERMINATION OF OUTPUT/INPUT TAX;
VAT PAYABLE; EXCESS INPUT TAX CREDITS F.2. ACCRUAL OF TAX......................................240
........................................................................ 177 F.3. TIME OF PAYMENT ....................................240
S.1. DETERMINATION OF OUTPUT TAX............177 F.4. PENALTIES ON UNPAID TAXES, FEES OR
S.2. DETERMINATION OF INPUT TAX CHARGES ..........................................................240
CREDITABLE .......................................................177 F.5. AUTHORITY OF TREASURER IN COLLECTION
S.3. ALLOCATION OF INPUT TAX ON MIXED AND INSPECTION OF BOOKS ..........................240
TRANSACTIONS .................................................177 G. TAXPAYER’S REMEDIES .......................... 240
T. SUBSTANTIATION OF INPUT TAX CREDITS G.1. PERIODS OF ASSESSMENT AND
........................................................................ 177 COLLECTION OF LOCAL TAXES, FEES OR
CHARGES ..........................................................240
U. REFUND OR TAX CREDIT OF EXCESS INPUT
TAX (CF REFUND OF ERRONEOUSLY PAID G.2. PROTEST OF ASSESSMENT .....................240
TAXES) ........................................................... 182 G.3. CLAIM FOR REFUND OF TAX CREDIT FOR
ERRONEOUSLY OR ILLEGALLY COLLECTED TAX,
V. INVOICING REQUIREMENTS ....................183
FEE OR CHARGE...............................................240
W. FILING OF RETURN AND PAYMENT ...... 185
H. CIVIL REMEDIES BY THE LGU FOR
X. WITHHOLDING OF FINAL VAT ON SALES TO COLLECTION OF REVENUES ....................... 240
GOVERNMENT .............................................. 185
H.1. LOCAL GOVERNMENT’S LIEN FOR
IV. TAX REMEDIES UNDER THE NIRC.....197 DELINQUENT TAXES, FEES OR CHARGES .....240

A. TAXPAYER’S REMEDIES ......................... 200 H.2. CIVIL REMEDIES, IN GENERAL .................241

B. GOVERNMENT’S REMEDIES................... 209 I. REAL PROPERTY TAXATION .................... 242

I.1. FUNDAMENTAL PRINCIPLES (CAPUE)...... 242
V. ORGANIZATION AND FUNCTION OF THE
BUREAU OF INTERNAL REVENUE......... 218 I.2. NATURE OF REAL PROPERTY TAX ........... 242
I.3. IMPOSITION OF REAL PROPERTY TAX ..... 242
A. POWERS OF THE CIR ............................... 218
I.4. APPRAISAL AND ASSESSMENT OF REAL
B. ORGANIZATION AND FUNCTION OF THE
PROPERTY TAX ................................................ 244
BIR ..................................................................219
I.5. DECLARATION OF REAL PROPERTY ........ 244
VI. LOCAL GOVERNMENT CODE OF 1991, AS
I.6. LISTING OF REAL PROPERTY IN THE
AMENDED .............................................. 228 ASSESSMENT ROLLS ....................................... 244
A. LOCAL GOVERNMENT TAXATION .......... 228 I.7. APPRAISAL AND VALUATION OF REAL
C. TAXING POWERS OF MUNICIPALITIES ... 233 PROPERTY ........................................................ 245

C.1. TAX ON VARIOUS TYPES OF BUSINESSES I.8. ASSESSMENT OF REAL PROPERTY ......... 246
...........................................................................233 I.9. COLLECTION OF REAL PROPERTY TAX ... 246
C.2 CEILING ON BUSINESS TAX IMPOSSIBLE ON I.10. SPECIAL RULES ON PAYMENT ................ 246
MUNICIPALITIES WITHIN METRO MANILA .... 235
J. TAXPAYER’S REMEDIES ........................... 247
C.3. TAX ON RETIREMENT ON BUSINESS ...... 235
J.1. ADMINISTRATIVE ....................................... 247
C.4 RULES ON PAYMENT OF BUSINESS TAX 235
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 J.2. JUDICIAL .................................................... 248
VII. TARIFF AND CUSTOMS CODE OF 1978,
AS AMENDED ........................................ 252
A. TARIFF AND DUTIES, DEFINED ............... 252
B. GENERAL RULE: ALL IMPORTED ARTICLES
ARE SUBJECT TO DUTY [SEC. 101, TCC; SEC.
104, CMTA] .................................................... 252
C. PURPOSE FOR IMPOSITION .................... 252
D. FLEXIBLE TARIFF CLAUSE....................... 252
E. REQUIREMENTS OF IMPORTATION ....... 253
E.1. BEGINNING AND ENDING OF IMPORTATION
.......................................................................... 253
E.2. OBLIGATIONS OF IMPORTER .................. 253
F. IMPORTATION IN VIOLATION OF TCC .... 257
F.1. SMUGGLING............................................... 257
F.2. OTHER FRAUDULENT PRACTICES .......... 258
G. CLASSIFICATION OF GOODS...................258
G.1. TAXABLE IMPORTATION .......................... 258
G.2. PROHIBITED IMPORTATION.................... 258
G.3. CONDITIONALLY-FREE IMPORTATION .. 259
H. CLASSIFICATION OF DUTIES................... 264
H.1. ORDINARY/REGULAR DUTIES ................ 264
H.2. SPECIAL DUTIES....................................... 267
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I. REMEDIES .................................................. 267
I.1. GOVERNMENT ............................................ 267
I.2. TAXPAYER .................................................. 269
VIII. JUDICIAL REMEDIES....................... 275
A. JURISDICTION OF THE COURT OF TAX
APPEALS ....................................................... 275
A.1. CIVIL TAX CASES........................................ 275
A.2. CRIMINAL CASES ...................................... 275
B. JUDICIAL PROCEDURES .......................... 276
B.1. JUDICIAL ACTION FOR COLLECTION OF
TAXES................................................................ 276
B.2. CIVIL CASES................................................277
B.3. CRIMINAL CASES ...................................... 279
C. TAXPAYER’S SUIT IMPUGNING THE
VALIDITY OF TAX MEASURES OR ACTS OF
TAXING AUTHORITIES ................................. 280
C.1. TAXPAYER’S SUIT, DEFINED ....................280
C.2. DISTINGUISHED FROM CITIZEN’S SUIT ..280
C.3. REQUISITES FOR CHALLENGING THE
CONSTITUTIONALITY OF A TAX MEASURE OR
ACT OF TAXING AUTHORITY ...........................280
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TAXATION LAW
TAXATION 1

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UP LAW BOC TAXATION 1
I. General Principles of
Taxation
A. DEFINITION, CONCEPT AND PURPOSE
OF TAXATION
A.1. TAXATION
(1) Is a mode of raising revenue for public
purpose; the exercise of sovereign power to raise
revenue for the expense of the government.
(2) The process or means by which the sovereign,
through its law-making body, raises income to
defray the necessary expenses of government; a
method of apportioning the cost of government
among those who in some measure are privileged
to enjoy its benefits and must, therefore, bear its
burdens [51 Am. Jur. 34; 1 Cooley 72-93].
(3) As a power, it refers to the inherent power of
the state to demand enforced contributions for
public purpose or purposes.
(4) Is described as a destructive power which
interferes with the personal and property rights of
the people and takes from them a portion of their
property for the support of the government.
[Paseo Realty & Development Corporation v. CA,
G.R. No. 119286 (2004)]
A.2. PURPOSE
1) Revenue-raising
Primary purpose of taxation is to provide funds or
property with which to promote the general
welfare and protection of its citizens.
Fees may be properly regarded as taxes even
though they also serve as an instrument of
regulation. If the purpose is primarily revenue, or
if revenue is, at least, one of the real and
substantial purposes, then the exaction is
properly called a tax. [PAL v. Edu, G.R. No. L-
41383 (1988)]
2) Non-revenue/special or regulatory
Taxation is often employed as a device for
regulation by means of which certain effects or
conditions envisioned by governments may be
achieved. Taxes may be levied with a regulatory
purpose to provide means for the rehabilitation
and stabilization of a threatened industry which
is affected with public interest as to be within the
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TAXATION LAW
police power of the state. These regulatory
purposes are also known as Sumptuary. Thus,
taxation can:
(1) Strengthen anemic enterprises or provide
incentive to greater production through grant
of tax exemptions or the creation of conditions
conducive to their growth.
(2) Protect local industries against foreign
competition by imposing additional taxes on
imported goods, or encourage foreign trade by
providing tax incentives on imported goods.
(3) Be a bargaining tool by setting tariff rates first
at a relatively high level before trade
negotiations are entered into with another
country.
(4) Halt inflation in periods of prosperity to curb
spending power; ward off depression in
periods of slump to expand business.
(5) Reduce inequalities in wealth and incomes, as
for instance, the estate, donor's and income
taxes, their payers being the recipients of
unearned wealth or mostly in the higher
income brackets. Progressive system of
taxation prevents the undue concentration of
wealth in the hands of a few individuals.
Progressivity is keystoned on the principle that
those who are able to pay shoulder the bigger
portion of the tax burden. [Mamalateo]
(6) Taxes may be levied to promote science and
invention (see RA. No. 5448) or to finance
educational activities (see RA. No. 5447) or to
improve the efficiency of local police forces in
the maintenance of peace and order through
grant of subsidy (see RA.No. 6141).
(7) Be an implement of the police power to
promote the general welfare.
(8) Protect local industries from foreign
competition.
Taxation is no longer envisioned as a measure
merely to raise revenue to support the
existence of the government; taxes may be
levied with a regulatory purpose to provide
means for the rehabilitation and stabilization
of a threatened industry which is affected with
public interest as to be within the police power
of the state. [Caltex v. COA, G.R. No. 92585
(1992)]
(9) To address push for the government’s health
measure, just like what happened in the
UP LAW BOC TAXATION 1
landmark legislation on sin taxes in 2012 (see
R.A. No. 10351).
B. NATURE AND CHARACTERISTICS OF
TAXATION
B.1 NATURE
1) Inherent in sovereignty – The power to tax is an
attribute of sovereignty. It is a power emanating
from necessity. It is a necessary burden to
preserve the State's sovereignty and a means to
give the citizenry an army to resist an aggression,
a navy to defend its shores from invasion, a corps
of civil servants to serve, public improvement
designed for the enjoyment of the citizenry and
those which come within the State's territory, and
facilities and protection which a government is
supposed to provide [Phil. Guaranty Co., Inc. v.
Commissioner, G.R. No. L-22074 (1965)].
2) Essentially a legislative function – The power to
tax is peculiarly and exclusively legislative and
cannot be exercised by the executive or judicial
branch of the government [1 Cooley 160-161].
Hence, only Congress, our national legislative
body, can impose taxes. The levy of a tax,
however, may also be made by a local legislative
body subject to such limitations as may be
provided by law. It includes the authority to:
(a) Determine the nature, purpose, extent,
coverage, apportionment, situs, and method
of collection of the tax;
(b) Grant tax exemptions or condonations; and
(c) Specify or provide for the administrative as
well as judicial remedies that either the
government or the taxpayers may avail
themselves in the proper implementation of
the tax measure.
3) Subject to constitutional and inherent
limitations – The power to tax is said to be the
strongest of all the powers of government. It is
unlimited, plenary, comprehensive and supreme,
in the absence of constitutional restrictions, the
principal check on its abuse resting in the
responsibility of members of Congress to their
constituents. However, the power of taxation is
subject to constitutional and inherent limitations
[Mamalateo]. These limitations are those
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provided in the fundamental law or implied
therefrom, while the rest spring from the nature
of the taxing power itself although they may or
may not be provided in the Constitution.
B.2 CHARACTERISTICS
(1) It is an enforced contribution for its imposition
is in no way dependent upon the will or assent
of the person taxed. It is not contractual, either
express or implied, but positive acts of
government.
(2) It is generally payable in the form of money,
although the law may provide payment in kind
(e.g. backpay certificates under Sec. 2, R.A. No.
304, as amended);
(3) It is proportionate in character or is laid by
some rule of apportionment which is usually
based on ability to pay.
“The rule of taxation shall be uniform and
equitable. The Congress shall evolve a
progressive system of taxation.” [Sec. 28 (1),
Art. VI, 1987 Constitution]
(4) It is levied on persons, property, rights, acts,
privileges, or transactions.
(5) It is levied by the State which has jurisdiction
or control over the subject to be taxed.
(6) It is personal to the taxpayer.
(7) It is levied by the law-making body of the
State. The power to tax is a legislative power
but is also granted to local governments,
subject to such guidelines and limitations as
law may be provided by law.
“Each local government unit shall have the
power to create its own sources of revenues
and to levy taxes, fees, and charges subject to
such guidelines and limitations as the
Congress may provide, consistent with the
basic policy of local autnomy. Such taxes, fees,
and charges shal accrue exclusively to the
local governments.” [Sec. 5, Art. X, 1987
Constitution];
(8) It is levied for public purpose. Revenues
derived from taxes cannot be used for purely
private purposes or for the exclusive benefit of
private persons. [Gaston v. Republic Planters
Bank, G.R. No. 77194 (1988)]. The “public
purpose or purposes” of the imposition is
implied in the levy of tax. [Mendoza v.
Municipality, G.R. No. L-7373 (1954)]. A tax
UP LAW BOC TAXATION 1 TAXATION LAW

levied for a private purpose constitutes a (9) It is also an important characteristic of most
taking of property without due process of law; taxes that they are commonly required to be
and paid at regular periods or intervals (see 1
Cooley 64) every year.

C. POWER OF TAXATION AS DISTINGUISHED FROM POLICE POWER AND EMINENT DOMAIN

When the distinction of exercise of powers is relevant

Since Congress has the power to exercise the State inherent powers of Police Power, Eminent Domain and
Taxation, the distinction between police power and the power to tax, which could be significant if the
exercising authority were mere political subdivisions (since delegation by it to such political subdivisions of
one power does not necessarily include the other), would not be of any moment when, as in the case under
consideration, Congress itself exercises the power. [NTC v. CA, 311 SCRA 508 (1999)]
Therefore, the distinction is important when the one exercising it is the LGU (mere delegated authority).

Taxation Eminent Domain Police Power

Authority (who May be exercised only by
exercises the the government or its
Power) political subdivisions.
Purpose The property (generally in
the form of money) is
taken for the support of
the government.
Persons Affected Operates upon a
community or class of
individuals.
Effect The money contributed
becomes part of the
public funds.
Benefits Received It is assumed that the
individual receives the
equivalent of the tax in
the form of protection
and benefits he receives
from the government.
Amount of Generally, there is no
Imposition limit on the amount of tax
that may be imposed.
Relationship to Subject to constitutional
Constitution limitations, including the
prohibition against
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May be exercised by the May be exercised only by
government or its the government or its
political subdivisions or political subdivisions.
may be granted to public
service companies or
public utilities.
Merely a power to take The use of the property is
private property for public “regulated” for the
use. purpose of promoting the
general welfare; it is not
compensable.
Operates on an individual Operates upon a
as the owner of a community or a class of
particular property. individuals.
There is no transfer of
title. At most, there is
There is a transfer of the
restraint on the injurious
right to property.
use of property.
He receives the market The person affected
value of the property receives indirect benefits
taken from him. as may arise from the
maintenance of a healthy
economic standard of
society.
No amount imposed but Amount imposed should
rather the owner is paid not be more than
the market value of sufficient to cover the
property taken. cost of the license and
necessary expenses.
Inferior to the impairment Relatively free from
prohibition; government constitutional limitations
cannot expropriate and is superior to the
UP LAW BOC TAXATION 1 TAXATION LAW

impairment of the private property, which impairment of contract

obligation of contracts. under a contract had provision.
previously bound itself to
purchase from the other
contracting party.

([Mamalateo, Reviewer on Taxation 2nd Edition (2008), Rex Bookstore, Inc., pp. 11-12)

PAGE 5 OF 275
UP LAW BOC TAXATION 1
D. THEORY AND BASIS OF TAXATION
(1) Lifeblood theory
Taxes are the lifeblood of the government and
their prompt and certain availability is an
imperious need. [CIR v. Pineda, G.R. No. L-
22734 (1967)]
Taxes are the lifeblood of the government and
so should be collected without unnecessary
hindrance. It is said that taxes are what we pay
for civilized society. Without taxes, the
government would be paralyzed for lack of the
motive power to activate and operate it [CIR v.
Algue, G.R. No. L-28896 (1988)].
(2) Necessity theory
The power of taxation proceeds upon theory
that the existence of government is a
necessity; that is cannot continue without
means to pay its expenses; and that for those
means it has the right to compel all citizens
and property within its limits to contribute.
The power to tax is an attribute of sovereignty.
It is a power emanating from necessity. It is a
necessary burden to preserve the State's
sovereignty and a means to give the citizenry:
 an army to resist an aggression;
 a navy to defend its shores from invasion;
 a corps of civil servants to serve’
 public improvement designed for the
enjoyment of the citizenry and those which
come within the State's territory; and
 facilities and protection which a
government is supposed to provide.
[Phil. Guaranty v. CIR, G.R. No. L-22074
(1965)]
The obligation to pay taxes rests upon the
necessity of money for the support of the state.
For this reason, no one is allowed to object to
or resist the payment of taxes solely because
no personal benefit to him can be pointed out.
[Lorenzo v. Posadas, G.R. No. L-43082 (1937)]
(3) Benefits-protection Theory (Symbiotic
Relationship)
This principle serves as the basis of taxation
and is founded on the reciprocal duties of
protection and support between the State and
its inhabitants.
Despite the natural reluctance to surrender
part of one's hard earned income to the taxing
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authorities, every person who is able to must
contribute his share in the running of the
government. The government for its part is
expected to respond in the form of tangible
and intangible benefits intended to improve
the lives of the people and enhance their
moral and material values. This symbiotic
relationship is the rationale of taxation and
should dispel the erroneous notion that it is an
arbitrary method of exaction by those in the
seat of power. [CIR v. Algue, supra]
(4) Jurisdiction over subject and objects
The limited powers of sovereignty are confined
to objects within the respective spheres of
governmental control. These objects are the
proper subjects or objects of taxation and
none else.
E. PRINCIPLES OF A SOUND TAX
SYSTEM
(1) Fiscal adequacy
The sources of tax revenue should coincide
with, and approximate the needs of,
government expenditures. The revenue
should be elastic or capable of expanding or
contracting annually in response to variations
in public expenditures.
(2) Administrative feasibility
Tax laws should be capable of convenient, just
and effective administration. Each tax should
be capable of uniform enforcement by
government officials, convenient as to the
time, place, and manner of payment, and not
unduly burdensome upon, or discouraging to
business activity.
(3) Theoretical justice or equality
The tax burden should be in proportion to the
taxpayer’s ability to pay. This is the so-called
ability to pay principle. Taxation should be
uniform as well as equitable
Note: The non-observance of the above
principles will not necessarily render the tax
imposed invalid except to the extent those
specific constitutional limitations are violated.
(De Leon)
UP LAW BOC
F. SCOPE AND LIMITATIONS OF
TAXATION
F.1. INHERENT LIMITATIONS
(a) Public Purpose
The proceeds of the tax must be used (a) for
the support of the State or (b) for some
recognized objects of government or directly
to promote the welfare of the community.
Test: Whether the statute is designed to
promote the public interest, as opposed to the
furtherance of the advantage of individuals,
although each advantage to individuals might
incidentally serve the public. [Pascual v. Sec.
of Public Works, G.R. No. L-10405 (1960)]
The protection and promotion of the sugar
industry is a matter of public concern; the
legislature may determine within reasonable
bounds what is necessary for its protection
and expedient for its promotion. [Lutz v.
Araneta, G.R. No. L-7859 (1955)]
The public purpose of a tax may legally exist
even if the motive which impelled the
legislature to impose the tax was to favor one
industry over another. [Tio v. Videogram, G.R.
No. L-75697 (1987)]
Tests in Determining Public Purpose:
(1) Duty Test - Whether the thing to be
furthered by the appropriation of public
revenue is something which is the duty of
the State as a government to provide.
(2) Promotion of General Welfare Test -
Whether the proceeds of the tax will
directly promote the welfare of the
community in equal measure.
(3) Character of the Direct Object of the
Expenditure – It is the essential character
of the direct object of the expenditure
which must determine its validity as
justifying a tax and not the magnitude of
the interests to be affected nor the degree
to which the general advantage of the
community, and thus the public welfare,
may be ultimately benefited by their
promotion. Incidental advantage to the
public or to the State, which results from
the promotion of private enterprises or
business, does not justify their aid with
public money. [Pascual v. Sec. of Public
Works, supra]
TAXATION 1 TAXATION LAW
(b) Inherently Legislative
Stated in another way, taxation may
exceptionally be delegated, subject to such
well-settled limitations as:
(1) The delegation shall not contravene any
constitutional provision or the inherent
limitations of taxation;
(2) The delegation is effected either by the
Constitution or by validly enacted
legislative measures or statute; and
(3) The delegated levy power, except when the
delegation is by an express provision of the
Constitution itself, should only be in favor
of the local legislative body of the local or
municipal government concerned. [Vitug
and Acosta]
(i) General Rule: Delegata potestas non potest
delegari. The power to tax is exclusively vested
in the legislative body and it may not be re-
delegated.
Judge Cooley enunciates the doctrine in the
following oft-quoted language: "One of the
settled maxims in constitutional law is that
the power conferred upon the legislature to
make laws cannot be delegated by that
department to any other body or authority.
Where the sovereign power of the state has
located the authority, there it must remain;
and by the constitutional agency alone the
laws must be made until the Constitution itself
is charged.” [People v. Vera, G.R. No. L-45685,
November 16, 1937]
Legislature has the power to determine the:
(1) nature (kind),
(2) object (purpose),
(3) extent (rate),
(4) coverage (subjects) and
(5) situs (place) of taxation.
(ii) Exceptions
(a) Delegation to local governments – This
exception is in line with the general
principle that the power to create
municipal corporations for purposes of
local self-government carries with it, by
necessary implication, the power to confer
the power to tax on such local governments.
(1 Cooley 190). This is logical for after all,
municipal corporations are merely
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UP LAW BOC TAXATION 1 TAXATION LAW

instrumentalities of the state for the better as no delegation of the strictly

administration of the government in legislative power to tax is involved.
respect to matters of local concern. [Pepsi-
(3) The powers which cannot be
Cola Bottling Co. of the Phil. Inc. v. Mun. of
delegated include the
Tanauan, G.R. No. L-31156 (1976)]. Under
determination of the subjects to be
the new Constitution, however, LGUs are
taxed, the purpose of the tax, the
now expressly given the power to create its
amount or rate of the tax, the
own sources of revenue and to levy taxes,
manner, means, and agencies of
fees and charges, subject to such
collection, and the prescribing of
guidelines and limitations as the Congress
the necessary rules with respect
may provide which must be consistent with
thereto.
the basic policy of local autonomy. [Art. X,
Sec 5, 1987 Constitution]
(c) Territorial
(b) Delegation to the President Rule: A state may not tax property lying
outside its borders or lay an excise or privilege
(1) to enter into Executive agreements;
tax upon the exercise or enjoyment of a right
and
or privilege derived from the laws of another
(2) to ratify treaties which grant tax state and therein exercise and enjoyed. (51
exemption subject to Senate Am.Jur. 87-88).
concurrence.
Reasons:
The Congress may, by law, authorize the (1) Tax laws (and this is true of all laws) do not
President to fix within specified limits, and operate beyond a country’s territorial limits.
subject to such limitations and restrictions
(2) Property which is wholly and exclusively
as it may impose, tariff rates, import and
within the jurisdiction of another state
export quotas, tonnage and wharfage dues,
receives none of the protection for which a
and other duties or imposts within the
tax is supposed to be a compensation.
framework of the national development
program of the Government. [Art. 6, Sec.
Note: Where privity of relationship exists. It
28(2), 1987 Constitution]
does not mean, however, that a person outside
(c) Delegation to administrative agencies – of state is no longer subject to its taxing
Limited to the administrative powers. The fundamental basis of the right to
implementation that calls for some tax is the capacity of the government to
degree of discretionary powers under provide benefits and protection to the object
sufficient standards expressed by law or of the tax. A person may be taxed where there
implied from the policy and purposes of is between him and the taxing state, a privity
the Act. of the relationship justifying the levy. Thus, the
(1) There are certain aspects of the citizen’s income may be taxed even if he
resides abroad as the personal (as
taxing process that are not
distinguished from territorial) jurisdiction of
legislative and they may, therefore,
his government over him remains. In this case,
be vested in an administrative body.
the basis of the power to tax is not dependent
The powers which are not
on the source of the income nor upon the
legislative include: (1) the power to
location of the property nor upon the
value property for purposes of
residence of the taxpayer but upon his relation
taxation pursuant to fixed rules; (2)
the power to assess and collect the as a citizen to the state. As such citizen, he is
entitled, wherever he may be, inside or outside
taxes; and (3) the power to perform
of his country, to the protection of his
any of the innumerable details of
government.
computation, appraisement, and
adjustment, and the delegation of
such details.
(d) International Comity
(2) The exercise of the above powers is
Comity – respect accorded by nations to each
really not an exception to the rule
other because they are sovereign equals.
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UP LAW BOC TAXATION 1
Thus, the property or income of a foreign state
or government may not be the subject of
taxation by another state.
Reasons:
(1) In par in parem non habet imperium. As
between equals there is no sovereign
(Doctrine of Sovereign Equality among
states under international law). One state
cannot exercise its sovereign powers over
another.)
(2) In international law, a foreign government
may not be sued without its consent →
useless to impose a tax which could not be
collected.
(3) Usage among states that when a foreign
sovereign enters the territorial jurisdiction
of another, there is an implied
understanding that the former does not
intend to degrade its dignity by placing
itself under the jurisdiction of the other.
(e) Exemption of Government Entities,
Agencies, and Instrumentalities
If the taxing authority is the National
Government:
General Rule: Agencies and instrumentalities
of the government are exempt from tax.
Note: Unless otherwise provided by law, the
exemption applies only to government entities
through which the government immediately
and directly exercises its sovereign powers.
With respect to government-owned or
controlled corporations performing
proprietary (not governmental) functions, they
are generally subject to tax in the absence of
tax exemption provisions in their charters or
the law creating them.
Reasons for the exemption:
(a) To levy a tax upon public property would
render necessary new taxes on other public
property for the payment of the tax so laid and
thus, the government would be taxing itself to
raise money to pay over for itself.
(b) This immunity also rests upon
fundamental principles of government, being
necessary in order that the functions of
government shall not be unduly impeded. (1
Cooley 263).
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TAXATION LAW
(c) The practical effect of an exemption
running to the benefit of the government is
merely to reduce the amount of money that
has to be handled by the government in the
course of its operations: For these reasons,
provisions granting exemptions to government
agencies may be construed liberally in favor of
non-tax liability of such agencies. [Maceda v.
Macaraig, Jr., G.R. No. 88291 (1991)].
Exception: There is no constitutional
prohibition against the government taxing
itself. [Coll. v. Bisaya Land Transportation, 105
Phil. 338 (1959)].
If the taxing authority is a local government
unit: RA 7160 expressly prohibits LGUs from
levying tax on the National Government, its
agencies and instrumentalities and other
LGUs. [Sec. 133 (o), Local Government Code]
F.2. CONSTITUTIONAL LIMITATIONS
(a) Provisions Directly Affecting Taxation
(i) Prohibition against imprisonment for non-
payment of poll tax
No person shall be imprisoned for debt or non-
payment of a poll tax. [Art. III, Sec. 20, 1987
Constitution]
(ii) Uniformity and equality of taxation
The rule of taxation shall be uniform and
equitable. Congress shall evolve a progressive
system of taxation. [Art. VI, Sec. 28(1), 1987
Constitution]
(1) Uniformity – All taxable articles or
properties of the same class shall be taxed
at the same rate. [City of Baguio v. de Leon,
G.R. No. L-24756 (1968)].
(a) Uniformity of operation throughout tax
unit - The rule requires the uniform
application and operation, without
discrimination, of the tax in every place
where the subject of it is found. This
means, for example, that a tax for a
national purpose must be uniform and
equal throughout the country and a tax
for a province, city, municipality, or
barangay must be uniform and equal
throughout the province, city,
municipality or barangay.
(b) Equality in burden – Uniformity implies
equality in burden, not equality in
UP LAW BOC TAXATION 1
amount or equality in its strict and
literal meaning. The reason is simple
enough. If legislation imposes a single
tax upon all persons, properties, or
transactions, an inequality would
obviously result considering that not all
persons, properties, and transactions
are identical or similarly situated.
Neither does uniformity demand that
taxes shall be proportional to the
relative value or amount of the subject
thereof. Taxes may be progressive.
(2) Equity
(a) Uniformity in taxation is effected through
the apportionment of the tax burden among
the taxpayers which under the Constitution
must be equitable. “Equitable” means fair,
just, reasonable and proportionate to the
taxpayer’s ability to pay. Taxation may be
uniform but inequitable where the amount of
the tax imposed is excessive or unreasonable.
(b) The constitutional requirement of equity in
taxation also implies an approach which
employees a reasonable classification of the
entities or individuals who are to be affected
by a tax. Where the “tax differentiation is not
based on material or substantial differences,”
the guarantee of equal protection of the laws
and the uniformity rule will likewise be
infringed.
Taxation does not require identity or equality
under all circumstances, or negate the
authority to classify the objects of taxation.
Classification, to be valid, must be reasonable
and this requirement is not deemed satisfied
unless:
(1) It is based upon substantial distinctions
which make real differences;
(2) These are germane to the purpose of the
legislation or ordinance;
(3) The classification applies not only to
present conditions but also to future
conditions substantially identical to those
of the present; and
(4) The classification applies equally to all
those who belong to the same class.
[Pepsi-Cola v. Butuan City, G.R. No. L-
22814 (1968)]
The progressive system of taxation would
place stress on direct rather than indirect
taxes, on non-essentiality rather than
PAGE 10 OF 275
TAXATION LAW
essentiality to the taxpayer of the object of
taxation, or on the taxpayer’s ability to pay.
Example is that individual income tax system
that imposes rates progressing upwards as
the tax base (taxpayer’s taxable income)
increases. A progressive tax, however, must
not be confused with a progressive system of
taxation.
While equal protection refers more to like
treatment of persons in like circumstances,
uniformity and equity refer to the proper
relative treatment for tax purposes of persons
in unlike circumstances.
(iii) Grant by Congress of authority to the
President to impose tariff rates
Delegation of Tariff powers to the President
under the flexible tariff clause [Sec. 28(2), Art.
VI, 1987 Constitution], which authorizes the
President to modify import duties. [Sec. 1608,
Customs Modernization and Tariff Act;
previously, Sec. 401, TCC]
(iv) Prohibition against taxation of religious,
charitable entities, and educational entities
Art. VI, Sec. 28(3), 1987 Constitution:
(a) Charitable institutions, churches and
personages or convents appurtenant
thereto, mosques, non-profit
cemeteries, and all lands, buildings, and
improvements,
(b) Actually, directly, and exclusively used
for religious, charitable, or educational
purposes shall be exempt from taxation.
(c) The tax exemption under this
constitutional provision covers property
taxes only and not other taxes [Lladoc v.
Commissioner, G.R. No. L-19201 (1965)].
In general, special assessments are not
covered by the exemption because by
nature they are not classified as taxes.
[Apostolic Prefect v. City Treasurer of
Baguio, G.R. No. L-47252 (1941)]
To be entitled to the exemption, the petitioner
must prove that:
(1) It is a charitable institution
(2) Its real properties are actually, directly and
exclusively used for charitable purposes.
UP LAW BOC TAXATION 1 TAXATION LAW

achieve; and no money inures to the private

Revenue or income from trade, business or
other activity, the conduct of which is not
related to the exercise or performance of
religious, educational and charitable purposes
or functions shall be subject to internal
revenue taxes when the same is not actually,
directly or exclusively used for the intended
purposes. [BIR Ruling 046-2000]
Test of Use of the property, and not
Exemption the ownership
Actual, direct and exclusive
Nature of
use for religious, charitable
Use
or educational purposes.
Real property taxes on
facilities which are
(1) actual,
(2) incidental to, or
(3) reasonably necessary
for the accomplishment
of said purposes such as
in the case of hospitals,
a school for training
Scope of nurses, a nurses’ home,
Exemption property to provide
housing facilities for
interns, resident doctors
and other members of
the hospital staff, and
recreational facilities for
student nurses, interns
and residents, such as
athletic fields. [Abra
Valley College v. Aquino,
G.R. No. L-39086
(1988)]
benefit of the persons managing or operating
the institution.
“Exclusive" - possessed and enjoyed to the
exclusion of others; debarred from
participation or enjoyment; "Exclusively" - "in
a manner to exclude; as enjoying a privilege
exclusively.”
If real property is used for one or more
commercial purposes, it is not exclusively used
for the exempted purposes but is subject to
taxation. The words "dominant use" or
"principal use" cannot be substituted for the
words "used exclusively" without doing
violence to the Constitution and the law.
Solely is synonymous with exclusively. [Lung
Center of the Philippines v. Quezon City, G.R.
No. 144104 (2004)]
Note: Lung Center did not necessarily overturn
the case of Abra Valley College v. Aquino.
Lung Center just provided a stricter
interpretation. In Abra Valley, the Court held:
The primary use of the school lot and building
is the basic and controlling guide, norm and
standard to determine tax exemption, and not
the mere incidental use thereof. Under the
1935 Constitution, the trial court correctly held
that the school building as well as the lot
where it is built, should be taxed, not because
the second floor of the same is being used by
the Director and his family for residential
purposes (incidental to its educational
purpose), but because the first floor thereof is
being used for commercial purposes. However,
since only a portion is used for purposes of
commerce, it is only fair that half of the
assessed tax be returned to the school
involved.

TEST: Whether an enterprise is charitable or (v) Prohibition against taxation of non-stock,

not: whether it exists to carry out a purpose non-profit educational institutions
recognized in law as charitable or whether it is Art. XIV, Sec. 4, 1987 Constitution
maintained for gain, profit, or private
(3) All revenues and assets of non-stock,
advantage.
non-profit educational institutions used
A charitable institution does not lose its actually, directly, and exclusively for
character as such and its exemption from educational purposes shall be exempt from
taxes simply because it derives income from taxes and duties.
paying patients, whether out-patient, or
Proprietary educational institutions,
confined in the hospital, or receives subsidies
including those cooperatively owned, may
from the government, so long as the money
likewise be entitled to such exemptions
received is devoted or used altogether to the
subject to the limitations provided by law,
charitable object which it is intended to
PAGE 11 OF 275
UP LAW BOC TAXATION 1 TAXATION LAW

including restrictions on dividends and Art. VI, Sec. 28, par. 3 Art. XIV, Sec. 4,
provisions for reinvestment. par. 3
religious, charitable,
(4) Subject to conditions prescribed by law,
or educational
all grants, endowments, donations, or
purposes.
contributions used actually, directly, and
exclusively for educational purposes shall Property taxes Income, property,
be exempt from tax. and donor’s taxes
and custom duties.
This provision covers only non-stock, non-
profit educational institutions. (vi) Majority vote of Congress for grant of tax
The exemption covers income, property, and exemption
donor’s taxes, custom duties, and other taxes Art. VI, Sec. 28, 1987 Constitution. No law
imposed by either or both the national granting any tax exemption shall be passed
government or political subdivisions on all without the concurrence of a majority of all
revenues, assets, property or donations, used the Members of the Congress.
actually, directly and exclusively for
educational purposes. (In the case of religious
Basis: The inherent power of the state to
and charitable entities and non-profit
impose taxes carries with it the power to grant
cemeteries, the exemption is limited to
tax exemptions.
property tax.)
The exemption does not cover revenues
Exemptions may be created by:
derived from, or assets used in, unrelated
activities or enterprise. (1) The Constitution, or
(2) Statutes, subject to constitutional
Similar tax exemptions may be extended to limitations
proprietary (for profit) educational institutions
by law subject to such limitations as it may Vote required for the grant of exemption:
provide, including restrictions on dividends Absolute majority of the members of Congress
and provisions for reinvestment. The (at least ½ + 1 of ALL the members voting
restrictions are designed to insure that the SEPARATELY)
tax-exemption benefits are used for Vote required for withdrawal of such grant of
educational purposes. exemption: Relative majority is sufficient
Lands, buildings, and improvements actually, (majority of the quorum).
directly and exclusively used for educational The provision guaranteeing equal protection
purposes are exempt from property tax [Sec. of the laws and that mandating the rule of
28(3), Art. VI, 1987 Constitution], whether the taxation shall be uniform and equitable
educational institution is proprietary or non- likewise limit, although not expressly, the
profit. legislative power to grant tax exemption.
Art. VI, Sec. 28, par. 3 Art. XIV, Sec. 4, Grants in the nature of tax exemptions:
par. 3 (1) Tax amnesties
Charitable Non-stock, non- (2) Tax condonations
institutions, churches profit educational (3) Tax refunds
and parsonages or institutions.
convents
appurtenant thereto, Note:
mosques, non-profit (1) Local government units may, through
cemeteries, and all ordinances duly approved, grant tax
lands, buildings, and exemptions, incentives or reliefs under
improvements, such terms and conditions as they may
actually, directly, and deem necessary. [Sec. 192, LGC]
exclusively used for
PAGE 12 OF 275
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(2) The President of the Philippines may,
when public interest so requires, condone
or reduce the real property tax and interest
for any year in any province or city or a
municipality within the Metropolitan
Manila Area. [Sec. 277, LGC]
(vii) Prohibition on use of tax levied for special
purpose
All money collected on any tax levied for a
special purpose shall be treated as a special
fund and paid out for such purpose only.
If the purpose for which a special fund was
created has been fulfilled or abandoned, the
balance, if any, shall be transferred to the
general funds of the Government. [Gaston v.
Republic Planters Bank, G.R. No. L-77194
(1988)].
(viii) President’s veto power on appropriation,
revenue, tariff bills
Art. VI, Sec. 27(2), 1987 Constitution. 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 times to which he does not
object.
(ix) Non-impairment of jurisdiction of the
Supreme Court
Art VIII, Sec. 2, 1987 Constitution. The
Congress shall have the power to define,
prescribe, and apportion the jurisdiction of
the various courts but may not deprive the
Supreme Court of its jurisdiction over cases
enumerated in Section 5 hereof.
Art. VIII, Sec. 5(2(b)), 1987 Constitution. The
Supreme Court shall have the following
powers:
(2) Review, revise, modify or affirm on
appeal or certiorari, as the laws or the Rules
of Court may provide, final judgments and
orders of lower courts in
(b) all cases involving the legality of any
tax, impost, assessment or toll or
any penalty imposed in relation
thereto.
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TAXATION 1 TAXATION LAW
Even the legislative body cannot deprive the
SC of its appellate jurisdiction over all cases
coming from inferior courts where the
constitutionality or validity of an ordinance or
the legality of any tax, impost, assessment, or
toll is in question. [San Miguel Corp v. Avelino,
G.R. No. L-39699 (1979)]
Art. VI, Sec. 30, 1987 Constitution. No law
shall be passed increasing the appellate
jurisdiction of the Supreme Court without
its advice and concurrence.
Scope of Judicial Review in taxation: limited
only to the interpretation and application of
tax laws. Its power does not include inquiry
into the policy of legislation. Neither can it
legitimately question or refuse to sanction the
provisions of any law consistent with the
Constitution. [Coll. v. Bisaya Land
Transportation, 105 Phil. 338 (1959)].
(x) Grant of power to the local government
units to create its own sources of revenue
LGUs have power to create its own sources of
revenue and to levy taxes, fees and charges,
subject to such guidelines and limitations as
the Congress may provide which must be
consistent with the basic policy of local
autonomy. [Art. X, Sec. 5, 1987 Constitution]
(xi) Flexible tariff clause
Delegation of tariff powers to the President
under the flexible tariff clause [Art. VI, Sec.
28(2), 1987 Constitution]
Flexible tariff clause: the authority given to the
President, upon the recommendation of
NEDA, to adjust the tariff rates under Sec.
1608 of the CMTA (previously, Sec. 401, CMTA)
in the interest of national economy, general
welfare and/or national security.
(xii) Exemption from real property taxes
Art. VI, Sec. 28(3), 1987 Constitution
Charitable institutions, churches and
personages or convents appurtenant
thereto, mosques, non-profit cemeteries,
and all lands, buildings, and improvements,
actually, directly, and exclusively used for
UP LAW BOC
religious, charitable, or educational
purposes shall be exempt from taxation.
(xiii) No appropriation or use of public money
for religious purposes
Art. VI, Sec. 29, 1987 Constitution
(1) No money shall be paid out of the
Treasury except in pursuance of an
appropriation made by law.
(2) No public money or property shall be
appropriated, applied, paid, or
employed, directly or indirectly, for the
use, benefit, or support of any sect,
church, denomination, sectarian
institution, or system of religion, or of
any priest, preacher, minister, other
religious teacher, or dignitary as such,
except when such priest, preacher,
minister, or dignitary is assigned to the
armed forces, or to any penal institution,
or government orphanage or
leprosarium.
(3) All money collected on any tax levied for
a special purpose shall be treated as a
special fund and paid out for such
purpose only. If the purpose for which a
special fund was created has been
fulfilled or abandoned, the balance, if
any, shall be transferred to the general
funds of the Government
(b) Provisions Indirectly Affecting Taxation
(i) Due process
Art. III, Sec. 1, 1987 Constitution. No person
shall be deprived of life, liberty, or property
without due process of law, nor shall any
person be denied the equal protection of
the laws.
(1) Substantive Due Process – An act is done
under the authority of a valid law or the
Constitution itself.
(2) Procedural Due Process – An act is done
after compliance with fair and reasonable
methods or procedure prescribed by law.
Due Process in Taxation requirements:
(1) Public purpose
(2) Imposed within taxing authority’s
territorial jurisdiction
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TAXATION 1 TAXATION LAW
(3) Assessment or collection is not arbitrary or
oppressive
The due process clause may be invoked where
a taxing statute is so arbitrary that it finds no
support in the Constitution, as where it can be
shown to amount to the confiscation of
property. [Sison v. Ancheta, G.R. No. L-
59431(1984)]
Instances of violations of the due process
clause:
(1) If the tax amounts to confiscation of
property;
(2) If the subject of confiscation is outside the
jurisdiction of the taxing authority;
(3) If the tax is imposed for a purpose other
than a public purpose;
(4) If the law which is applied retroactively
imposes just and oppressive taxes.
(5) If the law violates the inherent limitations
on taxation.
(ii) Equal protection
Art. III, Sec. 1, 1987 Constitution. No person
shall be deprived of life, liberty, or property
without due process of law, nor shall any person
be denied the equal protection of the laws.
All persons subject to legislation shall be
treated alike under similar circumstances and
conditions both in the privileges conferred and
liabilities imposed. (1 Cooley 824-825; See
Sison v. Ancheta, supra).
The doctrine does not require that persons or
properties different in fact be treated in laws
as though they were the same. Indeed, to treat
them the same or alike may offend the
Constitution. What the Constitution prohibits
is class legislation which discriminates against
some and favors others. As long as there are
rational or reasonable grounds for so doing,
Congress may, therefore, group the persons or
properties to be taxed and it is sufficient “if all
of the same class are subject to the same rate
and the tax is administered impartially upon
them.” (1 Cooley 608).
The equal protection clause is subject to
reasonable classification (See requisites for
valid classification, supra).
UP LAW BOC
(iii) Religious freedom
Art. III, Sec. 5, 1987 Constitution. No law
shall be made respecting an establishment
of religion, or prohibiting the free exercise
thereof. (Non-establishment clause)
The free exercise and enjoyment of religious
profession and worship, without
discrimination or preference, shall forever
be allowed. (Free exercise clause)
No religious test shall be required for the
exercise of civil and political rights.
The free exercise clause is the basis of tax
exemptions.
The imposition of license fees on the
distribution and sale of bibles and other
religious literature by a non-stock, non-profit
missionary organization not for purposes of
profit amounts to a condition or permit for the
exercise of their right, thus violating the
constitutional guarantee of the free exercise
and enjoyment of religious profession and
worship which carries with it the right to
disseminate religious beliefs and information.
[American Bible Society v. City of Manila, G.R.
No. L-9637 (1957)] It is actually in the nature
of a condition or permit for the exercise of the
right. This is different from a tax in the income
of one who engages in religious activities or a
tax on property used or employed in
connection with those activities. It is one thing
to impose a tax on the income or property of a
preacher. It is quite another thing to exact a
tax for the privilege of delivering a sermon.
The Constitution, however, does not prohibit
imposing a generally applicable tax on the
sale of religious materials by a religious
organization. [Tolentino v. Secretary of
Finance, G.R. No. 115455 (1994)]
(iv) Non-impairment of obligations of contracts
Art. III, Sec. 10, 1987 Constitution. No law
impairing the obligation of contracts shall
be passed.
The Contract Clause has never been thought
as a limitation on the exercise of the State's
power of taxation save only where a tax
exemption has been granted for a valid
PAGE 15 OF 275
TAXATION 1 TAXATION LAW
consideration. [Tolentino v. Secretary of
Finance, supra]
G. STAGES OR ASPECTS OF TAXATION
The exercise of taxation involves the following
stages:
(1) [LEGISLATIVE ACT] Levy or imposition – This
process involves the passage of tax laws or
ordinances through the legislature. The tax
laws to be passed shall determine those to
be taxed (person, property or rights), how
much is to be collected (the rate and the
base of tax), and how taxes are to be
implemented (the manner of imposing and
collecting tax). It also involves the granting
of tax exemptions, tax amnesties or tax
condonation.
(2) [EXECUTIVE ACT] Assessment and collection
– This process involves the act of
administration and implementation of tax
laws by the executive through its
administrative agencies such as the Bureau
of Internal Revenue or Bureau of Customs.
(3) [TAXPAYER’S ACT] Payment – this process
involves the act of compliance by the
taxpayer in contributing his share to pay
the expenses of the government. Payment
of tax also includes the options, schemes or
remedies as may be legally open or
available to the taxpayer.
(4) [TAXPAYER’S AND EXECUTIVE ACT] Refund – A
claim for refund must first be filed with the
Commissioner of Internal Revenue. A suit
or proceeding may be filed within two years
from the date of payment of the tax or
penalty regardless of any supervening
cause that may arise after payment. The
Commissioner may, even without a written
claim therefor, refund or credit any tax,
where on the face of the return, such
payment appears clearly to have been
erroneously paid. [Sec. 229, NIRC]
UP LAW BOC TAXATION 1 TAXATION LAW

H. DEFINITION, NATURE AND (3) The person or property taxed is within the
CHARACTERISTICS OF TAXES jurisdiction of the taxing authority;
(4) Assessment and collection is in
H.1 TAXES consonance with the due process clause;
AND
(a) Are enforced proportional contributions
from persons and property levied by the law- (5) The tax must not infringe on the inherent
making body of the State by virtue of its and constitutional limitations of the power
sovereignty for the support of the government of taxation.
and all public needs.
(b) Are the enforced proportional and J. TAX AS DISTINGUISHED FROM
pecuniary contributions from persons and
OTHER FORMS OF EXACTIONS
property levied by the law-making body of the
state having jurisdiction over the subject of the (1) Tariff
burden for the support of the government and Taxes Tariff
public needs. All embracing term to A kind of tax imposed
include various kinds on articles which are
(c) Are what we pay for civilized society.
of enforced traded internationally
Without taxes, the government would be
contributions upon
paralyzed for lack of the motive power to
persons for the
activate and operate it. [CIR v. Algue, supra]
attainment of public
purposes
Essential Characteristics
(a) It is a forced charge, imposition or (2) Toll
contribution. As such, it operates ad Taxes Toll
infinitum. Paid for the support Paid for the use of
(b) It is assessed in accordance with some of the government another’s property.
reasonable rule of apportionment which Demand of Demand of
means that conformably with the sovereignty proprietorship
constitutional mandate for Congress to
evolve a progressive tax system, taxes Generally, no limit on Amount paid
must be based on taxpayer’s ability to pay the amount collected depends upon the
[Art VI, Sec 28[a], 1987 Constitution] as long as it is not cost of construction
excessive, or maintenance of the
(c) It is a pecuniary burden payable in money. unreasonable or public improvement
(d) It is imposed by the State on persons, confiscatory used.
property, or exercise within its jurisdiction, Imposed only by the Imposed by the
in accordance with the principle of government government or by
territoriality. private individuals or
(e) It is levied by the legislative body of the entities.
State. A toll is a sum of money for the use of
(f) It is levied for a public purpose. something, generally applied to the
consideration which is paid for the use of a
(g) It is personal to the taxpayer. road, bridge or the like, of a public nature. (1
Cooley 77.)
I. REQUISITES OF A VALID TAX The view has been expressed, however, that
the taking of tolls is only another method of
(1) For a public purpose; taxing the public for the cost of the
(2) Rule of taxation should be uniform; construction and repair of the improvement
for the use of which the toll is charged. (71 Am.
Jur. 2d 351.)
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(3) License fee (2) The power to regulate as an exercise of

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

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(4) Special assessment Taxes Debt

Taxes Special Assessment compensation (see
Levied not only on Levied only on land Art. 1279, Civil Code)
land
Imprisonment is a A person cannot be
Imposed regardless Imposed because of sanction for non- imprisoned for non-
of public an increase in value payment of tax, payment of debt
improvements of land benefited by except poll tax (except when it arises
public improvement from a crime)
Contribution of a Contribution of a Governed by the Governed by the
taxpayer for the person for the special prescriptive ordinary periods of
support of the construction of a periods provided for prescription
government public improvement in the NIRC
It has general Exceptional both as Does not draw Draws interest when
application both as to to time and locality interest except only it is so stipulated or
time and place when delinquent where there is default
Imposed only by Can be imposed by
public authority private individual
A special assessment is not a personal liability
of the person assessed, i.e., his liability is
limited only to the land involved. It is based
A tax is not a debt in the ordinary sense of the
wholly on benefits (not necessity).
word.
A charge imposed only on property owners
benefited is a special assessment rather than
(6) Penalty
a tax notwithstanding that the statute calls it
Taxes Penalty
a tax. The rule is that an exemption from
Violation of tax laws Any sanction imposed
taxation does not include exemption from
may give rise to as a punishment for
special assessment. But the power to tax
imposition of penalty violation of law or
carries with it the power to levy a special
acts deemed injurious
assessment.
Note: The term "special levy" is the name used Generally intended to Designed to regulate
in the present Local Government Code (RA. No. raise revenue conduct
7160). A province, city, or municipality, or the May be imposed only May be imposed by
National Government, may impose a special by the government the government or
levy on lands especially benefited by public private individuals or
works or improvements financed by it. [Sec. entities
240, RA 7160]
Cannot be a subject Can be a subject of
of set off or set off or
(5) Debt compensation compensation (see
Taxes Debt Art. 1279, Civil Code)
Based on laws Generally based on
contract, express or
implied. K. KINDS OF TAXES
Generally cannot be Assignable (1) As to object
assigned (a) Personal, Poll or Capitation Tax – tax of
a fixed amount imposed on persons
Generally paid in May be paid in kind residing within a specified territory,
money whether citizens or not, without regard
Cannot be a subject Can be a subject of to their property or the occupation or
of set off or set off or business in which they may be engaged
compensation (e.g. community (formerly residence)
tax). Taxes of a specified amount
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imposed upon each person performing are indirect (e.g., VAT, percentage tax,
a certain act or engaging in a certain excise taxes on specified goods,
business or profession are not, however, customs duties).
poll taxes. (71 Am. Jur. 2d 357).
(b) Property Tax – tax imposed on property,
(3) As to tax rates
real or personal, in proportion to its
(a) Specific Tax – a tax of a fixed amount
value or in accordance with some other
imposed by the head or number or by
reasonable method of apportionment
some other standard of weight or
(e.g., real estate tax). The obligation to
measurement. It requires no
pay the tax is absolute and unavoidable
assessment (valuation) other than the
and is not based upon the voluntary
listing or classification of the objects to
action of the person assessed.
be taxed (e.g., taxes on distilled spirits,
(c) Privilege/Excise Tax – any tax which wines, and fermented liquors; cigars
does not fall within the classification of and cigarettes)
a poll tax or a property tax. Thus, it is
(b) Ad Valorem Tax – a tax of a fixed
said that an excise tax is a charge
proportion of the value of the property
imposed upon the performance of an
with respect to which the tax is
act, the enjoyment of a privilege, or the
assessed. It requires the intervention of
engaging in an occupation, profession,
assessors or appraisers to estimate the
or business. The obligation to pay the
value of such property before the
tax is based on the voluntary action of
amount due from each taxpayer can be
the person taxed in performing the act
determined. The phrase “ad valorem”
or engaging in the activity which is
means literally, “according to value.”
subject to the excise. The term “excise
(e.g., real estate tax, excise tax on
tax” is synonymous with “privilege tax”
automobiles, non-essential goods such
and the two are often used
as jewelry and perfumes, customs
interchangeably (e.g., income tax, value
duties (except on cinematographic
added tax, estate tax, donor’s tax).
films)).
(c) Mixed
(2) As to burden or incidence
(a) Direct Taxes – taxes which are
demanded from persons who also (4) As to purpose
shoulder them; taxes for which the (a) General or Fiscal Tax – levied for the
taxpayer is directly or primarily liable, or general or ordinary purposes of the
which he cannot shift to another (e.g., Government, i.e., to raise revenue for
income tax, estate tax, donor’s tax, governmental needs (e.g., income tax,
community tax) VAT, and almost all taxes).
(b) Indirect Taxes – taxes which are (b) Special/Regulatory/Sumptuary Tax –
demanded from one person in the levied for special purposes, i.e., to
expectation and intention that he shall achieve some social or economic ends
indemnify himself at the expense of irrespective of whether revenue is
another, falling finally upon the actually raised or not (e.g., protective
ultimate purchaser or consumer; taxes tariffs or customs duties on imported
levied upon transactions or activities goods to enable similar products
before the articles subject matter manufactured locally to compete with
thereof, reach the consumers who such imports in the domestic market).
ultimately pay for them not as taxes but
Tariff duties intended mainly as a
as part of the purchase price. Thus, the
source of revenue are relatively low so
person who absorbs or bears the burden
as not to discourage imports.
of the tax is other than the one on whom
it is imposed and required by law to pay
the tax. Practically all business taxes
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(5) As to scope (or authority imposing the tax) situs is necessarily in the state which has
(a) National – taxes imposed by the jurisdiction or which exercises dominion over
national government (e.g., national the subject in question. Within the territorial
internal revenue taxes, customs duties, jurisdiction, the taxing authority may
and national taxes imposed by laws). determine the situs.
(b) Municipal or Local – taxes imposed by
local governments (e.g., business taxes
Factors that Determine Situs:
that may be imposed under the Local
(1) Nature of the tax;
Government Code, professional tax).
(2) Subject matter of the tax (person, property,
act or activity);
(6) As to graduation
(a) Progressive – The rate of tax increases as (3) Possible protection and benefit that may
the tax base or bracket increases, e.g., accrue both to the government and the
income tax, estate tax, donor’s tax. taxpayer;
(b) Regressive – The rate of tax decreases as (4) Citizenship of the taxpayer;
the tax base or bracket increases. There is
(5) Residence of the taxpayer;
no regressive tax in the Philippines.
(6) Source of income.
(c) Proportionate – The rate of tax is based on
a fixed percentage of the amount of the
property, receipts or other basis to be taxed, (b) Situs of Income Tax
e.g., real estate tax, VAT, and other
percentage taxes. Taxpayer Source of Income
Citizen- Residency Within Without
(d) Digressive – A fixed rate is imposed on a
ship Phils. Phils.
certain amount and diminishes gradually
on sums below it. The tax rate in this case Filipino Resident Taxable Taxable
is arbitrary because the increase in tax rate
is not proportionate to the increase of tax Filipino Non- Taxable Non-
base. Resident Taxable
Alien Resident Taxable Non-
Taxable
Regressive/Progressive system of taxation
A regressive tax must not be confused with the Alien Non- Taxable Non-
regressive system of taxation. Resident Taxable
In a society where the majority of the people
have low incomes, regressive taxation system (c) Situs of Property Tax
exists when there are more indirect taxes
imposed than direct taxes. Since the low- Kind of Property Situs
income sector of the population as a whole Real property Where it is located
buys more consumption goods on which the (lex rei sitae)
indirect taxes are collected, the burden of Tangible Personal Where property is
indirect taxes rests more on them than on the property physically located
more affluent groups. although the owner
A progressive tax is, therefore, also different resides in another
from a progressive system of taxation. jurisdiction.
Intangible personal Gen Rule: Domicile
property (e.g., of the owner.
L. SITUS OF TAXATION credits, bills Mobilia sequuntur
(a) Meaning: Situs of taxation literally means receivables, bank personam
the place of taxation. The basic rule is that the deposits, bonds, (movables follow
state where the subject to be taxed has a situs promissory notes, the person)
may rightfully levy and collect the tax; and the mortgage loans,
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Kind of Property Situs General Rule: Tax laws are construed strictly
judgments and against the government and liberally in favor
corporate stocks) of the taxpayer. [Manila Railroad Co. v. Coll. of
Exceptions: Customs, G.R. No. L-30264 (1929)].
(1) When property No person or property is subject to taxation
has acquired a unless within the terms or plain import of a
business situs in taxing statute. (see72 Am.Jur. 2d 44).
another
jurisdiction; or Taxes, being burdens, they are not to be
presumed beyond what the statute expressly
(2) When the law and clearly declares. [Coll. v. La Tondena, G.R.
provides for the No. L-10431 (1962)]. Thus, a tax payable by
situs of the “individuals” does not apply to “corporations.”
subject of tax
(e.g., Sec 104, Tax statutes offering rewards are liberally
NIRC) construed in favor of informers. [Penid v.
Virata, G.R. No. L-44004 (1983)].

(d) Situs of Excise Tax Exceptions:

Kind of Excise Tax Situs (1) The rule of strict construction as against the
Income Tax Source of the government is not applicable where the
income, nationality language of the statute is plain and there is
or residence of no doubt as to the legislative intent. (see 51
taxpayer (Sec. 23, Am.Jur.368). In such case, the words
NIRC) employed are to be given their ordinary
meaning. E.g. Word “individual” was
Donor’s Tax Location of changed by the law to “person”. This
property; nationality clearly indicates that the tax applies to
or residence of both natural and juridical persons, unless
taxpayer otherwise expressly provided.
Estate Tax Location of (2) The rule does not apply where the taxpayer
property; nationality claims exemption from the tax.
or residence of
taxpayer Tax statutes are to receive a reasonable
construction or interpretation with a view to
carrying out their purpose and intent. They
(e) Situs of Business Tax should not be construed as to permit the
taxpayer easily to evade the payment of tax.
Kind of Business Situs (Carbon Steel Co. v. Lewellyn, 251 U.S. 201).
Tax Thus, the good faith of the taxpayer is not a
VAT Where transaction is sufficient justification for exemption from the
made payment of surcharges imposed by the law for
Sale of Real Where the real failing to pay tax within the period required by
Property property is located law.

Sale of Personal Where the personal

Property property was sold M.2. TAX EXEMPTION AND EXCLUSION
Tax exemptions must be shown to exist clearly
and categorically, and supported by clear
legal provisions. [NPC v. Albay, G.R. No.
M. CONSTRUCTION AND
87479 (1990)]
INTERPRETATION OF
General Rule: In the construction of tax
M.1. TAX LAWS statutes, exemptions are not favored and are
construed strictissimi juris against the
PAGE 21 OF 275
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taxpayer. [Republic Flour Mills v. Comm. &
CTA, G.R. No. L-25602 (1970)].
(a) NPC v. Albay [supra]: Tax exemptions must
be shown to exist clearly and categorically,
and supported by clear legal provisions.
(b) Floro Cement v. Gorospe [supra]: Claims
for an exemption must be able to point out
some provision of law creating the right,
and cannot be allowed to exist upon a mere
vague implication or inference.
(c) CIR v. CA [supra]: Refunds are in the
nature of exemption, and must be
construed strictly against the
grantee/taxpayer.
(d) Comm. v. Kiener Co. Ltd. [G.R. No. L-
24754 (1975)]: Taxation is the rule and
exemption the exception, and therefore, he
who claims exemption must be able to
justify his claim or right thereto, by a grant
expressed in terms “too plain to be
mistaken and too categorical to be
misinterpreted.”
Exceptions:
(a) When the law itself expressly provides for a
liberal construction, that is, in case of
doubt, it shall be resolved in favor of
exemption; and
(b) When the exemption is in favor of the
government itself or its agencies, or of
religious, charitable, and educational
institutions because the general rule is that
they are exempt from tax.
(c) When the exemption is granted under
special circumstances to special classes of
persons.
(d) If there is an express mention or if the
taxpayer falls within the purview of the
exemption by clear legislative intent, the
rule on strict construction does not apply.
[Comm. v. Arnoldus Carpentry Shop, Inc.,
G.R. No. 71122 (1988)].
M.3. TAX RULES AND REGULATIONS
General Rule: The Secretary of Finance, upon
recommendation of the CIR, shall promulgate
all needful rules and regulations for the
effective enforcement of the provisions of the
NIRC. [Sec. 244, NIRC]
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TAXATION 1 TAXATION LAW
It is an elementary rule in administrative law
that administrative regulations and policies
enacted by administrative bodies to interpret
the law which they are entrusted to enforce
have the force of law and entitled to great
respect. They have in their favor a
presumption of legality [Gonzales v. Land
Bank, G.R. No. 76759 (1990)]
Requisites for validity and effectivity of
regulations
(1) Reasonable
(2) Within the authority conferred
(3) Not contrary to law and the Constitution
[Art. 7, NCC]
(4) Must be published
Tax regulations whose purpose is to enforce of
implement existing law must comply with the
following requisites to be effective [RP v.
Pilipinas Shell Petroleum Corp., G.R. No.
173918 (2008)]:
(1) Be published in a newspaper of general
circulation [Art. 2, NCC]; AND
(2) Filed with the UP Law Center Office of the
National Administrative Register (ONAR)
[Ch 2, Book VII, EO 292]
Note: Administrative rules and regulations
must always be in harmony with the provisions
of the law. In case of conflict with the law or
the Constitution, the administrative rules and
regulations are null and void. As a matter of
policy, however, courts will declare a
regulation or provision thereof invalid only
when the conflict with the law is clear and
unequivocal.
Administrative interpretations and opinions
The power to interpret the provisions of the
Tax Code and other tax laws is under the
exclusive and original jurisdiction of the
Commissioner of Internal Revenue subject to
review by the Secretary of Finance [Sec. 4,
par.1, NIRC].
Revenue regulations are the formal
interpretation of the provisions of the NIRC
and other laws by the Secretary of Finance
upon the recommendation of the
Commissioner of Internal Revenue.
General rule: The Commissioner has the sole
authority to issue rulings but he also has the
UP LAW BOC TAXATION 1
power to delegate said authority to his
subordinates with the rank equivalent to a
division chief or higher.
Exceptions: The Commissioner may not
delegate the following:
(a) The power to recommend the
promulgation of rules and regulations by
the Secretary of Finance;
(b) The power to issue rulings of first
impression or to reverse, revoke, or modify
any existing ruling of the Bureau;
(c) The power to compromise or abate any tax
liability as provided by Sec. 204 and 205 of
the NIRC
Exception to the exception: BUT assessments
issued by RDOs involving (a) Php500,000 or
less, and (b) minor criminal violations as
determined by the Secretary of Finance as
recommended by the Commissioner, may be
compromised by a Regional Evaluation Board
(CHAIRMAN: Regional Director; MEMBERS:
Assistant Regional Director, heads of the
Legal, Assessment and Collection Divisions,
and the Revenue District Officer having
jurisdiction over the taxpayer.) [Sec. 7, NIRC].
Decisions of the Supreme Court applying or
interpreting existing tax laws are binding on
all subordinate courts and have the force and
effect of law. As provided for in Article 8 of the
Civil Code, they “form part of the law of the
land”.
The same is also true with respect to decisions
of the Court of Tax Appeals. However, by the
nature of its jurisdiction, the decisions of this
court are still appealable to the Supreme
Court by a petition for review on certiorari
(Rule 45). [Sec. 11, RA 9282]
M.4. PENAL PROVISIONS OF TAX LAWS
Penal provisions of tax laws must be strictly
construed. It is not legitimate to stretch the
language of a rule, however beneficent its
intention, beyond the fair and ordinary
meaning of its language.
A penal statute should be construed strictly
against the State and in favor of the accused.
The reason for this principle is the tenderness
of the law for the rights of individuals and the
object is to establish a certain rule by
conformity to which mankind would be safe,
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TAXATION LAW
and the discretion of the court limited. [People
v. Purisima, G.R. No. L-42050-66 (1978)].
M.5. NON-RETROACTIVE APPLICATION OF
TAX LAWS TO TAXPAYERS
General rule: Tax laws are prospective in
operation. The reason is that the nature and
amount of the tax could not be foreseen and
understood by the taxpayer at the time the
transaction which the law seeks to tax was
completed.
Exception: Tax laws may be applied
retroactively provided it is expressly declared
or clearly the legislative intent. [Lorenzo v.
Posadas, supra].
Exception to the exception: a tax law should
not be given retroactive application when it
would be so harsh and oppressive for in such
case, the constitutional limitation of due
process would be violated [Republic v.
Fernandez, supra].
N. SOURCES OF TAX LAWS
(a) Constitution of the Philippines
A constitutional provision regarding taxation
is primarily intended to limit and regulate the
exercise of taxation power. The State can
exercise the power to tax even if the
Constitution is completely silent about
taxation.
(b) Statutes
The present tax statutes of the Philippines are
embodied in R.A. 8424, which is not the
prevailing National Internal Revenue Code
(NIRC) effective January 1, 1998, which was
amended per R.A. 9337 (The VAT Reform Law).
(c) Judicial Decisions
These refer to the decisions for application
made concerning tax issues by the proper
courts exercising judicial authority of
competent jurisdiction. These courts may be
the Supreme Court and the Court of Tax
Appeals. Their decisions on tax laws comprise
the greater portion of tax jurisprudence. They
form part of the legal system of the Philippines.
By the nature of its jurisdiction, the decisions
of the Court of Tax Appeals are still
appealable to the Supreme Court. The
UP LAW BOC TAXATION 1
decision of the Supreme Court on any matter
is final and executory.
(d) Executive Orders
Executive Orders are regulations issued by the
President or some administrative authority
under his direction for the purpose of
interpreting, implementing, or giving
administrative effect to a provision of the
Constitution or of some law or treaty.
(e) Tax Treaties and Conventions
These refer to the treaties or international
agreements with foreign countries regarding
tax enforcement and exemptions. They have
the force and effect of law.
(f) Revenue Regulations by the Department of
Finance
Revenue Regulations are rules or orders
having force of law issued by executive
authority of the government to ensure uniform
application of the tax law.
In order that administrative regulations may
be considered valid, all of the following
requisites must be complied with:
(1) The regulations must be useful, practical
and necessary for the enforcement of the
law;
(2) They must be reasonable in their
provisions;
(3) They must not be contrary to law; and
(4) They must be duly published in the
Official Gazette. [Inter-provincial Auto
Bus Co. v. Collector, 52 O.G. No. 2, p. 791;
Lim Hoa Ting v. Central Bank, L-10666,
(1958)]
Note: Ruling of the Secretary of Finance are
not binding on the courts because the duty or
power of interpreting laws is primarily a
function of the judiciary.
The Secretary of Finance is vested with
authority to revoke, repeal or abrogate acts or
previous rulings of his predecessors in office
because these are not binding on their
successors. [Hilado v. Collector of Internal
Revenue, et al., 100 Phil 295]
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TAXATION LAW
(g) BIR Revenue Memorandum Circulars and
Bureau of Customs Memorandum Orders
These are administrative rulings or opinions
which are less general interpretations of tax
laws being issued from time to time by the
Commissioner of the Internal Revenue or
Commissioner of the Bureau of Customs, as
the case may be. They are primarily intended
to maintain uniform application of tax laws
within the department or area of authority.
Memoranda have the status of advisory or sort
of information service. For this reason, they
can be reversed anytime.
Note: The Courts generally respect the
interpretations made by the executive officer
whose duty is to enforce the law. However,
such interpretations are not conclusive and
shall be disregarded if found erroneous by the
Court. [Molina v. Rafferty, 37 Phil 545]
(h) BIR Rulings
BIR Rulings are expressed official
interpretations of the tax laws as applied to
specific transactions. Unlike a Revenue
Regulation, it is more limited in application.
BIR Rulings are not the final interpreations of
the tax laws. They are considered the best
opinion or advisory at the moment and are
considered sound law until chagned by the
court. [CIR v. Ledesma, (1970)]
(i) Local Tax Ordinances
These are tax ordinances issued by the
province, city, municipality and baranggay
subjct to such limitations as provided by the
Local Government Code. [Valencia and Roxas]
O. DOCTRINES IN TAXATION
O.1. PROSPECTIVITY OF TAX LAWS
General rule: Tax laws are prospective in
operation.
Reason: Nature and amount of the tax under
tax laws enacted after the transaction could
not have been foreseen and understood by the
taxpayer at the time of the transaction.
Exception: Tax laws may be applied
retroactively provided it is expressly declared
or it is clearly the legislative intent (e.g.,
UP LAW BOC TAXATION 1
increase taxes on income already earned)
except when retroactive application would be
so harsh and oppressive. [Republic v.
Fernandez, G.R. No. L-9141 (1956)]
It is a cardinal rule that laws shall have no
retroactive effect, unless the contrary is
provided (Art. 4, Civil Code). [Hydro Resources
v. CA, G.R. No. 80276 (1990)]
The language of the statute must clearly
demand or press that it shall have a
retroactive effect. [Lorenzo v. Posadas, supra]
Exception to the exception:
Collection of interest in tax cases is not penal
in nature; it is but a just compensation to the
State. The constitutional prohibition against
ex post facto laws is not applicable to the
collection of interest on back taxes. [Central
Azucarera v. CTA, G.R. No. L-23236 (1967)]
Non-retroactivity of rulings [Sec. 246, NIRC]
General rule: Rulings do not have retroactive
application if the revocation, modification, or
reversal will be prejudicial to the taxpayer.
Exceptions:
(1) Taxpayer’s deliberate misstatement or
omission of facts
(2) BIR’s gathered facts is materially different
from the facts from which the ruling was
based on
(3) Taxpayer acted in bad faith
Note: The rule on non-retroactivity of rulings
may be applied only if the parties in the ruling
involve the taxpayer himself/itself. The
taxpayer cannot invoke the rulings granted in
favor of the other taxpayers.
O.2. IMPRESCRIPTIBILITY OF TAXES
Unless otherwise provided by law, taxes are
imprescriptible. [CIR v. Ayala Securities
Corporation G.R. No. L-29485 (1980)]
The law on prescription, being a remedial
measure, should be liberally construed in
order to afford such protection. As a corollary,
the exceptions to the law on prescription
should perforce be strictly construed.
[Commissioner v. CA, G.R. No. 104171 (1999)]
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TAXATION LAW
Prescriptions found in statutes
(1) National Internal Revenue Code - statute of
limitations in the assessment and
collection of taxes therein imposed.
Summary of prescription on assessment and
collection:
Prescription of assessment AND
collection from the:
a. prescribed last day of filing of
3 returns (even if return was filed
YEARS earlier than the deadline); OR
b. the day when the return was
actually filed if filed later than the
last day of filing [Sec. 203, NIRC]
Prescription of assessment in
cases of:
a. false or fraudulent return with
10 intent to evade tax; OR
YEARS b. failure to file a return [Sec. 222,
NIRC]
From the discovery of the fraud,
falsity, or omission.
Prescription of collection of tax if:
a. assessed within the 3-year and
10-year prescriptive periods
b. assessed within the extended
5 period agreed upon by the
YEARS Commissioner and taxpayer
(waiver of the prescriptive period)
Collected by distraint, levy or by a
proceeding in court. [Sec. 222,
NIRC]
Note: The prescriptive period from final
liquidation is three (3) years, except in cases
of: (1) tentative liquidation; (2) payment under
protest; (3) fraud; and (4) compliance audit.
(2) Customs Modernization and Tariffs Act
(CMTA) – repealed the Tariff and Customs
Code (TCC). Under Sec. 430, it provides that
“[i]n the absence of fraud and when the goods
have been finally assessed and released, the
assessment shall be conclusive upon all
parties three (3) years from the date of final
payment or duties, or upon completion of the
UP LAW BOC TAXATION 1
post-clearance audit. (Note: The same rule
was provided under Sec. 1603 of the TCC, but
it was worded differently).
(3) Local Government Code – prescribes
prescriptive periods for the assessment from
the date they became due (5 years) and
collection (5 years) of taxes (including Real
Property Taxes) from the date of assessment
by administrative or judicial action. The
prescriptive period is 3 years if the tax accrued
before the effectivity of the Local Government
Code. [Sec. 194 and 270, RA 7160 or the LGC].
In case of fraud or intent to evade the payment
of taxes, fees, or charges, the same may be
assessed from discovery of the fraud or intent
to evade payment (10 years).
The prescriptive period is tolled when:
(a) The treasurer is legally prevented from
making the assessment or collection
(b) The taxpayer requests for a
reinvestigation and executes a waiver
in writing before expiration of the
period within which to assess or collect;
and
(c) The taxpayer is out of the country or
otherwise cannot be located.
O.3. DOUBLE TAXATION
Means taxing twice the same taxpayer for the
same tax period upon the same thing or
activity, when it should be taxed once, for the
same purpose and with the same kind of
character of tax.
(a) Strict sense (Direct Duplicate Taxation)
(1) The same property must be taxed twice
when it should be taxed once;
(2) Both taxes must be imposed on the same
property or subject matter;
(3) For the same purpose;
(4) By the same State, Government, or taxing
authority;
(5) Within the same territory, jurisdiction or
taxing district;
(6) During the same taxing period; and
(7) Of the same kind or character of tax.
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TAXATION LAW
(b) Broad sense (Indirect Duplicate Taxation)
There is double taxation in the broad sense or
there is indirect duplicate taxation if any of the
elements for direct duplicate taxation is
absent.
It extends to all cases in which there is a
burden of two or more pecuniary impositions.
For example, a tax upon the same property
imposed by two different states.
Double taxation, standing alone and not being
forbidden by our fundamental law, is not a
valid defense against the legality of a tax
measure [Pepsi Cola v. Mun. of Tanauan, G.R.
No. L-31156 (1976)]. But from it might
emanate such defenses against taxation as
oppressiveness and inequality of the tax.
Constitutionality of double taxation
There is no constitutional prohibition against
double taxation in the Philippines. It is
something not favored, but is permissible,
provided some other constitutional
requirement is not thereby violated.
[Villanueva v. City of Iloilo, G.R. No. L-26521
(1968)]
If the tax law follows the constitutional rule on
uniformity, there can be no valid objection to
taxing the same income, business or property
twice. [China Banking Corp. v. CA, G.R. No.
146749 (2003)]
Double taxation in its narrow sense is
undoubtedly unconstitutional but that in the
broader sense is not necessarily so. (De Leon,
citing 26 R.C.L 264-265). Where double
taxation (in its narrow sense) occurs, the
taxpayer may seek relief under the uniformity
rule or the equal protection guarantee. (De
Leon, citing 84 C.J.S.138).
International Double Taxation
Double taxation usually takes place when a
person is resident of a contracting state and
derives income from, or owns capital in, the
other contracting state and both states
impose tax on that income or capital. In order
to eliminate double taxation, a tax treaty
resorts to several methods. [CIR v. SC Johnson
& Sons, Inc., G.R. No. 127105 (1999)]
The purpose of these international
agreements is to reconcile the national fiscal
legislations of the contracting parties in order
UP LAW BOC
to help the taxpayer avoid simultaneous
taxation in two different jurisdictions. More
precisely, the tax conventions are drafted with
a view towards the elimination of international
juridical double taxation, which is defined as
the imposition of comparable taxes in two or
more states on the same taxpayer in respect of
the same subject matter and for identical
periods. The apparent rationale for doing
away with double taxation is to encourage the
free flow of goods and services and the
movement of capital, technology and persons
between countries, conditions deemed vital in
creating robust and dynamic economies.
Foreign investments will only thrive in a fairly
predictable and reasonable international
investment climate and the protection against
double taxation is crucial in creating such a
climate. [CIR v. SC Johnson & Sons, Inc., supra]
Modes of eliminating double taxation
(a) Allowing reciprocal exemption either by
law or by treaty;
(b) Allowance of tax credit for foreign taxes
paid;
(c) Allowance of deductions such as for
foreign taxes paid, and vanishing
deductions in estate tax; OR
(d) Reduction of Philippine tax rate.
O.4. POWER TO TAX INVOLVES POWER TO
DESTROY
According to Chief Justice John Marshall, "the
power to tax involves the power to destroy."
[McCulloch vs. Maryland, 17 U.S. [4 Wheat.]
316-428, 4L. ed. 579.] To say, however, that
the power to tax is the power to destroy is to
describe not the purposes for which the taxing
power may be used but the extent to which it
may be employed in order to raise revenues.
(see1 Cooley 178.) Thus, even if a tax should
destroy a business, such fact alone could not
invalidate the tax. (84 C.J.S. 46.)
Incidentally, our Constitution mandates that
"the rule of taxation shall be uniform and
equitable." In a case, our Supreme Court said:
"The power of taxation is sometimes called
also the power to destroy. Therefore, it should
be exercised with caution to minimize injury to
the proprietary rights of the taxpayer. It must
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TAXATION 1 TAXATION LAW
be exercised fairly, equally and uniformly, lest
the tax collector kills the 'hen that lays the
golden eggs.' And in order to maintain the
general public's trust and confidence in the
government, this power must be used justly
and not treacherously." [Roxas v. Court of Tax
Appeals, 23 SCRA 276, App120, 1968; Philex
Mining Corp. vs. Comm. of Internal Revenue,
97 SCAD 777,294 SCRA 687 (Aug. 28, 1998)].
Note: Justice Holmes once said: “The power to
ta is not the power to destroy while this Court
(the Supreme Court) sits.” The two limitations
on the power of taxation are the inherent and
constitutional limitations which are intended
to prevent abuse on the exercise of the
otherwise plenary and unlimited power. It is
the Court’s role to see to it that the exercise of
the power does not transgress these
limitations.
O.5. ESCAPE FROM TAXATION
a. Shifting of tax burden
Shifting - the transfer of the burden of a tax by
the original payer or the one on whom the tax
was assessed or imposed to someone else.
What is transferred is not the payment of the
tax but the burden of the tax. All indirect taxes
may be shifted; direct taxes cannot be shifted.
(i) Ways of shifting the tax burden
(1) Forward shifting - When the burden of
the tax is transferred from a factor of
production through the factors of
distribution until it finally settles on the
ultimate purchaser or consumer.
Examples: VAT, percentage tax.
(2) Backward shifting - When the burden of
the tax is transferred from the consumer
or purchaser through the factors of
distribution to the factor of production.
Example: Consumer or purchaser may
shift tax imposed on him to retailer by
purchasing only after the price is
reduced, and from the latter to the
wholesaler, and finally to the
manufacturer or producer.
(3) Onward shifting - When the tax is
shifted two or more times either forward
or backward.
UP LAW BOC TAXATION 1
(ii) Factors determining tax shifting
(1) Elasticity of demand and supply - The
more the elasticity, the lower the
incidence on the sales. The higher the
incidence on supply.
(2) Nature of markets – In an oligopolistic
market (i.e. sellers and many buyers)
tax shifting to buyers is high since few
sellers can team up to determine the
market price. In a situation where
there are many buyers and sellers, a
large portion of tax will be borne by
sellers. For a monopolistic market, the
entire tax burden falls on the
shoulders of the buyer.
(3) Government policy on pricing – In the
case of government price control, the
supplier cannot increase prices, hence
cannot shift tax burden to buyers and
vice versa.
(4) Geographical location – If taxes are
imposed on certain regions, it is hard
to shift them to consumers because
consumers will move to regions with
low taxes.
(5) Nature of tax (Direct or Indirect tax) –
Direct tax e.g. PAYE (pay-as-you-
earn) cannot be shifted whatsoever
while indirect taxes can be shifted
through increase in prices.
(6) Rate of tax – If too high, shifting can
occur backwards or forwards, if too
low, it may be absorbed by the
manufacturer.
(7) Time available for adjustment – The
person who can adjust faster (buyer or
seller) will be able to shift tax e.g. if
the buyer cash shift to substitute
goods, the seller will bear the tax
burden.
(8) The tax point
(ii) Taxes that can be shifted
(a) Value-added Tax
(b) Percentage Tax
(c) Excise Tax
(iii) Meaning of impact and incidence of
taxation
Impact of taxation is the point on which a tax
is originally imposed. In so far as the law is
concerned, the taxpayer, the subject of tax, is
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TAXATION LAW
the person who must pay the tax to the
government.
Incidence of taxation is that point on which the
tax burden finally rests or settles down. It
takes place when shifting has been effected
from the statutory taxpayer to another.
Impact Distinguished from Incidence
(1) Impact refers to the initial burden of the
tax, while incidence refers to the ultimate
burden of the tax.
(2) Impact is at the point of imposition,
incidence occurs at the point of settlement.
(3) The impact of a tax falls upon the person
from whom the tax is collected and the
incidence rests on the person who pays it
eventually.
Example: Suppose a tax — excise duty — is
imposed on soap. Its impact is on the
producers, in the first instance, as they are
liable to pay it to the government. But, the
producers may succeed in collecting it
from the consumers by raising the price of
soap by the amount of tax. In that case,
consumers eventually pay the tax and so
the incidence falls upon them.
(4) Impact may be shifted but incidence
cannot. For, incidence is the end of the
shifting process. Sometimes, however,
when no shifting is possible, as in the case
of income tax or such other direct taxes,
the impact coincides with incidence on the
same person.
Relationship between Impact, Shifting, and
Incidence of a Tax
The impact is the initial phenomenon, the
shifting is the intermediate process, and the
incidence is the result.
Impact is the imposition of the tax; shifting is
the transfer of the tax; while incidence is the
setting or coming to rest of the tax. (e.g.
impact in VAT is on the producer who shifts
the burden to the customer who finally bears
the incidence of the tax)
b. Tax avoidance (Tax Minimization)
The exploitation by the taxpayer of legally
permissible alternative tax rates or methods of
assessing taxable property or income in order
to avoid or reduce tax liability. It is politely
UP LAW BOC
called “tax minimization” and is NOT
punishable by law.
Example: A person refrains from engaging in
some activity or enjoying some privilege in
order to avoid the incidental taxation or to
lower his tax bracket for a taxable year.
c. Tax evasion (Tax Dodging)
Tax Evasion - is the use by the taxpayer of
illegal or fraudulent means to defeat or lessen
the payment of a tax. It is also known as “tax
dodging.” It is punishable by law.
Example: Deliberate failure to report a taxable
income or property; deliberate reduction of
income that has been received; overstatement
of expenses.
Elements of Tax Evasion
(1) The end to be achieved. Example: the
payment of less than that known by the
taxpayer to be legally due, or in paying no
tax when such is due.
(2) An accompanying state of mind described
as being “evil,” “in bad faith,” “willful” or
“deliberate and not accidental.”
(3) A course of action (or failure of action)
which is unlawful.
Since fraud is a state of mind, it need not be
proved by direct evidence but may be inferred
from the circumstances of the case. Thus:
(1) The failure of the taxpayer to declare for
taxation purposes his true and actual
income derived from his business for two
consecutive years has been held as an
indication of his fraudulent intent to cheat
the government of its due taxes. [Republic
v. Gonzales, G.R. No. L-17962 (1965)]
(2) The substantial underdeclaration of
income in the income tax returns of the
taxpayer for four (4) consecutive years
coupled with his intentional overstatement
of deductions justifies the finding of fraud.
[Perez v. CTA and Collector, G.R. No. L-
10507 (1958)].
Tax Avoidance v. Tax Evasion
Tax Tax Evasion
Avoidance
Also called Tax Tax Dodging
as Minimization
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TAXATION 1 TAXATION LAW
Tax Tax Evasion
Avoidance
Means Legal Illegal
Outcome of Outcome of
tax planning tax fraud
Punishable No Yes
?
Purpose Merely Entirely
minimize escape
payment of payment of
taxes (tax taxes
savings)
Other matter(s):
Transformation – method of escape in
taxation whereby the manufacturer or
producer upon whom the tax has been
imposed pays the tax and endeavors to recoup
himself by improving his process of production
thereby turning out his units of products at a
lower cost. The taxpayer escapes by a
transformation of the tax into a gain through
the medium of production.
O.6. EXEMPTION FROM TAXATION
(a) Meaning of exemption from taxation
The grant of immunity to particular persons or
corporations or to person or corporations of a
particular class from a tax which persons and
corporations generally within the same state
or taxing district are obliged to pay. It is an
immunity or privilege; it is freedom from a
financial charge or burden to which others are
subjected. It is strictly construed against the
taxpayer.
Taxation is the rule; exemption is the
exception. He who claims exemption must be
able to justify his claim or right thereto, by a
grant expressed in terms “too plain to be
mistaken and too categorical to be
misinterpreted.” If not expressly mentioned in
the law, it must at least be within its purview
by clear legislative intent.
Grounds for Tax Exemption
(1) It may be based on contract.
(2) It may be based on some ground of public
policy.
(3) It may be created in a treaty on grounds of
reciprocity or to lessen the rigors of
international or multiple taxation.
UP LAW BOC TAXATION 1
But equity is NOT a ground for tax exemption.
Exemption from tax is allowable only if there
is a clear provision. While equity cannot be
used as a basis or justification for tax
exemption, a law may validly authorize the
condonation of taxes on equitable
considerations.
(b) Nature of tax exemption
(1) Mere personal privilege - cannot be
assigned or transferred without the
consent of the legislature. The legislative
consent to the transfer may be given either
in the original act granting the exemption
or in a subsequent law
(2) General rule: Revocable by the
government.
Exception: If founded on a contract which is
protected from impairment. But the
contract must contain the essential
elements of other contracts. An exemption
provided for in a franchise, however, may
be repealed or amended pursuant to the
Constitution [Art. XII, Sec. 11, 1987
Constitution]. A legislative franchise is a
mere privilege.
(3) Implies a waiver on the part of the
government of its right to collect taxes due
to it, and, in this sense, is prejudicial
thereto. Hence, it exists only by virtue of an
express grant and must be strictly
construed.
(4) Not necessarily discriminatory, provided it
has reasonable foundation or rational basis.
Where, however, no valid distinction exists,
the exemption may be challenged as
violative of the equal protection guarantee
or the uniformity rule.
(c) Kinds of tax exemption
(i) Express or Affirmative - either entirely or in
part, may be made by provisions of the
Constitution, statutes, treaties, ordinances,
franchises, or contracts.
(ii) Implied or Exemption by Omission - when a
tax is levied on certain classes without
mentioning the other classes. Every tax
statute, in a very real sense, makes
exemptions since all those not mentioned
are deemed exempted. The omission may
be either accidental or intentional.
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TAXATION LAW
Exemptions are not presumed, but when
public property is involved, exemption is
the rule, and taxation is the exception.
(iii) Contractual - The legislature of a State
may, in the absence of special restrictions
in its constitution, make a valid contract
with a corporation in respect to taxation,
and that such contract can be enforced
against the State at the instance of the
corporation [Casanovas v. Hord, G.R. No.
3473 (1907)]. In the real sense of the term
and where the non-impairment clause of
the Constitution can rightly be invoked, this
includes those agreed to by the taxing
authority in contracts, such as those
contained in government bonds or
debentures, lawfully entered into by them
under enabling laws in which the
government, acting in its private capacity,
sheds its cloak of authority and waives its
governmental immunity.
These contractual tax exemptions,
however, are not to be confused with tax
exemptions granted under franchises. A
franchise partakes the nature of a grant
which is beyond the purview of the non-
impairment clause of the Constitution.
[Manila Electric Company v. Province of
Laguna, G.R. No. 131359 (1999)]
(d) Rationale of Tax Exemption
Such exemption will benefit the body of the
people and not particular individuals or
private interest and that the public benefit is
sufficient to offset the monetary loss entailed
in the grant of the exemption.
Principles of Tax Exemption:
(1) As the power of taxation is a high
prerogative of sovereignty, the relinquishment
is never presumed and any reduction or
diminution thereof with respect to its mode or
its rate, must be strictly construed, and the
same must be couched in clear and
unmistakable terms in order that it may be
applied. [Floro Cement v. Gorospe, G.R. No. L-
46787 (1991)]
(2) When granted, they are strictly construed
against the taxpayer [Luzon Stevedoring Co. v.
CTA, G.R. No. L-30232 (1988)]
UP LAW BOC TAXATION 1
(3) Tax exemptions are strictly construed
against the taxpayer, they being highly
disfavored and may almost be said “to be
odious to the law.” [Manila Electric Company v.
Vera, G.R. No. L-29987 (1975)]
(e) Revocation of Tax Exemption
General Rule: Revocable by the government.
Exception: Contractual tax exemptions may
not be unilaterally so revoked by the taxing
authority without thereby violating the non-
impairment clause of the Constitution.
O.7. DOCTRINE OF EQUITABLE
RECOUPMENT
A claim for refund barred by prescription may
be allowed to offset unsettled tax liabilities.
The doctrine finds NO application in this
jurisdiction.
O.8. COMPENSATION AND SET-OFF
General rule: Internal revenue taxes cannot be
the subject of set-off or compensation
[Republic v. Mambulao Lumber, G.R. No. L-
17725 (1962)]
Reasons:
(1) This would adversely affect the
government revenue system [Philex Mining
v. CA, G.R. No. 125704 (1998)].
(2) Government and the taxpayer are not
creditors and debtors of each other. The
payment of taxes is not a contractual
obligation but arises out of a duty to pay.
[Republic v. Mambulao Lumber, supra]
Exception: If the claims against the
government have been recognized and an
amount has already been appropriated for
that purpose. Where both claims have already
become (1) due and (2) demandable as well as
(3) fully liquidated, compensation takes place
by operation of law under Art. 1200 in relation
to Articles 1279 and 1290 of the NCC, and both
debts are extinguished to the concurrent
amount. [Domingo v. Garlitos, G.R. No. L-
18994 (1963)]
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TAXATION LAW
O.9. COMPROMISE AND TAX AMNESTY
COMPROMISE
(a) A contract whereby the parties, by making
reciprocal concessions avoid litigation or
put an end to one already commenced. (Art.
2028, Civil Code). It involves a reduction of
the taxpayer’s liability.
(b) Requisites of a tax compromise:
(1) The taxpayer must have a tax liability.
(2) There must be an offer (by the taxpayer
or Commissioner) of an amount to be
paid by the taxpayer.
(3) There must be acceptance (by the
Commissioner or the taxpayer, as the
case may be) of the offer in settlement of
the original claim.
TAX AMNESTY
(a) Definition
A tax amnesty partakes of an absolute
forgiveness or waiver by the Government of its
right to collect what otherwise would be due it,
and in this sense, prejudicial thereto,
particularly to give tax evaders, who wish to
relent and are willing to reform a chance to do
so and become a part of the new society with
a clean slate. [Republic v. IAC, G.R. No. L-
69344 (1991)]
A tax amnesty, much like a tax exemption, is
never favored nor presumed in law. If granted,
the terms of the amnesty, like that of a tax
exemption, must be construed strictly against
the taxpayer and liberally in favor of the taxing
authority. The State cannot strip itself of the
most essential power of taxation by doubtful
words. He who claims an exemption (or an
amnesty) from the common burden must
justify his claim by the clearest grant of
organic or state law. It cannot be allowed to
exist upon a vague implication. If a doubt
arises as to the intent of the legislature, that
doubt must be resolved in favor of the state.
[CIR v. Marubeni Corp., G.R. No. 137377
(2001)].
(b) Amnesty distinguished from tax exemption
Tax amnesty is immunity from all criminal and
civil obligations arising from non-payment of
taxes. It is a general pardon given to all
UP LAW BOC TAXATION 1 TAXATION LAW

taxpayers. It applies to past tax periods, hence The doctrine of locus standi is the right of
of retroactive application. [People v. appearance in a court of justice. The doctrine
Castañeda, G.R. No. L-46881 (1988)] requires a litigant to have a material interest
in the outcome of a case. In private suits, locus
Tax exemption is immunity from all civil
standi requires a litigant to be a "real party in
liability only. It is an immunity or privilege, a
interest," which is defined as "the party who
freedom from a charge or burden of which
stands to be benefited or injured by the
others are subjected. [Greenfield v. Meer, C.A.
judgment in the suit or the party entitled to the
No.-156 (1946)]. It is generally prospective in
avails of the suit."
application (Dimaampao, 2005, p. 111).
In public suits, this Court recognizes the
difficulty of applying the doctrine especially
Tax Amnesty v. Tax Exemption when plaintiff asserts a public right on behalf
Tax of the general public because of conflicting
Tax Amnesty
Exemption public policy issues. On one end, there is the
Immunity Immunity right of the ordinary citizen to petition the
from civil, from civil courts to be freed from unlawful government
criminal, liability (relief intrusion and illegal official action. At the
administrative from paying other end, there is the public policy precluding
Benefit
liability taxes) excessive judicial interference in official acts,
arising from which may unnecessarily hinder the delivery of
non-payment basic public services.
of taxes
The Court has adopted the "direct injury test"
Past tax Future tax to determine locus standi in public suits. In
Coverage
liability liability People v. Vera, it was held that a person who
Actual Yes None impugns the validity of a statute must have "a
Revenue personal and substantial interest in the case
Loss such that he has sustained, or will sustain
direct injury as a result." the "direct injury test"
O.10. TAXPAYER’S SUIT in public suits is similar to the "real party in
interest" rule for private suits under section 2,
a. Nature and Concept Rule 3 of the 1997 Rules of Civil Procedure.
Taxpayer’s suit – refers to a case where the act [Planter’s Products, Inc. v. Fertiphil
complained of directly involves the illegal Corporation, G.R. no. 166006, (March 14,
disbursement of public funds derived from 2008)]
taxation. [Kilosbayan v. Guingona, Jr. (1994)]
As applied to taxation:
b. As distinguished from a citizen’s suit It is well-stated that the validity of a statute
The plaintiff in a taxpayer's suit is in a different may be contested only by one who will sustain
category from the plaintiff in a citizen's suit. In a direct injury in consequence of its
the former, the plaintiff is affected by the enforcement. Yet, there are many decisions
expenditure of public funds, while in the latter, nullifying, at the instance of taxpayers, laws
he is but the mere instrument of the public providing for the disbursement of public funds,
concern. [De Castro v. Judicial and Bar Council upon the theory that "the expenditure of
(2010)] public funds by an officer of the state for the
purpose of administering an unconstitutional
c. Requisites of a taxpayer’s suit challenging act constitutes a misapplication of such
the constitutionality of a tax measure or act of funds," which may be enjoined at the request
a taxing authority; concept of locus standi, of a taxpayer. [Pascual v. Secretary of Public
doctrine of transcendental importance and Works (1960)]
ripeness for judicial determination A taxpayer is allowed to sue where there is a
claim that public funds are illegally disbursed,
(1) Concept of locus standi as applied in or that the public money is being deflected to
taxation any improper purpose, or that there is wastage
of public funds through the enforcement of an
PAGE 32 OF 275
UP LAW BOC TAXATION 1 TAXATION LAW

invalid or unconstitutional law. A person suing issue as the final arbiter of all justiciable
as a taxpayer, however, must show that the act controversies. The doctrine of standing, being
complained of directly involves the illegal a mere procedural technicality, should be
disbursement of public funds derived from waived, if at all, to adequately thresh out an
taxation. He must also prove that he has important constitutional issue.
sufficient interest in preventing the illegal
expenditure of money raised by taxation and
that he will sustain a direct injury because of (3) Ripeness for judicial determination
the enforcement of the questioned statute or
“Ripeness for judicial determination” means
contract. In other words, for a taxpayer’s suit
that litigation is inevitable or there is no
to prosper, two requisites must be met:
adequate relief available in any other form or
(1) public funds derived from taxation are proceeding.
disbursed by a political subdivision or
instrumentality and in doing so, a law is
violated or some irregularity is committed and CJH Development Corp. V. BIR (2008):
However, CJH is not left without recourse. The
(2) the petitioner is directly affected by the
tariff and customs code provides for the
alleged act. [Mamba v. Lara, G.R. no. 165109,
administrative and judicial remedies available
(Dec. 14, 2009)]
to a taxpayer who is minded to contest an
assessment, subject of course to certain
reglementary periods. The TCC provides that a
(2) Doctrine of transcendental importance
protest can be raised provided that payment
Recognizing that a strict application of the first be made of the amount due. The decision
"direct injury" test may hamper public interest, of the Collector can be reviewed by the
this court relaxed the requirement in cases of Commissioner of Customs who can approve,
"transcendental importance" or with "far modify or reverse the decision or action of the
reaching implications." being a mere Collector. If the party is not satisfied with the
procedural technicality, it has also been held ruling of the Commissioner, he may file the
that locus standi may be waived in the public necessary appeal to the Court of Tax Appeals.
interest. [Ibid] Afterwards, the decision of the Court of Tax
Appeals can be appealed to this Court.
Planters Products, Inc. v. Fertiphil Corp.: even
assuming arguendo that there is no direct
injury, We find that the liberal policy
consistently adopted by this court on locus
standi must apply. The issues raised by
Fertiphil are of paramount public importance.
It involves not only the constitutionality of a
tax law but, more importantly, the use of taxes
for public purpose. Former President Marcos
issued LOI no. 1465 with the intention of
rehabilitating an ailing private company. This
is clear from the text of the LOI. PPI is
expressly named in the LOI as the direct
beneficiary of the levy. Worse, the levy was
made dependent and conditional upon ppi
becoming financially viable. The LOI provided
that "the capital contribution shall be
collected until adequate capital is raised to
make PPI viable."

The constitutionality of the levy is already in

doubt on a plain reading of the statute. It is our
constitutional duty to squarely resolve the
PAGE 33 OF 275
UP LAW BOC TAXATION 1
II. National Taxation
A. ORGANIZATION AND FUNCTIONS OF
THE BUREAU OF INTERNAL REVENUE
A.1. RULE-MAKING AUTHORITY OF THE
SECRETARY OF FINANCE
a. Authority of the Secretary of Finance to
promulgate rules and regulations (Sec. 244,
NIRC)
The Secretary of Finance, upon
recommendation of the CIR, shall promulgate
all needful rules and regulations for effective
enforcement of the provisions of the Code.
b. Specific provisions to be contained in rules
and regulations (Sec. 245, NIRC)
(a) The time and manner in which Revenue

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

(b) The forms of labels, brands or marks to be
required on goods subject to an excise tax, and
the manner in which the labelling, branding or
marking shall be effected; 
 payment shall be furnished the taxpayer, and
(c) The conditions under which and the
manner in which goods intended for export,
which if not exported would be subject to an
excise tax, shall be labelled, branded or
marked;
(d) The conditions to be observed by revenue
officers respecting the institutions and
conduct of legal actions and proceedings; 
 through the collection officers of the Bureau of
(e) The conditions under which goods
intended for storage in bonded warehouses
shall be conveyed thither, their manner of
storage and the method of keeping the entries
and records in connection therewith, also the
books to be kept by Revenue Inspectors and
the reports to be made by them in connection
with their supervision of such houses; 
 other provisions of this Code prescribing the
(f) The conditions under which denatured
alcohol may be removed and dealt in, the
character and quantity of the denaturing
PAGE 34 OF 275
TAXATION LAW
material to be used, the manner in which the
process of denaturing shall be effected, so as
to render the alcohol suitably denatured and
unfit for oral intake, the bonds to be given, the
books and records to be kept, the entries to be
made therein, the reports to be made to the
CIR, and the signs to be displayed in the
business ort by the person for whom such
denaturing is done or by whom, such alcohol
is dealt in; 

(g) The manner in which revenue shall be
collected and paid, the instrument, document
or object to which revenue stamps shall be
affixed, the mode of cancellation of the same,
the manner in which the proper books,
records, invoices and other papers shall be
kept and entries therein made by the person
subject to the tax, as well as the manner in
which licenses and stamps shall be gathered
up and returned after serving their purposes;
(h) The conditions to be observed by revenue
officers respecting the enforcement of Title III
imposing a tax on estate of a decedent, and
other transfers mortis causa, as well as on
gifts and such other rules and regulations
which the CIR may consider suitable for the
enforcement of the said Title III; 

(i) The manner in which tax returns,
information and reports shall be prepared and
reported and the tax collected and paid, as
well as the conditions under which evidence of
the preparation and publication of tax
statistics;
(j) The manner in which internal revenue taxes,
such as income tax, including withholding tax,
estate and donor's taxes, value-added tax,
other percentage taxes, excise taxes and
documentary stamp taxes shall be paid
Internal Revenue or through duly authorized
agent banks which are hereby deputized to
receive payments of such taxes and the
returns, papers and statements that may be
filed by the taxpayers in connection with the
payment of the tax:
Provided, however, That notwithstanding the
place of filing of returns and payment of taxes,
the CIR may, by rules and regulations, require
that the tax returns, papers and statements
UP LAW BOC
that may be filed by the taxpayers in
connection with the payment of the tax.
Provided, however, That notwithstanding the
other provisions of this Code prescribing the
place of filing of returns and payment of taxes,
the CIR may, by rules and regulations require
that the tax returns, papers and statements
and taxes of large taxpayers be filed and paid,
respectively, through collection officers or
through duly authorized agent banks:
Provided, further, That the CIR can exercise
this power within six (6) years from the
approval of Republic Act No. 7646 or the
completion of its comprehensive
computerization program, whichever comes
earlier:
Provided, finally, That separate venues for the
Luzon, Visayas and Mindanao areas may be
designated for the filing of tax returns and
payment of taxes by said large taxpayers.
For the purpose of this Section, 'large
taxpayer' means a taxpayer who satisfies any
of the following criteria:
(1) Value-Added Tax (VAT) - Business
establishment with VAT paid or payable of at
least P100,000 for any quarter of the
preceding taxable year;
(2) Excise tax - Business establishment 
 with
excise tax paid or payable of at least
P1,000,000 for the preceding taxable year; 
 presumed valid unless modified, reversed or
(3) Corporate Income Tax - Business
establishment with annual income tax paid or
payable of at least P1,000,000 for the
preceding taxable year; and 
 the date of receipt of such ruling, seek its
(4) Withholding tax - Business establishment
with withholding tax payment or remittance of
at least P1,000,000 for the preceding taxable
year. 
 (4) A reversal or modification of the BIR ruling
Provided, however, That the Secretary of
Finance, upon recommendation of the CIR,
may modify or add to the above criteria for
determining a large taxpayer after considering
such factors as inflation, volume of business,
wage and employment levels, and similar
economic factors.
The penalties prescribed under Section 248
shall be imposed on any violation of the rules
and regulations issued by the Secretary of
Finance, upon recommendation of the CIR,
PAGE 35 OF 275
TAXATION 1 TAXATION LAW
prescribing the place of filing of returns and
payments of taxes by large taxpayers.
A.2. JURISDICTION, POWER AND
FUNCTIONS OF THE COMMISSIONER OF
INTERNAL REVENUE
a. Powers and duties of the Bureau of Internal
Revenue (Sec. 2, NIRC)
(1) To assess and collect national internal
taxes, fees, and charges;
(2) To enforce all forfeitures, penalties and
fines connected therewith;
(3) To execute judgment in all cases decided in
its favor by the CTA and the ordinary courts;
and
(4) To effect and administer the supervisory
and police powers conferred upon it by the Tax
Code or other special laws.
b. Power of the Commissioner to interpret tax
laws and to decide tax cases
(1) Shall be under the exclusive and original
jurisdiction of the CIR, subject to review by the
Secretary of Finance. (Sec. 4, NIRC)
(2) A ruling by the BIR Commissioner shall be
superseded by the Secretary of Finance. 

(3) A taxpayer who receives an adverse ruling
from the CIR may, within thirty (30) days from
review by the Secretary of Finance, either by
himself/itself or though his/its duly
authorized representative. 

shall terminate its effectivity upon 
 the
receipt by the taxpayer or the BIR of written
notice of reversal or modification, whichever
came earlier.
**The Secretary of Finance may now also
review the rulings MOTU PROPRIO. (DOF
ORDER 7-02)
c. Non-retroactivity of rulings (Sec. 246, NIRC)
General Rule: No retroactive application if the
revocation, modification or reversal of rules
UP LAW BOC TAXATION 1
and regulations, rulings or circulars will be
prejudicial to the taxpayers.
Exceptions:
(a) Where the taxpayer deliberately misstates
or omits material facts from his return or any
document required of him by the BIR;
(b) Where the facts subsequently gathered

 by the BIR are materially different from 
 the
facts on which the ruling is based; or 

(c) Where the taxpayer acted in bad faith. 
 assets located in the Philippines (Sec. 24 (B),
B. NATIONAL INTERNAL REVENUE
CODE (NIRC) OF 1997, AS AMENDED
B.1. INCOME TAXATION
a. DEFINITION, NATURE AND GENERAL
PRINCIPLES
Definition
Income Tax is defined as a tax on all yearly
profits arising from property, professions,
trades, or offices, or as a tax on the person’s
income, emoluments, profits and the like
[Fisher v. Trinidad, G.R. No. L-2118643 (1924)].
It may be succinctly defined as a tax on
income, whether gross or net, realized in one
taxable year.
Nature
Income tax is generally classified as an excise
tax. It is not levied upon persons, property,
funds or profits but upon the right of a person
to receive income or profits.
General Principles
In the Philippines, income tax is imposed on
the net income of citizens, resident aliens,
domestic corporations, and nonresident aliens
and foreign corporations engaged in trade or
PAGE 36 OF 275
TAXATION LAW
business within the Philippines [Sec. 24 (A),
Sec. 25 (A), Sec. 27 (A), Sec. 28 (A), NIRC]. It is
also imposed on the gross income of
nonresident aliens and foreign corporations
not doing business in the Philippines [Sec. 25
(B), (C), (D), Sec. 28 (B), NIRC]. It is further
imposed as a final tax on certain passive
income (interests, royalties, prizes, and other
winnings), cash and property dividends,
capital gains from the sale of domestic shares
of stock and real property classified as capital
Sec. 25 (A) (2), (3), Sec. 27 (D), Sec. 28 (A),
NIRC).
Income Tax Law aims to mitigate the evils
arising from the inequalities of wealth by a
progressive scheme of taxation which places
the burden of taxation on those best able to
pay [Madrigal v. Rafferty & Concepcion, G.R.
No. L-12287 (1918)].
a.1. Income Tax Systems
(a) Global Tax System
Under a global tax system, it did not matter
whether the income received by the taxpayer
is classified as compensation income,
business or professional income, passive
investment income, capital gain, or other
income. All items of gross income, deductions,
and personal and additional exemptions, if
any, are reported in one income tax return, and
one set of tax rates are applied on the tax base.
(b) Schedular Tax System
Different types of incomes are subject to
different sets of graduated or flat income tax
rates. The applicable tax rate(s) will depend
on the classification of the taxable income and
the basis could be gross income or net income.
Separate income tax returns (or other types of
return applicable) are filed by the recipient of
income for the particular types of income
received.
UP LAW BOC TAXATION 1 TAXATION LAW

Global System Schedular System

It is a personal tax based on the income of the Tax on income producing activities.
taxpayer.
Emphasizes the burden allocation aspects. Emphasizes on revenue and administrative
aspects.

Most equitable system yet developed for Because of its multiple rates, the tax burden of a
distributing tax burden. The burden of an person does not correspond to his income but
individual is closely d related to his resources and rather fall fortuitously on the type of his income. It
his ability to pay. is fixed and final.
It serves as a means for redistributing income and This function is alien to schedular system where in
wealth. Big income earners are subject to higher times of plenty or in times of need, people pay the
taxes than small income earners it serves as an same fixed tax on their income.
automatic counter-cyclical device to generate
more revenues from people in times of expanding
economies and at the same time to collect less
from them in times of depression.
It serves as a supplementary device to accomplish The schedular system cannot perform any of these
non-fiscal goals of the government, such as, to functions.
encourage desired activities. By adjusting the
rates, for instance, it can promote saving or
consumer's demand, or encourage donations
worthy causes.
Administration is not quite as easy as schedular The administration is simple, being confined to
because one has to consider all income from each transaction or activity.
whatever source.

(2) Progressive – The tax rate increases as the

(c) Semi-schedular or Semi-global Tax System
All compensation income, business or
professional income, capital gain and passive
income not subject to final tax, and other
income are added together to arrive at the
gross income, and after deducting the sum of
allowable deductions, the taxable income is
subjected to one set of graduated tax rates or
normal corporate income tax. With respect to
such income the computation is global.
For those other income not mentioned above,
they remain subject to different sets of tax
rates and covered by different returns.
Note: The Philippines, under EO 37 (1986) and
RA 8424 (1998), follows a semi-schedular and
semi-global tax system.
a.2. Features of the Philippine Income Tax Law
(1) Direct Tax – The tax burden is borne by the
income recipient upon whom the tax is
imposed.
PAGE 37 OF 275
tax base increases. It is founded on the ability
to pay principle and is consistent with Sec. 28,
Art. VI, 1987 Constitution.
(3) Comprehensive – The Philippines has
adopted the most comprehensive system of
imposing income tax by adopting the
citizenship principle, the residence principle,
and the source principle. Any of the three
principles is enough to justify the imposition of
income tax on the income of a resident citizen
and a domestic corporation that are taxed on
a worldwide income.
(4) Semi-Schedular or Semi-Global Tax System
– The Philippines follows the semi-schedular
or semi-global system of income taxation,
although certain passive investment incomes
and capital gains from sale of capital assets
(namely: (a) shares of stock of domestic
corporations, and (b) real property) are subject
to final taxes at preferential tax rates.
a.3. Criteria in Imposing Philippine Income Tax
UP LAW BOC TAXATION 1
(1) Citizenship or Nationality Principle
A citizen of the Philippines is subject to
Philippine income tax:
(a) On his worldwide income, if he resides in
the Philippines; or
(b) Only on his income from sources within the
Philippines, if he qualifies as a nonresident
citizen.
(b) Residence Principle
A resident alien is liable to pay Philippine
income tax on his income from sources within
the Philippines but is exempt from tax on his
income from sources outside the Philippines.
(c) Source of Income Principle
An alien is subject to Philippine income tax
because he derives income from sources
within the Philippines. Thus, a non-resident
alien or non-resident foreign corporation is
liable to pay Philippine income tax on income
from sources within the Philippines, such as
dividend interest, rent, or royalty, despite the
fact that he has not set foot in the Philippines.
The income tax law adopts the most
comprehensive tax situs of nationality and
residence of the taxpayer and of the generally
accepted and internationally recognized
income tax base [Tan v. De Rosario, G.R. No.
109289 (1994)]. Resident citizens and
domestic corporations are subjected to
income tax liability on their income from all
sources within and without the Philippines.
The law adopts the source rule with respect to
income received by taxpayers other than
resident citizens and domestic corporations.
a.4. Types of Philippine Income Tax
(1) Graduated income tax on individuals
(2) Normal corporate income tax on
corporations
(3) Minimum corporate income tax on
corporations
(4) Special income tax on certain corporations
(5) Capital gains tax on sale or exchange of
shares of stock of a domestic corporation
classified as capital assets
PAGE 38 OF 275
TAXATION LAW
(6) Capital gains tax on sale or exchange of
real property classified as capital asset
(7) Final withholding tax on certain passive
investment income paid to residents
(8) Final withholding tax on income payments
made to non-residents
(9) Fringe benefits tax on fringe benefits of
supervisory or managerial employees
(10) Branch profit remittance tax
(11) Tax on improperly accumulated earnings
of corporations
a.5. Taxable Period
The accounting periods used in determining
the taxable income of taxpayers are:
(1) Calendar Year - Accounting period of 12
months ending on the last day of
December. Instances when the Calendar
Year is used for the computation of income:
i. If the taxpayer's annual accounting
period is other than a fiscal year; or
ii. If the taxpayer has no annual
accounting period; or
iii. If the taxpayer does not keep books of
accounts; or
iv. If the taxpayer is an individual [Sec. 43,
NIRC].
(2) Fiscal Year - Accounting period of 12
months ending on the last day of any
month other than December [Sec. 22(Q),
NIRC].
(3) Short Period - Accounting period which
starts after the first month of the tax year or
ends before the last month of the tax year
(less than 12 months). Instances whereby
short accounting period arises:
i. When a corporation is newly
organized.
ii. When a corporation is dissolved.
iii. When a corporation changes
accounting period.
iv. When the taxpayer dies.
"Taxable year" means the calendar year, or the
fiscal year ending during such calendar year,
upon the basis of which the net income is
computed under Title II (Tax on Income).
Taxable year includes, in the case of return
made for a fractional part of a year under the
UP LAW BOC TAXATION 1 TAXATION LAW

provisions of Title II, the period for which such

return is made [Sec. 22 (P), NIRC].

a.6. Kinds of Taxpayers

Taxpayer – any person subject to tax imposed
by Title II of the Tax Code [Sec. 22(N), NIRC].
Person – means an individual, a trust, estate
or corporation [Sec. 22(A), NIRC].
For income tax purposes, taxpayers are
classified generally as follows:
(1) Individuals;
(2) Corporations ;
(3) Partnerships (Ordinary and General
Professional Partnerships);
(4) Estates and Trusts;
(5) Co-ownerships

PAGE 39 OF 275
UP LAW BOC TAXATION 1 TAXATION LAW

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

Special Classes of
Minimum Wage Earner
Individuals

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

PAGE 40 OF 275
UP LAW BOC TAXATION 1
(a) Individual Taxpayers
(i) Citizens
(a) Resident Citizens (RC)
(b) Non-resident Citizens (NRC)
(a) Citizen of the Philippines who establishes
to the satisfaction of the Commissioner the
fact of his physical presence abroad with a
definite intention to reside therein.
(b) Citizen who leaves the Philippines during
the taxable year to reside abroad, either as
an immigrant or for employment on a
permanent basis.
(c) Citizen of the Philippines who works and
derives income from abroad and whose
employment thereat requires him to be
physically present abroad most of the time
during the taxable year (183 DAYS).
(d) Citizen previously considered as non-
resident citizen and who arrives in the
Philippines at any time during the taxable
year to reside permanently in the
Philippines  Treated as NRC with respect
to his income derived from sources abroad
until the date of his arrival in the
Philippines
(ii) Aliens
(a) Resident Alien
An alien actually present in the Philippines who is
not a mere transient or sojourner is a resident for
income tax purposes.
No/Indefinite Intention = RESIDENT: If he lives in
the Philippines and has no definite intention as to
his stay, he is a resident. A mere floating intention
indefinite as to time, to return to another country
is not sufficient to constitute him a transient.
Definite Intention = TRANSIENT: One who comes
to the Philippines for a definite purpose, which in
its nature may be promptly accomplished, is a
transient.
Exception: Definite Intention but such cannot be
promptly accomplished; If his purpose is of such
nature that an extended stay may be necessary
for its accomplishment, and thus the alien makes
his home temporarily in the Philippines, then he
becomes a resident.
(b) Non-resident Alien
PAGE 41 OF 275
TAXATION LAW
(1) Engaged in trade or business within the
Philippines - If the aggregate period of his stay in
the Philippines is more than 180 days during any
calendar year.
(2) Not engaged in trade or business within the
Philippines - If the aggregate period of his stay in
the Philippines does not exceed 180 days.
(iii) Special class of individual employees
(a) Minimum Wage Earner
a. A worker in the private sector paid the
statutory minimum wage;
b. An employee in the public sector with
compensation income of not more than the
statutory minimum wage in the non-
agricultural sector where he/she is assigned.
(b) Corporations
Includes all types of corporations,
partnerships (no matter how created or
organized), joint stock companies, joint
accounts, associations, or insurance
companies, whether or not registered with
the SEC.
Excludes general professional partnerships
(GPP), joint venture or consortium formed for
the purpose of undertaking construction
projects, joint venture or consortium
engaging in petroleum, coal, geothermal and
other energy operations pursuant to an
operating or consortium agreement under a
service contract with the government.
(i) Domestic corporations – A corporation
created and organized under its laws (the
law of incorporation test).
(ii) Foreign corporations – A corporation
which is not domestic.
(a) Resident foreign corporations – Foreign
corporation engaged in trade or business
within the Philippines.
Doing business – The term implies a continuity
of commercial dealings and arrangements,
and contemplates, to that extent, the
performance of acts or works or the exercise of
some of the functions normally incident to,
and in progressive prosecution of commercial
gain or for the purpose and object of the
business organization (RA 7042, Foreign
UP LAW BOC TAXATION 1 TAXATION LAW

Investments Act). the property owned in common by them in their

individual tax returns for the year and the co-
In order that a foreign corporation may be
ownership is not considered as a separate taxable
regarded as doing business within a State,
entity or a corporation.
there must be continuity of conduct and
intention to establish a continuous business,
such as the appointment of a local agent, and INCOME TAX
not one of a temporary character [CIR v. British
Overseas Airways Corporation, G.R. No. b.1. Definition, Nature and General Principles
65773-74 (1987)].
(b) Non-resident foreign corporations –
Definition
Foreign corporation not engaged in trade or
business within the Philippines Income Tax is defined as a tax on all yearly profits
arising from property, professions, trades, or
(iii) Joint venture and consortium – Essential
offices, or as a tax on the person’s income,
factors of a joint venture or consortium:
emoluments, profits and the like [Fisher v.
(a) Each party must make a contribution, not Trinidad, supra]
necessarily of capital but by way of services,
skill, knowledge, material or money;
Nature
(b) Profits must be shared among the parties;
Income tax is generally classified as an excise tax.
(c) There must be a joint proprietary interest
It is not levied upon persons, property, funds or
and right of mutual control over the subject
profits but upon the right of a person to receive
matter of the enterprise;
income or profits.
(d) There is a single business transaction.

General Principles
(c) Partnerships
(a) A resident citizen of the Philippines is taxable
The Tax Code mandates that every other type of on all income derived from sources within and
business partnership (Ordinary Partnerships) is without the Philippines;
subject to income tax in the same manner and at
(b) A nonresident citizen is taxable only on
the same rate as an ordinary corporation.
income derived from sources within the
General Professional Partnerships (GPP) Philippines;
A general professional partnership is a
(c) An individual citizen of the Philippines who is
partnership formed by persons for the sole
working and deriving income from abroad as
purpose of exercising their common profession,
an overseas contract worker is taxable only on
no part of the income of which is derived from
income derived from sources within the
engaging in any trade or business.
Philippines:
Not considered as a taxable entity for income tax
Provided, That a seaman shall be treated as
purposes. The partners themselves, not the
an overseas contract worker if he is a:
partnership, are liable for the payment of income
tax in their individual capacities. (1) citizen of the Philippines; and
(2) receives compensation for services
rendered abroad as a member of the
(d) Estates and Trusts
complement of a vessel engaged
Taxable estates and trusts are taxed in the same exclusively in international trade
manner and on the same basis as an individual.
(d) An alien individual, whether a resident or not
of the Philippines, is taxable only on income
(e) Co-ownership derived from sources within the Philippines;
For income tax purposes, the co-owners in a co-
ownership report their share of the income from
PAGE 42 OF 275
UP LAW BOC TAXATION 1
(e) A domestic corporation is taxable on all
income derived from sources within and
without the Philippines; and
(f) A foreign corporation, whether engaged or not
in trade or business in the Philippines, is
taxable only on income derived from sources
within the Philippines. [Sec. 23, NIRC]
Taxpayer Within Without
Resident Citizen  
Non-resident Citizen and  X
OCW
Resident and Non-resident  X capital. (1 Mertens, Sec. 5.06) The increase in
Alien
Domestic Corporation  
Foreign Corporation  X
B.2. INCOME
b.2.1. Definition and Nature
Definition
(a) Income means all wealth which flows to the
taxpayer other than a mere return of capital. It
includes gain derived from the sale or other
disposition of capital assets. Income is a gain
derived from labor or capital, or both labor
and capital; and includes the gain derived
from the sale or exchange of capital assets.
(b) It is an amount of money coming to a person
within a specified time, whether as payment
for services, interest or profit from investment.
Unless otherwise specified. It means cash or
its equivalent. Income can also be thought of
as a flow of the fruits of one's labor. [Conwi v.
CTA , G.R. No. 48532 (1992)]
(c) Income may be received in the form of cash,
property, service, or a combination of the three.
Nature
Income includes earnings, lawfully or unlawfully
acquired, without consensual recognition,
express or implied, of an obligation to repay and
without restriction as their disposition. [James v.
US, 366 US 213(1961)]
b.2.2. When Income is Taxable
PAGE 43 OF 275
TAXATION LAW
i. Existence of Income
(1) There is INCOME, gain or profit
(2) RECEIVED or REALIZED during the taxable
year
(3) NOT EXEMPT from income tax
(a) "The fact is that property is a tree, income is
the fruit; labor is a tree, income the fruit;
capital is a tree, income the fruit." A tax on
income is not a tax on property. "Income," as
here used, can be defined as "profits or gains."
[Madrigal v. Rafferty, supra]
(b) A mere increase in the value of property is not
income, but merely unrealized increase in
the value of property is also known as
appraisal surplus or revaluation increment.
Income v. Capital {Madrigal v. Rafferty, supra]
Income Capital
Denotes a flow of Fund or property
wealth during a existing at one
definite period of distinct point in time.
time.
Service of wealth Wealth itself
Subject to tax Return of capital is
not subject to tax
Fruit Tree
ii. Realization of Income
Income is realized when there is a gain or profit
derived from a closed and completed transaction.
Actual vis-à-vis Constructive receipt
(1) Actual receipt – Income is actually reduced to
possession. The realization of gain may take
the form of actual receipt of cash.
(2) Constructive receipt – An income is
considered constructively received when it is
credited to the account of, or segregated in
favor of a person. The person may withdraw
the said account credited in his favor anytime
without any substantial limitations or
conditions upon which payment or enjoyment
is to be made or exercised.
Examples:
UP LAW BOC TAXATION 1
(a) Interest credited on savings bank deposit
(b) Matured interest coupons not yet collected
by the taxpayer
(c) Dividends applied by the corporation
against the indebtedness of a stockholder
(d) Share in the profit of a partner in a general
professional partnership, although not yet
distributed, is regarded as constructively
received; or
(e) Intended payment deposited in court
(consignation).
The doctrine of constructive receipt is
designed to prevent the taxpayer using the
cash basis from deferring or postponing the
actual receipt of taxable income. Without the
rule, the taxpayer can conveniently select the
year in which he will report the income.
(Dimaampao)
For a taxpayer using the accrual method, the
determinative question is, when do the facts
present themselves in such a manner that the
taxpayer must recognize income or expense? The
accrual of income and expense is permitted when
the all-events test has been met. This test
requires: (1) fixing of a right to income or liability
to pay; and (2) the availability of the reasonable
accurate determination of such income or liability
[CIR v. Isabela Cultural Corporation, G.R. No.
135210 (2001) ].
The “As If” Theory of Constructive Income is
designed to prevent a cash basis taxpayer to
delay reporting of income. It also resumes the
existence of income on transactions supposedly
not subject to tax. [Valencia and Roxas]
iii. Recognition of Income
Income realized pertains to the accrual basis of
accounting.
Recognition of income in the books is when it is
realized and expenses are recognized when
incurred. It is the right to receive and not the
actual receipt that determines the inclusion of
the amount in gross income
Examples:
(1) Interest or rent income earned but not
yet received
(2) Rent expense accrued but not yet paid
PAGE 44 OF 275
TAXATION LAW
(3) Wages due to workers but remaining
unpaid
Generally, trade and manufacturing businesses
use accrual method while servicing businesses
use cash method. If the service business opted to
report on accrual basis, such method can only be
applied when it comes to reporting of expense. To
prevent tax evasion, individual taxpayers whose
business consists of the sale of inventories cannot
use cash method. [Valencia and Roxas]
iv. Cash Method of Accounting versus Accrual
Method of Accounting
Cash method generally reports income upon cash
collection and reports expenses upon payment. If
earned from rendering of services, income is to be
reported in the year when collected, whether
earned or unearned.
Accrual method generally reports income when
earned and reports expense when incurred. If
earned from sale of goods, income is to be
reported in the year of sale, irrespective of
collection.
Methods of accounting in reporting income and
expenses
[N.B. Not in syllabus; Additional matter]
Installment method vis-à-vis Deferred method
vis-à-vis Percentage of completion method (in
long- term contracts)
Installment Method is a special method of
accounting whereby income on installment sales
of property during the year is allowed to be
reported in installments in proportion to the
installment payments actually received in that
year, which the gross profit realized or to be
realized when payment is completed, bears to the
total contract price (Sec. 49, NIRC).
Income may be reported on the installment basis
in the following cases:
Sales of personal property by a dealer
A dealer who regularly sells or otherwise disposes
of personal property on the installment plan
Sales of real property (inventory) and casual sales
of personalty
UP LAW BOC TAXATION 1 TAXATION LAW

(1) casual sale or other casual disposition of basis. In computing his income for the year of
personal property (not of a kind which would change or any subsequent year, amounts actually
be includible in the inventory of the taxpayer if received during any such year on account of sales
on hand at the close of the taxable year) or other dispositions of property made in any prior
where the selling price > P1,000 and the initial year shall not be excluded. [see Sec. 49(D), NIRC].
payments do not exceed 25% of the selling
price, or
Deferred Payment
(2) sale or other disposition of real property
(inventory), if the initial payments do not (a) If the initial payments exceed 25% of the
exceed 25% of the selling price. Note: This sale selling price, the gain realized may be
is subject to creditable withholding tax and reported on a deferred payment method.
normal tax which is 30% for corporate
(b) The taxable gain or income returnable during
taxpayer or 5% to 32% for individual taxpayer.
the year of sale is the difference between the
selling or contract price and the cost of the
property, even though the entire purchase
Sales of real property considered as capital asset
price has not been actually received in the year
by individuals
of sale.
An Individual who sells or disposes of real
(c) The obligations of the purchaser received by
property, considered as capital asset, if initial
the vendor are to be considered as equivalent
payments do not exceed 25% of the selling price,
of cash.
may pay the capital gains tax in installments (Sec.
49(C), NIRC). Note: This sale is subject to a
capital gains tax of 6% based on the selling price
Personal Property Real Property
or zonal value, whichever is higher.
Dealer
Note: Initial payments are the total payments Dealer in personal Installment
received in cash or property (other than evidences property who method; Provided,
of indebtedness such as promissory notes, regularly sells in initial payments do
mortgages given) by the seller upon or before the installment plan: not exceed 25% of
execution of the instrument of sale during the Installment method selling price
taxable year of the disposition of the real property. *held as ordinary If exceeds 25%--
Considered as initial payments are the asset regardless of Deferred payment
downpayment and all other payments received amount of method
by the seller during the year of sale, including percentage of initial *held as inventory
excess mortgage assumed by the buyer over the payments
basis or cost of the property sold. It contemplates Casual Sale
at least one other payment in addition to the Installment
initial payment. If the entire purchase price is to method; Provided:
be paid in a lump sum in a later year, there being (1) Selling price
no payment during the first year, the income may exceeds
not be returned on the installment basis. php1,000
Selling price is the total amount or price of the (2) Initial
sale including the cash or property received and payments do not
all notes of the buyer or mortgages assumed by exceed 25% of
him. selling price
If either of 2 or both
Contract price is the amount which the purchaser conditions not
contracts to pay the seller in cash. It includes the met—Deferred
excess of the mortgages assumed over the cost or payment method
other basis of the property sold. *personal property
Change from accrual to installment basis not considered
A taxpayer entitled to the benefits of a dealer in inventory
personal property may elect for any taxable year Sale by Individuals
to report his taxable income on the installment
PAGE 45 OF 275
UP LAW BOC TAXATION 1
Installment
method; Provided,
initial payments do
not exceed 25% of
selling price
*held as capital
asset
Percentage of completion (in long-term contracts)
Income from long-term construction contracts
refers to the earnings derived from construction
of a building, installation or other construction
contract usually covering a period in excess of
one year. When income is derived from long-term
construction contracts, it is generally reported on
the basis of percentage of completion made every
year that will be evidence by the certificates of
engineers or architects. The reportable income is
calculated by deducting from the contract price
the actual cost of construction.
In recognizing realized revenue for long-term
construction contracts, accountants usually
follow two methods:
(a) Completed contract method – requires
recognition of revenue only when the contract
is finally completed; and
(b) Percentage of completion method – requires
recognition of income based on the progress
of work.
Long-term contracts are no longer allowed to
be reported based on the completed contract
method basis beginning January 1, 1998
pursuant to RA 8424; hence, all long-term
contracts must be reported using the
percentage of completion method.
b.2.3. Tests in Determining Whether Income is
Earned for Tax Purposes
i. Realization test – no taxable income until there
is a separation from capital of something of
exchangeable value, thereby supplying the
realization or transmutation which would result
in the receipt of income [Eisner v. Macomber, 252
U.S. 189, 190 (1920)]. Thus, stock dividends are
not income subject to income tax on the part of
the stockholder when he merely holds more
shares representing the same equity interest in
the corporation that declared stock dividends
[Fisher v Trinidad, supra].
PAGE 46 OF 275
TAXATION LAW
ii. Claim of right doctrine (or Doctrine of
Ownership, command, or control) – a taxable
gain is conditioned upon the presence of a claim
of right to the alleged gain and the absence of a
definite unconditional obligation to return or
repay that which would otherwise constitute a
gain. To collect a tax would give the government
an unjustified preference as to the part of the
money that rightfully and completely belongs to
the victim. The embezzler’s title is void.
iii. Economic benefit test, Doctrine of Pro\prietary
Interest – any economic benefit to the employee
that increases his net worth, whatever may have
been the mode by which it is effected, is taxable.
Thus, in stock options, the difference between the
fair market value of the shares at the time the
option is exercised and the option price
constitutes additional compensation income to
the employee at the time of exercise (not upon
the grant or vesting of the right).
iv. Severance Test – under the doctrine of
severance test of income, in order that income
may exist, is necessary that there be a separation
from capital of something of exchangeable value.
The income required a realization of gain.
v. All Events Test – Under the accrual method of
accounting, expenses are deductible in the
taxable year in which: (1) all events have occurred
which determine the liability; and (2) the amount
of liability can be determined with reasonable
accuracy.
“All events test” requires:
(a) Fixing a right to income or liability to pay;
and
(b) The availability of reasonably accurate
determination of such income or liability.
All of the above tests are followed in the
Philippines for purposes of determining whether
income is received by the taxpayer or not during
the year (Mamalateo).
b.2.4. Classification of Income
Income may be classified as follows:
(1) Compensation Income
UP LAW BOC TAXATION 1 TAXATION LAW

The gain derived from labor, especially Income Situs

employment (earned form employer-employee (b) Intangible
relationship) such as salaries and commissions,.
General rule: Place of Sale
These earnings are subject to normal tax.
Exception: Shares of stock of
(2) Profession or Business Income domestic corporations: Place
The value derived from an exercise of profession, of incorporation
business or utiliation of capital including profit
Shares of Place of incorporation
and gain derived from sale or converstion of
Stock of
assets.
Domestic
Corporation
Examples are net income from business and gain
from the sale of assets used in trade or business.
These earnings are subject to normal tax.
B.3. GROSS INCOME
b.3.1. Definition
(3) Passive Income
An income in which the taxpayer merely waits for Gross Income [Sec. 32(A)] – CG2IR2DAP3
the amount to come in. Examples are royalty,
Gross Income means all income derived from
interest, prizes, and winnings. Generally, passive
whatever source, including (but not limited to)
income is subject to final tax.
the following items:
(4) Capital Gain (1) Compensation for services in whatever
An income derived from sale of assets not used in form paid, including, but not limited to
trade or business. Examples are sale of family fees, salaries, wages, commissions, and
home and other sales of shares of stocks which similar items;
are subject to final taxes. Other sales of capital (2) Gross income derived from the conduct of
assets are subject to normal tax. [Valencia and trade or business or the exercise of a
Roxas] profession;
(3) Gains derived from dealings in property;
b.2.5. Situs of Income Taxation (4) Interests;
Income Situs (5) Rents;
Interest Residence of the debtor (6) Royalties;
(7) Dividends;
Dividends Residence of the corporation
(8) Annuities;
Services Place of performance (9) Prizes and winnings;
Rentals Location of the property (10) Pensions; and
(11) Partner's distributive share from the net
Royalties Place of exercise
income of the general professional
Sale of Real Location of realty partnership.
Property The list here is NOT exclusive
Sale of (a) Tangible The term “gross income” whenever used without
Personal qualification is comprehensive, as defined above,
Purchase and sale: Location of
Sale and is different from the limited meaning of gross
income for purposes of minimum corporate
Manufactured w/in and sold income tax or the gross income tax of
w/o: Partly w/in and partly corporations. Gross income includes gross profit
w/o from ordinary business and other income not
Manufactured w/o and sold subject to passive income tax or final withholding
w/in: Partly w/in and partly tax.
w/o Gross income means income, gain, or profit
subject to income tax. It includes the
compensation for personal services, business
PAGE 47 OF 275
UP LAW BOC TAXATION 1
income, profits, and income derived from any
source whatever (whether legal or illegal), unless
it is exempt from income tax under the
Constitution, tax treaty, or statute or it is subject
to final withholding income tax in accordance
with the semi-global or semi-schedular tax
system adopted by the Philippines.
It is the difference between gross sales/revenue
and the cost of goods sold/services. The
definition of gross income is broad and
comprehensive to include proceeds from sales of
transport documents. (Mamalateo)
b.3.2. Concept of Income From Whaterver Source
Derived
“Income derived from whatever source” means
inclusion of all income not expressly exempted
within the class of taxable income under the laws
irrespective of the voluntary or involuntary action
of the taxpayer in producing the gains, and
whether derived from legal or illegal sources (i.e.
gambling, extortion, smuggling, etc.)
b.3.3. Gross Income vis-à-vis Net Income vis-à-vis
Taxable Income
Gross income – means income, gain or profit
subject to tax.
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).
b.3.4. Sources of Income Subject to Tax
Source is ascribed to the place wherein the
income is earned. It is governed by the situs of
taxation. This classification of income is
necessary to determine whether such income is
subject to tax or not. Income may be:
(i) Derived entirely from sources within the
Philippines [Sec. 42(A), NIRC]. Examples:
compensation for labor or service derived from
Philippine sources; interest on bonds, notes,
deposits and the like earned in the Philippines;
dividends declared by domestic corporations;
rentals and royalties from property located within
PAGE 48 OF 275
TAXATION LAW
the Philippines; and gains, profits and income
from sale of real property as well as from
personal property in the Philippines. As a rule,
incomes earned within the Philippines are
taxable.
(ii) Derived entirely from sources without the
Philippines [Sec. 42(C), NIRC]. Examples:
compensation for labor or service rendered by
overseas contract workers; interest on bonds,
notes, deposits and the like earned abroad;
dividends declared by nonresident foreign
corporation; rental and royalties from property
located outside the Philippines; and gains, profits
and income from sale of real property as well as
from personal property located outside the
Philippines. As a rule, income earned from
outside the Philippines are not taxable except for
resident citizens and domestic corporations.
(iii) Derived from sources partly within or partly
without the Philippines. Examples: gains, profits
and income from transportation or other services
rendered partly within and partly outside, and
dividend received by a resident citizen from a
resident foreign corporation. (Sec. 43(E), NIRC).
In general, when an income is earned partly from
within and partly from without, only income
within is taxable in the Philippines, except if the
taxpayer is a resident citizen or a domestic
corporation. A Filipino citizen or a domestic
corporation whose income is derived from within
and without the Philippines is generally subject
to tax.
b.3.5. Classification of Income Subject to Tax
i. Compensation Income
Income arising from an employer-employee (ER-
EE) relationship. It means all remuneration for
services performed by an EE for his ER, including
the cash value of all remuneration paid in any
medium other than cash [Sec. 78(A)], unless
specifically excluded by the Tax Code.
It includes, but is not limited to, salaries and
wages, honoraria and emoluments, allowances
(e.g., transportation, representation,
entertainment), commissions, fees (including
directors’ fees, if the director is, at the same time,
an employee of the payor-corporation), tips,
taxable bonuses, fringe benefits except those
UP LAW BOC TAXATION 1
subject to Fringe Benefit Tax (FBT) under Section
33 of the Tax Code, and taxable pensions and
retirement pay (e.g., retirement benefits earned
without meeting the conditions for exemption
thereof, such as retirement of less than 50 years
of age.)
General Rule: every form of compensation
income is taxable regardless of how it is earned,
by whom it is paid, the label by which it is
designated, the basis upon which it is determined,
or the form in which it is received. The basis upon
which remuneration is paid is immaterial. It may
be paid on the basis of piece of work, percentage
of profits, hourly, weekly, monthly, or annually.
Exception: The term wages does NOT include
remuneration paid:
a) For agricultural labor paid entirely in
products of the farm where the labor is
performed
b) For domestic service in a private home
c) For casual labor not in the course of the
employer's trade or business
d) For services by a citizen or resident of the
Philippines for a foreign government or
an int’l organization. [Sec. 78(A), NIRC]
The term “remuneration for domestic services”
refers to remuneration paid for services of a
household nature performed by an employee in
or about the private home of the person whom he
is employed. The services of household personnel
furnished to an employee (except rank and file
employees) by an employer shall be subject to the
fringe benefits tax pursuant to Sec. 33 of the Tax
Code. A private home is the fixed place of abode
of an individual or family. If the home is utilized
primarily for the purpose of supplying board or
lodging to the public as a business enterprise, it
ceases to be a private home and remuneration
paid for services performed therein is not
exempted. Services of the household nature in or
about a private home include services rendered
by cooks, maids, butlers, valets, laundresses,
gardeners, chauffeurs of automobiles for family
use. The remuneration paid for the services which
are performed in or about rooming or lodging
houses, boarding houses, clubs, hotels, hospitals
or commercial officer or establishments is
considered as compensation. Remuneration paid
PAGE 49 OF 275
TAXATION LAW
for services performed as a private secretary, even
if they are performed in the employer’s home is
considered as compensation.
The term “casual labor” includes labor which is
occasional, incidental or regular. “Not in the
course of the employer’s trade or business”
includes labor that does not promote or advance
the trade or business of the employer.
The term “remuneration paid for services
performed as an employee of a foreign
government or an international organization”
includes not only remuneration paid for services
performed by ambassadors, ministers and other
diplomatic officers and employees but also
remuneration paid for services performed as
consular or other officer or employee of a foreign
government or as a non-diplomatic
representative of such government.
Compensation income including overtime pay,
holiday pay, night shift differential pay, and
hazard pay, earned by MINIMUM WAGE
EARNERS (MWE) who has no other returnable
income are NOT taxable and not subject to
withholding tax on wages [RA 9504]; Provided,
however, that an employee shall not enjoy the
privilege of being a MWE and, therefore, his/her
entire earning are not exempt from income tax
and, consequently, from withholding tax if he
receives/earns additional compensation such as
commissions, honoraria, fringe benefits, benefits
in excess of the allowable statutory amount of
P82,000 [RA 10653], taxable allowance, and
other taxable income other than the statutory
minimum wage (SMW), holiday pay, overtime pay,
hazard pay and night shift differential pay.
MWEs receiving other income, such as income
from the conduct of trade, business, or practice of
profession, except income subject to final tax, in
addition to compensation income are not
exempted from income tax on their income
earned during the taxable year.
This rule, notwithstanding, the SMW, Holiday Pay,
overtime pay, night differential pay and hazard
pay shall still exempt from withholding tax.
Forms of compensation and how they are
assessed
Cash – If compensation is paid in cash, the full
amount received is the measure of the income
subject to tax.
UP LAW BOC TAXATION 1
Medium other than money – If services are paid
for in a medium other than money (e.g., shares of
stock, bonds, and other forms of property), the
fair market value (FMV) of the thing taken in
payment is the amount to be included as
compensation subject to tax. If the services are
rendered at a stipulated price, in the absence of
evidence to the contrary, such price will be
presumed to be the FMV of the remuneration
received.
Living quarters or meals
General Rule: The value to the employee of the
living quarters and meals given by the employer
shall be added to his compensation subject to
withholding.
Exception: If living quarters/meals are furnished
to an employee for the convenience of the
employer, the value need NOT be included as
part of compensation income.
Facilities and privileges of a relatively small value
- Facilities and privileges (such an entertainment,
medical services, or so called “courtesy”
discounts on purchases), otherwise known as
“de minimis benefits” furnished or offered by an
employer to his employees generally, are NOT
considered as compensation subject to income
tax and therefore withholding tax if such facilities
are offered or furnished by the employer merely
as means of promoting the health, goodwill,
contentment, or efficiency of his employees.
Convenience of the Employer Rule
Allowances in kind furnished to the employee for
and as necessary incident to the performance of
his duties are not taxable [Valencia and Roxas].
If meals, living quarters, and other facilities and
privileges are furnished to an employee for the
convenience of the employer, and incidental to
the requirement of the employee’s work or
position, the value of that privilege need not be
included as compensation [Henderson v.
Collector]
The amount of “de minimis” benefits confirming
to the ceiling prescribed shall not be considered
in determining the P82,000 [RA 10653] ceiling of
“other benefits” excluded from gross income
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TAXATION LAW
under Section 32 (b)(7)(e) of the Tax Code,
Provided, that the excess of the ‘de minimis’
benefits over their respective ceilings prescribed
by these regulations shall be considered as part
of “other benefits” and the employee receiving it
will be subject to tax only on the excess over the
P82,000 ceiling, Provided, further, that MWEs
receiving, ‘other benefits’ exceeding the P82,000
limit shall be taxable on the excess benefits, as
well as on his salaries, wages, and allowances,
just like an employee receiving compensation
income beyond the SMW. Any amount given by
the employer as benefits to its employees,
whether classified as “de minimis” benefits or
fringe benefits, shall constitute as deductible
expense upon such employer. Where
compensation is paid in property other than
money, the employer shall make necessary
arrangements to ensure that the amount of the
tax required to be withheld is available for
payment to the BIR.
Classification of Gross Compensation Income
Basic salary or wage
Salary – earnings received periodically for a
regular work other than manual labor, e.g.,
monthly salary of an employee
Wages – earnings received usually according to
specified intervals of work, as by the hour, day, or
week, e.g., a carpenter’s wage.
Backwages are subject to income tax and
withholding tax on wages [BIR Ruling No. DA-
073-2008]
Honoraria – payments given in recognition for
services performed for which the established
practice discourages charging a fixed fee, e.g.,
honorarium of a guest lecturer
Fixed or variable allowances, i.e. Transportation,
Representation, and other allowances such as
Cost of Living Allowances (COLA)
General Rule: Fixed or variable transportation,
representation or other allowances that are
received by a public officer or employee of a
private entity, in addition to the regular
compensation fixed for his position or office is
COMPENSATION subject to withholding tax.
(Rev. Regs. 2-98)
UP LAW BOC TAXATION 1
Exception: Any amount paid specifically, either as
advances or reimbursements for travelling,
representation and other bona fide ordinary and
necessary expenses incurred or reasonably
expected to be incurred by the employee in the
performance of his duties are NOT
COMPENSATION subject to withholding tax,
provided the following conditions are satisfied:
a) It is for ordinary and necessary traveling
and representation or entertainment
expenses paid or incurred by the
employee in the pursuit of the employer’s
trade, business or profession; and
b) The employee is required to account or
liquidate for the foregoing expenses.
The excess of actual expenses over advances
made shall constitute taxable income if such
amount is not returned to the employer. The
employee is required to account/liquidate for the
expenses in accordance with the specific
requirements of substantiation for each category
of expenses pursuant to Sec.34 of the Tax Code.
Note: Reasonable amounts of
reimbursements/advances for traveling and
entertainment expenses which are pre-computed
on a daily basis and are paid to an employee
while he is on an assignment or duty are NOT
subject to withholding tax on wages and
substantiation requirements.
Commission – usually a percentage of total sales
or on certain quota of sales volume attained as
part of incentive such as sales commission.
Fees – received by an employee for the services
rendered to the employer including a director’s
fee of the company, fees paid to the public
officials such as clerks of court or sheriffs for
services rendered in the performance of their
official duty over and above their regular salaries.
Tips and Gratuities – those paid directly to the
employee (usually by a customer of the employer)
which are not accounted for by the employee to
the employer (taxable income but not subject to
withholding tax) [RR NO. 2-98, Sec. 2.78.1]
Hazard or Emergency Pay – additional payment
received due to the workers’ exposure to danger
or harm while working. It is normally added to the
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TAXATION LAW
basic salary together with the overtime pay and
night differential to arrive at gross salary.
Retirement Pay – a lump sum payment received
by an employee who has served a company for a
considerable period of time and has decided to
withdraw from work into privacy. [RR 6-82, Sec.
2b]
In general, retirement pay is taxable except in the
following instances:
a) SSS or GSIS retirement pays.
b) Retirement pay (R.A. 7641) due to old age
provided the following requirements are
met:
i. The retirement program is
approved by the BIR
Commissioner;
ii. It must be a reasonable benefit
plan. (Its implementation must be
fair and equitable for the benefit of
all employees)
iii. The retiree should have been
employed for 10 years in the said
company;
iv. The retiree should have been 50
years old or above at the time of
retirement; and
v. It should have been availed of for
the first time.
Separation pay – taxable if VOLUNTARILY
availed of. It shall not be taxable if involuntary,
i.e., death, sickness, disability, reorganization/
merger of company and company at the brink of
bankruptcy or for any cause beyond the control of
the said official or employee.
“For any cause beyond the control.” – Connotes
involuntariness on the part of the official or
employee. The separation from the service of the
official or employee must not be asked for or
initiated by him or it was not of his own making.
Such fact shall be duly established by the
employer by competent evidence which should
be attached to the monthly return for the period
in which the amount paid due to the involuntary
separation was made.
UP LAW BOC TAXATION 1
Amounts received by reason of involuntary
separation remain EXEMPT from income tax even
if the official or the employee, at the time of
separation, had rendered less than ten (10) years
of service and/or is below fifty (50) years of age.
Any payment made by an employer to an
employer to an employee on account of dismissal,
constitutes compensation regardless of whether
the employer is legally bound by contract, statute,
or otherwise, to make such payment.
Pension – a stated allowance paid regularly to a
person on his retirement or to his dependents on
his death, in consideration of past services,
meritorious work, age, loss, or injury. Pension is
taxable unless the law states otherwise, OR
unless the BIR approves the pension plan of a
private company.
Vacation and sick leave – rules in determining
whether money received for vacation and sick
leave is taxable or not:
If paid or availed of as salary of an employee who
is on vacation or on sick leave notwithstanding his
absence from work, it constitutes TAXABLE
compensation income. [RR 6-82, 2d]
Monetized value of unutilized VACATION leave
credits of ten (10) days or less which were paid to
private employees during the year, and the
monetized value of vacation and sick leave
credits paid to government officials and
employees are NOT subject to income tax and to
the withholding tax. These are ‘de minimis’
benefits.’ [RR no. 5-2011, Sec 2.78.1(A)(7)] Note:
Monetization of sick leave credits of private
employees even if not exceeding 10 days is not
exempt from income tax and withholding tax on
wages.
Terminal leave or money value of accumulated
vacation and sick leave benefits received by heir
upon death of employee is not taxable.
Thirteenth month pay and other benefits - Not
taxable if the total amount received is P82,000
[RA 10653] or less. Any amount exceeding
P82,000 is taxable. [Sec. 32(7)e, NIRC]
Fringe Benefits and De Minimis
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TAXATION LAW
Fringe Benefits – any good, service, or other
benefit furnished or granted by an employer, in
cash or in kind, in addition to basic salaries of an
individual employee [Sec. 33, NIRC]
De Minimis – privileges of relatively small value
as given by the employer to his employees.
Fringe Benefits and De Minimis are not
considered compensation subject to income tax
and withholding tax.
Overtime Pay – premium payment received for
working beyond regular hours of work which is
included in the computation of gross salary of
employee. It constitutes compensation.
Profit Sharing – the proportionate share in the
profits of the business received by the employee
in addition to his wages.
Awards for special services – awards for past
services or suggestions to employers resulting in
the prevention of theft or robbery, etc. are also
compensations.
Beneficial Payments – such as where employer
pays the income tax owed by an employee are
additional compensation income.
Other forms of compensation – other forms
received due to services rendered are
compensation paid in kind, e.g., insurance
premium paid by the employer for insurance
coverage where the heirs of the employee are the
beneficiaries is the employee’s income.
Note: Any amount which is required by law to be
deducted by the employer from the
compensation of an employee including the
withheld tax is considered as part of the
employee’s compensation and is deemed to be
paid to the employee as compensation at the
time the deduction is made. (This also applies to
deductions not required by law.)
Withholding Tax on Compensation Income
The income recipient (i.e., EE) is the person liable
to pay the tax on income, yet to improve the
collection of compensation income of EEs, the
UP LAW BOC TAXATION 1
State requires the ER to withhold the tax upon
payment of the compensation income.
ii. Fringe Benefits
(a) Special treatment of fringe benefits
Persons liable: The Employer (as a withholding
agent), whether individual, professional
partnership or a corporation, regardless of
whether the corporation is taxable or not, or the
government and its instrumentalities, is liable to
remit the fringe benefit tax to the BIR once fringe
benefit is given to a managerial or supervisory
employee.
The fringe benefit tax (FBT) is a final tax on the
employee’s income to be withheld by the
employer. The withholding and remittance of
FBT shall be made on a calendar quarterly basis.
Managerial employee: one who is vested with the
powers or prerogatives to lay down and execute
management policies and/or to hire, transfer,
suspend, lay-off, recall, discharge, assign or
discipline employees.
Supervisory employees: those who, in the interest
of the employer, effectively recommend such
managerial actions if the exercise of such
authority is not merely routinary or clerical in
nature but requires the use of independent
judgment.
All employees not falling within any of the above
definitions are considered rank-and-file
employees.
Fringe benefit tax is imposed on fringe benefits
received by supervisory and managerial
employees. The fringe benefits of rank and file
employees are treated as part of compensation
income subject to income tax and withholding tax
on compensation.
(b) Definition
Fringe benefit means any good, service, or other
benefit furnished or granted by an employer, in
cash or in kind, in addition to basic salaries, to an
individual employee (except rank and file
employees) such as, but not limited to the
following:
(a) Housing
(b) Expense Account
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TAXATION LAW
(c) Vehicle of any kind
(d) Household personnel, such as maid,
driver and others
(e) Interest on loan at less than market rate
to the extent of the difference between
the market rate and actual rate granted.
(f) Membership fees, dues and other
expenses borne by the employer for the
employee in social and athletic clubs and
similar organizations
(g) Expenses for foreign travel
(h) Holiday and vacation expenses
(i) Educational assistance to the employee
or his dependents; and
(j) Life or health insurance and other non-
life insurance premiums or similar
amounts on excess of what the law
allows.[Sec. 33(B)]
Tax Rate and Tax Base
Tax base is based on the grossed-up monetary
value (GMV) of fringe benefits. Rate is generally
32%.
GMV represents: (a) the whole amount of income
realized by the employee which includes the net
amount of money or net monetary value of
property that has been received; and (b) the
amount of fringe benefit tax due from the
employee which has been withheld and paid by
the employer for and in behalf of his employee..
How GMV is determined
GMV is determined by dividing the actual
monetary value of the fringe benefit by 68%
[100% - tax rate of 32%]. For example, the actual
monetary value of the fringe benefit is P1,000.
The GMV is equal to P1,470.59 [P1,000 / 0.68].
The fringe benefit tax, therefore, is P470.59
[P1470.59 x 32%].
Special Cases:
a) For fringe benefits received by non-
resident alien not engaged in trade of
business in the Philippines (NRANETB),
the tax rate is 25% of the GMV. The GMV
is determined by dividing the actual
monetary value of the fringe benefit by
75% [100% - 25%].
UP LAW BOC TAXATION 1
b) For fringe benefits received by alien
individuals and Filipino citizens
employed by regional or area
headquarters, regional operating
headquarters, offshore banking units
(OBUs), or foreign service contractor or by
a foreign subcontractor engaged in
petroleum operations in the Philippines,
or by any of their Filipino individual
employees who are employed and
occupying the same positions as those
occupied by the alien employees, the tax
rate is 15% of the GMV. The GMV is
determined by dividing the actual
monetary value of the fringe benefit by
85% [100% - 15%].
What is the tax implication if the employer gives
‘fringe benefits’ to rank-and-file employees?
Fringe benefits given to a rank-and-file employee
are treated as part of his compensation income
subject to normal tax rate and withholding tax on
compensation income, except de minimis
benefits and benefits provided for the
convenience of the employer.
Payor of Fringe Benefit Tax (FBT): The employer
withholds and pays the FBT but the law allows
him to deduct such tax from his gross income.
(c) Taxable and non-taxable fringe benefits
Fringe Benefits NOT subject to Tax
i. Fringe benefits not considered as gross
income – if it is required or necessary to
the business of employer; if it is for the
convenience or advantage of employer
ii. Fringe Benefit that is not taxable under
Sec. 32 (B) – Exclusions from Gross
Income
Fringe benefits not subject to Fringe Benefit Tax:
a) Fringe Benefits which are authorized and
exempted from income tax under the
Code or under special laws;
b) Contributions of the employer for the
benefit of the employee for retirement,
insurance and hospitalization benefit
plans;
PAGE 54 OF 275
TAXATION LAW
c) Benefits given to the rank-and-file
employees, whether granted under a
collective bargaining agreement or not;
and
d) Fringe benefits granted for the
convenience of the employer;
e) De minimis benefits
The exemption of any FB from the FBT shall not
be interpreted to mean exemption from any other
income tax imposed under the Tax Code except if
the same is likewise expressly exempt from any
other income tax imposed under the Tax Code or
under any other existing law. Thus, if the FB is
exempted from the FBT, the same may, however,
still form of the employee’s gross compensation
income which is subject to income tax; hence,
likewise subject to withholding tax on
compensation income payment.
De Minimis Benefits
Exempt from income tax and withholding tax on
compensation income of both managerial and
rank and file EEs. [as provided by R.R. No. 5-2011
/ R.R. No. 8-2012 and R.R. No. 1-2015]:
(1) Monetized unused vacation leave credits of
employees not exceeding ten (10) days during
the year; (RR No. 5-2011)
(2) Monetized value of vacation and sick leave
credits paid to government officials and
employees; (RR No. 5-2011)
(3) Medical cash allowance to dependents of
employees, not exceeding P750 per
employee per semester or P125 per month;
(RR No. 5-2011)
(4) Rice subsidy of P1,500 or one (1) sack of 50 kg.
rice per month amounting to not more than
P1,500; (RR No. 5-2011)
(5) Uniform and Clothing allowance not
exceeding P5,000 per annum; (RR No. 8-
2012)
(6) Actual medical assistance, e.g. medical
allowance to cover medical and healthcare
needs, annual medical/executive check-up,
maternity assistance, and routine
consultations, not exceeding P10,000.00 per
annum; (RR No. 5-2011)
UP LAW BOC TAXATION 1 TAXATION LAW

(7) Laundry allowance not exceeding P300 per Fringe Benefit Tax
month; (RR No. 5-2011) Housing Privilege Base (Monetary
Value)
(8) Employees achievement awards, e.g., for
length of service or safety achievement, Purchase of residential MV= 5% x
which must be in the form of a tangible property in installment acquisition cost
personal property other than cash or gift basis for the use of the exclusive of
employee interest x 50%
certificate, with an annual monetary value
not exceeding P10,000 received by the Purchase of residential MV= FMV or ZV,
employee under an established written plan property and ownership whichever is
which does not discriminate in favor of highly is transferred in the higher
paid employees; (RR No. 5-2011) name of the employee
(9) Gifts given during Christmas and major ZV = Zonal Value = value of the land or
anniversary celebrations not exceeding improvement, as declared in the Real Property
P5,000 per employee per annum; (RR No. 5- Declaration Form
2011)
FMV = Fair Market Value = FMV as determined by
(10) Daily meal allowance for overtime work and the Commissioner of Internal Revenue
night/graveyard shift not exceeding twenty-
five percent (25%) of the basic minimum
wage on a per region basis; (RR No. 5-2011) Non-taxable housing fringe benefit:
(11) Benefits received by an employee by virtue of a) Housing privilege of the Armed Forces of
a collective bargaining agreement (CBA) and the Philippines (AFP) officials – i.e, those
productivity incentive schemes provided that of the Philippine Army, Philippine Navy,
the total monetary value received from both or Philippine Air Force
CBA and productivity incentive schemes
b) A housing unit, which is situated inside or
combined do not exceed P10,000.00 per
adjacent to the premises of a business or
employee per taxable year. (RR No 1-2015)
factory – maximum of 50 meters from
perimeter of the business premises
All other benefits given by employers which are
c) Temporary housing for an employee who
not included in the above enumeration shall NOT
stays in housing unit for three months or
be considered as "de minimis" benefits and hence,
less
shall be subject to withholding tax on
compensation (rank and file employees) and FBT
(managerial/supervisory employees).

Housing
Motor Vehicle
Fringe Benefit Tax
Fringe Benefit Tax
Housing Privilege Base (Monetary Motor Vehicle
Base
Value)
Purchased in the name MV= acquisition
LEASE of residential MV= 50% of lease
of the employee cost
property for the payments
residential use of Cash given to employee MV= cash received
employees to purchase in his own by employee
where MV = name
monetary value of
the FB Purchase on installment, MV= acquisition
in the name of employee cost exclusive of
Assignment of residential MV= [5% (FMV or interest
property owned by ZV, whichever is
employer for use of higher) x 50%] Employee shoulders part MV= amount
employees of the purchase price, shouldered by
employer

PAGE 55 OF 275
UP LAW BOC TAXATION 1 TAXATION LAW

ownership in the name Doing business: The term implies a continuity of

of employee commercial dealings and arrangements, and
contemplates, to that extent, the performance of
Employer owns and MV= (AC/5) x 50%
acts or works or the exercise of some of the
maintains a fleet of
functions normally incident to, and in progressive
motor vehicles for use of
prosecution of, the purpose and object of its
the business and of
organization.
employees
Employer leases and MV= 50% of rental v. Income from Dealings in Property
maintains a fleet for the payment
use of the business and Dealings in property such as sales or exchanges
of employees may result in gain or loss. The kind of property
involved (i.e., whether the property is a capital
asset or an ordinary asset) determines the tax
Pure Compensation Earner implication and income tax treatment, as follows:
(Minimum Wage Earner, Rank & File, Executive) Taxable Ordinary Net Capital
Minimum Net Net Gains (other
Managerial or = +
Wage Rank and File Income Income than those
Supervisory subject to final
Earner
Basic Compensation CGT)
Exempt Taxable Taxable Ordinary Asset Capital Asset
Compensation Compensation Gain from sale, exchange or other disposition
Holiday Pay, OT, Nightshift Pay, Hazard Pay Ordinary Gain (part of
Capital Gain
Gross Income)
Exempt Taxable Taxable
Compensation Compensation Loss from sale, exchange, or other disposition
13th Month Pay up to P82,000 Ordinary Loss (part of
Allowable Deductions Capital Loss
Exempt Exempt Exempt from Gross Income)
Other Benefit in Excess of P82,000 Excess of Gains over Losses
N/A (with Taxable Taxable Part of Gross Income Net Capital Gain
caveat) Compensation Compensation
Excess of Losses over Gains
Fringe Benefit
Part of Allowable
N/A Taxable Subject to Deductions from Net Capital Loss
Compensation Fringe Benefit Gross Income
Tax
(a) Types of Properties
De Minimis Benefit
Capital v. Ordinary Asset
Exempt Exempt Exempt
Ordinary Assets Capital Assets
(1) Stock in trade of the Property held by the
iii. Professional Income taxpayer/ other taxpayer, whether or
Refers to fees received by a professional from the property of a kind not connected with
practice of his profession, provided that there is which would properly his trade or business
NO employer-employee relationship between be included in the which is not an
him and his clients. inventory of the ordinary asset.
taxpayer if on hand at
the close of the
iv. Income from Business taxable year. Generally, they
- Any income derived from doing business include:
(2) Property held by
the taxpayer primarily
PAGE 56 OF 275
UP LAW BOC TAXATION 1 TAXATION LAW

Ordinary Assets Capital Assets  100% if the capital asset has

for sale to customers (1) stocks and been held for not more than 12
in the ordinary course securities held by months; and
of his trade or taxpayers other than
business. dealers in securities  50% of the capital asset has been
held for more than 12 months
(3) Property used in (2) real property not
the trade or business used in trade or b) If the taxpayer is a corporation –
of a character which is business, such as  100%, regardless of the holding
subject to the residential house period of the capital asset (Sec.
allowance for and lot, idle or 39(B), NIRC)
depreciation, or vacant land or
building The tax rules for the gains or losses from sales or
(4) Real property used exchanges of capital assets over ordinary assets
in the trade or (3)investment are as follows:
business of the property, such as
taxpayer, including interest in a a) Net capital gain is added to ordinary gain
property held for rent. partnership, stock but net capital loss is not deductible from
investment ordinary gain.
(4)Personal or non- b) Net ordinary loss is deductible from
business properties, ordinary gain.
such as family car, c) Capital losses are deductible only to the
home appliances, extent of the capital gain.
jewelry.
d) There is a net capital loss carry-over on
the net capital asset’s loss in a taxable
(b) Types of Gains from dealings in property year which may be deducted as a short-
term capital loss from the net capital gain
(1) Ordinary income vis-à-vis Capital gain. – of the subsequent taxable year; provided
If the asset involved is classified as ordinary, the that the following conditions shall be
entire amount of the gain from the transaction observed:
shall be included in the computation of gross e) The taxpayer is other than a corporation;
income [Sec 32(A)], and the entire amount of the
loss shall be deductible from gross income. [Sec f) The amount of loss does not exceed the
34(D)]. (See Allowable Deductions from Gross income before exemptions at the year
Income - Losses when the loss was sustained; and
If the asset involved is a capital asset, the rules on g) The holding period should not exceed 12
capital gains and losses apply in the months. (Valencia)
determination of the amount to be included in When a capital gain or capital loss is sustained by
gross income. (See Capital Gains and Losses). a corporation, the following rules shall be
These rules do not apply to: (a) real property with observed:
a capital gains tax (final tax), or (2) shares of stock
of a domestic corporation with a capital gains tax a) There is no holding period; hence, there is
(final tax). Also, sale of shares of stock of a no net capital loss carry-over.
domestic corporation, held as capital assets, b) Capital gains and losses are recognized
through the stock exchange by either individual to the extent of their full amount.
or corporate taxpayers, is subject to ½ of 1%
percentage tax based on gross selling price. c) Capital losses are deductible only to the
extent of capital gains.
The following percentages of the gain or loss
recognized upon the sale or exchange of a capital d) Net capital losses are not deductible
asset shall be taken into account in computing from ordinary gain or income but ordinary
net capital gain, net capital loss, and net income: losses are deductible from net capital
gains.
a) If the taxpayer is an individual –

PAGE 57 OF 275
UP LAW BOC TAXATION 1
Note: For sale, barter, exchange or other forms of
disposition of shares of stock subject to the 5% or
10% capital gains tax on the net capital gain
during the taxable year, the capital losses
realized from this type of transaction during the
taxable year are deductible only to the extent of
capital gains from the same type of transaction
during the same period. If the transferor of the
shares is an individual, the rule on holding period
and capital loss carry-over will not apply,
notwithstanding the provisions of Section 39 of
the Tax Code. (RR 6-2008, c.4)
(2) Actual gain vis-à-vis Presumed gain
Presumed Gain: In the sale of real property
located in the Philippines, classified as capital
asset, the tax base is the gross selling price or fair
market value, whichever is higher. The law
presumes that the seller makes a gain from such
sale. Thus, whether or not the seller makes a
profit from the sale of real property, he has to pay
6% capital gains tax. In fact, he has to pay the tax,
even if he incurs an actual loss from the sale
thereof. (However, when the buyer is the
government, the individual seller has the option
whether to be taxed at the graduated income tax
rates or at 6% capital gains tax.)
Actual Gain: The tax base in the sale of real
property classified as an ordinary asset is the
actual gain. If the seller incurs a loss from the sale,
such loss may be deducted from his gross income
during the taxable year. The ordinary gain shall
be added to the operating income and the net
taxable income shall be subject to the graduated
rates from 5% to 32% (if an individual) or to 30%
corporate tax or to 2% MCIT (if a corporation).
Computation of the amount of gain or loss
Amount realized from sale or other
disposition of property
Less: Basis or Adjusted Basis
NET GAIN (LOSS)
Note: Amount realized from sale or other
disposition of property = sum of money received
+ fair market value of the property (other than
money) received
Note: When a taxpayer sells a real or personal
property, he should deduct its cost from its selling
PAGE 58 OF 275
TAXATION LAW
price to measure the gain or loss from the sales
transaction (Sec. 40, NIRC).
(3) Long term capital gain vis-à-vis Short term
capital gain
Long-term capital gain: Capital asset is held for
more than twelve months before it is sold. Only
50% of the gain is recognized.
Short-term capital gain: Capital asset is held for
12 months or less, 100% of the gain is subject to
tax.
(4) Net Capital Gain vis-à-vis Net Capital Loss
Net Capital Gain: Excess of the gains over the
losses on sales or exchange of capital assets
during the taxable year.
Net Capital Loss: Excess of the losses over the
gains on sales or exchanges of capital assets
during the taxable year. [Sec. 39A, NIRC]
(5) Income tax treatment of capital loss
(a) Capital loss limitation rule (applicable to both
corporations and individuals)
General Rule: Losses from sales or exchanges of
capital assets shall be allowed only to the extent
of the gains from such sales or exchanges (Sec.
39(C), NIRC).
Exception for Banks and Trust Companies: If a
bank or trust company incorporated under the
laws of the Philippines, a substantial part of
whose business is the receipt of deposits, sells
any bond, debenture, note, certificate or other
evidence of indebtedness issued by any
corporation (including one issued by a
government or political subdivision thereof) with
interest coupons or in registered form, any loss
resulting from such sale shall not be subject to
the foregoing limitation and shall not be included
in determining the applicability of such limitation
to other losses (Sec. 39(C), NIRC).
(b) Net loss carry-over rule (applicable only to
individuals)
If an individual sustains in any taxable year a net
capital loss, such loss (in an amount not in excess
of the net income for the year) shall be treated in
the succeeding taxable year as a loss from the
UP LAW BOC TAXATION 1
sale or exchange of a capital asset held for not
more than 12 months (Sec. 39(D), NIRC).
(6) Dealings in real property situated in the
Philippines
Persons Liable and Transactions Affected:
(a) Individual taxpayers, estates and trusts
(b) Sale or exchange or other disposition of
real property considered as capital assets.
(c) Includes "pacto de retro sale" and other
conditional sale.
(d) Domestic Corporation
(e) Sale or exchange or disposition of lands
and/or building which are not actually
used in business and are treated as
capital asset.
Rate and Basis of Tax
A final withholding tax of 6% is based on the
gross selling price or fair market value or zonal
value whichever is higher.
Note: Gain or loss is immaterial, there being a
conclusive presumption of gain.
(7) Dealings in shares of stock of Philippine
corporations
Persons Liable to the Tax:
(a) Individual taxpayer, whether citizen or
alien;
(b) Corporate taxpayer, whether domestic or
foreign; and
(c) Other taxpayers not falling under (a) and
(b) above, such as estate, trust, trust
funds and pension funds, among others.
Persons not liable:
(a) Dealers in securities
(b) Investor in shares of stock in a mutual
fund company
(c) All other persons who are specifically
exempt from national internal revenue
taxes under existing investment
incentives and other special laws.
PAGE 59 OF 275
TAXATION LAW
(a) Shares listed and traded through the stock
exchange other than sale by a dealer in securities:
½ of 1% of the gross selling price of the stock or
gross value in money of the shares of stock sold,
bartered, exchanged or otherwise disposed which
shall be assumed and paid by the seller or
transferor through the remittance of the stock
transaction tax by the seller or transferor’s broker.
Note: In the nature of percentage tax and not
income tax; exempt from income tax per Section
127 (d):
“Any gain derived from the sale, barter, exchange
or other disposition of share of stock under this
section shall be exempt from taxes imposed in
Sections 24(C), 27(D)(2), 28(A)(8)(c), and
28(B)(5)(c) of this Code and from the regular
individual or corporate income tax.”
Note: Percentage tax under Sec. 127 is NOT
DEDUCTIBLE for income tax purposes.
(b) Shares not listed and traded through the stock
exchange
Net capital gains derived during the taxable year
from sale, exchange, or transfer shall be taxed as
follows (on a per transaction basis):
Amount of Capital Tax Rate
Gain
Not over P 100,000 5%
On any amount in 10%
excess of P 100,000
(8) Sale of principal residence
Principal residence: the family home of the
individual taxpayer (RR 14-2000)
Disposition of principal residence (capital asset)
is exempt from Capital Gains Tax, provided:
(1) Sale or disposition of the old principal
residence;
(2) By natural persons - citizens or aliens
provided that they are residents taxable
under Sec. 24 of the Code (does not
include an estate or a trust);
(3) The proceeds of which is fully utilized in
(a) acquiring or (b) constructing a new
principal residence within eighteen (18)
months from date of sale or disposition;
UP LAW BOC TAXATION 1
(4) Notify the Commissioner within thirty
(30) days from the date of sale or
disposition through a prescribed return of
his intention to avail the tax exemption;
(5) Can only be availed of onlyonce every ten
(10) years;
(6) The historical cost or adjusted basis of his
old principal residence shall be carried
over to the cost basis of his new principal
residence
(7) If there is no full utilization, the portion of
the gains presumed to have been realized
shall be subject to capital gains tax.
(8) Portion of presumed gains subject to
CGT: (Unutilized/GSP) x (higher of GSP
or FMV)
vi. Passive Investment Income
Under Sec 24(B) of the Tax Code, a final tax is
imposed upon gross passive income of citizen
and resident aliens. An income is considered
passive if the taxpayer merely waits for it to be
realized.
(a) Interest Income
An earning derived from depositing or lending of
money, goods or credits [Valencia and Roxas] e.g.,
interest income from government securities such
as Treasury Bills.
Unless exempted by law, interest income
received by the taxpayer, whether or not usurious,
is subject to income tax.
(b) Dividend Income
A form of earnings derived from the distribution
made by a corporation out of its earnings or
profits and payable to its stockholders, whether
in money or in property.
In general, dividends are subject to final tax
under the Tax Code.
(1) Cash dividends
Dividends are subject to final tax under the NIRC.
However, dividends received by a domestic
corporation from another domestic corporation,
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TAXATION LAW
and a non-resident foreign corporation from a
domestic corporation is exempt from income tax.
Cash dividend is the most common form of
dividend, valued at the amount of money
received by the stockholder. Cash dividends and
property dividends are subject to income tax.
(2) Stock dividends
Stock dividend is generally exempt from income
tax, EXCEPT:
(a) If a corporation cancels or redeems stock
issued as a dividend at such time and in
such manner as to make the distribution
and cancellation or redemption, in whole
or in part, essentially equivalent to the
distribution of a taxable dividend, the
amount so distributed in redemption or
cancellation of the stock shall be
considered as taxable income to the
extent that it represents a distribution of
earnings or profits (Sec. 73(B), NIRC); or
(b) Where there is an option that some
stockholders could take cash or property
dividends instead of stock dividends;
some stockholders exercised the option
to take cash of property dividends; and
the exercise of option resulted in a
change of the stockholders’
proportionate share in the outstanding
share of the corporation.
(3) Property dividends
Property dividends or dividends in the form of
property are subject to tax at preferential rate
under the NIRC.
(4) Liquidating dividends
Represents distribution of all the property or
assets of a corporation in complete liquidation or
dissolution. It is strictly not dividend income, but
rather is treated in effect, a return of capital to the
extent of the shareholder’s investment. The
difference between the cost or other basis of the
stock and the amount received in liquidation of
the stock is a capital gain or a capital loss. Where
property is distributed in liquidation, the amount
received is the FMV of such property. The income
is subject to ordinary income tax rates. It is
UP LAW BOC TAXATION 1 TAXATION LAW

subject neither to the FWT on dividends nor to the
CGT on sale of shares.
Rent income may be in the following forms:
(1) Cash, at the stipulated price
(2) Obligations of the lessor to third persons
paid or assumed by the lessee in
consideration of the contract of lease,
e.g., real estate tax on the property
leased assumed by the lessee
(3) Advance payment
If the advance payment is actually a loan to the
lessor, or an option money for the property, or a
security deposit for the faithful performance of
certain obligations of the lessee, such advance
payment is not income to the lessor.
However, a security deposit that is applied to
rental is taxable income to the lessor.
If the advance payment is, in fact, a pre-paid
rental, received by the lessor under a claim of
right and without restriction as to its use, then
such payment is income to the lessor.
Pre-paid rent must be reported in full in the year
of receipt, regardless of the accounting method
used by the lessor.

(1) Lease of personal property

Rental income on the lease of personal property
located in the Philippines and paid to a non-
(c) Royalty Income resident taxpayer shall be taxed as follows:
Royalty is a valuable property that can be NRA-
developed and sold on a regular basis for a NRFC
NETB
consideration; in which case, any gain derived Vessel 4.5% 25%
therefrom is considered as an active business
income subject to the normal corporate tax. Aircraft, 7.5% 25%
machineries and
Where a person pays royalty to another for the other Equipment
use of its intellectual property, such royalty is
generally a passive income of the owner thereof Other assets 30% 25%
subject to withholding tax.
(2) Lease of real property
(d) Rental Income Lessor Tax Rate
Refers to earnings derived from leasing real Citizen
estate as well as personal property. Aside from Resident Alien Net taxable income
the regular amount of payment for using the shall be subject to the
property, it also includes all other obligations Non-resident alien
graduated income tax
assumed to be paid by the lessee to the third engaged in trade or
rates
party in behalf of the lessor (e.g., interest, taxes, business in the
loans, insurance premiums, etc.) [RR 19-86] Philippines
Non-resident alien Rental income from
not engaged in trade real property located
PAGE 61 OF 275
UP LAW BOC TAXATION 1 TAXATION LAW

Lessor Tax Rate extent of the value of such buildings or

or business in the in the Philippines
Philippines shall be subject to
25% final
withholding tax
unless a lower rate is
imposed pursuant to
an effective tax treaty
Domestic Corporation Net taxable income
shall be subject to
Resident Foreign
30% corporate
Corporation
income tax or its
gross income will be
subject to 2% MCIT
Non-resident Foreign Gross rental income
Corporation from real property
located in the
Philippines shall be
subject to 30%
corporate income tax,
such tax to be
withheld and
remitted by the lessee
in the Philippines
improvements when he became entitled to such
possession exceeds the amount already reported
as income on account of the erection of such
building or improvement. No appreciation in
value due to causes other than the premature
termination of lease shall be included (Sec. 49,
Rev. Reg. No. 2).
If the building or other leasehold improvement is
destroyed before the expiration of the lease, the
lessor is entitled to deduct as a loss for the year
when such destruction takes place, the amount
previously reported as income because of the
erection of the improvement, less any salvage
value, to the extent that such loss was not
compensated by insurance (Sec. 49, Rev. Reg. No.
2),
(b) VAT added to rental/paid by the lessee
If the lessee is VAT-registered, treat VAT paid as
input VAT;
If the lessee is not VAT-registered OR not liable
to VAT, treat VAT paid as additional rent expense
deductible from gross income.

(3) Tax treatment of:
(a) Leasehold improvements by lessee
Rent Income from leasehold improvements:
(i) Outright method- lessor shall report as
income FMV of the buildings or
improvements subject to the lease in the
year of completion.
(ii) Spread-out method- lessor shall spread
over the remaining term of the lease the
estimated depreciated (book) value of
such buildings or improvements at the
termination of the lease, and reports as
income for each remaining term of the
lease an aliquot part thereof.
estimated BV at the end of the lease
contract/ remaining lease term = Income
per year
If for any reason than a bona fide purchase from
the lessee by the lessor, the lease is terminated,
so that the lessor comes into possession or
control of the property prior to the time originally
fixed, lessor receives additional income for the
year which the lease is so terminated to the
(c) Advance Rental/ Long Term Lease
Pre-paid rent must be reported in full in the year
of receipt, regardless of the accounting method
used by the lessor.
vii. Annuities, Proceeds from Life insurance or
Other Types of Insurance
Annuities are installment payments received for
life insurance sold by insurance companies.
The aleatory contract of life annuity binds the
debtor to pay an annual pension or income
during the life of one or more determinate
persons in consideration of a capital consisting of
money or other property, whose ownership is
transferred to him at once with the burden of the
income. [Art. 2021, New Civil Code]
The annuity payments represent a part that is
taxable and not taxable. If part of annuity
payment represents interest, then it is a taxable
income. If the annuity is a return of premium, it is
not taxable.
viii. Prizes and Awards

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UP LAW BOC TAXATION 1
A prize is a reward for a contest or a competition.
It represents remuneration for an effort reflecting
one’s superiority.
Contest prizes and awards received are generally
taxable. Such payment constitutes gain derived
from labor.
The EXCEPTIONS are as follows:
(a) Prizes and awards made primarily in
recognition of religious, charitable,
scientific, educational, artistic, literary or
civic achievements are EXCLUSIONS
from gross income if:
(b) The recipient was selected without any
action on his part to enter a contest or
proceedings; and
(c) The recipient is not required to render
substantial future services as a condition
to receiving the prize or award.
(d) Prizes and awards granted to athletes in
local and international sports
competitions and tournaments held in
the Philippines and abroad and
sanctioned by their national associations
shall be EXEMPT from income tax.
ix. Pensions, Retirement Benefit, or Separation
Pay
Paid for past employment services rendered.
A stated allowance paid regularly to a person on
his retirement or to his dependents on his death,
in consideration of past services, meritorious
work, age, loss or injury. It is generally taxable
unless the law states otherwise. [VALENCIA,
Income Taxation 5th ed. (2009)]
x. Income from Any Source Whatever
Inclusion of all income not expressly exempted
within the class of taxable income under the laws
irrespective of the voluntary or involuntary action
of the taxpayer in producing the gains, and
whether derived from legal or illegal sources
(a) Forgiveness of indebtedness
The cancellation or forgiveness of indebtedness
may have any of three possible consequences:
It may amount to payment of income. If, for
example, an individual performs services to or for
PAGE 63 OF 275
TAXATION LAW
a creditor, who, in consideration thereof, cancels
the debt, income in that amount is realized by the
debtor as compensation for personal services.
It may amount to a gift. If a creditor wishes merely
to benefit the debtor, and without any
consideration therefore, cancels the debt, the
amount of the debt is a gift to the debtor and
need not be included in the latter’s report of
income.
It may amount to a capital transaction. If a
corporation to which a stockholder is indebted
forgives the debt, the transaction has the effect of
a payment of dividend.
(b) Tax Benefit Rule
This is a general principle in taxation which states
that is a taxpayer deducted an item on his income
tax return and enjoyed a tax benefit (reduced his
income tax) thereby, and in a subsequent year
recovers all or part of that item, he will recognize
gross income in the year the deducted item is
recovered. The rule has both an inclusionary and
an exclusionary component, i.e., the recovery is
included in the taxpayer’s gross income to the
extent that the taxpayer obtained a tax benefit
from the prior year’s deduction, and the recovery
is excluded to the extent that the prior year’s
deduction did not provide a tax benefit.
3 deductions in Sec. 34 which makes reference to
Tax Benefit Rule are the following:
• Taxes [ Sec 34(C)(1)]
• Abandonment Losses [Sec 34 (D)(7)(b)]
• Bad Debts [Sec 34(E)(1)]
(c) Recovery of accounts previously written-off
Bad debts claimed as a deduction in the
preceding year(s) but subsequently recovered
shall be included as part of the taxpayer’s gross
income in the year of such recovery to the extent
of the income tax benefit of said deduction. There
is an income tax benefit when the deduction of
the bad debt in the prior year resulted in lesser
income and hence tax savings for the company.
(Sec. 4, RR 5-99)
Illustration:
Case A Case B Case C
Year 1
UP LAW BOC TAXATION 1 TAXATION LAW

Gross General rule: A refund of a tax related to the

Income 500,000 400,000 500,000 business or the practice of profession, is taxable
Less: income (e.g., refund of fringe benefit tax) in the
Allowable year of receipt to the extent of the income tax
Deductions benefit of said deduction (i.e., the tax benefit rule
(before
applies).
write-off of
Uncollectibl Exceptions: However, the following tax refunds
e are not to be included in the computation of gross
Accounts/D income:
ebts) (200,000) (480,000) (495,000)
Taxable (1) Philippine income tax, except the fringe
Income (Net benefit tax
Loss) before
write-off 300,000 (60,000) 5,000 (2) Income tax imposed by authority of any
Deduction foreign country, if the taxpayer claimed a
for Accounts credit for such tax in the year it was paid
Receivable or incurred.
written off (2,000) (2,000) (6,000)
(3) Estate and donor’s taxes
Taxable
Income (Net (4) Taxes assessed against local benefits of a
Loss) after kind tending to increase the value of the
write-off 298,000 (62,000) (1,000) property assessed (Special assessments)
Year 2
Recovery of (5) Value Added Tax
Amounts
(6) Fines and penalties due to late payment
Written Off 2,000 2,000 6,000
Taxable of tax
Income on (7) Final taxes
the
Recovery 2,000 - 5,000 (8) Capital Gains Tax
Note: The enumeration of tax refunds that are not
In Case A, the entire amount recovered (P2,000) taxable (income) is derived from an enumeration
is included in the computation of gross income in of tax payments that are not deductible from
Year 2 because the taxpayer benefited by the gross income.
same extent. Prior to the write-off, the taxable If a tax is not an allowable deduction from gross
income was P300,000; after the write-off, the income when paid (no reduction of taxable
taxable income was reduced to P298,000. income, hence no tax benefit), the refund is not
In Case B, none of the P2,000 recovered would be taxable.
recognized as gross income in Year 2. Note that
even without the write-off, the taxpayer would
not have paid any income tax anyway. The (e) income from any source whatever
“taxable income” before the write-off was
actually a net loss. (f) Source rules in determining income from within
In Case C, only P5,000 of the P6,000 recovered and without
would be recognized as gross income in Year 2. It
was only to this extent that the taxpayer The following items of gross income shall be
benefited from the write-off. The taxpayer did not treated as gross income from sources WITHIN the
benefit from the extra P1,000 because at this Philippines:
point, the P1,000 was already a net loss.
(1) Interests
Derived from sources within the Philippines,
(d) Receipt of tax refunds or credit and interests on bonds, notes or other
interest-bearing obligation of residents.

PAGE 64 OF 275
UP LAW BOC TAXATION 1
Ultimately, the situs of interest income is the
residence of the debtor.
(2) Dividends
Dividends received:
from a domestic corporation; and
from a foreign corporation, UNLESS less than
50% of its gross income for the previous 3-year
period was derived from sources within the
Philippines [in which case it will be treated as
income partly from within and partly from
without].
The income which is considered as derived from
within the Philippines is obtained by using the
following formula:
Philippine Gross Income* x Dividend = Income
Within Worldwide Gross Income*
NOTE: * of the corporation giving the dividend
As a rule, the situs of dividend income is the
residence of the corporation declaring the
dividend.
(3) Services
Compensation for labor or personal services
performed in the Philippines: As a rule, the situs
of compensation is the place of performance of
the services.
(4) Rentals and Royalties
From property located in the Philippines or from
any interest in such property, including rentals or
royalties for –
(a) The use of or the right or privilege to use
in the Philippines any copyright, patent,
design or model, plan, secret formula or
process, goodwill, trademark, trade
brand or other like property or right;
(b) The use of, or the right to use in the
Philippines any industrial, commercial or
scientific equipment;
PAGE 65 OF 275
TAXATION LAW
(c) The supply of scientific, technical,
industrial or commercial knowledge or
information;
(d) The supply of any assistance that is
ancillary and subsidiary to, and is
furnished as a means of enabling the
application or enjoyment of, any such
property or right as is mentioned in (a),
any such equipment as is mentioned in
(b) or any such knowledge or information
as is mentioned in (c);
(e) The supply of services by a nonresident
person or his employee in connection
with the use of property or rights
belonging to, or the installation or
operation of any brand, machinery or
other apparatus purchased from such
nonresident person;
(f) Technical advice, assistance or services
rendered in connection with technical
management or administration of any
scientific, industrial or commercial
undertaking, venture, project or scheme;
and
(g) The use of or the right to use:
(1) Motion picture films;
(2) Films or video tapes for use in
connection with television; and
(3) Tapes for use in connection with
radio broadcasting.
As a rule, the situs of rental income is the place
where the property is located. The situs of royalty
income is where the rights are exercised.
(5) Sale of Real Property
As a rule, the situs of the income from sale of real
property is where the realty is located.
(6) Sale of Personal Property
General Rule: Gains, profits and income from the
sale of personal property, subject to the following
rules:
Place of Place of
Treatment**
PURCHASE SALE
Philippines Abroad Income from
Without
UP LAW BOC TAXATION 1 TAXATION LAW

Abroad Philippines Income from
Within
** in other words, the situs of the income from the
sale of personal property is the place of sale.
Exceptions:
(a) Gain from the sale of shares of stock in a
domestic corporation
(b) Treated as derived entirely from sources
within the Philippines regardless of
where the said shares are sold.
(c) Gains from the sale of (manufactured)
personal property:
(d) produced (in whole or in part) by the
taxpayer within and sold without the
Philippines, or
(e) produced (in whole or in part) by the
taxpayer without and sold within the
Philippines
(f) Treated as derived partly from sources
within and partly from sources without
the Philippines.
The exclusion of income should not be confused
with the reduction of gross income by the
application of allowable deductions. While
exclusions are simply not taken into account in
determining gross income, deductions are
subtracted from gross income to arrive at net
income. [De Leon]
Items of Exclusions representing return of capital
Amount of capital is generally recovered through
deduction of the cost or adjusted basis of the
property sold from the gross selling price or
consideration, or through the deduction from
gross income of depreciation relating to the
property used in trade or business before it is sold.
It may also related to indemnities, such as
proceeds of life insurance paid to the insured’s
beneficiaries and return of premiums paid by the
insurance company to the insured under a life
insurance, endowment or annuity contract.
Damages, in certain instances, may also be
exempt because they represent return of capital.

Place of Place of Items of Exclusion because it is subject to another

Treatment
PRODUCTION SALE internal revenue tax
Philippines Abroad Partly within, The value of property acquired by gift, bequest,
partly without devise or descent is exempt from income tax on
the part of the recipient because the receipt of
Abroad Philippines Partly within, such property is already subject to transfer taxes
partly without (estate tax or donor’s tax)

(8) Shares of Stock of Domestic Corporation Items of Exclusions because they are expressly
Treated as derived entirely from sources within exempt from income tax
the Philippines regardless of where the said (1) Under the Constitution
shares are sold.
(2) Under a tax treaty
(3) Under special laws
i. Rationale for the Exclusions
B.3.6. Exclusions from gross income
The term “exclusions” refers to items that are not
Exclusions from gross income refer to income included in the determination of gross income
received or earned but is not taxable as income because:
because it is exempted by law or by treaty. Such
tax-free income is not to be included in the (a) They represent return of capital or are not
income tax return unless information regarding it income, gain or profit;
is specifically called for. Receipts which are not in (b) They are subject to another kind of
fact income are, of course, excluded from gross internal revenue tax;
income.
(c) They are income, gain or profit expressly
exempt from income tax under the
PAGE 66 OF 275
UP LAW BOC TAXATION 1
Constitution, tax treaty, Tax Code, or a
general or special law. [Mamalateo]
ii. Taxpayers Who May Avail of the Exclusions
Exclusion Taxpayer
Return of capital All taxpayers since
there is no income.
Already subject to All taxpayers unless
internal revenue tax provided that income
is to be included.
Express exclusion As expressly provided.
iii. Exclusions Distinguished from Deductions and
Tax Credit
Exclusions from gross income refer to flow of
wealth to the taxpayer which are not treated as
part of gross income for purposes of computing
the taxpayer’s taxable income, due to the
following reasons: (1) it is exempted by the
Constitution or a statute; or (2) it does not come
within the definition of income.
Deductions, on the other hand, are the amounts
which the law allows to be subtracted from gross
income in order to arrive at net income.
Exclusions pertain to the computation of gross
income, while deductions pertain to the
computation of net income.
Exclusions are something received or earned by
the taxpayer which do not form part of gross
income while deductions are something spent or
paid in earning gross income.
Tax Credit refers to amounts subtracted from the
computed tax in order to arrive at taxes payable.
iv. Exclusions Under the Constitution
a) Income derived by the government or its
political subdivisions from the exercise of
any essential governmental function
b) Also, all assets and revenues of a non-
stock, non-profit private educational
institution used directly, actually and
exclusively for private educational
purposes shall be exempt from taxation.
PAGE 67 OF 275
TAXATION LAW
v. Exclusions Under the Tax Code (Sec. 32(b),
NIRC)
(a) Proceeds of life insurance policies.—
General rule: The proceeds of life insurance
policies paid to his estate or to any beneficiary
(but not a transferee for a valuable consideration),
directly or in trust, upon the death of the insured,
are excluded from the gross income of the
beneficiary. However, if such amounts are held
by the insurer under an agreement to pay interest
thereon, the interest payments received by the
insured shall be included in gross income. The
interest income shall be taxed at the graduated
income tax rates.
(b) Return of premium paid.—
General rule: The amount received by the insured
as a return of premiums paid by him under life
insurance, endowment, or annuity contracts,
either during the term or at the maturity of the
term mentioned in the contract or upon surrender
of the contract is a return of capital and not
income.
This refers to the cash surrender value of the
contract.
Exception: If the amounts received by the insured
(when added to the amounts already received
before the taxable year under such contract)
exceed the aggregate premiums or
considerations paid (whether or not paid during
the taxable year), then the excess shall be
included in gross income.
(c) Amounts received under life insurance,
endowment or annuity contracts.— Amounts
received (other than amounts paid by reason of
the death of the insured and interest payments
on such amounts) under a life insurance,
endowment or annuity contracts are excluded
from gross income, but if such amounts (when
added to amounts already received before the
taxable year under such contract) exceed the
aggregate premiums of considerations paid
(whether or not paid during the taxable year),
then the excess shall be included in gross income.
However, in the case of a transfer for valuable
consideration, by assignment or otherwise, of a
life insurance, endowment , or annuity contract,
or any interest therein, only the actual value of
such consideration and the amount of the
UP LAW BOC TAXATION 1 TAXATION LAW

premiums and other sums subsequently paid by or reimbursement of

the transferee are exempt from taxation. expenses

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

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

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

f) Motor vehicle registration fees; Tax credit – amount allowed by law to reduce the
Philippine income tax due, subject to limitations,
g) Real property tax;
on account of taxes paid or accrued to a foreign
h) Electric energy consumption tax; and country
i) Interest on delinquent taxes.
Tax Credit Tax Deduction
(2) Non-deductible taxes Taxes are deductible Taxes are deductible
from the Phil. Income from gross income in
General Rule: All taxes, national or local, paid or tax itself computing the
incurred during the taxable year in connection taxable income
with the taxpayer's profession, trade or business,
are deductible from gross income Effect: Reduces Effect: Reduces
Philippine income tax taxable income upon
Exceptions: liability which the tax liability
a) Philippine income tax, except Fringe is calculated
Benefit Taxes; Sources: Only foreign Sources: Deductible
b) Income tax imposed by authority of any income taxes may be taxes (e.g. business
foreign country, if taxpayer avails of the claimed as credits tax, excise tax)
Foreign Tax Credit (FTC) against Philippine
income tax.
Exception to exception: When the taxpayer does
NOT signify his desire to avail of the tax credit for
taxes of foreign countries, the amount may be An amount subtracted from an individual's or
allowed as a deduction from gross income of entity's tax liability to arrive at the total tax
citizens and domestic corporations subject to the liability. A tax credit reduces the taxpayer's
limitations set forth by law. liability, compared to a deduction which reduces
taxable income upon which the tax liability is
calculated. A credit differs from deduction to the
(3) Treatments of surcharges/interests/fines for extent that the former is subtracted from the tax
delinquency while the latter is subtracted from income before
The amount of deductible taxes is limited to the the tax is computed. [CIR v. Bicolandia Drug Corp.
basic tax and shall not include the amount for any G.R. No. 148083, (2006)]
surcharge or penalty on delinquent taxes.
However, interest on delinquent taxes, although
not deductible as tax, can be deducted as interest The following may claim tax credits:
expense at its full amount. [CIR v Palanca, 18 (a) Resident citizens
SCRA 496]
(b) Domestic corporations, which include all
Although interest payment for delinquent taxes is partnerships except general professional
not deductible as tax, the taxpayer is not partnerships
precluded thereby from claiming said interest
payment as deduction as such. [CIR v. Vda. de (c) Members of general professional
Prieto, 1960] partnerships
(d) Beneficiaries of estates or trusts
(4) Treatment of special assessment.
Special assessments and other taxes assessed The following may NOT claim tax credits:
against local benefits of a kind tending to (a) Non-resident citizens
increase the value of the property assessed are
non-deductible from gross income. (b) Aliens, whether resident or non-resident
(c) Foreign corporations, whether resident
on non-resident
(5) Tax credit vis-à-vis deduction.—
PAGE 77 OF 275
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Note: Tax credits for foreign taxes are allowed (a) Actual FTC
only for income derived from sources outside the (b) For taxes paid to one foreign country
Philippines. The above taxpayers are not entitled (c) For taxes paid to 2 or more foreign
to tax credit; they are taxable only on income countries
derived from Philippine sources.
Limitations on Tax Credit. (d) Losses
(a) [Per Country Limit] The amount of tax
(1) Requisites for deductibility.—
credit shall not exceed the same
proportion of the tax against which such (1) Loss must be that of the taxpayer (e.g.,
credit is taken, which the taxpayer's losses of the parent corp. cannot be
taxable income from sources within such deducted by its subsidiary);
country bears to his entire taxable (2) Actually sustained and charged off within
income for the same taxable year; and the taxable year;
(b) [Worldwide Limit] The total amount of (3) Incurred in trade, business or profession;
the credit shall not exceed the same (4) Of property connected with the trade,
proportion of the tax against which such business, or profession, if the loss arises
credit is taken, which the taxpayer's from fires, storms, shipwreck or other
taxable income from sources without the casualties, or from robbery, theft, or
Philippines taxable bears to his entire embezzlement;
taxable income for the same taxable year. (5) Sustained in a closed and completed
transaction;
Formula: (6) Not compensated for by insurance or
other form of indemnity;
Limit #1
(7) Not claimed as a deduction for estate tax
Taxable Limit on purposes;
Income Per amount (8) In case of casualty loss, filing of notice of
Foreign of tax loss with the BIR within 45 days from the
Phil.
Country x Income = credit date of the event that gave rise to the
Tax casualty; and
Worldwide (Per
Country (9) The taxpayer must prove the elements of
Taxable the loss claimed, such as the actual
Income Limit)
nature and occurrence of the event and
amount of the loss.
Limit #2 In case a non-depreciable vehicle is sold at a loss,
the loss incurred from the sale of non-
Taxable Limit on depreciable vehicle is not allowed as a deduction.
Income For amount [RR No. 2-2013]
all Foreign of tax
Phil.
Countries x Income = credit
No loss is recognized in the following.—
Tax (World
Worldwide (a) Merger, consolidation, or control
Taxable Wide
Limit) securities (where no gains are recognized
Income either);
(b) Exchanges not solely in kind;
Note: Computation of FTC: Limit #2 applies (c) Related taxpayers (see above – (c)
where taxes are paid to two or more foreign Interest expense incurred to acquire
countries. Allowable tax credit is the lower property for use in
between the tax credit computed under Limit #1 trade/business/profession)
and that computed under Limit#2. (d) Wash sales;
(e) Illegal transactions
FTC Limitations – lowest of the 3:

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UP LAW BOC TAXATION 1
(2) Other types of losses.—
(a) Capital losses
Incurred in the sale or exchange of capital assets
(allowable only to the extent of capital gains,
except for banks and trust companies under
conditions in Sec. 39 of NIRC where loss from
such sale is not subject to the foregoing
limitation);
Resulting from securities becoming worthless
and which are capital assets (considered loss
from sale or exchange) on last day of the taxable
year;
Losses from short sales of property;
Losses due to failure to exercise privileges or
options to buy or sell property.
(b) Securities becoming worthless
Loss in shrinkage in value of stock through
fluctuation in the market is not deductible from
gross income. (To be deductible, the loss must be
actually suffered when the stock is disposed of.)
Exception: If the stock of the corporation becomes
worthless, the cost or other basis may be
deducted by its owner in the taxable year in which
the stock became worthless, provided a
satisfactory showing of its worthlessness be
made, as in the case of bad debts.
(c) Losses on wash sales of stocks or securities
Wash Sale - a sale or other disposition of stock or
securities where substantially identical securities
(substantially the same as those disposed of) are
acquired or purchased (or there was an option to
acquire, and the acquisition or option should be
by purchase or exchange upon which gain or loss
is recognized under the income tax law) within a
61-day period, beginning 30 days before the sale
and ending 30 days after the sale
General rule: Not deductible from gross income
Exception: If by a dealer in securities in the course
of ordinary business, it is deductible.
(d) Wagering losses
Losses from wagering (gambling) are deductible
only to the extent of gains from such transactions.
A wager is made when the outcome depends
upon CHANCE.
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TAXATION LAW
(e) Net Operating Loss Carry Over (NOLCO)
Net operating loss (NOL) is the excess of
allowable deductions over gross income for any
taxable year immediately preceding the current
taxable year.
NOLCO: The NOL of the business or enterprise
which had not been previously offset as
deduction from gross income shall be carried
over as a deduction from gross income for the
next three (3) consecutive taxable years
immediately following the year of such loss,
provided however, that any net loss incurred in a
taxable year during which the taxpayer was
exempt from income tax shall not be allowed as
a deduction. [Sec. 34(3)(D), NIRC]
Exception: Mines other than oil and gas wells,
where a net operating loss without the benefit of
incentives provided for under EO No. 226
(Omnibus Investments Code) incurred in any of
the first ten (10) years of operation may be carried
over as a deduction from taxable income for the
next five (5) years immediately following the year
of such loss.
Requisites for NOLCO:
(1) The taxpayer was not exempt from
income tax the year the loss was incurred;
(2) There has been no substantial change in
the ownership of the business or
enterprise wherein:
(3) AT LEAST 75% of nominal value of
outstanding issued shares is held by or on
behalf of the same persons; or
(4) AT LEAST 75% of the paid up capital of
the corporation is held by or on behalf of
the same persons.
Taxpayers Entitled to NOLCO
(a) Individuals engaged in trade or business
or in the exercise of his profession
(including estates and trusts);
Note: An individual who avails of 40%
OSD shall not simultaneously claim
deduction of NOLCO. However, the
three-year reglementary period shall
continue to run during such period
notwithstanding the fact that the
aforesaid taxpayer availed of OSD during
the said period.
UP LAW BOC TAXATION 1
(b) Domestic and resident foreign
corporations subject to the normal
income tax (e.g., manufacturers and
traders) or preferential tax rates under
the Code (e.g., private educational
institutions, hospitals, and regional
operating headquarters) or under special
laws (e.g., PEZA-registered companies)
Note: Domestic and resident foreign
corporations taxed during the taxable
year with Minimum Corporate
Income Tax cannot enjoy the benefit of NOLCO.
However, the three-year period for the expiry of
the NOLCO is not interrupted by the fact that the
corporation is subject to MCIT during such three-
year period.
Other Losses:
(a) Abandonment losses in petroleum
operation and producing well.
(b) Losses due to voluntary removal of
building incident to renewal or
replacements are deductible from gross
income.
(c) Loss of useful value of capital assets due
to charges in business conditions is
deductible only to the extent of actual
loss sustained (after adjustment for
improvement, depreciation and salvage
value)
(d) Losses from sales or exchanges of
property between related taxpayers are
not recognized, but the gains are taxable.
(e) Losses of farmers incurred in the
operation of farm business are deductible.
(e) Bad debts
Debts resulting from the worthlessness or
uncollectibility, in whole or in part, of amounts
due the taxpayer actually ascertained to be
worthless and the corresponding receivable
should have been written off or charged off within
the taxable year.
(1) Requisites for deductibility.—
(1) Valid and legally demandable debt due
to the taxpayer
(2) Debt is connected with the taxpayer's
trade, business or practice of profession;
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TAXATION LAW
(3) Debt was not sustained in a transaction
entered into between related parties;
(4) Actually ascertained to be worthless and
uncollectible as of the end of the taxable
year (taxpayer had determined with
reasonably degree of certainty that the
claim could not be collected despite the
fact that the creditor took reasonable
steps to collect); and
(5) Actually charged off the books of
accounts of the taxpayer as of the end of
the taxable year
General rule: Taxpayer must ascertain and
demonstrate with reasonable certainty the
uncollectibility of debt
Exceptions:
(a) Banks as creditors – BSP Monetary Board
shall ascertain the worthlessness and
uncollectibility of the debt and shall
approve the writing off
(b) Receivables from an insurance or surety
company (as debtor) may be written off
as bad debts only when such company is
declared closed due to insolvency or
similar reason
The taxpayer must show that the debt is indeed
uncollectible even in the future. He must prove
that he exerted diligent efforts to collect:
(1) Sending of statement of accounts
(2) Collection letters
(3) Giving the account to a lawyer for
collection
(4) Filing the case in court [Phil. Refining
Corp. v. CA, G.R. No. 118794, May 8, 1996]
In ascertaining the debt to be worthless, it is not
enough that the taxpayer acted in good faith. He
must show that he had reasonably investigated
the relevant facts from which it became evident,
in the exercise of sound, objective business
judgment, that there remained no practical, but
only a vague prospect that the debt would be
paid [Collector v. Goodrich, G.R. No. L-22265
(1967)]
Rev. Reg. No. 5-1999:
“Actually ascertained to be worthless” –
UP LAW BOC TAXATION 1 TAXATION LAW

Determination of worthlessness must depend (1) Requisites for Deductibility. –

upon the particular facts and circumstances of
(1) It must be reasonable.
the case. A taxpayer may not postpone a bad
debt deduction on the basis of a mere hope of (2) It must be charged off during the year.
ultimate collection or because of a continuance of
(3) The asset must be used in profession,
attempts to collect, where there is no showing
trade or business.
that the surrounding circumstances differ from
those relating to other notes which were charged (4) The asset must have a limited useful life.
off in a prior year. The depreciable asset must be located in the
Accounts receivable may be written off as bad Philippines if the taxpayer is a nonresident alien
debts even without conclusive evidence that they or a foreign corporation. [Valencia and Roxas]
had definitely become worthless when: No depreciation shall be allowed for yachts,
(a) the amount is insignificant; and helicopters, airplanes and/or aircrafts, and land
vehicles which exceed the threshold amount of
(b) collection through court action may be
P2,400,000, unless the taxpayer’s main line of
more costly to the taxpayer.
business is transport operations or lease of
“Actually charged off from the taxpayer’s book of transportation equipment and the vehicles
accounts” purchased are used in the operations. [RR No. 12-
2012]
Receivable which has actually become worthless
at the end of the taxable year has been cancelled
and written off. Mere recording in the books of
Methods of computing depreciation allowance.—
account of estimated uncollectible accounts does
not constitute a write-off. (a) Straight-line cost- salvage value
estimated life
(2) Effect of recovery of bad debts.— (b) Declining balance (cost – depreciation)
x Rate
Tax Benefit Rule on Bad Debts
estimated life
Bad debts claimed as deduction in the preceding
year(s) but subsequently recovered shall be (c)Sum-of-the-year- nth period x cost-
included as part of the taxpayer‘s gross income in digit (SYD) salvage
the year of such recovery the extent of the income
SYD
tax benefit of said deduction. Also called the
equitable doctrine of tax benefit. Any other method
Requisites: which may be
prescribed by the
(1) Allowance must be reasonable Secretary of Finance
(2) Charged off during the taxable year from upon the
the taxpayer‘s books of accounts. recommendation of
the CIR
(3) Does not exceed the acquisition cost of
the property.
(g) Charitable and other contributions

(f) Depreciation (1) Requisites for deductibility.—

An annual reasonable allowance to reduce the
wasteful value of the tangible fixed assets
resulting from wear and tear and normal
obsolescence
For intangible assets, the annual allowance to
rduce their useful value is called amortization.
Actually PAID or made to the ENTITIES or
institutions specified by law;
Made within the TAXABLE year.
It must be EVIDENCED by adequate receipts or
records.

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For Contributions Other than Money: The amount
shall be BASED on the acquisition cost of the
property (i.e., not the fair market value at the time
of the contribution).
For Contributions subject to the statutory
limitation: It must NOT EXCEED 10% (individual)
or 5% (corporation) of the taxpayer‘s taxable
income before charitable contributions
(2) Amount that may be deducted.—
Kinds of Contributions:
(a) Contributions deductible in full;
(b) Contributions subject to the statutory
limit.
Contributions Deductible in Full:
(a) Donations to the Government of the
Philippines, or to any of its agencies, or
political subdivisions, including fully
owned government corporations –
(b) Exclusively to finance, provide for, or to
be used in undertaking priority activities
in
(c) Education
(d) Health
(e) Youth and sports development
(f) Human settlements
(g) Science and culture, and
(h) Economic development
(i) in accordance with a National Priority
Plan determined by NEDA (otherwise,
subject to statutory limit)
(j) Donations to Certain Foreign Institutions
or International Organizations which are
fully deductible in compliance with
agreements, treaties or commitments
entered into by the Government of the
Philippines and the foreign institutions or
international organizations or in
pursuance of special laws
(k) Donations to Accredited Non-
government Organizations subject to
conditions set forth in RR No. 13-98 –
NGO means a non-stock non-profit
domestic corporation or organization:
(l) Organized and operated exclusively for:
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TAXATION LAW
(i) scientific,
(ii) research,
(iii) educational,
(iv) character-building and youth and
sports development,
(v) health,
(vi) social welfare,
(vii) cultural or
(viii) charitable purposes, or
(ix) a combination thereof,
No part of the net income of which inures to the
benefit of any private individual
Directly utilizes contributions for the active
conduct of the activities constituting the purpose
or function for which it is organized, not later
than 15th day of the month following the close of
its taxable year in which contributions are
received, unless an extended period is granted by
the Secretary of Finance, upon recommendation
of the CIR
Administrative expense ,on an annual basis,
must not exceed 30% of total expenses for the
taxable year
Upon dissolution, its assets would be distributed
to another accredited NGO organized for a
similar purpose or purposes, OR to the State for
public purpose, OR would be distributed by a
competent court of justice to another accredited
NGO to be used in such manner as in the
judgment of said court shall best accomplish the
general purpose for which the dissolved
organization was organized.
Contributions subject to the Statutory Limit
These contributions are not deductible in full as
specified by the law or such deduction has not
met the requirements to be deducted in full.
Those made to:
(a) Government or any of its agencies or
political subdivisions exclusively for
public purposes (contributions for non-
priority activities)
(b) Accredited domestic corporation or
associations organized exclusively for
UP LAW BOC TAXATION 1
(c) Religious
(d) Charitable
(e) Scientific
(f) youth and sports development
(g) cultural
(h) educational purposes or
(i) rehabilitation of veterans
(j) Social welfare institutions
(k) Non-government organizations: No part
of the net income of which inures to the
benefit of any private stockholder or
individual
Statutory Limit:
(a) 10% in the case of an individual
(individual donor), and
(b) 5% in the case of a corporation (corporate
donor), of the taxpayer's/donor’s income
derived from trade, business or
profession computed before the
deduction for contributions and
donations
The amount deductible is the actual contribution
or the statutory limit computed, whichever is
lower
(h) Contributions to pension trusts
Contribution to a pension trust may be claimed as
deduction as follows:
(a) Amount contributed for the
present/normal service cost – 100%
deductible
(b) Amount contributed for the past service
cost – 1/10 of the amount contributed is
deductible in year the contribution is
made, the remaining balance will be
amortized equally over nine consecutive
years
General Rule: An employer establishing or
maintaining a pension trust to provide for the
payment of reasonable pensions to his
PAGE 83 OF 275
TAXATION LAW
employees shall be allowed as a deduction, a
reasonable amount transferred or paid into such
trust in excess of the contributions to such trust
made during the taxable year.
(1) Requisites for deductibility of payments to
pension trusts.—
There must be a pension or retirement plan
established to provide for the payment of
reasonable pensions to employees;
The pension plan is reasonable and actuarially
sound;
It must be funded by the employer;
The amount contributed must no longer be
subject to the employer’s control or disposition;
and
The payment has not theretofore been allowed
before as a deduction.
(i) Deductions under special laws
Special deductions for productivity bonus and
manpower training under the Productivity
Incentives Act of 1990
Deductions for training expenses of qualified
jewelry enterprises (Jewelry Industry
Development Act of 1998)
Deductions under the Adopt-a-School Act of
1998
Deductions under the Expanded Senior Citizens
Act of 2003. [Domondon]
B.4.4. Optional Standard Deduction
(a) Individuals, except non-resident aliens
May be taken by an individual in lieu of itemized
deductions except those earning purely
compensation income.
If an individual opted to use OSD, he is no longer
allowed to deduct cost of sales or cost of services.
Amount: 40% of gross sales or gross receipts
(under RA 9504, effective July 6, 2008)
Requisites:
(1) Taxpayer is a citizen or resident alien;
(2) Taxpayer’s income is not entirely from
compensation;
UP LAW BOC TAXATION 1
(3) Taxpayer signifies in his return his
intention to elect this deduction;
otherwise he is considered as having
availed of the itemized deductions;
(4) Election is irrevocable for the year in
which made; however, he can change to
itemized deductions in succeeding years.
(b) Corporations, except non-resident foreign
corporations
The option to elect Optional Standard Deduction
granted is now granted to corporations (domestic
and resident foreign corporations) by virtue of RA
9504. The OSD is 40% of its gross income.
The domestic and resident foreign corporation
shall keep such records pertaining to his gross
income as defined in Sec. 32 of the NIRC during
the taxable year, as may be required by the rules
and regulations promulgated by the Secretary of
Finance upon recommendation of the CIR.
Corporations availing of OSD are still required to
submit their financial statements when they file
their annual ITR and to keep such records
pertaining to its gross income. (RR 2-2010).
(c) Partnerships
General Co-Partnership
For purposes of taxation, the Code considers
general co-partnerships as corporations. Hence,
rules on OSD for corporations are applicable to
general co-partnerships.
General Professional Partnerships (GPP)
If the GPP availed of itemized deductions, the
partners are not allowed to claim the OSD from
their share in the net income because the OSD is
a proxy for all the items of deductions allowed in
arriving at taxable income. This means that the
OSD is in lieu of the items of deductions claimed
by the GPP and the items of deduction claimed by
the partners.
If the GPP avails of OSD in computing its net
income, the partners comprising it can no longer
claim further deduction from their share in the
said net income for the following reasons:
The partners’ distributive share in the GPP is
treated as his gross income not his gross
sales/receipts and the 40% OSD allowed to
individuals is specifically mandated to be
PAGE 84 OF 275
TAXATION LAW
deducted not from his gross income but from his
gross sales/receipts; and,
The OSD being in lieu of the itemized deductions
allowed in computing taxable income as defined
under Section 32 of the Tax Code, it will answer
for both the items of deduction allowed to the
GPP and its partners.
Since one-layer of income tax is imposed on the
income of the GPP and the individual partners
where the law had placed the statutory incidence
of the tax in the hands of the latter, the type of
deduction chosen by the GPP must be the same
type of deduction that can be availed of by the
partners. Accordingly, if the GPP claims itemized
deductions, all items of deduction allowed under
Sec. 34 can be claimed both at the level of the
GPP and at the level of the partner in order to
determine the taxable income. On the other
hand, should the GPP opt to claim the OSD, the
individual partners are deemed to have availed
also of the OSD because the OSD is in lieu of the
itemized deductions that can be claimed in
computing taxable income.
If the partner also derives other gross income
from trade, business or practice of profession
apart and distinct from his share in the net
income of the GPP, the deduction that he can
claim from his other gross income would follow
the same deduction availed of from his
partnership income as explained in the foregoing
rules. Provided, however, that if the GPP opts for
the OSD, the individual partner may still claim
40% of its gross income from trade, business or
practice of profession but not to include his share
from the net income of the GPP. (RR 2-2010)
B.4.5. Personal and additional exemptions
(a) Basic personal exemptions
According to RA 9504 (Minimum Wage Earner
Law, effective July 6, 2008) basic personal
exemption is Fifty thousand pesos (P50,000) for
each individual taxpayer, regardless of status, i.e.,
whether single, married or head of the family.
But note Sec 35(A) of NIRC – In the case of
married individuals where only one of the
spouses is deriving gross income, only such
spouse shall be allowed the personal exemption.
UP LAW BOC TAXATION 1
(b) Additional exemptions for taxpayer with
dependents
An individual, whether single or married, shall be
allowed an additional exemption of P25,000 for
each qualified dependent child (QDC), provided
that the total number of dependents for which
additional exemptions may be claimed shall not
exceed 4 dependents (depends on the number of
qualified dependent children)
Married Individuals: Additional exemptions for
QDC are claimed by only one spouse.
Generally, the spouse who is the gross
compensation earner is the claimant of the
additional exemptions.
Where the husband and wife are both
compensation income earners: the husband is
the proper claimant of the additional exemptions
EXCEPT if there is an express waiver by the
husband in favor of his wife, as embodied in the
application for registration (BIR Form No. 1902)
or in the Certificate of Update of Exemption and
of Employer’s and Employee’s Information (BIR
Form No. 2305), whichever is applicable.
When the spouses have business and/or
professional income only: either may claim the
additional exemptions at the end of the year.
The employed spouse shall be automatically
entitled to claim the additional exemptions for
children in the following instances:
(a) spouse is unemployed
(b) spouse is a non-resident citizen deriving
income from foreign sources
Legally separated spouses: Additional
exemptions can be claimed by the spouse with
custody of the child or children (but the total
amount for the spouses shall not exceed the
maximum of four). [Sec 35(B), NIRC]
If the taxpayer should have additional
dependents during the taxable year, he may
claim the corresponding additional exemption,
as the case may be, in full for such year.
Who is a dependent for purposes of additional
exemptions?
(1) A taxpayer’s child, whether legitimate,
illegitimate or legally adopted child
(2) Chiefly dependent for support upon on
the taxpayer
(3) Living with the taxpayer
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TAXATION LAW
(4) Not more than 21 years old, unmarried
and not gainfully employed or
(5) Regardless of age, is incapable of self-
support because of mental or physical
defect. [Sec 35(B), NIRC]
Note: Only children (not parents) may be
considered “dependent” for purposes of
additional exemptions.
The definition of the term “dependent” under
Section 35(B) of the NIRC now includes a “Foster
Child” or a child placed under planned temporary
substitute parental care by a Foster Parent or a
Foster Family. [RMC No. 41-20i3, Jan. 23, 2013]
Who may claim personal exemptions?
Citizens (whether resident or non-resident) and
resident aliens
Non-resident aliens engaged in trade or business
are entitled personal exemptions subject to
reciprocity. (See below)
(c) Status-at-the-end-of-the-year rule
Change of Status [Sec 35(C), NIRC]
(a) If taxpayer marries during taxable year,
taxpayer may claim the corresponding
BPE in full for such year (i.e., no need to
pro-rate the exemption).
(b) If taxpayer should have additional
dependent(s) during taxable year,
taxpayer may claim corresponding AE in
full for such year.
(c) If taxpayer dies during taxable year, his
estate may claim BPE and AE as if he died
at the close of such year.
(d) If during the taxable year spouse dies; or
any of the dependents dies or marries,
turns 21 years old or becomes gainfully
employed, taxpayer may still claim same
exemptions as if the spouse or any of the
dependents died, or married, turned 21
years old or became gainfully employed
at the close of such year.
Note: When it comes to change of status, the
status beneficial to the taxpayer is used for
purposes of claiming deductions as long as the
taxpayer achieved such status at any time during
the taxable period.
UP LAW BOC TAXATION 1
(d) Exemptions claimed by non-resident aliens
Non-resident aliens engaged in trade or business
are entitled personal exemptions subject to
reciprocity.
It means that NRA-ETB shall be allowed a
personal exemption only if the income tax law in
his country grants allowance for personal
exemptions to the citizens and residents of the
Philippines as stipulated in the reciprocity tax
treaty with the Philippine Government.
Limit of PE Allowed to NRAETB: An amount
equal to the exemptions allowed by the non-
resident alien’s country to Filipino citizens not
residing therein but deriving income therefrom,
but not to exceed the amount fixed by NIRC.(In
other words, whichever is lower)
B.4.6. Items Not Deductible
General rule: In determining deductions, one of
the general rules is that deductions must be paid
or incurred in connection with the taxpayer’s
trade, business or profession. Capital
expenditures (e.g. acquisition cost of a building)
are also not deductible, because these are not
expenses, but form part of assets.
Exceptions: In computing taxable net income, no
deduction shall be allowed with respect to:
(a) Personal, living or family expenses (note: they
are not deductible from compensation and
business/professional income
(b) Any amount paid out for new buildings or for
permanent improvements (capital expenditures),
or betterments made to increase the value of any
property or estate
(c) Any amount expended in restoring property
(major repairs) or in making good the exhaustion
thereof for which an allowance [for depreciation
or depletion] is or has been made
(d) Premiums paid on any life insurance policy
covering the life of any officer, employee, or any
person financially interested in the trade or
business carried on by the taxpayer, individual or
corporate, when the taxpayer is directly or
indirectly a beneficiary under such policy
(e) Interest expense and bad debts between
related parties [Sec. 36(B), NIRC)]
(f) Losses from sales or exchanges of property
between related taxpayers.
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TAXATION LAW
(g) Non-deductible interest – should the taxpayer
elect to deduct interest payments against its
gross income, he cannot at the same time
capitalize such interest and claim depreciation on
the undepreciated cost which includes the
interest. [PICOP v. Commissioner, G.R. No.
106949-50, Dec. 1, 1995]
(h) Non –deductible taxes
(i) Non-deductible losses
(j) Losses on Wash Sales (except if by dealer in
securities in ordinary course of exempt
corporations) These are:
(1) Proprietary Educational Institutions and
hospitals
(2) Government owned and controlled
corporations
(3) Others
Related Parties [Sec. 34(B)]
(1) Between members of a family (which shall
include only his brothers and sisters, spouse,
ancestors and lineal descendants)
(2) Between an individual and a corporation
more than 50% in value of the outstanding
stock of which is owned, directly or indirectly,
by or for such individual – except in the case
of distributions in liquidation
(3) Between two corporations more than 50% in
value of the outstanding stock of each of
which is owned, directly or indirectly by or for
the same individual
(4) Between the grantor and the fiduciary of a
trust
(5) Between the fiduciary of a trust and the
fiduciary of another trust if the same person
is a grantor with respect to each trust
(6) Between the fiduciary of a trust and a
beneficiary of such trust [Section 36(B), NIRC]
Relevant points regarding related taxpayers
 Payment of interest is not deductible.
 Bad debts are not deductible.
 Losses from sales or exchanges of property
are not deductible.
UP LAW BOC TAXATION 1 TAXATION LAW

Summary Table for Taxation of Individuals (all individual taxpayers, including non-resident aliens)
Basic Personal Additional Personal
Classification Taxable Income Tax Rates
Exemption Exemption
Income from
sources within and
Resident Citizen Allowed Allowed 5%-32%
outside the
Philippines

Income from
Non-Resident Citizen sources within the Allowed Allowed 5%-32%
Philippines
Income from
Resident Alien sources within the Allowed Allowed 5%-32%
Philippines

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

Non-resident Alien Not Income from

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

PAGE 87 OF 275
UP LAW BOC
C. INCOME TAX ON INDIVIDUALS
C.1. INCOME TAX ON RESIDENT CITIZENS,
NON-RESIDENT CITIZENS AND RESIDENT
ALIENS
C.1.1. Coverage – Income From All Sources
Within and Without the Philippines; exception
(i) Resident Citizens
A Filipino resident citizen is taxable on income
from all sources (within and without the
Philippines)
(ii) Non-resident Citizens
A non-resident citizen is taxable only on
income derived from sources within the
Philippines.
A non-resident citizen is a Filipino citizen who:
(a) Establishes to the satisfaction of the
CIR the fact of his physical presence
abroad with a definite intention to
reside therein
(b) Leaves the Philippines during the
taxable year to reside abroad (as
immigrant or for employment on a
permanent basis)
(c) Works and derives income from
abroad and whose employment
requires him to be present abroad
most of the time during the taxable
year
(d) Has been previously considered as a
non-resident and arrives in the
Philippines at any time during the
taxable year to reside here
permanently (only with respect to his
income from sources abroad until the
date of his arrival in the country)
Other considerations:
(a) A Filipino citizen working and deriving
abroad as an Overseas Contract
Worker is taxable only on income from
sources WITHIN the Philippines.
(b) OCW refers to Filipino citizens in
foreign countries, who are physically
present in a foreign country as a
PAGE 88 OF 275
TAXATION 1 TAXATION LAW
consequence of their employment in
that country. Their salaries and wages
are paid by an employer abroad and is
not borne by an entity or person in the
Philippines. They must be duly
registered with the Philippine
Overseas Employment Administration
(POEA) with valid Overseas
Employment Certificate (OEC).
(c) An OCW’s income arising out of his
overseas employment is exempt from
income tax.
(iii) Resident Aliens
A resident alien is taxable only on income from
sources WITHIN the Philippines.
A resident alien is an individual whose
residence is in the Philippines and who is not a
Filipino citizen.
An alien actually present in the Philippine who
is not a mere transient or sojourner is a
resident of the Philippines for purposes of the
income tax. Whether he is a transient or not is
determined by his intentions with regard to
the length and nature of his stay. A mere
floating intention indefinite as to time, to
return to another country is not sufficient to
constitute him a transient. If he lives in the
Philippines and has no definite intention to
stay, he is a resident.
One who comes to the Philippines for a
definite purpose which, in its nature, may be
promptly accomplished is a transient. But if
his purpose is of such a nature that an
extended stay may be necessary for its
accomplishment, and to that end the alien
makes his home temporarily in the Philippines,
he becomes a resident, though it may be his
intention at all times to return to his domicile
abroad when the purpose of which he came
has been consummated or abandoned. [Sec. 5,
RR No. 2]
C.1.2. Coverage – Taxation on Compensation
Income
Income arising from an ER-EE relationship. It
means all remuneration for services
performed by an EE for his ER, including the
cash value of all remuneration paid in any
medium other than cash. [Sec. 78(A)] It
UP LAW BOC
includes, but is not limited to salaries and
wages, commissions, tips, allowances,
bonuses, Fringe Benefits of rank and file EEs
and other forms of compensation.
i. Inclusions
(a) Monetary compensation – If compensation
is paid in cash, the full amount received is the
measure of the income subject to tax.
(1) Regular salary/wage
Salary – earnings received periodically for a
regular work other than manual labor, such as
monthly salary of an employee
Wages – all remuneration (other than fees
paid to a public official) for services performed
by an employee for his employer, including the
cash value of all remuneration paid in any
medium other than cash. [Sec. 78A, NIRC]
(2) Separation pay/retirement benefit not
otherwise exempt
Retirement pay – a lump sum payment
received by an employee who has served a
company for a considerable period of time and
has decided to withdraw from work into
privacy. [RR 6-82, Sec. 2b]
General rule: Retirement pay is taxable
Exceptions:
(a) SSS or GSIS retirement pays.
(b) Retirement pay (R.A. 7641) due to old
age provided the following
requirements are met:
(1) The retirement program is
approved by the BIR
Commissioner;
(2) It must be a reasonable benefit
plan. (fair and equitable)
(3) The retiree should have been
employed for 10 years in the said
company;
(4) The retiree should have been 50
years old or above at the time of
retirement; and
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TAXATION 1 TAXATION LAW
(5) It should have been availed of for
the first time.
Separation pay – taxable if voluntarily availed
of. It shall not be taxable if involuntary i.e.
Death, sickness, disability, reorganization
/merger of company and company at the brink
of bankruptcy or for any cause beyond the
control of the said official or employee
(3) Bonuses, 13th month pay, and other
benefits not exempt
Tips and Gratuities – those paid directly to the
employee (usually by a customer of the
employer) which are not accounted for by the
employee to the employer. (taxable income
but not subject to withholding tax) [RR NO. 2-
98, Sec. 2.78.1]
Thirteenth month pay and other benefits - Not
taxable if the total amount received is
P82,000 or less. Any amount exceeding
P82,000 is taxable. [Sec. 32(7)(e), NIRC]
Overtime Pay – premium payment received for
working beyond regular hours of work which is
included in the computation of gross salary of
employee. It constitutes compensation.
(4) Directors’ fees
Fees – received by an employee for the
services rendered to the employer including a
director’s fee of the company, fees paid to the
public officials such as clerks of court or
sheriffs for services rendered in the
performance of their official duty over and
above their regular salaries.
(b) Nonmonetary compensation - If services
are paid for in a medium other than money,
the fair market value of the thing taken in
payment is the measure of the income subject
to tax.
(1) Fringe benefit not subject to tax
(See Chapter on Gross Income for the
discussion of Taxable and Non-taxable fringe
benefits)
If the recipient of the fringe benefits is a rank
and file employee, and the said fringe benefit
UP LAW BOC TAXATION 1 TAXATION LAW

is not tax-exempt, then the value of such (a) Benefits received by government
fringe benefit shall be considered as part of employees under RA 6686
the compensation income of such employee
(b) Benefits received by employees
subject to tax payable by the employee.
pursuant to PD 851 (13th Month Pay
[Domondon]
Decree)
(c) Benefits received by employees not
ii. Exclusions covered by PD 851 as amended by
Memorandum Order No. 28; and,
(a) Fringe benefit subject to tax
(d) Other benefits such as productivity
(See Chapter on Gross Income for the
incentives and Christmas bonus
discussion of Taxable and Non-taxable fringe
benefits)
Where the recipient of the fringe benefit is not Iii. Deductions
a rank and file employee, and the said benefit
(a) Personal and additional exemptions (See
is not tax-exempt, then the same shall not be
the Chapter on Deductions for the full
included in the compensation income of such
discussion of Personal and additional
employee subject to tax. The fringe benefit
exemptions)
[tax] is instead levied upon the employer, who
is required to pay. [Domondon]
Basic Personal Exemptions
Convenience of the ER Rule According to RA 9504 (effective July 6, 2008)
basic personal exemption is Fifty thousand
If meals, living quarters, and other facilities
pesos (P50,000) for each individual taxpayer,
and privileges are furnished to an employee
regardless whether single, married or head of
for the convenience of the employer, and
the family.
incidental to the requirement of the
employee’s work or position, the value of that
privilege need not be included as
Additional Exemptions
compensation [Henderson v. Collector (1961)]
Depends on the number of qualified
dependent children
(b) De minimis benefits Amount allowed as a deduction  P25,000
Facilities or privileges of relatively small value per dependent child, but not to exceed four
furnished by an employer to his employees children [RA 9504]
and are as a means of promoting the health,
goodwill, contentment, or efficiency of his
employees. (b) Health and hospitalization insurance
These are exempt from fringe benefit tax and Premium Paid on Health or Hospitalization
compensation income tax. Insurance [Sec.34 (M)]
Amount of premium paid on health and/or
hospitalization by an individual taxpayer
(c) 13th month pay and other benefits and
(head of family or married), for himself and
payments specifically excluded from taxable
members of his family during the taxable year.
compensation income
Gross benefits received by employees of public
and private entities provided that the total Requisites for Deductibility
exclusion shall not exceed P82,000 (amounts (1) Insurance must have actually been
in excess are considered compensation taken
income)
(2) The amount of premium deductible
Benefits include: does not exceed P2,400 per family or
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P200 per month whichever is lower
during the taxable year.
(3) That said family has a gross income of
not more than P250,000 for the
calendar year.
(4) In case of married individual, only the
spouse claiming additional exemption
shall be entitled to this deduction.
Note: The spouse claiming the additional
exemptions for qualified dependent children
shall be the same spouse to claim the
deductions for premium payments.
The following may avail of the deduction
(a) Individual taxpayers earning purely
compensation income during the year.
(b) Individual taxpayer earning business
income or in practice of his profession.
C.1.3. Taxation of Business Income/Income
From Practice of Profession
All income obtained from doing business
and/or engaging in the practice of a
profession shall be included in the
computation of taxable income. (5-32% For
citizens, resident aliens & NRA Engaged in
trade or business; 25% in case of NRANETB)
C.1.4. Taxation of Passive Income
Passive Income Subject to Final Tax
“Final tax” means tax withheld from source,
and the amount received by the income earner
is net of the tax already. The tax withheld by
the income payor is remitted by him to the BIR.
The income having been tax-paid already, it
need not be included in the income tax return
at the end of the year. These passive income
items are as follows:
(a) Interest income
(b) Royalties
(c) Dividends from domestic corporations
(d) Prizes and other winnings
(a) Interest income
(a) on any currency bank deposit, yield or
any other monetary benefit from
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deposit substitutes, trust funds and
similar arrangements - 20% final tax
(b) under the expanded foreign currency
deposit system (EFCDS) - 7.5% final
tax for residents, exempt if non-
residents
Treatment of income from long-term deposits
On long-term deposit or investment
certificates (LTDIC) in banks (e.g., savings,
common or individual trust funds, deposit
substitutes, investment management
accounts and other investments, which have
maturity of 5 years or more) – exempt
Should LTDIC holder pre-terminate LTDIC
before the 5th year, a final tax shall be
imposed on the entire income based on the
remaining maturity:
4 years to less than 5 years 5%
3 years to less than 4 years 12%
less than 3 years 20%
(b) Royalties
(See summary table)
(c) Dividends from domestic corporation
(a) cash and/or property dividends
actually or constructively received by
an individual from
(b) a domestic corporation
(c) a joint stock company
(d) insurance or mutual fund companies
(e) regional operating headquarters of
multinational companies
(f) share of an individual in the
distributable net income after tax of a
partnership (except a general
professional partnership) of which he
is a partner
(g) share of an individual member or co-
venturer in the net income after tax of
an association, a joint account, or a
joint venture or consortium taxable as
a corporation
UP LAW BOC TAXATION 1
RATE:
(a) 10%for residents (RC, RA) and non
resident citizens (NRC);
(b) 20% for NRAETB(non-resident aliens
engaged in trade or business)
A stock dividend representing the transfer of
surplus to capital account shall not be subject
to tax.
However, if a corporation cancels or redeems
stock issued as a dividend at such time and in
such manner as to make the distribution and
cancellation or redemption, in whole or in part,
essentially equivalent to the distribution of a
taxable dividend, the amount so distributed in
redemption or cancellation of the stock shall
be considered as taxable income to the extent
that it represents a distribution of earnings or
profits. [Sec. 73B, NIRC]
In other words, stock dividends are generally
not subject to tax as long as there are no
options in lieu of the shares of stock.
On the other hand, a stock dividend
constitutes income if it gives the shareholder
an interest different from that which his
former stockholdings represented.
(d) Prizes and other winnings
(a) Winnings, except Philippine Charity
sweepstakes / lotto winnings – 20%
(b) Prizes exceeding P10,000 – 20%
Prize, differentiated from winnings
A prize is the result of an effort made (e.g.,
prize in a beauty contest), while winnings are
the result of a transaction where the outcome
depends upon chance (e.g., betting).
For interest from foreign currency loans
granted by FCDUs to residents other than
Offshore Banking Units (OBUs) or other
depository banks under the expanded system
– tax rate is 10% if payors are RESIDENTS,
whether individuals or corporations.
For interest from foreign currency loans
granted by OBUs to residents other than OBUs
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TAXATION LAW
or local commercial banks, including branches
of foreign banks that may be authorized by the
BSP to transact business with OBUs - tax rate
is 10% if payors are RESIDENTS, whether
individuals or corporations.
Gross income from all sources within the
Philippines derived by non-resident
cinematographic film owners, lessors or
distributors – tax rate is 25% if payee is: (a)
non-resident alien individual, or (b) non-
resident foreign corporation. The term
“cinematographic films” includes motion
picture films, films, tapes, discs and other
such similar or related products.
Informer’s reward given to persons who
voluntarily provide definite and sworn
information that lead to or was instrumental
in the discovery of fraud or violation of the
provisions of the NIRC or special laws being
administered by the BIR and resulted in the
actual recovery or collection of revenues,
surcharges and fees and/or the conviction of
the guilty party or parties, and/or the
imposition of any fine or penalty or the actual
collection of a compromise amount, in case of
amicable settlement, shall be subject to
income tax, collected as a final withholding
tax, at the rate of 10%, pursuant to Sec. 282 of
the NIRC [RR 16-2010]
Passive income not subject to tax
Interest income from long-term deposit or
investment in the form of savings, common or
individual trust funds, deposit substitutes,
investment management accounts and other
investments evidenced by certificates in such
form prescribed by the BSP shall be exempt
from tax
But should the holder of the certificate pre-
terminate the deposit or investment before
the 5th year, a final tax shall be imposed on
the entire income and shall be deducted and
withheld by the depository bank from the
proceeds of the long-term deposit or
investment certificate based on the remaining
maturity thereof:
Four (4) years to less than five (5) years - 5%;
Three (3) years to less than four (4) years -
12%; and
UP LAW BOC TAXATION 1
Less than three (3) years - 20%.
Any income of nonresidents, whether
individuals or corporations, from transactions
with depository banks under the expanded
system shall be exempt from income tax.
C.1.5. Taxation of Captial Gains
(1) Income from sale of shares of stock of a
philippine corporation
(a) Shares traded and listed in the stock
exchange – exempt
The transaction is exempt from income tax
regardless of the nature of business of the
seller or transferor. However, it is subject to
the one-half of one percent (1/2 of 1%) stock
transaction tax imposed under Sec. 127(A) of
the Tax Code based on the gross selling price
or gross value in money of the shares of stock
sold or transferred.
(b) Shares not listed and traded in the stock
exchange – subject to final tax
On sale, barter, exchange or other disposition
of shares of stockof a domestic corporation not
listed and traded through a local stock
exchange, held as a capital asset:
On the net capital gain:
Not over P100,000 = Final Tax of 5%
On any amount in excess of P100,000 = plus
Final Tax of 10% on the excess
Key Definitions
Net capital gain: selling price less cost
Selling price: consideration on the sale OR fair
market value of the shares of stock at the time
of the sale, whichever is higher
Cost: original purchase price
(2) Income from the sale of real property
situated in the philippines
What property covered
Property located in the PH classified as capital
assets
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TAXATION LAW
What transactions covered
Sales, exchanges, or other disposition of real
property (classified as capital assets),
including pacto de retro sales and other forms
of conditional sales of the following: citizens,
resident aliens, NRAETB, NRANETB,
domestic corporations.
Tax rate
General rule: 6% of —whichever is higher of:
(a) Gross selling price, or
(b) Fair market value (determined in
accordance with Sec. 6(E), NIRC).
Exception:
In case of sales made to the government, any
of its political subdivisions or agencies, or to
GOCCs, it can be taxed either:
Under Sec. 24(D)(1), NIRC – 6% CGT, or
Under Sec. 24(A), NIRC, at the option of the
taxpayer.
In case of the sale of or disposition of their
principal residence by natural persons
Requirements:
Sale or disposition by a natural person of his
principal residence,
The proceeds of which is fully utilized in
acquiring/constructing a new principal
residence,
Such acquisition/construction taking place
within 18 calendar months from the date of
sale or disposition,
The taxpayer notifies the Commissioner within
30 days from the sale/disposition through a
prescribed return of his intention to avail of the
exemption,
The tax exemption can only be availed of once
every 10 years.
Tax treatment: Exempt from capital gains tax
(CGT). If there is no full utilization of the
proceeds of sale or disposition, the portion of
the gain presumed to have been realized from
the sale or disposition shall be subject to CGT.
How taxable portion and tax determined:
UP LAW BOC TAXATION 1 TAXATION LAW

𝐻𝐼𝐺𝐻𝐸𝑅 𝑜𝑓 𝐺𝑟𝑜𝑠𝑠 𝑠𝑒𝑙𝑙𝑖𝑛𝑔 𝑝𝑟𝑖𝑐𝑒 At 30% corporate income tax, if the seller is a
𝐴𝑚𝑜𝑢𝑛𝑡 𝑢𝑛𝑢𝑡𝑖𝑙𝑖𝑧𝑒𝑑
[ 𝑜𝑟 ] 𝑥 [ 𝐺𝑟𝑜𝑠𝑠 𝑠𝑒𝑙𝑙𝑖𝑛𝑔 𝑝𝑟𝑖𝑐𝑒 ] corporation.
𝐹𝑀𝑉 @ 𝑠𝑎𝑙𝑒 Rule: Capital gain/loss is recognized in full.
Capital assets shall refer to all real properties
The historical cost or adjusted basis of the real held by a taxpayer, whether or not connected
property sold or disposed shall be carried over with his trade or business, and which are not
to the new principal residence built or included among the real properties
acquired. considered as ordinary assets under Section
Computation for the basis of new principal 39(A)(1) of the NIRC.
residence: Ordinary assets shall refer to all real
XXX properties specifically excluded from the
definition of capital assets under Section
Historical cost of old principal 39(A)(1) of the NIRC, namely:
residence
Stock in trade of a taxpayer or other real
Add: Additional cost to XXX property of a kind which would properly be
acquire new principal included in the inventory of the taxpayer if on
residence* hand at the close of the taxable year; or
Adjusted cost bases of the XXX Real property held by the taxpayer primarily
new principal residence for sale to customers in the ordinary course of
his trade or business; or
Real property used in trade or business (i.e.,
*Additional cost to acquire
buildings and/or improvements) of a
new principal residence:
character which is subject to the allowance for
Cost to acquire new principal XXX depreciation provided for under Sec. 34(F) of
residence the Code; or
Less: Gross selling price of old (XXX) Real property used in trade or business of the
principal residence taxpayer
Additional cost to acquire new XXX
principal residence
C.2. INCOME TAX ON NON-RESIDENT
ALIENS ENGAGED IN TRADE OR BUSINESS
A non-resident alien is an individual whose
residence and citizenship is not in the
(3) Income from the sale, exchange, or other Philippines.
disposition of other capital assets One who comes to the Philippines for a
definite purpose which, in its nature, may be
Other properties shall be subject to income tax promptly accomplished is a transient. But if
his purpose is of such a nature that an
(a) At the graduated income tax rates, if extended stay may be necessary for its
the seller is an individual; accomplishment, and to that end the alien
(b) Long-term capital gains: only 50% is makes his home temporarily in the Philippines,
recognized. he becomes a resident, though it may be his
(c) Short-term capital asset transactions: intention at all times to return to his domicile
100% subject to tax. [Sec. 39(B), abroad when the purpose of which he came
NIRC] has been consummated or abandoned. [Sec. 5,
RR No. 2]
Determination of whether short- or long-term: In general, a non-resident alien individual who
Short-term if held for 12 months or less; shall come to the Philippines and stay therein
otherwise, it is a long-term capital gain. for an aggregate period of more than 180 days
during any calendar year shall be deemed a
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non-resident alien doing business in the (2) Cinematographic films and similar works
Philippines. shall be subject to twenty-five percent (25%)
Intended stay in the Philippines: of the gross income 

(3) Interest income from long-term deposit or
a) Up to 180 days – Non-resident alien investment in the form of savings, common or
not engaged in trade or business individual trust funds, deposit substitutes,
b) More than 180 days but less than 1 investment management accounts and other
year – Non-resident alien engaged in investments evidenced by certificates in such
trade or business form prescribed by the Bangko Sentral ng
Pilipinas (BSP) shall be exempt from the tax 

c) 1 year or more – Resident alien But should the holder of the certificate pre-
terminate the deposit or investment before
General Rule: Subject to an income tax in the the fifth (5th) year, a final tax shall be imposed
same manner as an individual citizen and a on the entire income and shall be deducted
resident alien individual on taxable income and withheld by the depository bank from the
from all sources within the Philippines. proceeds of the long-term deposit or
investment certificate based on the remaining
Cash and/or property dividends maturity thereof:
The following shall be subject to an income (i) Four (4) years to less than five (5) years -
tax of twenty percent (20%) on the total 5%; 

amount thereof:
 (ii) Three (3) years to less than four (4) years -
(a) Cash and/or property dividends from: 12%; and 

(1) A domestic corporation; 
 (iii) Less than three (3) years - 20%. 

(2) A joint stock company; 

(3) An insurance or mutual fund Capital gains
company; 
 Capital gains realized from sale, barter or
(4) A regional operating headquarter of exchange of shares of stock in domestic

multinational company; 
 corporations not traded through the local
(5) The share of a nonresident alien stock exchange, and real properties shall be
subject to the similar tax prescribed on

individual in the distributable net income
citizens and resident aliens.
after tax of a partnership (except a general (a) Sale, barter or exchange of Shares of stock
professional partnership) of which he is a in domestic corporation not traded –
partner; (1) Net over P100,000 – 5% of net capital
(6) The share of a nonresident alien gains realized
individual in the net income after tax of an (2) On any amount in excess of P100,000 –
association, a joint account, or a joint 10% of net capital gains realized
venture taxable as a corporation of which (b) Sale, barter or exchange of real properties
he is a member or a co-venturer; – 6% of gross selling price or current FMV
(b) Interests 
 whichever is higher
(c) Royalties (in any form); and 

(d) Prizes (except prizes amounting to Ten

thousand pesos (P10,000) or less which shall C.3. INCOME TAX ON NON-RESIDENT
be subject to graduated tax) and other ALIENS NOT ENGAGED IN TRADE OR
winnings (except Philippine Charity BUSINESS
Sweepstakes and Lotto winnings) (1) Alien individuals employed by:
(a) Regional or Area Headquarters
Except: (RAHQ) and Regional Operating
(1) The following Royalties shall be subject to Headquarters (ROHQ) established in the
a final tax of ten percent (10%) on the total Philippines by multinational companies
amount thereof:

(a) On books as well as other literary Multinational company: a foreign firm or
works; and
(b) On musical compositions entity
 engaged in international trade
with affiliates or subsidiaries or branch
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offices in the Asia-Pacific Region and
other foreign markets.
(b) Offshore Banking Units established in
the Philippines
(2) Alien individuals who are permanent
residents of a foreign country but who are
employed and assigned in the Philippines by a
foreign service contractor or by a foreign
service subcontractor engaged in petroleum
operations in the Philippines. 

Tax Rate and Base - 15% of gross income
received as salaries, wages, annuities,
compensation, remuneration and other
emoluments, such as honoraria and
allowances.
The same tax treatment shall apply to
Filipinos employed and occupying the same
positions as those of aliens employed by these
multinational companies, offshore banking
units and petroleum service contractors and
subcontractors.
Note that the coverage of the special
classification (and the corresponding tax rate)
is limited to income received as wages. Hence,
any income earned from all other sources
within the Philippines by the alien employees
shall be subject to the pertinent income tax
(example: sale of real property in the
Philippines is subject to 6% capital gain tax,
imposed on the gross selling price or fair
market value of the property at the time of the
sale, whichever is higher)
C.4. INDIVIDUAL TAXPAYERS EXEMPT
FROM INCOME TAX
Individual Taxpayers exempt from income tax
are:
(1) Senior Citizens 
 RA 9504]
(2) Minimum wage earners 
 (2) Minimum wage earner – shall refer to a
(3) Exemptions granted under international

agreements 
 minimum wage, or to an employee in the
All individuals and entities claiming
exemption from imposition of taxes on income
and, consequently, from withholding taxes are
required to provide a copy of a valid, current
and subsisting tax exemption certificate or
ruling, as per existing administrative
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TAXATION LAW
issuances and any issuance that may be issued
from time to time, before payment of the
related income. The tax exemption certificate
or ruling must explicitly recognize the grant of
tax exemption, as well as the corresponding
exemption from imposition of withholding tax.
Failure on the part of the taxpayer to present
the said tax exemption certificate or ruling as
herein required shall subject him to the
payment of appropriate withholding taxes due
on the transaction. [RMC No. 8-2014]
C.4.1 Senior Citizens
Who are covered: any resident citizen— (a) At
least 60 years old,and
(b) Who are considered minimum wage
earners under RA 9504 (Sec. 4 (b) RA 7432, as
amended by RA 9994) and/or the aggregate
amount of gross income earned by the senior
citizen during the taxable year does not
exceed the amount of his personal exemptions
(BPE and APE).
C.4.2. Minimum Wage Earners
Rule: they shall be exempt from payment of
income tax on their taxable income.

Limit: However, if he receives “other benefits”
in excess of the allowable statutory amount of
P82,000, then he shall be taxable on the
exceeds benefits as well as his salaries, wages,
and allowances, just like an employee
receiving compensation income beyond the
statutory minimum wage.
Taxation of compensation income of a
minimum wage earner
(1) Statutory minimum wage – earner shall
refer to rate fixed by the Regional Tripartite
Wage and Productivity Board, as defined by
the Bureau of Labor and Employment
Statistics (BLES) of the Department of Labor
and Employment. [Sec.22 GG, as amended by
worker in the private sector paid the statutory
public sector with compensation income of
not more than the statutory minimum wage in
the non-agricultural sector where he/she is
assigned. [Sec.22 HH, as amended by RA
9504]
UP LAW BOC TAXATION 1 TAXATION LAW

The minimum wage shall be exempt from the

payment of income tax on their taxable
income: Provided, further, That the holiday
pay, overtime pay, night shift differential pay
and hazard pay received by such minimum
wage earners shall likewise be exempt from
income tax
(3) Income also subject to tax exemption:
holiday pay, overtime pay, night shift
differential, and hazard pay
Compensation income including overtime pay,
holiday pay and hazard pay, earned by
minimum wage earners who has no other
returnable income are NOT taxable and not
subject to withholding tax on wages [RA
9504]

C.4.3. Exemptions Granted Under

international Agreements
See RMC No, 31-2013, April 12, 2013 – taxation
of compensation income of Philippine
nationals and alien individuals employed by
foreign governments/embassies/diplomatic
missions and international organizations
situated in the Philippines.

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D. INCOME TAX ON CORPORATIONS
D.1. INCOME TAX ON DOMESTIC
CORPORATIONS AND RESIDENT FOREIGN
CORPORATIONS
Domestic Corporations
Taxes payable are:
(1) Regular Tax
(2) Minimum Corporate Income Tax
Resident Foreign Corporations
General rule: A resident foreign corporation is
a corporation organized under the laws of a
foreign country, which is engaged in trade or
business in the Philippines.
(a) A Philippine branch of a foreign
corporation duly licensed by the SEC is
considered a resident foreign corporation.
Thus, only the income of the Philippine branch
from sources within the Philippines is subject
to Philippine income tax. 
 Resident foreign corporations are subject to
(b) Marubeni v. Commissioner: As general rule,
the head office of a foreign corporation is the
same juridical entity as its branch in the
Philippines following the single entity

concept. Thus, the income from sources
within the Philippines of the foreign head
office shall thus be taxable to the Philippine
branch.
But, when the head office of a foreign
corporation independently and directly
invested in a domestic corporation without the
funds passing through its Philippine branch,
the taxpayer, with respect to the tax on dividend
income, would be the non-resident foreign
corporation itself and the dividend income
shall be subject to the tax similarly imposed
on non- resident foreign corporations.
Definition of “doing business” under the
Foreign Investment Act of 1991

The phrase "doing business" shall include
soliciting orders, service contracts, opening
offices, whether called "liaison" offices or
branches; appointing representatives or
distributors domiciled in the Philippines or
who in any calendar year stay in the country for
a period or periods totaling one hundred
eighty [180] days or more; participating in the
management, supervision or control of any
PAGE 101 OF 275
TAXATION LAW
domestic business, firm, entity or corporation
in the Philippines; and any other act or acts
that imply a continuity of commercial dealings
or arrangements and contemplate to that
extent the performance of acts or works, or the
exercise of some of the functions normally
incident to, and in progressive prosecution of
commercial gain or of the purpose and object
of the business organization: Provided,
however, That the phrase "doing business"
shall not be deemed to include mere
investment as a shareholder by a foreign entity
in domestic corporations duly registered to do
business, and/or the exercise of rights as such
investor; nor having a nominee director or
officer to represent its interests in such
corporation; nor appointing a representative
or distributor domiciled in the Philippines
which transacts business in its own name and
for its own account; [Sec. 3 (d)]
With respect to their income from sources
within the Philippines
any or some of the following:
(1) Capital Gains Tax 

(2) Final Tax on Passive Income 

(3) Normal Tax [OR] Minimum Corporate

Income Tax (MCIT) [OR] Gross Income Tax

(GIT) 

(4) Branch Profit Remittance Tax 

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

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

Domestic Corporations
(1) Imposed upon any domestic corporation
beginning the fourth taxable year in which
UP LAW BOC
such corporation commenced its business
operations. For purposes of the MCIT, the
taxable year in which business operations
commenced shall be the year when the
corporation registers with the BIR (not in
which the corporation started commercial
operations). 
 and the like. “Direct costs and expenses” shall
(2) Tax rate: 2% of the Gross Income 
 only pertain to those costs exclusively and
Imposition of MCIT
Gross Sales
Less: Sales Returns xxx
Sales Discounts xxx
Allowances xxx
Cost of Goods Sold xxx
MCIT GI
Computation of gross income
The term “Gross Income” shall be equivalent
to gross sales less sales returns, discounts and
allowances and cost of goods sold. “Cost of
goods sold” shall include all business
expenses directly incurred to produce the
merchandise to bring them to their present
location and use.
If apart from deriving income from core
business activities there are other items of
gross income realized or earned by the
taxpayer which are subject to the normal
corporate income tax, they must be included
as part of gross income for computing MCIT.
[Sec. 27 (E), NIRC; RR 12-2007]
This means that the term “gross income” will
also include all items of gross income
enumerated under Section 32(A) of the NIRC,
except: (a) income exempt from income tax,
and (b) income subjected to FWT.
Computation by type of business
(a) Merchandising/Manufacturing Concerns
Net Sales xxx
Less: Cost of Goods Sold xxx
Gross Income xxx
(b) Service Concerns
Gross Receipts/Revenue xxx
Less: Direct Cost of Services xxx
Gross Income xxx
TAXATION 1 TAXATION LAW
Net Sales is gross sales less sales returns,
discounts and allowances
Direct cost of services includes salaries of
personnel rendering the services, expenses on
the facilities directly utilized, cost of supplies,
directly incurred in relation to the revenue
realized by the sellers of services. These refer
xxx to costs which are considered indispensable to
the earning of the revenue such that without
such costs, no revenue can be generated.
Pointers
xxx MCIT is in the nature of a tax credit, not an
xxx allowable deduction. Its purpose is to prevent
corporations from escaping being taxed by
including frivolous expenses in their
statement of income.
Is the Minimum Corporate Income Tax (MCIT)
an addition to the regular or normal income
tax?
No, the MCIT is not an additional tax. The
MCIT is compared with the regular income tax,
which is due from a corporation. If the regular
income is higher than the MCIT, then the
corporation does not pay the MCIT.
Who are covered by MCIT?
The MCIT covers domestic and resident
foreign corporations which are subject to the
regular income tax. The term “regular income
tax” refers to the regular income tax rates
under the Tax Code. Thus, corporations which
are subject to a special corporate tax system
do not fall within the coverage of the MCIT.
These special corporations are:
(1) Corporations that are subject to ten
percent 
(10%) preferential tax rate:
Proprietary educational institutions, nonprofit
hospitals, Offshore Banking Units (OBUs) on
their income from foreign currency
transactions which has been subjected to a
final income tax at 10% of such income, and
depository banks under the expanded foreign
currency deposit system on their income from
foreign currency transactions which has
subjected to final income tax at 10%; RFCs
engaged in business as Regional Operating
Headquarters 

PAGE 102 OF 275
UP LAW BOC
(2) Firms under special income tax regime
such as those under the PEZA law [RA 7916],
the Bases Conversion Development Act [RA
7227] and forms enjoying Income Tax Holiday
(ITH) under EO No. 226; 
 Excess MCIT from the previous taxable year/s
(3) International carriers subject to tax at 2
½ % of their gross Philippine billings; 
 quarterly MCIT tax due.
Note: For domestic corporations whose
operations or activities are partly covered by
the regular income tax and partly covered
under a special income tax system, the MCIT
shall apply on operations covered by the
regular corporate income tax system.
MCIT gross income differentiated from the
normal tax gross income
 corporate income tax returns whether this be
The latter would include other incidental
income items, such as rent income, interest,
gain on sale of assets, certain tax refunds, etc.
What amount of income tax is paid by the
corporation to the BIR?

Whichever is higher between the normal tax
and the minimum corporate income tax
Illustration:
E Co., a domestic trading corporation, in its
fourth year of operations had a gross profit
from sales of P300,000 and net taxable
income of P100,000. How much was the
income tax paid by the corporation for the
year?
MCIT (P300,000 x 2%) P6,000
Normal Income Tax P30,000
(P100,000 x 30%)
Income Tax to be paid for P30,000
the year (whichever is
higher)
Quarterly MCIT Computation
The computation and the payment of MCIT
shall likewise apply at the time of filing the
quarterly corporate income tax. In the
computation of the tax due for the taxable
quarter, if the quarterly MCIT is higher than
the quarterly normal income tax, the tax due
to be paid for such taxable quarter at the time
of filing the quarterly corporate income tax
return shall be the MCIT.
Items allowed to be credited against quarterly
MCIT due: (a) CWT, (b) Quarterly income tax
PAGE 103 OF 275
TAXATION 1 TAXATION LAW
payments under the normal income tax; and
(c) MCIT paid in the previous taxable
quarter(s).
shall not be allowed to be credited against the
Annual Income Tax Computation.
The final comparison between the normal
income tax payable and the MCIT shall be
made at the end of the taxable year. The
payable or excess payment in the Annual
Income Tax Return shall be computed taking
into consideration corporate income tax
payment made at the time of filing of quarterly
MCIT or normal income tax.
In the computation of annual income tax due,
if the normal income tax due is higher than the
computed annual MCIT, the following shall be
allowed to be credited against the annual
income tax: (a) quarterly MCIT payments, (b)
quarterly normal income tax payments, (c)
excess MCIT in the prior year/s (subject to the
prescriptive period allowed for its creditability),
(d) CWTs in the current year, (d) excess CWTs
in the prior year.
If in the computation of annual income tax due,
the computed annual MCIT due is higher than
the annual normal income tax due, the
following may be credited against the annual
income tax: (a) quarterly MCIT payments of
current taxable quarter, (b) quarterly normal
income tax payments in current year, (c) CWTs
in the current year, (d) excess CWTs in the prior
year.
Excess MCIT from the previous taxable year/s
shall not be allowed to be credited against the
annual MCIT due as the same can only be
applied against normal income tax.
Manner of Filing and Payment.
The MCIT shall be paid in the same manner
prescribed for the payment of the normal
corporate income tax which is on a quarterly
and on a yearly basis.
Carry forward of excess minimum tax
Any excess of the minimum corporate income
tax over the normal income tax shall be carried
UP LAW BOC TAXATION 1 TAXATION LAW

forward on an annual basis. The excess can be Arrow pointing
downward means that the
credited against the normal income tax in the normal tax is higher so that there can be an
nextthree (3) succeeding taxable years. [Sec. excess MCIT carry-forward against it.
27(E)(2)] In the year to which carried forward,
the normal tax should be higher than the MCIT. *Cannot carry forward an amount higher than
the NT, hence the excess of 60K from Year 4
Illustration: was reduced to 40K. The unused P20,000
A domestic corporation had the following data cannot be used in Year 8 because Year 8 was
on computations of the normal tax (NT) and beyond three years from Year 4.
the minimum corporate income tax (MCIT) for
five years. Relief from the MCIT under certain conditions
(Sec. 27 (E)(3), NIRC)
The Secretary of Finance,
Yr 4 Yr 5 Yr 6 Yr 7 Yr 8 upon the recommendation of the
MCIT 80K 50K 30K 40K 35K Commissioner, may suspend the imposition of
NT 20K 30K 40K 20K 70K the MCIT upon submission of proof by the
applicant- corporation that the corporation
The excess MCIT over NT carry-forward is sustained substantial losses on account of the
shown as follows: following
(LMB):
(1) Prolonged labor dispute (losses from a
strike staged by employees that lasts for more
than 6 months and caused the temporary
shutdown of operations), or
(2) Force majeure (acts of God and other
calamity; includes armed conflicts like war or
insurgency), or
(3) Legitimate business reverses (substantial
losses due to fire, robbery, theft or other
economic reasons).

Optional gross income tax (OGIT)

Section 27 (A) of the NIRC provides for an
optional gross income tax of 15% based on
gross income. The President, upon the
PAGE 104 OF 275
UP LAW BOC TAXATION 1 TAXATION LAW

recommendation of the Secretary of Finance, (6) Non- taxable joint ventures; and 

may, effective January 1, 2000, allow domestic (7) Enterprises that are registered:
corporations the option to be taxed at fifteen (a) with the Philippine Economic Zone
percent (15%) of gross income as defined Authority (PEZA) under R.A. 7916; 

therein, after the following conditions have (b) pursuant to the Bases Conversion and
been satisfied: Development Act of 1992 under R.A.
7227; and 

Tax effort ratio 20% of GNP
(c) under special economic zones
Ratio of income tax 40% declared by law which enjoy payment of
collection to total tax special tax rate on their registered
revenues operations or activities in lieu of other
VAT tax effort 4% of GNP
taxes, national or local. 

Ratio of Consolidated 0.90%
Public Sector Financial
Applicability of the MCIT where a corporation is
Position (CPSFP) to GNP
governed both under the regular tax system
Ratio of the corporation’s Does not and a special income tax system
Cost of Sales to Gross exceed 55%
For corporations whose operations or
Sales activities are partly covered by the regular
income tax and partly covered under special
income tax system, the MCIT shall apply on
Gross Sales xxx
operations by the regular income tax system.
Less: Sales Returns xxx
Sales Discounts xxx Resident Foreign Corporations
Allowances xxx
Cost of Goods Sold xxx xxx The discussion with respect to this topic
(income subject to normal tax, MCIT, or GIT)
GI xxx
under the subheading of domestic
corporations is equally applicable to resident
foreign corporations, both as to concepts and
The election of the gross income tax option by computations, except that RFCs are taxed
the corporation shall be irrevocable for three only on income from sources within the
(3) consecutive taxable years during which the Philippines.
corporation is qualified under the scheme. (a) Normal Corporate Income Tax Rate 30%

of net taxable income from sources within
For purposes of gross income tax, gross 
the Philippines [RA 9337] (b) Minimum
income should be the same as gross income
for purposes of MCIT in cases of trading, Corporate Income Tax 
(MCIT)  2% of MCIT
merchandising and manufacturing concern Gross Income from sources within the
business. However, for service enterprises, Philippines. The MCIT is imposed on RFCs
gross income means gross receipts less sales under the same conditions as domestic
returns, discounts, allowances and cost of corporations. [Sec. 28(A)(2), NIRC] 

services. (c) Gross Income Tax (GIT)  The President,
upon the recommendation of the Secretary of
Note: At present, the OGIT has not been Finance, may allow resident foreign
implemented in the Philippines. corporations the option to be taxed at fifteen
percent (15%) of gross income within the
Corporations exempt from the MCIT: Philippines, under the same conditions as
(1) Banks and other non-bank financial domestic corporations. [Sec. 28(A)(1), NIRC] 


intermediaries; 
 D.1.3. Branch Profit Remittance Tax
(2) Insurance companies; 
 Taxable transaction – any profit remitted by a
branch of a multinational corporation to its
(3) Publicly-held corporations; 

head office
(4) Taxable partnerships; 

(5) General professional partnerships; 

PAGE 105 OF 275
UP LAW BOC TAXATION 1 TAXATION LAW

Tax Rate and Base – 15% final tax based on the But by virtue of RA 9504, it now also applies
total profits applied or earmarked for to corporations, except non-resident foreign
remittance without any deduction for the tax corporation.
component. The 15% final tax should Moreover, the rate was increased from 10% to
excluding: (a) profits on activities which are 40%.
registered with the Philippine Economic Zone
Authority (PEZA) and (b) passive income gains D.1.5. Taxation of Passive Income
and profits received not directly connected
with the conduct of its trade or business in the Domestic Corporations
Philippines.
Passive Income Subject to Tax
Income not treated as branch profits unless (1) Interest from deposits and yield or any
effectively connected with the conduct of 
other monetary benefit from deposit
trade or business in the Philippines: substitutes and from trust funds and similar
(1) Interests, dividends, rents, royalties arrangements and royalties 


remuneration for technical services 
 (2) Capital gains from the sale of shares of
(2) salaries, wages premiums, annuities, stock not traded in the stock exchange

emoluments 
 (3) Income derived from depository bank
(3) other fixed or determinable annual, under the expanded foreign currency deposit

periodic or casual gains, profits, income system 


(4) capital gains received during each (4) Inter-corporate dividends 

taxable year from all sources within the (5) Capital gains realized from the sale,
Philippines 
 
exchange, or of lands and/or buildings 


Notes: Interest from deposits and yield or any other

(1) imposed whether the head office of the monetary benefit from deposit substitutes and
foreign corporation is located in a tax treaty from trust funds and similar arrangements and
country, in a tax haven or other non- treaty royalties
country. 
 On any currency bank deposit, yield or any
(2) imposed only on the profits remitted by a other monetary benefit from deposit
Philippine branch to the head office of a substitutes, trust funds and similar
foreign corporation. 
 arrangements - 20%

D.1.4. Allowable Deductions Capital gains from the sale of shares of stock
i. Itemized Deductions not traded in the stock exchange

(1) Bad debts 
 On sale, barter, exchange or other disposition
(2) Expenses 
 of shares of stockof a domestic corporation not
listed and traded through a local stock
(3) Losses 

exchange, held as a capital asset:
(4) Taxes 

(5) Depreciation 
 On the net capital gain:
(6) Interest 
 (1) First P100,000: Final Tax of 5%

(7) Depletion of oil and gas wells and mines 
 (2) On any amount in excess of P100,000: plus
(8) Charitable and other contributions 
 10% Final tax on the excess
(9) Research and development 

Income derived from depository bank under the
(10) Pension trusts 

expanded foreign currency deposit system
Under the expanded foreign currency deposit
ii. Optional Standard Deductions (OSD)
system (EFCDS) - 7.5%
Before RA 9504, effective July 6, 2009, OSD
only applied to individuals except non-
Inter-corporate dividends
resident aliens.
 Dividends received from another domestic
corporation - exempt

PAGE 106 OF 275

UP LAW BOC TAXATION 1
Capital gains realized from the sale, exchange,
or disposition of lands and/or buildings
 trust funds and similar arrangements and
On the sale, exchange or disposition of lands
and/or buildings which are not actually used
in the business of a corporation and are
treated as capital assets  On the gross
selling price, or the current fair market value
at the time of the sale, whichever is higher, a
final tax of 6%
Note: Tax treatment is the same as that of
individuals.
The capital gains tax is applied on the gross
selling price, or the current fair market value
at the time of the sale, whichever is higher.
Any gain or loss on the sale is immaterial
because there is a conclusive presumption by
law that the sale resulted in a gain.
Passive Income Not Subject to Tax
(1) Income derived by a depository bank under
the expanded foreign currency deposit system
from foreign currency transactions with
nonresidents, offshore banking units in the
Philippines, local commercial banks,
including branches of foreign banks that may
be authorized by the Bangko Sentral ng
Pilipinas (BSP) to transact business with
foreign currency depository system units and
other depository banks under the expanded
foreign currency deposit system shall be
exempt from income exempt from income tax
Except: Net income from transactions
specified by the Secretary of Finance upon
recommendation by the Monetary Board
BUT: Interest income from foreign currency
loans granted by such depository banks under
said expanded foreign currency deposit
system to residents, other than offshore
banking units in the Philippines, shall be
subject to a final tax at the rate of 10%.
(2) Any income of nonresidents, whether
individuals or corporations, from transactions
with depository banks under the expanded
system shall be exempt from exempt from
income tax.
Resident Foreign Corporations
PAGE 107 OF 275
TAXATION LAW
Interest from deposits and yield or any other
monetary benefit from deposit substitutes,
royalties
On any currency bank deposit, yield or any
other monetary benefit from deposit
substitutes, trust funds and similar
arrangements – Final tax of 20%
Income derived from a depository bank under
the expanded foreign currency deposit system

Under the expanded foreign currency deposit
system (EFCDS) – Final tax of 7.5%
Intercorporate dividends
Dividends received from a
corporation liable
to tax under the NIRC- exempt
Exclude:
(1) International carrier 

(2) Offshore banking units 

(3) Branch profits remittances 

(4) Regional or area headquarters and

regional operating headquarters of
multination companies 

D.1.6. Taxation of Capital Gains
Domestic Corporations
Income from sale of shares of stock

On sale, barter, exchange or other disposition
of shares of stockof a domestic corporation not
listed and traded through a local stock
exchange, held as a capital asset:
On the net capital gain:

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

(2) On any amount in excess of P100,000: plus
10% Final tax on the excess
Income from the sale of real property situated
in the Philippines
Income from the sale, exchange, or other
disposition of other capital assets

On the sale, exchange or disposition of lands
and/or buildings which are not actually used
in the business of a corporation and are
treated as capital assets  On the gross
selling price, or the current fair market value
at the time of the sale, whichever is higher, a
final tax of 6%
UP LAW BOC TAXATION 1
Note: Tax treatment is the same as that of
individuals.
 the country in which the nonresident foreign
The capital gains tax is applied on the gross
selling price, or the current fair market value
at the time of the sale, whichever is higher.
Any gain or loss on the sale is immaterial
because there is a conclusive presumption by
law that the sale resulted in a gain.
Resident Foreign Corporations
Capital gain from sale of shares of stock not
traded in the stock exchange
 on the dividends received from a domestic
On sale, barter, exchange or other disposition
of shares of stock of a domestic corporation
not listed and traded through a local stock
exchange, held as a capital asset:
On the net capital gain:
 of real property or on shares of stock of a
(a) First P100,000: Final Tax of 5%
 domestic corporation not listed and traded
(b) On any amount in excess of P100,000: plus
10% Final tax on the excess
D.2. INCOME TAX ON NON-RESIDENT
FOREIGN CORPORATIONS
General rule
Except as otherwise provided, the tax is 30%
of the gross income (except certain passive
income)received during each taxable year
from all sources within the Philippines, such
as interests (except interests on foreign loans,
dividends, rents, royalties, salaries, premiums
(except reinsurance premiums), annuities,
emoluments or other fixed or determinable
annual, periodic or casual gains, profits and
income, and capital gains EXCEPT capital
gains on the sale of shares of stock (not listed
and traded through a local stock exchange), of
a domestic corporation which are subject to
the tax rates prescribed for individuals and
resident foreign corporations.
Tax on certain income
Interest on foreign loans
(1) on foreign loans contracted on or after
August 1, 1986 – 20%
(2) under the expanded foreign currency
deposit system (EFCDS) - exempt
Intercorporate dividends
PAGE 108 OF 275
TAXATION LAW
(a) Intercorporate Dividend – 15%, as long as
corporation is domiciled allows a tax credit for
taxes “deemed paid” in the Philippines
equivalent to at least 15%
(b) 15% represents the difference between the
regular income tax of 30% on corporations
and the 15% tax on dividends (“tax sparing
credit”) 

(c) If the country within which the NRFC is
domiciled does NOT allow a tax credit, a final
withholding tax at the rate of30% is imposed
corporation. 

Capital gains from sale of shares of stock not
traded in the stock exchange

On sale, barter, exchange or other disposition
through a local stock exchange, held as a
capital asset:
On the net capital gain:
(a) First P100,000 Final Tax of 5%
(b) On any amount in excess of P100,000 plus
Final Tax of 10% on the excess
Exclude:
(1) Film rentals and other payments to non-
resident cinematographic film owner, lessor or
distributor
Final tax of 25% of gross income
from all sources within the Philippines 

(2) Rental, lease and charter fees payable to
non-resident owner or lessor of vessels
chartered by Philippine nationals
Final tax of
4.5% of gross rentals, lease or charter fees
from leases or charters to Filipino citizens or
corporations, as approved by the Maritime
Authority 

(3) Rentals, charter and other fees payable to
non-resident owner or lessor of aircraft
machineries and other equipment
Final tax of
7.5% of gross rentals or fees 

D.3. INCOME TAX ON SPECIAL
CORPORATIONS
D.3.1. Domestic Corporations
i. Proprietary Educational Institutions and
Hospitals
UP LAW BOC TAXATION 1 TAXATION LAW

Tax Rate and Base – 10% on net income
(except on income subject to capital gains tax
and passive income subject to final tax) within
and without the Philippines
Caveat: If gross income from unrelated trade
or business or other activity exceeds 50% of
total gross income derived from all sources,
the tax rate of 30% shall be imposed on the
entire taxable income.
functions may be subject to tax. Where it is
done precisely to fulfill a constitutional
mandate and national policy, no one can
doubt its wisdom. [Mactan Cebu Airport v
Marcos, 1996]
If the taxing authority is the local gov’t unit
RA 7160 expressly prohibits LGUs from levying
tax on the Nat’l Gov’t, its agencies and
instrumentalities and other LGUs.

Unrelated trade, business or other activity –
any trade, business or other activity, the
conduct of which is not substantially related to
the exercise or performance by such
educational institution or hospital of its
primary purpose or function.
iv. Depositary Banks (Foreign Currency Deposit
Units)
Income derived from a depository bank under
the expanded foreign currency deposit system

Under the expanded foreign currency deposit
system (EFCDS) – Final tax of 7.5%

Proprietary educational institution – any D.3.2. Resident Foreign Corporations

private school maintained and administered
by private individuals or groups with an issued i. International Carrier Doing Business in the
permit to operate from the DECS, CHED or Philippines
TESDA. [Sec. 27(B), NIRC] Tax Rate and Base – 2.5% on Gross Philippine
Billings (GPB)
ii. Non-profit Hospitals
(See Proprietary Educational Institutions and What is GPB
Hospitals, supra) In the case of International Air Carriers, GPB
refers to the amount of:
iii. Government-owned or Controlled (a) gross revenue derived from carriage of
Corporations, Agencies or Instrumentalities 
persons, excess baggage, cargo and mail
originating from the Philippines in a
For GOCCS continuous and uninterrupted flight,
General rule: GOCCs are taxable as any other irrespective of the place of sale or issue and
corporation engaged in similar business, the place of payment of the ticket or passage
industry or activity, except:
 document 

(1) Government Service Insurance System (b) gross revenue from tickets revalidated,
(GSIS)
 exchanged and/or indorsed to another
(2) Social Security System (SSS) international airline if the passenger boards a
(3) Philippine Health Insurance Corporation plane in a port or point in the Philippines 

(PHIC) 
 (c) for flights which originate from the
(4) Local water districts (LWDs) 
 Philippines, but transshipment of passenger
(5) Philippine Charity Sweepstakes Office takes place at any port outside the Philippines

(PCSO) 
 on another airline, the gross revenue
[Sec. 27(C), NIRC] consisting of only the aliquot portion of the
cost of the ticket corresponding to the leg
For instrumentalities and agencies of flown from the Philippines to the point of
government transhipment transshipment [RR 15-2002] 

General rule: The government is exempt from
tax. Air Canada vs. CIR (CTA Case No. 6572):
(a) A foreign airline company selling tickets in
Exception: When it chooses to tax itself. the Philippines through their local agents
Nothing can prevent Congress from decreeing shall be considered as resident foreign
that even instrumentalities or agencies of the
government performing governmental
PAGE 109 OF 275
UP LAW BOC TAXATION 1 TAXATION LAW

corporation engaged in trade or business 
in iv. Regional or Area Headquarters and
the country. 
 Regional Operating Headquarters of
(b) The absence of flight operations within the Multinational Companies

Philippine territory cannot alter the fact that Regional or area headquarters: not subject to
income tax
the income received was derived from
activities within the Philippines. 

Regional or area headquarters – a branch
(c) The test of taxability is the source, and the established in the Philippines by multinational
source is that activity which produced the companies and which headquarters do not
income. 
 earn or derive income from the Philippines and
which act as supervisory, communications and
In the case of International Shipping, GPB coordinating center for their affiliates,
means:
 subsidiaries, or branches in the Asia-Pacific
Gross revenue whether for passenger, cargo or Region and other foreign markets.
mail originating from the Philippines up to
final destination, regardless of the place of Regional operating headquarters
sale or payments of the passage or freight (a) 10% of their taxable income 

documents. (b) a branch established in the Philippines by

multinational companies which are engaged
ii. Off-shore Banking Units
in any of the following services: 

Coverage of the Rule
(1) general administration and planning
Only income derived by offshore banking units
(2) business planning and coordination
from foreign currency transactions with:
(3) sourcing and procurement of raw
(1) non-residents, 

materials and components
(2) other offshore banking units 
 (4) 
corporate finance advisory services
(3) local commercial banks including (5) marketing control and sales promotion
branches 
of foreign banks that may be (6) training and personnel management
authorized by the Bangko Sentral ng Pilipinas (7) logistic services
(BSP) to transact business with offshore
banking units. 
 (8) research and development services and
product development

Tax Rate (9)
 technical support and maintenance
Exempt from all taxes, except net income from (10) data processing and communications,
such transactions as may be specified by the
and

Secretary of Finance, upon recommendation
(11) business development.
by the Monetary Board to be subject to the
regular income tax payable by banks.

Exception: Interest income derived from

foreign currency loans granted to residents
other than offshore banking units or local
commercial banks, including local branches of
foreign banks that may be authorized by the
BSP to transact business with offshore
banking units, shall be subject only to a final
tax at the rate of 10%. [Sec. 28(A)(4), NIRC]

iii. Resident Depositary Banks (Foreign

Currency Deposit Units)
Income derived from a depository bank under
the expanded foreign currency deposit system

Under the expanded foreign currency deposit
system (EFCDS) – Final tax of 7.5%

PAGE 110 OF 275

UP LAW BOC TAXATION 1 TAXATION LAW

PAGE 111 OF 275

UP LAW BOC TAXATION 1
D.4. IMPROPERLY ACCUMULATED
EARNINGS TAX
[Sec. 29, NIRC, as implemented by RR 2-2001]
Rule: There is imposed for each taxable year,
in addition to other taxes, a tax equal to 10%
of the improperly accumulated taxable
income of domestic and closely-held
corporations formed or availed of for the
purpose of avoiding the income tax with
respect to its shareholders or the shareholders
of any other corporation, by permitting the
earnings and profits of the corporation to
accumulate instead of dividing them among
or distributing them to the shareholders.
Rationale: It is a tax in the nature of a penalty
to the corporation for the improper
accumulation of its earnings, and a deterrent
to the avoidance of tax upon shareholders who
are supposed to pay dividends tax on the
earnings distributed to them. The touchstone
of the liability is the purpose behind the
accumulation of the income and not the
consequences of the accumulation.
Exception: The use of undistributed earnings
and profits for the reasonable needs of the
business would not generally make the
accumulated or undistributed earnings
subject to the tax.
What is meant by “reasonable needs of the
business” is determined by the Immediacy Test
Immediacy Test
It states that the “reasonable needs of the
business” are the
 (3) is owned directly or indirectly by or for not
(1) immediate needs of the business; and
 more than 20 individuals. Domestic
(2) reasonably anticipated needs.
How to prove the “reasonable needs of the
business”

The corporation should prove that there is
(1) an immediate need for the accumulation of

the earnings and profits; or 
 determination is based on stock ownership, the
(2) a direct correlation of anticipated needs to

such accumulation of profits. 
 (1) Stock Not Owned by Individuals. - Stock
Composition
The following constitute accumulation of
earnings for the reasonable needs of the
business:
(1) Allowance for the increase in the

accumulation of earnings up to 100% of the
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TAXATION LAW
paid-up capital of the corporation as of
Balance Sheet date, 

(2) inclusive of accumulations taken from
other years; 

(3) Earnings reserved for definite corporate
Expansion projects or programs requiring
considerable capital expenditure as approved
by the Board of Directors or equivalent body; 

(4) Earnings reserved for Building, Plant or
Equipment Acquisition as approved by the
Board of Directors or equivalent body; 

(5) Earnings reserved for compliance with any
Loan Covenant or pre-existing obligation
established under a legitimate business
agreement; 

(6) Earnings required by Law or applicable
regulations to be retained by the corporation
or in respect of which there is legal prohibition
against its distribution; 

(7) In the case of subsidiaries of foreign
corporations in the Philippines, all
undistributed earnings intended or reserved
for Investments within the Philippines as can
be proven by corporate records and/or
relevant documentary evidence. 

Covered Corporations
Only domestic corporations classified as
closely- held corporations are liable for IAET.
Closely-held corporations are those:
(1) at least 50% in value of the outstanding
capital stock; or 

(2) at least 50% of the total combined voting
power of all classes of stock entitled to vote 

corporations not falling under the aforesaid
definition are, therefore, publicly- held
corporations. 

To determine whether the corporation is
closely held corporation, insofar as such
following rules shall be applied:
owned directly or indirectly by or for a
corporation, partnership, estate or trust shall
be considered as being owned proportionately
by its shareholders, partners or beneficiaries.


(2) Family and Partnership Ownership. - An
individual shall be considered as owning the
UP LAW BOC TAXATION 1
stock owned, directly or indirectly, by or for his
family, or by or for his partner. 
 called “Immediacy Test” under American
For purposes of this paragraph, the ‘family of
an individual’ includes his brothers or sisters
(whether by whole or half-blood), spouse,
ancestors and lineal descendants. 
 anticipated needs. In either case, the
(3) Option to Acquire Stocks. - If any person
has an option to acquire stock, such stock
shall be considered as owned by such person.


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

(4) Constructive Ownership as Actual
Ownership. - Stock constructively owned by
reason of the application of (a) or (c) shall, for
purposes of applying (1) or (2), be treated as
actually owned by such person.
But stock constructively owned by the
individual by reason of the application of (b)
shall NOT be treated as owned by him for
purposes of again applying such paragraph in
order to make another the constructive owner
of such stock.
BIR Ruling 025-02
The ownership of a domestic corporation for
purposes of determining whether it is a closely
held corporation or a publicly held corporation
is ultimately traced to the individual
shareholders of the parent company.
Where at least 50% of the outstanding capital
stock or at least 50% of the total combined
voting power of all classes of stock entitled to
vote in a corporation is owned directly or
indirectly by at least 21 or more individuals, the
corporation is considered as a publicly-held
corporation, thus, exempt from IAET.
Determination of reasonable needs of the
business

An accumulation of earnings or profits
(including undistributed earnings or profits of
prior years) is unreasonable if it is not
necessary for the purpose of the business,
considering all the circumstances of the case.
To determine the “reasonable needs” of the
business in order to justify an accumulation of
PAGE 113 OF 275
TAXATION LAW
earnings, the Regulations adhere to the so-
jurisprudence as adopted in this jurisdiction.
Accordingly, the term “reasonable needs of
the business” means the immediate needs of
the business, including reasonably
corporation should be able to prove: (a) an
immediate need for the accumulation of the
earnings and profits, or (b) the direct
correlation of anticipated needs to such
accumulation of profits. Otherwise, such
accumulation would be deemed to be not for
the reasonable needs of the business, and the
penalty tax would apply.
D.5 EXEMPTION FROM TAX ON
CORPORATIONS
Tax exempt corporations
(1) Nonprofit labor, agricultural or

horticultural organizations
(2) Non-stock/ non-profit mutual savings
bank or non-stock/ non-profit cooperative
bank 

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

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

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

(8) Non-stock and non-profit educational

institutions
(9) 
 Government educational institutions
(10) Organizations with a purely local
operation whose income is derived only from
assessment, duties and fees collected from
their members to meet operational expenses
such as fire insurance company, farmers’ or
other mutual typhoon associations, mutual
UP LAW BOC TAXATION 1
ditch or irrigation company and mutual or
cooperative 
telephone company 
 subject to corporate tax of 30%.
(11) Associations of farmers, fruit growers, and

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

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

(2) It should meet the following tests:
(a) Organizational Test–requires that he
corporation or association’s constitutive
documents exclusively limit its purposes
to one or more of those described in
paragraph (E) of 
Section 30 of the 1997
NIRC. 

(b) Operational Test – mandates that the
regular activities of the corporation or
association be exclusively devoted to the
accomplishment of the purposes
specified in paragraph (E) of Section 30 of
the 1997 NIRC, as amended. A
corporation or association fails to meet
this test if a substantial part of its
operations may be considered 
“activities
conducted for profit”. 
 business. A GPP is exempt from income tax. It
(3) All the net income or assets of the
corporation or association must be devoted to
its purpose/s and no part of its net income or
asset accrues to or benefits any 
member or
specified person. (4) It must not be a branch
of a foreign non- 
stock, non-profit
corporation. 
 Rules
[RMO No. 20-2013]
D.6. TAX ON GENERAL PARTNERSHIPS,
GENERAL PROFESSIONAL PARTNERSHIPS,
CO-OWNERSHIPS, JOINT VENTURES AND
CONSORTIUMS
General Partnerships
Partnerships wherein all or part of their
income is derived from the conduct of trade or
business. An ordinary business partnership is
PAGE 114 OF 275
TAXATION LAW
considered as a corporation and is thus
Rules
(1) The partnership is subject to the same rules

on corporations (capital gains tax, final tax
on passive income, normal tax, minimum
corporate income tax [MCIT] and gross income
tax [GIT]), but is not subject to the improperly
accumulated earnings tax [IAET]. The
partnership must file quarterly and year-end
income tax returns. 

(2) The taxable income of the partnership,
less the normal corporate income tax (30%)
thereon, is the distributable net income of the
partnership. 

The share of a partner in the partnership’s
distributable net income of a year shall be
deemed to have been actually or
constructively received by the partners in the
same taxable year and shall be taxed to them
in their individual capacity, whether actually
distributed or not. [Sec. 73(D), NIRC] Such
share will be subjected to a final tax of 10% to
be withheld by the partnership. [Sec. 24(B)(2),
NIRC]
General Professional Partnerships
Partnerships formed by persons for the sole
purpose of exercising their common
profession, no part of the income of which is
derived from engaging in any trade or
is, however, required to file a tax return for its
income for the purpose of furnishing
information as to the share in the gains or
profits that each partner shall include in his
individual tax return.
(1) A GPP is a partnership formed by persons
for the purpose of exercising their common
profession, no part of the income of which is
derived from engaging in trade or business. A
GPP as such shall not be subject to the income
tax. It is not a taxable entity for income tax
purposes. 

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

(3) For purposes of computing the distributive
share of the partners, the net income of the
UP LAW BOC TAXATION 1
GPP shall be computed in the same manner as
a corporation.
(4) Each partner shall report as gross income
his distributive share, actually or
constructively received, in the net income of
the partnership.
(5) The distributive share of a partner (actual
or constructive) shall be subject to a creditable
withholding income tax of 10% if the amount
share is not more than P720,000 and 15% if
the amount of the share is more than
P720,000. [RR 2- 1998]
(6) If the partnership sustains a net operating
loss, the partners shall be entitled to deduct
their respective shares in the net operating
loss from their individual gross income.
GPP is not a taxable entity
The GPP is deemed to be no more than a mere
mechanism or a flow-through entity in the
generation of income by, and the ultimate
mechanism distribution of such income to the
individual partners. [Tan v. Commissioner (Oct.
3, 1994)]
But the partnership itself is required to file
income tax returns for the purpose of
furnishing information as to the share in the
gains or profits which each partner shall
include in his individual return. [RR 2- 1998]
The share of an individual partner in the net
profit of a general professional partnership is
deemed to have been actually or
constructively received by the partner in the
same taxable year in which such partnership
net income was earned, and shall be taxed to
them in their individual capacities, whether
actually distributed or not, at the graduated
income tax ranging from 5% to 32%.
Thus, the principle of constructive receipt of
income or profit is being applied to
undistributed profits of GPPs. The payment [to
the partners] of such tax-paid profits in
another year should no longer be liable to
income tax. [Mamalateo]
Co-ownerships
There is co-ownership

(1) When two or more heirs inherit and
undivided property from a decedent.
(2) When a donor makes a gift of an undivided
property in favor of two or more donees.
PAGE 115 OF 275
TAXATION LAW
When Co-ownership is not subject to tax
When the co-ownership’s activities are limited
merely to the preservation of the co-owned
property and to the collection of the income
from the property. The income derived by a co-
owner from the property shall be reported in
his individual tax return regardless of whether
such income is actually or constructively
received.
When Co-ownership is subject to tax
The following circumstances would render a
co-ownership subject to a corporate income
tax: (a) When a co-ownership is formed or
established voluntarily, or upon agreement of
the parties; (b) When the individual co-owner
reinvested his share, and (c) When the
inherited property remained undivided for
more than ten years, and no attempt was ever
made to divide to same among the co-heirs,
nor was the property under administration
proceedings nor held in trust, the property
should be considered as owned by an
unregistered partnership.
Automatically converted into an unregistered
partnership the moment the said common
properties and/or the incomes derived from
them are used as a common fund with intent
to produce profits for the heirs in proportion to
their respective shares in the inheritance as
determined in a project partition either duly
executed in an extrajudicial settlement or
approved by the court in the corresponding
testate or intestate proceeding. [Ona v. CIR,
May, 25 1972]
Joint Ventures and Consortiums
To constitute a” joint venture,” certain factors
are essential. Each party to the venture must
make a contribution, not necessarily of capital,
but by way of services, skill, knowledge,
material or money,; profits must be shared
among the parties; there must be a joint
proprietary interest and right of mutual
control over the subject matter of the
enterprise; and usually, there is single
business transaction.
An unincorporated joint venture is taxed likes
a corporation. The share of the joint venture
partners will no longer be taxable to them
because they partake of dividends if paid to a
UP LAW BOC TAXATION 1
domestic or resident corporation. However, an
unincorporated joint venture formed for the
purpose of undertaking a construction project
or engaging in petroleum operations pursuant
to the consortium agreement with the
Philippine Government is not subject to the
corporate income tax. Only the joint venture
partners will be taxed on their respective
shares in the income of the joint ventures.
Two elements necessary to exempt a joint
venture or consortium from tax
(1) The joint venture must be an

unincorporated entity formed by two or

more persons 
 employees, the total amount of compensation
(2) The joint venture was formed for the

purpose of undertaking a construction
project, or engaging in the petroleum and
other energy operations with operating
contract with the government. 

E. FILING OF RETURNS AND PAYMENT
OF INCOME TAX
E.1. DEFINITION OF A TAX RETURN AND
INFORMATION RETURN
Tax Return
Tax return refers to a formal report prepared
by the taxpayer or his agent in a prescribed
form showing an enumeration of taxable
amounts and description of taxable
transactions, allowable deductions, amount
of tax and tax payable to the government.
Examples of tax returns are:
(a) BIR Form Nos. 1700 and 1701 – Annual
Income Tax Returns for Individual
(b) BIR Form No. 1702 – Annual Income Tax
Return for Corporations and Partnerships
(c) BIR Form No. 1800 – Donor’s Tax Return
(d) BIR Form No. 1801 – Estate Tax Return
Information Return
Any individual not required to file an income
tax return may nevertheless be required to file
an information return pursuant to rules and
regulations prescribed by the Secretary of
Finance, upon recommendation of the
Commissioner. [Sec. 51(A)(3), NIRC]
Every withholding agent required to deduct
and withhold taxes under Section 57 shall
PAGE 116 OF 275
TAXATION LAW
submit to the Commissioner an annual
information return containing the list of
payees and income payments, amount of
taxes withheld from each payee and such
other pertinent information as may be
required by the Commissioner. [Sec. 58(C),
NIRC]
Every employer required to deduct and
withhold the taxes in respect of the wages of
his employees shall, on or before January
thirty-first (31st) of the succeeding year,
submit to the Commissioner an annual
information return containing a list of
income of each employee, the total amount of
taxes withheld therefrom during the year,
accompanied by copies of the statement
referred to in the preceding paragraph, and
such other information as may be deemed
necessary. [Sec. 83(B), NIRC]
E.2. PERIOD TO FILE INCOME TAX RETURN
OF INDIVIDUALS AND CORPORATIONS
(1) Individuals
Individuals deriving mixed income, or purely
business/professional income, or other
income must file quarterly income tax returns
(BIR Form 1700 Q), and an annual income tax
return (BIR Form 1700) as follows: (Sec. 74,
NIRC)
Period Due Date for Filing Return
Q1 Return April 15 of the same year
Q2 Return August 15 of the same
year
Q3 Return November 15 of the same
year
Annual Return April 15 of the following
year
(2) Corporations
Domestic corporations and resident foreign
corporations shall file quarterly corporate
income tax returns (BIR Form 1702 Q) within
60 days after the end of the calendar or fiscal
quarter used, and annual corporate income
tax return (BIR Form 1702) on or before the 15th
day of the fourth month following the close of
the calendar year or fiscal year, as the case
may be (Sec. 74, NIRC). The deadlines for the
filing of the tax returns by a corporation using
the calendar year are as follows:
UP LAW BOC
Period Due Date for Filing Return
Q1 Return May 31 of the same year
Q2 Return August 31 of the same
year
Q3 Return November 30 of the same
year
Annual Return April 15 of the following
year
E.3. PERSONS LIABLE TO FILE INCOME TAX
RETURNS
E.3.1. Individual Taxpayers
i. General Rule and Exceptions (Sec. 51(A),
NIRC)
General Rule: The following are required to file
income tax returns:
(a) Every Filipino citizen residing in the
Philippines
(b) Every Filipino citizen residing outside the
Philippines on his income from sources
within the Philippines
(c) Every alien residing in the Philippines, on
income derived from sources within the
Philippines
(d) Every non-resident alien engaged in
trade or business or in the exercise of
profession in the Philippines.
Note: A grant of tax exemption is not
necessariliy an excuse from the requirement to
file a tax return [Garrison v. CA, 187 SCRA 525].
Exceptions:
Individuals whose gross income (not
necessarily from compensation income) does
not exceed his total personal and additional
exemptions for dependents, except citizens
and alien individuals engaged in business or
practice of profession within the Philippines
who shall file income tax returns regardless of
the amount of gross income.
Individuals with respect to pure compensation
income derived from sources within the
Philippines, the income tax on which has been
withheld except when such compensation has
been derived from more than one employer.
A minimum wage earner as defined in Sec.
22(HH) of the NIRC, as amended by R.A. No.
9504.
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TAXATION 1 TAXATION LAW
Individuals whose sole income has been
subjected to final withholding tax pursuant to
Sec. 57(A) of the Tax Code.
Individuals who are exempt from income tax
pursuant to the provisions of the Tax Code and
other laws, general or special (Sec. 51, NIRC).
Special Provisions
Income of non-resident aliens not engaged in
trade or business in the Philippines is subject to
withholding income tax to be withheld by the
payor thereof.
In the case of married persons, whether
citizens or aliens, residents or not, who do not
derive income purely from compensation, only
one consolidated return to cover the income of
both spouses for the taxable year shall be filed
by either spouse; where it is impracticable for
the spouses to file one consolidated return,
each may file a separate return but the returns
so filed shall be consolidated for the purpose
of verification. The husband shall be deemed
the head of family entitled to claim the
additional exemption in respect of dependent
children, unless he explicitly waives his right in
favor of the wife in the withholding exemption
certificate (Sec. 79 (F)(1), NIRC).
The income of unmarried minors is a tax
liability of the minor but where such income is
derived from property received from a living
parent, the income shall be included in the
return of the parent except (a) when the
donor’s tax has been paid on such property, or
(b) when the transfer of such property is
exempt form the donor’s tax.
If the taxpayer is unable to make his return,
such as when he suffers from disability, the
return may be made by his duly authorized
agent or representative or by the guardian or
other person charged with the care of the
taxpayer or his property, the principal and his
representative or guardian incurring the
penalties for erroneous, false or fraudulent
returns.
ii. Substituted Filing
Substituted filing of tax returns is required
where (i) an employee receives purely
compensation income from a single or one
UP LAW BOC
employer who deducted and remitted to the
BIR the (ii) correct amount of withholding tax
form the employee’s compensation income
during the year, and said employee has (iii) no
taxable other income subject to income tax
under the global tax system. In lieu of the
regular tax returns to be filed by the
employees, the employer shall file BIR Form
2316 (Certificate of Income Tax Withheld on
Compensation) with the BIR on or before
January 31 of the following year. BIR Form
2316 shall contain a certification to the effect
that the employer’s filing of BIR Form 1604-CF
shall be considered as a substituted filing of
the employee’s income tax return to the extent
that the amount of compensation and tax
withheld in BIR Form 1604-CF as filed with
BIR is consistent with the corresponding
amounts indicated in BIR Form 2316. However,
non-resident citizens who receive purely
income from foreign sources are no longer
required to file their Philippine income tax
return, although they must still file an income
tax return covering income from sources
within the Philippines.
E.3.2. Corporate Taxpayers
All corporations subject to income tax, except
foreign corporations not engaged in trade or
business in the Philippines, shall render
quarterly income tax returns on a cumulative
basis for the preceding quarter or quarters
upon which their income tax is paid and a final
or adjustment return on or before the 15th day
of April or fourth month following the close of
the fiscal year covering the entire taxable
income of the preceding calendar or fiscal year,
signed and sworn to by the President, Vice-
President or principal officer and by the
treasurer or assistant treasurer (Sec. 52(A),
NIRC).
E.4. WHERE TO FILE INCOME TAX
RETURNS
(1) Individuals
Except in cases where the Commissioner
otherwise permits, the return shall be filed
with an authorized agent bank, Revenue
District Officer, Collection Agent or duly
authorized Treasurer of the city or
municipality in which such person has his
legal residence or principal place of business
in the Philippines, or if there be no legal
PAGE 118 OF 275
TAXATION 1 TAXATION LAW
residence or place of business in the
Philippines, with the Office of the
Commissioner (Sec. 51(B), NIRC)
(2) Corporations
The return shall be filed at the place where the
corporation’s principal office is located and
where its books of accounts and other date are
kept; otherwise, the returns shall be filed and
the tax paid thereon with the Office of the
Commissioner of Internal Revenue.
E.5. PENALTIES FOR NON-FILING OF
RETURNS
(a) For failure to file any return and pay the tax
due: a penalty equivalent to 25% of the
amount due (Sec. 248(A)(1), NIRC).
(b) In case of willful neglect to file the return:
a penalty equivalent to 50% of the tax or of the
deficiency tax, in case, any payment has been
made on the basis of such return before the
discovery of the falsity or fraud (Sec. 248(B),
NIRC).
F. WITHHOLDING OF TAXES
F.1. CONCEPT OF WITHHOLDING TAXES
Withholding tax is a method of collecting
income tax in advance from the taxable
income of the recipient of income. It is a
systematic way of collecting taxes at source,
an indispensable method of collecting taxes to
ensure adequate revenue for the government.
The withholding of income tax on
compensation income, on certain income
payments made to resident taxpayers, and on
income payments made to non-resident
taxpayers is very important for all taxpayers,
because the obligation to withhold and remit
the tax is mandatory and prescribed by law.
In the operation of the withholding tax system,
the payee is the taxpayer, the person on whom
the tax is imposed, while the payor, a separate
entity, acts no more than an agent of the
government for the collection of the tax in
order to ensure its payment. The amount
thereby used to settle the tax liability is
deemed sourced from the proceeds
constitutive of the tax base. In an ad valorem
UP LAW BOC TAXATION 1 TAXATION LAW

tax, the tax paid or withheld is not deducted
from the tax base, except when the law clearly
spells out in defining the tax base.
The duty to withhold is different from the duty
to pay income tax. The revenue officers
generally disallow the expenses claimed as
deduction from gross income, if no
withholding of tax as required by law or the
regulations was withheld and remitted to the
BIR within the prescribed dates.
In addition, the withholding tax that should
have been withheld and remitted to the BIR as
well as the penalties for non-, late or
erroneous payment of the withholding tax
such as surcharges and deficiency interest are
assessed by the BIR. [Mamalateo]
F.2. KINDS OF WITHHOLDING TAXES
(b) The income recipient is still required to file
an income tax return, to report the income
and/or pay the difference between the tax
withheld and the tax due on the income. 

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


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

(2) On gross payments for the purchase of
services 

(3) Payments made to government public
works contractors 

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


Withholding of final tax of certain income


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

Withholding of creditable tax at source


The Secretary of Finance may, upon the
recommendation of the Commissioner,
require the withholding of a tax on the items
of income payable to natural or juridical
persons, residing in the Philippines, by payor-
corporation/persons as provided for by law, at
the rate of not less than one percent (1%) but
not more than thirty-two percent (32%), which
shall be credited against the income tax
liability of the taxpayer for the taxable year.

Withholding of creditable tax (RR 2-98)

(a) Under the creditable withholding tax
system, taxes withheld on certain income
payments are intended to equal or at least
approximate the tax due of the payee on said
income. 

PAGE 119 OF 275
UP COLLEGE OF LAW TAXATION 2 TAXATION LAW

TAXATION LAW
TAXATION 2

PAGE 120 OF 275

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

promissory notes, and corporate stocks) follows
the residence/domicile of owner thereof. Situs is
the domicile or residence of the owner. (Collector
v Fisher)

Exceptions:
(1) Rule of Reciprocity
(2) When it is inconsistent with express
provisions of law
(3) When justice does not demand that it should
be, as where the property in fact has a situs
elsewhere

Intangible Properties which are considered

situated in the Philippines (Sec 104)
(1) Franchise which must be exercised in the
Philippines
(2) Shares, obligations or bonds issued by
any corporation or sociedad anonima
organized or constituted in the
Philippines in accordance with its laws
(3) Shares, obligations or bonds issued by
any foreign corporation 85% of the
business of which is located in the
Philippines
(4) Shares, obligations or bonds issued by
any foreign corporation if such shares,
obligations or bonds have acquired a
business situs in the Philippines
(5) Shares or rights in any partnership,
business or industry established in the
Philippines

F.2. RULE OF RECIPROCITY

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

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G. GROSS ESTATE VIS-À-VIS NET ESTATE

Gross Estate Net Estate

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

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

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

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

Summary of the Composition of the Gross Estate and Exclusions, Deductions therefrom
RC/NRC/RA NRA
Composition and Determination of GROSS Estate
The value at the time of his death of all the The value at the time of his death of all the
deceased’s: deceased’s:
a. Real property wherever situated a. Real property located in the Phil.
b. Tangible personal property wherever situated b. Tangible personal property located in the Phil.
c. Intangible personal property wherever c. Intangible personal property with a situs in the
situated Phil. (subject to the rule of reciprocity)
Note: If there is reciprocity, intangible assets
are excluded from gross estate
Exclusions from Gross Estate(Sec 85(H) and Sec 87)
a. Separate property of the surviving spouse (Sec. 85 (H))
b. GSIS proceeds/ benefits
c. Accruals from SSS
d. Proceeds of life insurance where the beneficiary is irrevocably appointed
e. Proceeds of life insurance under a group insurance taken by employer
f. War damage payments and Benefits received from US Veterans Administration
g. Transfer by way of bona fide sales
h. Transfer of property to the National Government or to any of its political subdivisions
i. Merger of usufruct in the owner of the naked title (Sec. 87 (A))
j. Properties held in trust by the decedent. Transmission of inheritance or legacy by fiduciary heir or
legatee to the fideicommissay (Sec. 87 (B))
PAGE 124 OF 275
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RC/NRC/RA NRA
k. Transmission from the first heir, legatee, or done in favour of another beneficiary, in accordance
with the desire of their predecessor (Sec. 87 (C))
l. Acquisition and/or transfer expressly declared as not taxable
m. Bequests, devises, legacies or transfers to social welfare, cultural and charitable institutions,
provided that not more than 30% of said transfer shall be used for administration purposes (Sec.
87 (D))
Deductions from GROSS estate to arrive at the NET estate
Ordinary deductions Ordinary deductions1
(1) Expenses, losses, indebtedness, taxes. (ELIT) (1) Proportionate deductions for (ELIT)2
(a) Funeral expenses (a) Funeral expenses
(b) Judicial expenses (b) Judicial expenses
(c) Claims against the estate (c) Claims against the estate
(d) Claims against insolvent persons (d) Claims against insolvent persons
(e) Unpaid mortgage and debt (e) Unpaid mortgage and debt
(f) Taxes (f) Taxes
(g) Losses (g) Losses

(2) Vanishing deductions (2) Vanishing deductions

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

Special deductions No Amounts received under R.A. 4917

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

Share in conjugal property Share in conjugal property

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

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VALUATION OF GROSS ESTATE (SEC
88)
General Rule: Gross Estate = FMV at the time
of the decedent’s death
Real Property
(1) Appraised value, whichever is higher
between:
(a) FMV, as determined by the
Commissioner of Internal Revenue
(CIR) (zonal value) or
(b) FMV, as shown in the schedule of
values fixed by the Provincial or City
Assessor.
If there is no zonal value, the taxable
base is the FMV that appears in the
latest tax declaration.
(2) If there is an improvement, the value of
improvement is the construction cost per
building permit or the fair market value
per latest tax declaration.
Personal Property
(1) FMV at the time of death.
(2) If none, acquisition cost for recently
acquired properties or the current market
price for the previously acquired
properties. (Sec 40(B)
(3) Stocks, bonds, and other securities.
(a) If listed and traded stocks = value is
the mean between the highest and
lowest quoted selling prices at the
date of death; if none, nearest the date
of death (Sec 5, RR 02-2003)
(b) If unlisted stocks = book value at time
of death (ordinary common shares) or
par value (preferred shares)
N.B: Bonds, mortgages, and Certificates of
Stocks are taxable at the place where they
are physically located.
(4) Proceeds of Life Insurance with Revocable
Beneficiary: face value of policy (not cash
surrender value)
Right to Usufruct use or habitation, and
annuity
(1) Probable life of the beneficiary in
accordance with the latest basic standard
mortality table shall be taken into account.
J. ITEMS TO BE INCLUDED IN GROSS
ESTATE
Items to be included in the Gross Estate
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TAXATION LAW
[Sec. 85, NIRC]
(1) Property owned by the decedent actually
and physically present in his estate at the
time of his death;
(2) Decedent’s interest;
(3) Properties not physically in the estate,
such as:
(a) Transfers in contemplation of death
[Sec. 85(B), NIRC];
(b) Transfers with retention or reservation
of certain rights [Sec. 85(B), NIRC];
(c) Revocable transfers [Sec. 85(C),
NIRC];
(d) Property passing under general power
of appointment [Sec. 85(D), NIRC];
(e) Transfers for insufficient
consideration [Sec. 85(G), NIRC];
(f) Proceeds of life insurance [Sec. 85(E),
NIRC];
(g) Claims against insolvent persons [Sec.
86(A)(d)]; and
(h) Capital of the surviving spouse [Sec.
85(H), NIRC].
DECEDENT’S INTEREST (Sec. 85(A))
This includes any interest having value or
capable of being valued which is owned by the
decedent existing at the time of death, such as
dividend declared on or before death, but is
received by the estate after death, partnership
profits which have accrued before his death,
but received after death. This also includes
those transferred by the decedent at the time
of his death.
Note: When decedent had relinquished his
interest BEFORE his death, he could not be
deemed to have transmitted interest in such
property at his death.
TRANSFERS IN CONTEMPLATION OF DEATH
(Sec. 85(B))
The term “in contemplation of death”, as used
in estate taxation, does not refer to the
general expectation of death. The words mean
that it is the thought of death, as a controlling
motive, which induces the disposition of the
property for the purpose of avoiding the tax.
The decedent’s motive is a question of fact.
Thus, the imminence of death may afford
convincing evidence of the impelling cause of
transfer. However, it is a contemplation of
death and not necessarily contemplation of
imminent death to which the statute refers.
UP COLLEGE OF LAW TAXATION 2
These transfers should be without or with
insufficient considerations.
The law does not specify the number of years
prior to a decedent’s death within which a
transfer can be considered in contemplation of
death. (De leon)
TRANSFERS WITH RETENTION OR
RESERVATION OF CERTAIN RIGHTS
These are transfers with retention or
reservation of certain rights that result to the
incapacity of transferee to freely enjoy and
dispose of the property until the transferor’s
death, and the transfer may be regarded as
having been intended to take effect in
possession or enjoyment at the transferor’s
death. These do not include bona fide sale for
an adequate and full consideration.
REVOCABLE TRANSFERS (Sec. 85(C))
General Rule: A transfer is a revocable transfer
where:
(1) There is a transfer by trust or otherwise,
(2) The enjoyment thereof was subject at the
date of his death to any change through
the exercise of a power (in whatever
capacity exercisable) by:
(a) The decedent alone;
(b) The decedent in conjunction with any
other person without regard to when
or from what source the decedent
acquired such power, to alter, amend,
revoke, or terminate; or
(c) Where any such power is relinquished
in contemplation of the decedent
death.
Exception: Bona fide sale for an adequate
and full consideration in money or
money’s worth
Note: The power to alter, amend or revoke
shall be considered to exist on the date of the
decedent’s death even though:
(a) The exercise of the power is subject to a
precedent giving of notice, or
(b) The alteration, amendment or revocation
takes effect only on the expiration of a
stated period after the exercise of the
power, whether or not on or before the
date of the decedent’s death notice has
been given or the power has been
exercised.
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TAXATION LAW
If notice has not been given or the power has
not been exercised before the date of his death,
such notice shall be considered to have been
given, or the power exercised, on the date of
his death.
TRANSFER OF PROPERTY UNDER GENERAL
POWER OF APPOINTMENT (Sec. 85(D))
Power of Appointment – the right to designate
the person or property who shall enjoy and
possess certain property from the estate of a
prior decedent. (Domondon)
(i) General Power of Appointment: when it
gives to the decedent the power to appoint
any person he pleases including himself.
He had a power exercisable in favor of
himself, his creditors or creditors of his
estate (AmJur)
(ii) Special Power of Appointment: when the
decedent
a. can appoint only among a
designated class of persons other
than himself, his estate, the
creditors of his estate, or
b. if the power of appointment is
expressly not exercisable in favor
of the decedent, his estate, his
creditors, or creditors of his estate.
General Rule: Property over which the
decedent held a power of appointment is
excluded in his gross estate
Exception: Included in the gross estate if the
property arises under a general power of
appointment exercised by the decedent:
(1) By will; or
(2) By deed executed in contemplation of or
intended to take effect in possession or
enjoyment at or after his death; or
(3) By deed under which he has retained for
his life or any period not ascertainable
without reference to his death or for any
period which does not in fact end before
his death –
(a) The possession or enjoyment of, or the
right to the income from the property;
or
(b) The right either alone or in conjunction
with any person, to designate the
persons who shall enjoy or possess the
property or the income therefrom.
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TRANSFERS FOR INSUFFICIENT
CONSIDERATION (Sec. 85(G))
Transfers, trusts, interests, rights, or powers
(denominated as transfer in contemplation of
death, revocable transfer and property
passing under general power of appointment)
made, created, exercised or relinquished for a
consideration in money or money’s worth, but
is NOT a bona fide sale for an adequate and
full consideration in money or money’s worth.
The value to be included in the gross estate is
the excess of the fair market value of the
property at the time of the decedent’s death
over the consideration received.
Example:
Case A: If bona fide sale – no value shall be
included in the gross estate
Case B: If not a bona fide sale - the excess of
the fair market value at the time of death over
the value of the consideration received by the
decedent shall form part of his gross estate.
Case C: If inter vivos transfer is proven
fictitious/simulated – total value of the
property at the time of death included in the
gross estate.
Case Case Case
Over
A B C
FMV, transfer 2,000 1,500 2,500
FMV, death 2,500 2,000 2,000
Consideration 2,000 800 0 taken out by a company for its employees.
received
Value included in the 0 1,200 2,000
Gross Estate
The transfer for insufficient consideration
must fall under any of the following:
(1) Transfer in contemplation of death;
(2) Revocable transfer, or
(3) Property passing under a GPA.
Otherwise, the tax imposed is donor’s tax.
PROCEEDS OF LIFE INSURANCE (Sec. 85(E))
Inclusion of proceeds of life insurance to the
gross estate depends on i) designated
beneficiary; ii) revocability of the insurance; iii)
period and source of funds used in premiums.
When included in the gross estate
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TAXATION 2 TAXATION LAW
Proceeds of life insurance taken out by the
decedent on his own life shall be included in
the gross estate in the following cases:
(1) Beneficiary is the estate of the deceased,
his executor or administrator, irrespective
of whether or not the insured retained the
power of revocation; or
(2) Beneficiary is other than the decedent’s
estate, executor or administrator, when
designation of beneficiary is not expressly
made irrevocable.
When not taxable
(1) Irrevocably designated; how done –
(i) By expressly stating it in the policy (the
designation of a beneficiary is
PRESUMED to be revocable);
(ii) By not changing the beneficiary during
the lifetime of the insured. This was
added in Sec. 11, RA 10607 (2013)
which provides that, “The insured
shall have the right to change the
beneficiary he designated in the policy
(i.e., it’s revocable), unless he has
expressly waived this right in said
policy. Notwithstanding the foregoing,
in the event the insured does not
change the beneficiary during his
lifetime, the designation shall be
deemed irrevocable.”
(2) Accident insurance proceeds as the Tax
Code specifically mentions only life
insurance policies
(3) Proceeds of a group insurance policy
(4) Amount receivable by any beneficiary
irrevocably designated in the policy of
insurance by the insured. The transfer is
absolute and the insured did not retain
any legal interest in the insurance
(5) Amount receivable by any beneficiary
irrevocably designated in the policy of
insurance by the insured. The transfer is
absolute and the insured did not retain
any legal interest in the insurance
(6) Proceeds of insurance policies issued by
the GSIS to government officials and
employees, which are exempt from all
taxes; (PD 1146)
(i) Benefits accruing under the SSS law
(RA 1161)
(7) Proceeds of life insurance payable to heirs
of deceased members of military
personnel (RA 360)
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CAPITAL OF THE SURVIVING SPOUSE
[Sec.85(H), NIRC]
It is NOT part of the gross estate of the
deceased spouse. (See Exclusions)
To determine the conjugal or separate
character of proceeds, the following factors
are considered:
(1) Policy was taken before marriage – Source
of funds determines ownership of the
proceeds of life insurance
(2) Policy was taken during marriage
(a) Beneficiary is estate of the insured –
Proceeds are presumed conjugal;
hence, one-half share of the surviving
spouse is not taxable
(b) Beneficiary is third person – Proceeds
are payable to beneficiary even in
premiums were paid out of the
conjugal
CLAIMS AGAINST INSOLVENT PERSONS
For estate tax purposes, an insolvent is a
person whose properties are not sufficient to
satisfy, whether fully or partially, his debts. A
judicial declaration of insolvency is not
required but the incapacity of the debtor
should be proven. As a rule, regardless of the
amount the debtor is unable to pay, the full
amount of the claim against the insolvent
person should be included in the gross estate
of the decedent. The portion of the claim
which is not collectible should be allowed as a
deduction from the gross estate.
K. DEDUCTIONS FROM ESTATE
Deductions and/or losses already deducted
from gross income can no longer be deducted
from gross estate. Further, deductions should
not be compensated for by any insurance or
extrajudicial settlement. Otherwise, they are
not valid deductions.
K.1. ORDINARY DEDUCTIONS
1.A. Expenses, Losses, Indebtedness and Taxes,
Etc. (ELIT)
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TAXATION LAW
i. FUNERAL EXPENSES (Sec. 86 (A)(1)(a))
Actual funeral expenses shall mean (i) those
which are actually incurred (ii) in connection
with, and before the interment or burial of the
deceased and (iii) must be paid out of the
estate and not by another person or out of
contributions from friends and relatives. These
must be (iv) duly supported by receipts or
invoices or other evidence to show that they
were actually incurred. They include:
(a) The mourning apparel of the surviving
spouse and unmarried minor children of
the deceased bought and used on the
occasion of the burial;
(b) Expenses for the deceased’s wake,
including food and drinks;
(c) Publication charges for death notices;
(d) Telecommunication expenses incurred in
informing relatives of the deceased;
(e) Cost of burial plot, tombstones,
monument or mausoleum but not their
upkeep. In case the deceased owns a
family estate or several burial lots, only
the value corresponding to the plot where
he is buried is deductible;
(f) Interment and/or cremation fees and
charges; and
(g) All other expenses incurred for the
performance of the rites and ceremonies
incident to interment.
Limitation: Allowable deduction is not to
exceed P200,000 and whichever is lower of:
(a) Actual funeral expenses (whether paid
or not) up to the time of interment, or
(b) An amount equal to 5% of the gross
estate.
The unpaid portion of the funeral expenses
incurred which is in excess of the P200,000
threshold is NOT allowed to be claimed as a
deduction under “claims against the estate”.
(Sec. 6(A)(1), RR 02-200)
N.B. – Compare (1) ACTUAL, (2) 5% GROSS, or
(3) 200K and pick whichever is lower.
Not included are: (i) Expenses incurred after
the interment, such as for prayers, masses,
entertainment, or the like are not deductible.
(ii) Any portion of the funeral and burial
expenses borne or defrayed by relatives and
friends of the deceased are not deductible. (iii)
Medical expenses as of the last illness will not
form part of funeral expenses but should be
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claimed as medical expenses. (Sec. 6, RR 2-
2003)
Illustrations
(a) If five percent (5%) of the gross estate is
P220,000 and the amount actually
incurred is P215,000, the maximum
amount that may be deducted is only
P200,000;
(b) If five percent (5%) of the gross estate is P
100,000 and the total amount incurred is
P150,000 where P20,000 thereof is still
unpaid, the only amount that can be
claimed as deduction for funeral expenses
is P100,000. The entire P50,000 excess
amount consisting of P30,000 paid
amount and P20,000 unpaid amount can
no longer be claimed as FUNERAL
EXPENSES. Neither can the P20,000
unpaid portion be deducted from the
gross estate as CLAIMS AGAINST THE
ESTATE.
ii. JUDICIAL EXPENSES OF TESTAMENTARY
AND INTESTATE PROCEEDINGS (Sec. 86
(A)(1)(b))
Expenses allowed as deduction under this
category are (i) those incurred in the inventory-
taking of assets comprising the gross estate,
their administration, the payment of debts of
the estate, as well as the distribution of the
estate among the heirs. They are (ii) incurred
during the settlement of the estate but not
beyond the last day prescribed by law, or the
extension thereof, for the filing of the estate
tax return. (Sec. 86 (A)(2), RR 2-2003).
These expenses must be (iii) for the benefit of
the estate, and (iv) substantiated by recipts
OR if unpaid, should be supported by a sworn
statement of account issued and signed by the
creditor.
Judicial expenses may include:
(1) Fees of executor or administrator
(2) Attorney’s fees – These refer to the
notarial fee paid for the extrajudicial
settlement is deductible since such
settlement effected a distribution of the
decedent’s estate to his lawful heirs. [CIR
v. CA (2000)]
(3) Court fees
(4) Accountant’s fees
(5) Appraiser’s fees
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(6) Clerk hire
(7) Costs of preserving and distributing the
estate
(8) Costs of storing or maintaining property of
the estate
(9) Brokerage fees for selling property of the
estate
Not deductible
(a) Compensation paid to a trustee of the
decedent’s estate for his services rendered
for the purpose of managing the
decedent’s real estate for the benefit of
the testamentary heirs (Lorenzo v.
Posadas)
(b) Expenses incurred by the presumptive heir
and that of her witnesses for appearance
at the trial to oppose the probate of a will.
(c) Attorney’s fees incident to litigation
incurred by the heirs in asserting their
respective rights, or claims as to who are
entitled to the estate left by the deceased.
(d) Premiums paid by the administrator on his
bond, being exclusively used for his
account, since the giving of the bond is in
the nature of a qualification for the office
and not necessary in the settlement of his
estate.
iii. CLAIMS AGAINST THE ESTATE (Sec. 86
(A)(1)(c))
The word “claims” is generally construed to
mean (i) debts or demands of a pecuniary
nature (ii) which could have been enforced
against the deceased in his lifetime and could
have been reduced to simple money
judgements. These are liabilities of the estate
or indebtedness of such (iii) arising out of:
contract, tort, or operation of law. (Dizon v
CTA, 2008)
Requisites for Deductibility of Claims Against
the Estate:
(a) The liability represents a personal
obligation of the deceased existing at the
time of his death except unpaid
obligations incurred incident to his death
such as unpaid funeral expenses (i.e.,
expenses incurred up to the time of
internment) and unpaid medical expenses
which are classified under a different
category of deductions.
(b) The liability was contracted in good faith
and for adequate and full consideration in
money or money’s worth
UP COLLEGE OF LAW TAXATION 2
(c) The claim must be a debt or claim which is
valid in law and enforceable in court;
(d) The indebtedness must not have been
condoned by the creditor or the action to
collect from the decedent must not have
prescribed.
(e) They must be reasonably certain in
amount, and substantiated.
Substantiation Requirements
In case of simple loan (including advances):
(1) The debt instrument must be duly
notarized at the time the indebtedness
was incurred, such as promissory note or
contract of loan, except for loans granted
by financial institutions where
notarization is not part of the business
practice/policy of the financial institution-
lender.
(2) Duly notarized Certification from the
creditor as to the unpaid balance of the
debt, including interest as of the time of
death. If the creditor is:
- CORPORATION: sworn certification
should be signed by the President, or Vice-
President, or other principal officer of the
corporation.
- PARTNERSHIP: sworn certification
should be signed by any of the general
partners.
- BANK/FINANCIAL INSTITUTIONS:
Certification shall be executed by the
branch manager of the bank/financial
institution which monitors and manages
the loan of the decedent-debtor.
- INDIVIDUAL: sworn certification should
be signed by him.
In any of these cases, the one who should
certify must not be a relative of the
borrower within the 4th civil degree, either
by consanguinity or affinity, except when a
copy of the promissory note or other
evidence of the indebtedness must is filed
with the RDO having jurisdiction over the
borrower within 15 days from the
execution thereof.
(3) Proof of financial capacity of the creditor to
lend the amount at the time the loan was
granted, as well as its latest audited
balance sheet with a detailed schedule of
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TAXATION LAW
its receivable showing the unpaid balance
of the decedent-debtor
In case the creditor is an individual who is
no longer required to file ITRs with the
Bureau, a duly notarized declaration by
the creditor of his capacity to lend at the
time when the loan was granted without
prejudice to verification that may be made
by the BIR to substantiate such
declaration of the creditor.
If the creditor is a non-resident, the
executor/ administrator or any of the legal
heirs must submit a duly notarized
declaration by the creditor of his capacity
to lend at the time when the loan was
granted, authenticated or certified to as
such by the tax authority of the country
where the non-resident creditor is a
resident
(4) A statement under oath executed by the
administrator or executor of the estate
reflecting the disposition of the proceeds
of the loan if it was contracted within 3
years prior to the death of the decedent.
If the unpaid obligation arose from purchase
of goods or services:
(1) Pertinent documents evidencing the
purchase of goods or service, such as sales
invoice/delivery receipt (for sale of goods),
or contract for the services agreed to be
rendered (for sale of services), as duly
acknowledged, executed and signed by
decedent-debtor and creditor, and
statement of account given by the creditor
as duly received by the decedent-debtor
(2) Duly notarized certification from the
creditor as to the unpaid balance of the
debt, including interest as of the time of
death.
(3) Certified true copy of the latest audited
balance sheet of the creditor with a
detailed schedule of its receivable
showing the unpaid balance of the
decedent-debtor. Moreover, a certified
true copy of the updated latest subsidiary
ledger/records of the debtor-decedent,
should likewise be submitted.
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Where the settlement is made through the
Court in a testate or intestate proceeding,
pertinent documents filed with the Court
evidencing the claims against the estate,
and the Court Order approving the said
claims, if already issued, in addition to the
documents mentioned in the preceding
paragraphs.
iv. CLAIMS AGAINST INSOLVENT PERSONS
(Sec. 86 (A)(1)(d))
These are claims of the estate (i) against
insolvent persons (ii) which are not collectible.
To be deductible from the gross estate:
Additional Requirements:
(a) The incapacity of the debtor to pay his
obligation should be proven, although a
judicial declaration of insolvency is not
required;
(b) The full amount owed by the insolvent
must first be included in the decedent’s
gross estate; and
(c) If the insolvent could only pay a partial
amount, the full amount owed shall be
included in the gross estate, and the
amount uncollectible shall be allowed as
a deduction.
N.B. – Unpaid claims on funeral expenses in
excess of 200K cannot be designated as
claims against the estate.
v. UNPAID MORTGAGES, LOSSES AND TAXES
(Sec. 86(A)(1)(e))
Unpaid Mortgages
Requisites for Deductibility [Sec. 6-A5(a), RR
2-2003]
(a) The value of the decedent’s interest
therein, undiminished by such mortgage
or indebtedness, is included in the value of
the gross estates.
(b) The mortgages were contracted bona fide
and for an adequate and full consideration
in money or money’s worth.
In case the loan of the decedent is only an
accommodation loan where the loan proceeds
went to another person, the value of the
unpaid loan must be included as a receivable
of the estate. If there is a legal impediment to
recognize the same as a receivable of the
estate, the said unpaid obligation shall not be
allowed as a deduction. In all instances, the
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TAXATION LAW
mortgaged property, to the extent of the
decedent’s interest therein, should always
form part of the taxable gross estate. (RR 2-
2003)
Unpaid Taxes
Requisites for Deductibility
(a) Taxes which have accrued as of or before
the death of the decedent (if it was
incurred after, it is chargeable to the
income of the estate), and
(b) Unpaid as of the time of his death,
regardless of whether or not it was
incurred in connection with trade or
business
Not included:
(a) Income tax upon income received after
death, or
(b) Property taxes not accrued before his
death, or
(c) The estate tax due from the transmission
of his estate
Casualty Losses
Requisites for Deductibility
(a) Incurred during the settlement of the
estate
(b) Arising from fires, storms, shipwreck, or
other casualties from robbery, theft, or
embezzlement
(c) Not compensated by insurance or
otherwise
(d) At the filing of the estate tax return, such
losses have not been claimed as a
deduction for income tax purposes in an
income tax return
(e) Incurred not later than the last day for the
payment of the estate tax as prescribed by
law.  6 MONTHS (or +30 days if an
extension is granted) after death.
Therefore, all casualty losses AFTER 6
months (or +30 days) are not deductible.
Casualty loss can be allowed as deduction in
one instance only, either for income tax
purposes or estate tax purposes. (Sec. 6(A)(5)),
Rev. Reg 2-2003)
NOTE: See Formula for computing Ordinary
Deductions of NRA above.
1.B. Property Previously Taxed [Sec. 86(A)(2)]
a.k.a. VANISHING DEDUCTIONS
UP COLLEGE OF LAW TAXATION 2
This is an amount allowed to reduce the
taxable estate of a decedent where property:
(1) Received by him from a prior decedent by
gift, bequest, device, or inheritance
(2) Transferred to him by gift, has been the
object of previous transfer transaction,
subject to transfer tax, either donor’s tax
or estate tax.
Conditions
(1) There must be 2 deceased persons and the
first one is the donor
(2) The second decedent dies within 5 years
after the death of a prior decedent, or in
case of gift, the decedent-donee dies
within the same period after the date of
the gift.
Requisites
(1) Death – The present decedent died within
5 years from the date of the prior decedent
OR date of gift.
(2) Identity of the property– The property with
respect to which deduction is sought can
be identified as the one who received from
prior decedent, or from the donor, or as
the property acquired in exchange for the
original property so received.
(3) Inclusion of the property – The property
must have formed part of the gross estate
situated in the Philippines of the prior
decedent, or have been included in the
total amount of the gifts of the donor
made within 5 years prior to the present
decedent’s death.
(4) Previous taxation of property – The estate
tax on the prior succession, or the donor’s
tax on the gift must have been finally
determined and paid by the prior decedent
or by the donor, as the case may be.
(5) No previous vanishing deduction on the
property – No such deduction on the
property, or the property given in
exchange therefor, was allowed in
determining the value of the net estate of
the prior decedent. This is intended to
preclude the application of the vanishing
deduction on the same property more
than once.
Limitations
(1) Value of property – The deduction is
limited by the value of property previously
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TAXATION LAW
taxed or the aggregate value of such
property if more than one item, as finally
determined for the purpose of the prior
estate tax (or gift tax) or the value of such
property in present decedent’s gross
estate, whichever is lower.
(2) Deduction for mortgage or lien – The initial
value (in number 1 above) shall be reduced
by the total amount paid, if any, by the
present decedent on any mortgage or
other lien on the property where a
deduction was allowed, by reason of the
payment, of such mortgage or other lien
from the gross estate of the prior decedent,
or gift or donor, in determining the estate
tax of the prior decedent or the donor’s tax.
(3) Deductions for expenses, etc. – The value
as reduced in #2 shall be further reduced
by an amount which bears the same ratio
to the amounts allowed as deductions for:
(a) Expenses, losses, indebtedness, and
taxes (ordinary deductions), and
(b) Transfers for public use as the amount
otherwise deductible for property
previously taxed bears to the value of
the decedent’s gross estate; and
(4) Percentage of deductions – The vanishing
deduction shall be the value (final basis) in
#3 multiplied by the ff. percentages:
VD
If received by inheritance or gift
Rate
100% Within 1 year prior to the death of
the present decedent
80% More than 1 year but not more than
2 years prior to the death of the
decedent
60% More than 2 years but not more
than 3 years
40% More than 3 years but not more
than 4 years prior to the death of
the decedent
20% More than 4 years but not more
than 5 years prior to the death of
the decedent
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FORMULA FOR VANISHING DEDUCTIONS:
(please take note of the limitations above)
Value Taken of Property
Less: Mortgage debt paid, if any
= Initial Basis
Less: Proportionate Deduction**
= Final Basis
Multiplied by Deduction Rate
VANISHING DEDUCTION
**Proportionate Deduction
Initial Basis
Value of GE of present decedent
x (ELIT+TPU)
Note: Amount of Vanishing Deductions is NOT
subtracted from the value of the CPG to
determine the share of surviving spouse. It is
deducted from the exclusive property of the
decedent.
1.C. Transfers for Public Purpose (Sec. 86(A)(3))
These are (i) dispositions in a last will and
testament or transfers to take effect after
death (ii) in favor of the Government of the
Republic of the Philippines, or any political
subdivision thereof, for exclusively public
purposes. The whole amount of all the
bequests, legacies, devises, or transfers to or
for the use of shall be deductible from gross
estate, (iii) provided such amount or value had
been included in the computation of the gross
estate. Thus, there is no limitation for the
amount to be deducted.
1.D. Amounts Received by Heirs Under RA 4917
(An Act Providing that Retirement Benefits of
Employees of Private Firms shall not be subject
to attachment, levy, execution or any tax
whatsoever) [Sec. 86(A)(7)]
Any amount received by the heirs from the
decedent’s employer as a consequence of the
death of the decedent-employee in
accordance with RA 4917, provided that such
amount is included in the gross estate of the
decedent. These include:
(1) Retirement benefits from private firms
with private benefit plan, if the retiring
employee is 50 years old or older. This can
only be availed once.
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TAXATION 2 TAXATION LAW
(2) Benefits granted in case of separation
beyond the control of the employee.
SPECIAL DEDUCTIONS
(A) Family Home (Sec. 86(A)(4))
It is the dwelling house, including the land on
which it is situated, where the husband and
wife, or a head of the family, and members of
their family reside, as certified to by the
Barangay Captain of the locality. It is deemed
constituted on the house and lot from the time
it is actually occupied as the family residence
and considered as such for as long as any of its
beneficiaries actually resides therein. (Arts.
152 and 153, Family Code)
Temporary absence from the constituted
family home due to travel or studies or work
abroad, etc. does not interrupt actual
occupancy. The family home is generally
characterized by permanency, that is, the
place to which, whenever absent for business
or pleasure, one still intends to return. (Sec.
6(D), RR 2-2003)
It must be part of the ACP or CPG, or the
exclusive properties of either spouse. It may
also be constituted by an unmarried head of a
family on his or her own property. (Sec. 6(D),
RR 2-2003 citing Art. 156, FC).
For purposes of availing this deduction, a
person may constitute only one family home.
Sec. 6(D), RR 2-2003 citing Art. 161, FC.
Requisites for Deductibility (Sec. 6(D)(b), RR 2-
2003)
(1) The family home must be the actual
residential home of the decedent and his
family at the time of his death, as certified
by the barangay captain of the locality.
(2) The total value of the family home must be
included as part of the gross estate of the
decedent
(3) Allowable deduction must be in an
amount equivalent to the current FMV of
the family home as declared or included in
the gross estate, or the extent of the
decedent’s interest (whether
conjugal/community or exclusive
property), whichever is lower, but in no
case shall the deduction exceed
P1,000,000.
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(4) The decedent was married or if single, was
a head of the family.
(5) Along with the decedent, any of the
beneficiaries must be dwelling in the
family home.
(6) The family home as well as the land on
which it stands must be owned by the
decedent. Therefore, the FMV of the family
home should have been included in the
computation of the decedent’s gross
estate.
nor (iii) any unpaid amount for medical
expenses incurred prior to the one-year period
from date of death be allowed to be deducted
from the gross estate under “Claims against
the estate”. (RR 2-2003, Sec. 6-F)
(D) Net Share of Surviving Spouse in CPG/ACP
(Sec. 86(C),; Sec. 6(H), RR 2-2003)
(Compare with Capital of Suriving Spouse
which is excluded from the gross estate).

Beneficiaries of a Family Home The amount deductible is the net share of the
(1) The husband and wife, or an unmarried surviving spouse in the CPG. The net share is
person who is the head of a family; and equivalent to ½ of 50% of the conjugal
(2) Their parents, ascendants, descendants, property after deducting the obligations
brothers and sisters, whether the chargeable to such property. Net share of the
relationship be legitimate or illegitimate, surviving spouse is neither an ordinary nor a
who are living in the family home and who special deduction.
depend upon the head of the family for
legal support. N.B. – There are three deductions with ceilings:
(1) Funeral expenses at P200,000; (2) Medical
Limitation: P1,000,000 expenses at P500,000, and (3) Family home at
1M.
(B) Standard Deduction (Sec. 86(A)(5), Sec.
6(E), RR 2-2003) L. EXCLUSIONS FROM ESTATE
An amount equivalent to one million pesos
(P1,000,000) shall be deducted from the Capital of the Surviving Spouse (Sec. 85(H))
gross estate without need of substantiation. Capital: property of the spouses brought into
marriage. Strictly speaking, capital under the
Civil Law refers to the property brought by the
(C) Medical Expenses (Sec. 86(A)(6); Sec. 6(F), husband to the marriage while that brought
RR 2-2003) into the marriage by the wife known is as
All medical expenses (cost of medicine, paraphernal property. (Domondon)
hospital bills, doctors’ fees, etc.) incurred
(whether paid or unpaid). Exclusive Property of Each Spouse
If ACP governs If CPG governs
Requisites for Deductibility property relations property relations
1. The expenses were incurred by the decedent
within 1 year prior to his death The community of The husband and wife
2. The expenses are duly substantiated with property shall consist place in a common
receipts and other documents in support of all the property fund the proceeds,
thereof owned by the spouses products, fruits, and
at the time of the income from their
Limitation Provided, that in no case shall the celebration of the separate properties
deductible medical expenses exceed Five marriage or acquired and those acquired by
Hundred Thousand Pesos (P500,000). thereafter. (Art. 91 either or both
Family Code) spouses through their
Not allowed as deduction: (i) Any amount of efforts or by chance,
medical expenses incurred within one year (1) The following are and, upon dissolution
from death in excess of P500,000 shall no excluded from of the marriage or of
longer be allowed as a deduction under this the community the partnership, the
subsection. Neither can (ii) any unpaid amount property: net gains or benefits
thereof in excess of the P500,000 threshold (a) Property obtained by either or
acquired by both spouses shall be
PAGE 135 OF 275
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gratuitous title divided equally partnership or by

by either between them, unless either or both
spouse, and the otherwise agreed in spouses. (Art. 118,
fruits as well as marriage Family Code)
the income settlements. (Art. (3) Whenever an
thereof, if any, 106, Family Code) amount or credit
unless it is payable within a
expressly (1) The following are period of time
provided by the exclusive property belongs to one of
donor, testator, of each spouse: the spouses, the
or grantor that (a) That which is sums collated
they shall form brought to the during the
part of the marriage as his marriage in
community or her own partial payments
property. (b) That which or by instalments
(b) Property for each acquires on the principal
personal and DURING the are considered
exclusive use of marriage by the exclusive
either spouse; gratuitous title property of the
however, (c) That which is spouse. However,
jewelry shall acquired by interest falling
form part of the right of due during the
community redemption, by marriage on the
property. barter or by principal belong
(c) Property exchange with to the conjugal
acquired before property partnership.
the marriage by belonging to (4) All property
either spouse only one of the acquired during
who has spouses the marriage
legitimate (d) That which is whether the
descendants purchased with acquisition
from a former exclusive appears to have
marriage, and money of the been made,
the fruits as wife or the contracted or
well as the husband (Art. registered in the
income, if any, 109, Family name of one or
of such Code) both spouses,, is
property. (Art. (2) Property bought presumed to
92 Family on instalments belong to the
Code) paid partly from conjugal
(2) Property acquired exclusive funds of partnership,
during the either or both unless it is proved
marriage is spouses and that it pertains
presumed to partly from exclusively to the
belong to the conjugal funds husband or to the
community, belong to the wife.
unless it is proved buyer or buyers if If separation of property governs property
that it is one of full ownership relations
those excluded was vested
therefrom. BEFORE the Separation of property may refer to present
marriage subject or future property or both. It may be total or
to reimbursement partial. In the latter case, the property not
advanced by the agreed upon as separate shall pertain to the
conjugal absolute community. (Art. 144, Family Code)

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M. TAX CREDIT FOR ESTATE TAXES

To each spouse shall belong all earnings
from his or her profession, business or
industry, and all fruits, natural, industrial, or
civil, due or received during the marriage
from his or her separate property. (Art. 145,
Family Code)
PAID IN A FOREIGN COUNTRY
It is a remedy against international double
taxation. To minimize the onerous effect of
taxing the same property twice, tax credit
against Philippine estate tax is allowed for
estate taxes paid to foreign countries.

Exemptions: Who may claim: RC/NRC/RA. Only the estate

(1) Where net estate does not exceed of a decedent who was a citizen or a resident
P200,000. (Sec. 84) of the Philippines at the time of his death can
(2) The following transmissions shall not be claim tax credit for any estate tax paid to a
taxed: foreign country.
(a) Merger of the usufruct in the owner
of the naked title General Rule
(b) Transmission or delivery of the The estate tax imposed by the NIRC shall be
inheritance or legacy by the fiduciary credited with the amounts of any estate tax
heir or legatee to the fideicomissary imposed by the authority of a foreign country.
(c) The transmission from the first heir,
legatee, or done in favor of another
beneficiary in accordance with the
desire of the predecessor
(d) All bequests, devises, legacies, or
transfers to social welfare, cultural
and charitable institutions, no part of
the net income of which inures to the
benefit of any individual, and
provided that not more than 30% of
the said bequests, etc shall be used
by such institution for administration
purposes.

Note: Effectivity of Family Code (Aug 3, 1988)

Exemptions under special laws
(1) Benefits received by members from the
GSIS and the SSS by reason of death
(2) Amounts received from the Philippines
and US governments for damages
suffered during the last war.
(3) Benefits received by beneficiaries residing
in the Philippines under laws
administered by the US Veteran
Administration
(4) Bequests, legacies, or donations mortis
causa to social welfare, cultural, or
charitable organizations. Bequests to be
used actually, directly and exclusively for
educational purposes are also exempt
from tax.
(5) Grants and donations to the Intramuros
Administration

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

DECEDENT ' S NET ESTATE (FOREIGN COUNTRY)

𝑇AX CREDIT LIMIT = ENTIRE NET ESTATE
X PHILIPPINE ESTATE TAX

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

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

DECEDENT ' S NET ESTATE (FOREIGN COUNTRY)

TAX CREDIT LIMIT = ENTIRE NET ESTATE
X PHILIPPINE ESTATE TAX

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

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

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

Illustration:

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

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

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

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

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Amount Allowed (whichever is lower)

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

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

Amount Allowed (Lower)

450/1500 x 15,000 4,500

Total foreign income taxes

6,400
paid
Tax credit allowed under Limitation A P 4,400

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

total net estate.
The extent of his liability, however, shall in no
case exceed the value of his share in the
inheritance.

Claims for taxes, whether assessed before or

after the death of the deceased, can be
collected from the heirs even after the
distribution of the properties of the decedent,
xxx. The heirs shall be liable therefor, in
proportion to their share in the inheritance.
Marcos v. CA (1997)

Tax deficiency after distribution of properties

(1) Sue all the heirs and collect from each of
them the amount of tax proportionate to
the inheritance received
(2) By virtue of a lien created under Sec 219,
sue only one heir and subject the property
he received from the estate to the
payment of estate tax. Such heir may go
against the other heirs.

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Tax Rates:
If the Net Estate is
Over But not Over The Tax Shall be Plus Of the Excess Over
P 200,000.00 Exempt
P 200,000.00 500,000.00 0 5% P 200,000.00
500,000.00 2,000,000.00 P 15,000.00 8% 500,000.00
2,000,000.00 5,000,000.00 135,000.00 11 % 2,000,000.00
5,000,000.00 10,000,000.00 465,000.00 15 % 5,000,000.00
10,000,000.00 1,215,000.00 20 % 10,000,000.00

Exempt: If net taxable estate ≤ 200,000

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UP COLLEGE OF LAW
II. Donor’s Tax
A. BASIC PRINCIPLES
The donor’s tax is imposed on donations inter
vivos or those made between living persons to
take effect during the lifetime of the donor. It
supplements the estate tax by preventing the
avoidance of the latter through the device of
donating the property during the lifetime of the
deceased.
It shall not apply unless and until there is a
completed gift. The transfer of property by gift is
perfected from the moment the donor knows of
the acceptance by the donee; it is completed by
delivery, either actually or constructively, of the
donated property, to the donee. Thus, the law in
force at the time of the perfection/completion of
the donation shall govern the imposition of the
donor’s tax. (Sec. 11, RR 2-2003)
B. DEFINITION
A donor’s tax is levied, assessed, collected and
paid upon the transfer by any person, resident or
nonresident, of the property by gift. (Sec. 98(A),
NIRC). It shall apply whether the transfer is in
trust or otherwise, whether the gift is direct or
indirect, and whether the property is real or
personal, tangible or intangible. [Sec. 98(B),
NIRC]
It is the tax on donations. Thus, it is a tax on (i) an
act of the donor disposing gratuitously of a
thing/right in favour of a done located within the
Philippines, and on (ii) sales/exchanges of
properties, other than real property (defined in
Sec 24D) classified as capital asset within the
Philippines, for less than adequate and full
consideration in money or money’s worth.
C. NATURE
Donor’s tax is not a property tax but a tax
imposed on the transfer of property by way of gift
inter vivos. [Sec 11, RR 2-2003 citing Lladoc v. CIR
(1965)]
D. PURPOSE OR OBJECT
3 Note: The transfers which may be constituted as
donation is exempt from the donative intent requirement.
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TAXATION 2 TAXATION LAW
(1)
(2)
To supplement estate tax;
To prevent avoidance of income tax through
the device of splitting income among
numerous donees, who are usually members
of a family or into many trusts, with the donor
thereby escaping the effect of the progressive
rates of income tax.
If donor is:
RC/NRC/RA = liable for donor’s tax
REGARDLESS of where the gift was made or
where property is located
NRA = liable for donor’s tax only if the property
donated is within the Philippines.
E. REQUISITES OF VALID DONATION
(Art 725, NCC)
Requisites of a VALID and COMPLETE donation
(1) Donative intent of the donor3
(2) Capacity of the donor
(3) Delivery of the donated property
(4) Acceptance of the donee
(5) Donation must be in the proper form
(a) Movable: orally or in writing if value is
equal to or less than P5,000. Otherwise,
it shall be in writing.
(b) Immovable: must be made in a public
document.
Re: acceptance (Sec. 11, RR 2-2003)
(1) For movables exceeding 5K – Acceptance
shall be in writing (Art. 748, Civil Code)
(2) For immovable (Art. 749, Civil Code) –
(a) Must be in the same deed of donation; or
(b) In a separate public document – the
donor shall be notified thereof in an
authentic form, and this step shall be
noted in both instruments
(c) But it shall not take effect unless it is
done during the lifetime of the donor.
A gift that is incomplete because of reserved
powers becomes complete when either:
(a) the donor renounces the power OR
(b) his right to exercise the reserved power
ceases because of the happening of some
event or contingency or the fulfillment of
some condition, other than because of
the donor’s death. [Sec. 11, RR 2-2003]
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F. TRANSFERS WHICH MAY BE
CONSTITUTED AS DONATION
(1) Sale, exchange or transfer of property for
insufficient consideration
(2) Condonation or remission of debt where the
debtor did not render service in favor of the
creditor
Condonation or remission of debt is defined
as an act of liberality, by virtue of which,
without receiving any equivalent, the creditor
renounces the enforcement of the obligation,
which is extinguished in its entirety or in that
part or aspect of the same to which the
remission refers. It is an essential
characteristic of remission that it be
gratuitous, that there is no equivalent
received for the benefit given; once such
equivalent exists, the nature of the act
changes. It may become dation in payment
when the creditor receives a thing different
from that stipulated; or novation, when the
object or principal conditions of the
obligation should be changed; or
compromise, when the matter renounced is
in litigation or dispute and in exchange of
some concession which the creditor receives.
(Dizon v CTA, 2008)
(3) Renunciation in favor of other heirs (Sec 11,
RR 2-2003)
(a) Renunciation by the surviving spouse of
their share in the ACP/CPG after the
dissolution of the marriage in favor of
heirs of the deceased spouse or any other
person/s
(b) Renunciation by an heir, specifically and
categorically in favor of identified heir/s
to the exclusion or disadvantage of the
other co-heirs in the hereditary estate
However, general renunciation by an heir,
including the surviving spouse, of their
share in the hereditary estate left by the
decedent is NOT subject to DT
(4) Sale of shares not listed and traded in a local
stock exchange below FMV. Sec. 7.c.1.4, RR 6-
2008 provides: “In case the fair market value of
the shares of stock sold, bartered, or exchanged
is greater than the amount of money and/or fair
market value of the property received, the excess
of the fair market value of the shares of stock sold,
bartered or exchanged over the amount of money
PAGE 145 OF 275
TAXATION LAW
and the fair market value of the property, if any,
received as consideration shall be deemed a gift
subject to the donor’s tax under Sec. 100 of the
Tax Code, as amended.”
G. TRANSFER FOR LESS THAN ADEQUATE
AND FULL CONSIDERATION
In order for the rule to apply, there must be 1) a
transfer of property, other than real property
classified as a capital asset and subject to capital
gains tax under Sec. 24 (D) and 2) the transfer
was for less than an adequate and full
consideration in money or money’s worth.
In this case, the amount by which the fair market
value of the property exceed the value of the
consideration shall be considered a gift.
H. CLASSIFICATION OF DONOR
Donor’s Tax applies to individuals and
corporations (in their secondary purpose). They
may be classified into:
(a) Residents (RC/RA/DC/RFC)
(b) Non-Residents (NRC/NRA/NRFC)
Such classification is important in determining
the deductions from the gross gift of the donor,
and in filing the return.
Situs of Intangible Personal Properties
General Rule: Mobilia Sequuntur Personam
Principle: Taxation of intangible personal
properties (such as credits, bills, bank deposits
promissory notes, and corporate stocks) follows
the residence/domicile of owner thereof. Situs is
the domicile or residence of the owner. (Collector
v Fisher)
Exceptions:
(1) When it is inconsistent with express
provisions of law
(2) When justice does not demand that it should
be, as where the property in fact has a situs
elsewhere
Rule of Reciprocity
Same as in Estate Tax. See discussion above.
UP COLLEGE OF LAW TAXATION 2 TAXATION LAW

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

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

Note: If there is reciprocity, intangible assets are

excluded from gross gifts

Deductions and Exemptions from GROSS gift to arrive at NET Gifts

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

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

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

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

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

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

PAGE 146 OF 275

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NOT SUBJECT TO DONOR’S TAX
(1) Contributions to candidate or political party
for campaign purposes duly reported to
COMELEC
(2) Gift to Parish Priest or Church (applies only to
real property tax)
(3) Onerous Donations or Donations in exchange
for goods/services (since they are subject to
income tax)
SUBJECT TO DONOR’S TAX
Gratuitous Donations to Homeowners’
Association
J. VALUATION OF GIFTS MADE IN
PROPERTY
Taxable Base:
Net gifts i.e., net economic benefit from the
transfer that accrues to the donee AT THE TIME
OF DONATION
(1) If gift is personal property = FMV at the time
of donation
(2) If gift is real property = whichever is HIGHER
(a) FMV as determined by the CIR (Zonal
Value) or
(b) FMV in the latest schedule of values fixed
by the provincial and city assessor (MV
per Tax Declaration)
NOTE: Real property considered as capital assets
under the Tax Code are exempted from this rule
because the taxable value taken into account in
the computation of tax is the higher of either the
zonal value or the assessor’s value; not the
consideration. Therefore, the insufficiency and
inadequacy of the consideration paid would not
affect the computation of the tax due and
payable [Sec. 100 in relation to Sec. 24(d), NIRC]
Under Section 24(d), the fair market value itself,
if higher than the gross selling price, is the basis
for computing the capital gains tax imposed
upon the sale of such capital assets.
(3) If there is an improvement = construction cost
(based on the building permit and/or
occupancy permit) + 10% per year after the
year of construction; or the FMV based on the
latest tax declaration.
(4) If unlisted stocks = Adjusted Net Asset
Method shall be used whereby all assets and
liabilities are adjusted to fair market values.
The net of adjusted asset minus the adjusted
PAGE 147 OF 275
TAXATION LAW
liability value is the indicated value of the
equity.
Note:
Where property is transferred for less than an
adequate and full consideration in money or
money’s worth, then the amount by which the
FMV 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.
[Sec. 11, RR 2-2003]
N.B. – Applies also to sale, barter, or exchange of
shares of stock not listed and traded in a local
stock exchange at prices below the FMV. (Sec. 7,
RR 6-2008)
However, where the consideration is fictitious, the
entire value of the property shall be subject to
donor’s tax.
Donation to a Political Candidate
Prior to RA 7166, a donation for a political
candidate was subject to donor’s tax. (ACCRA v
CIR)
Under RA 7166, contributions duly reported to the
BIR are not subject to donor’s tax, as long as it is
utilized in his campaign.
Unutilized/excess campaign funds, that is,
campaign contributions net of the candidate’s
campaign exepnditures, shall be considered as
subject to income tax and as such, must be
included in the candidate’s taxable income as
stated in his/her ITR filed for the subject taxable
year (Sec. 2, RR 7-2011)
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K. TAX CREDIT FOR DONOR’S TAXES PAID IN A FOREIGN COUNTRY

Who may claim the tax credit

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

1. Per Country Limit

Net Gift (Foreign Country)

x Philippine Donor's Tax
Entire Net Gift

2. Worldwide Limit

Net Gift (All Countries)

x Philippine Donor's Tax
Entire Net Gift

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

property the amount of the mortgage
assumed. (Sec. 11, RR 2-2003)

General Formula
Gross Gifts
Less: Deductions from gross gifts
-----------------------------------------------------
Net gifts
Multiply by: Tax rate
-----------------------------------------------------
= Estate Tax Due
Less: Tax Credit, if any
-----------------------------------------------------
= Donor’s Tax Due, if any

If there are several gifts during the year

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

PAGE 150 OF 275

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Tax Rate
(1) IF NOT A STRANGER

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

(2) IF A STRANGER: 30%

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

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

SUMMARY OF TRANSFER TAXES

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

NB: when extension is granted, a bond may be

required by CIR ≤ 2x amount of tax
Where to file and to whom paid
General Rule: to the Authorized Agent Bank Resident
(AAB), Revenue Collection Officer (RCO) or duly GR: to AAB of the RDO having jurisdiction over the
authorized Treasurer of the city or municipality in place of the domicile of the donor at the time of the
the Revenue District Office having jurisdiction over transfer.
the place of domicile of the decedent at the time
of his death
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UP COLLEGE OF LAW TAXATION 2 TAXATION LAW

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

Non-resident
(1) The Philippine Embassy or Consulate in the
country where he is domiciled at the time of the
transfer, or
(2) Directly with the Office of the Commissioner.
Who should file
(1) The Eor/Aor or any of the legal heirs of the Any person, natural or juridical, resident or non-
decedent, whether resident or non-resident of resident, who transfers or causes to transfer
the Philippines, under any of the following property by gift, whether in trust or otherwise,
situations: whether the gift is direct or indirect and whether the
(a) In all cases of transfers subject to estate property is real or personal, tangible or intangible.
tax;
(b) Where though exempt from estate tax, the
gross value of the estate exceeds two
hundred thousand (P200,000) pesos; or
(c) Regardless of the gross value of the
estate, where the said estate consists of
registered or registrable property such as
real property, motor vehicle, shares of
stock or other similar property for which a
clearance from the BIR is required as a
condition precedent for the transfer of
ownership therof in the name of the
transferee; or
(2) If there is no executor or administrator
appointed, qualified, and acting within the
Philippines, then any person in actual or
constructive possession of any property of the
decedent.
NB: Eor/Aor has the primary obligation to pay the
estate tax but the heir or beneficiary has subsidiary
liability for the payment of that portion of the
estate which his distributive share bears to the
value of the total net estate. The extent of his
liability, however, shall in no case exceed the value
of his share in the inheritance.

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UP COLLEGE OF LAW TAXATION 2 TAXATION LAW

ESTATE TAX

EXCLUSIVE COMMUNITY TOTAL

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

**Proportionate Deduction
Initial Basis
=
Value of GE of present decedent
x (ELIT+TPU)

Less: (Ordinary Deductions)

7 ELIT9
Vanishing Deductions
Transfers for Public Use
Retirement Benefits received by heirs

4 DO NOT INCLUDE: Exemptions

5 Amount included in the GE = FMV at the time of death – consideration amount
6 Accrued before his death but only received after his death, e.g., dividends declared on/before, and received after death;

partnership’s profit earned on/before and received after, accrued interest and rents on/before and collected after death
7
Beneficiary must be the estate of the decedent, E/Aor or a third person. If premiums are paid using conjugal funds, part
of conjugal funds.
8 Full amount of the receivable. However, the uncollectible amount may be deducted from GE under ELIT.
Philippine Gross Estate
9 If NRA, Allowable Deduction wrt ELIT =
World Gross Estate
x ELIT
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UP COLLEGE OF LAW TAXATION 2 TAXATION LAW

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

Net EState in the Foreign Country

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

OR actual estate tax paid to foreign country

10 These are not allowable deductions when TP is NRA.

11 Applies only to RC/NRC/RA
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UP COLLEGE OF LAW TAXATION 2 TAXATION LAW

DONOR’S TAX

ON FIRST DONATION

Gross Gift xxx

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

Net Gift xxx

Less: Exemptions, if applicable xxx

Net Taxable Gift xxx

Multiply by Tax Rate xx%

Donor’s Tax Due xxx

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

ON SUBSEQUENT DONATIONS w/in the same calendar year

Gross Gift xxx

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

Net Gift xxx

Less: Exemptions, if applicable xxx

Net Taxable Gift xxx

Add: All previous net gifts during the year xxx
Aggregate Net Gifts xxx
Multiply by Tax Rate xx%
If only 1 country is involved: (whichever is lower)
Donor’s Tax on Aggregate Net Gifts xxx
Less: Donor’s tax on previous net gifts during the year xxx Net Donations outside Phil
Tax Credit =
Net Dontations w/in and w/o
x Philippine Donor ' s Tax
Donor’s Tax Due xxx
If two or more countries are involved: (whichever is lower)
Less: Tax Credit13, if any xxx
DONOR’S TAX DUE xxx Tax Credit =
Net Donation per Foreign Country
Net Dontations w/in and w/o
x Philippine Donor's Tax

OR
Net Donation w/o
Net Dontations w/in and w/o
x Philippine Donor ' s Tax

OR actual donor’s tax paid to foreign country

12 Applies only to RC/NRC/RA

13 Applies only to RC/NRC/RA
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 UP COLLEGE OF LAW TAXATION 2 TAXATION LAW

ESTATE TAX

DEATH GR: w/in 6m after death

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

DONOR’S TAX

Full Exemption NO TAX RETURN

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

PAGE 156 OF 275

UP COLLEGE OF LAW TAXATION 2
III. Value-Added Tax
(VAT)
A. CONCEPT
VAT is a consumption tax imposed at every
stage of distribution process on (i) the sale,
barter, exchange, or lease of goods or
properties and (ii) rendition of services in the
course of trade or business, or the (iii)
importation of goods, whether such imported
goods are for use in business or non-business
purposes. (Sec. 4.105-2, RR 16-2005)
The taxpayer (seller) determines his tax
liability by computing the tax on the gross
selling price or gross receipt (output tax), and
subtracting or crediting the earlier VAT on the
purchase or importation of goods or on the
purchase of service (input tax) against the tax
due on his own sale
B. CONSTITUTIONALITY OF VAT
ABAKADA Guro Party List, et. al. v. Ermita
(2005):
(a) The validity of raising the VAT rate from
10% to 12% by the President was upheld
by SC.
(b) With respect to Sec. 8, amending Sec. 110
(A), which provides for 60-month
amortization of the input tax on capital
goods purchased: It is not oppressive,
arbitrary, and confiscatory. The taxpayer is
not permanently deprived of his privilege
to credit the input tax. For whatever is the
purpose, it involves executive economic
policy and legislative wisdom in which the
Court cannot intervene.
(c) The tax law is uniform: it provides a
standard rate of 0% or 10% (or 12% now)
on all goods or services. The law does not
make any distinction as to the type of
industry or trade that will bear the 70%
limitation on the creditable input tax, 5-
year amortization of input tax on purchase
of capital goods, or the 5% final
withholding tax by the government.
(d) It is equitable: The law is equipped with a
threshold margin (P1.5M). Also, basic
marine and agricultural products in their
original state are still not subject to tax.
Congress also provided for mitigating
PAGE 157 OF 275
TAXATION LAW
measures to cushion the impact of the
imposition of the tax on those previously
exempt. Excise taxes on petroleum
products and natural gas were reduced.
Percentage tax on domestic carriers was
removed. Power producers are now
exempt from paying franchise tax.
(e) VAT, by its very nature, is regressive. BUT
the Constitution does not really prohibit
the imposition of indirect taxes (which is
essentially regressive).
(f) What it simply provides is that Congress
shall “evolve a progressive system of
taxation”.
Tolentino v. Secretary of Finance (1995):
(a) Regressivity is not a negative standard for
courts to enforce. What Congress is
required by the Constitution to do is to
“evolve a progressive system of taxation.”
This provision is placed in the
Constitution as moral incentives to
legislation, not as judicially enforceable
rights.
(b) Direct taxes are to be preferred, and as
much as possible, indirect taxes should
be minimized but not avoided entirely
because it is difficult, if not impossible, to
avoid them.
(c) The regressive effects are corrected by
the zero rating of certain transactions and
through the exemptions.
C. CHARACTERISTICS/ELEMENTS OF A
VAT-TAXABLE TRANSACTION
General Characteristics/Nature:
(1) Privilege/Percentage Tax – imposed by
law directly not on the thing or service but
on the ACT (sale, barter, exchange, lease,
importation, or performance of service)
(2) Ad Valorem Tax – the amount is based on
the gross selling price or gross value in
money of the goods or service, including
the use or lease or properties.
(3) Indirect Tax – The seller is the one
statutorily liable for the payment of the tax
but the amount of the tax may be shifted
or passed on to the buyer, transferee or
lessee of the goods, properties or services.
(4) Excise Tax - a tax on the privilege of
engaging in the business of selling goods
or services, or in the importation of goods
UP COLLEGE OF LAW TAXATION 2
Nature – VAT is a tax on consumption levied
on the sale, barter, exchange or lease of goods
or properties and services in the Philippines
and on importation of goods into the
Philippines.
This rule shall likewise apply to existing
contracts of sale or lease of goods, properties
or services at the time of the effectivity of RA
No. 9337. However, in the case of importation,
the importer is the one liable for the VAT. (Sec.
4.105.2, RR 16-2005)
General Features:
(1) VAT uses the Tax Credit Method
(2) All goods, properties and services (except
exempt transactions) including goods
subject to excise taxes, and use or lease of
properties, whether real or 158ersonal, are
subject to tax at all levels of distribution.
(3) Although tax is levied at all stages, the
cumulative effect is that the final value of
the goods sold to the ultimate consumers
is taxed only once.
(4) VAT, as a general rule, follow the
destination principle (goods and services
are taxed only in the country where they
are consumed). Therefore, no VAT shall be
imposed to form part of the cost of goods
destined for consumption outside the
territorial border of the taxing authority.
Elements of a VAT-taxable transaction in
general
1. There must be a sale, barter, exchange, or
lease in the Philippines
2. The subject matter must be taxable
goods or properties or services
GR: The sale must be made by a taxable
person in the course of trade or business
or in the furtherance of their profession.
Exception: In the case of importation of
goods, the transaction is taxable whether
or not done in the course of business.
Meaning of “in the course of trade or business”
Means the regular conduct of pursuit of a
commercial or an economic activity, including
transactions incidental thereto, by any person
regardless of whether or not the person
engaged therein is a nonstock, nonprofit
private organization (irrespective of the
disposition of its net income and whether or
PAGE 158 OF 275
TAXATION LAW
not it sells exclusively to members or their
guests), or government entity.
N.B. – Services rendered by non-resident
foreign persons shall be considered as being
rendered in the course of trade or business,
even if the performance of services is not
regular (Section 4.105-3, RR No. 16-2005)
D. IMPACT OF TAX V. INCIDENT OF TAX
Impact Incidence
The statutory One who bears the
taxpayer, the one burden of taxation
from whom the
government
collects.
Seller/Importer – Buyer/Final
Seller/Importer is Consumer – the
the one who collects buyer is the one who
the tax and pays to bears the burden of
the government the taxation.
E. TAX CREDIT METHOD
A taxpayer’s tax payable is the excess of
output tax over input tax:
OUTPUT VAT – INPUT VAT = VAT PAYABLE
Under the VAT method of taxation, which is
invoice-based, an entity can subtract from the
VAT charged on its sales or outputs the VAT it
paid on its purchases, inputs and imports. [CIR
v. Seagate (2005)].
Input tax – the VAT due on or paid by a VAT-
registered person on importation of goods or
local purchases of goods, properties, or
services, including lease or use of properties,
in the course of his trade or business.
(1) It includes the transitional input tax and
the presumptive input tax as determined
in accordance with Section 111 of the Code.
(2) It includes input taxes which can be
directly attributed to transactions subject
to the VAT plus a ratable portion of any
input tax which cannot be directly
attributed to either the taxable or exempt
activity.
(3) Input tax must be evidenced by a VAT
invoice or official receipt issued by a VAT-
registered person in accordance with Secs.
113 and 237 of the Code. [RR 16-2005]
UP COLLEGE OF LAW TAXATION 2
Output tax – the VAT due on the sale or lease
of taxable goods or properties or services by
any person registered or required to register
under Section 236 of the Code.
If at the end of any taxable month or quarter:
(a) The output tax exceeds the input tax, the
excess shall be paid by the VAT-registered
person
(b) The input tax exceeds the output tax, the
excess shall be carried over to the
succeeding quarter or quarters [Sec.
110(B), NIRC]
F. DESTINATION PRINCIPLE
As a general rule, the VAT system uses the
destination principle as a basis for the
jurisdictional reach of the tax. Goods and
services are taxed only in the country where
they are consumed. Thus, exports are zero-
rated, while imports are taxed. [CIR v.
American Express International (2005)]
N.B. – Cross Border Doctrine mandates that no
VAT shall be imposed to form part of the cost
of the goods destined for consumption outside
the territorial border of the taxing authority.
Atlas Consolidated Mining & Dev. Corp. v. CIR
(2007): Actual export of goods and services
from the Philippines to a foreign country must
be free of VAT, while those destined for use or
consumption within the Philippines shall be
imposed with 12% VAT. [Deoferio Jr. and
Mamalateo, p. 422]
Exception to destination principle – Sec.
108(b)(2)14
Sec. 108(b)(2), which subjects certain services
rendered in the Philippines to a zero-rated
VAT, is an exception under the destination
principle. The Court in CIR v. AMEX (2005)
enumerated the requisites to fall under that
provision.
1. The service is performed in the
Philippines;
14 Services other than those mentioned in the
preceding paragraph rendered to a person engaged
in business conducted outside the Philippines or a
nonresident person not engaged in business who is
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TAXATION LAW
2. the service falls under any of the
categories provided in Section 102(b)
of the Tax Code; and
3. it is paid for in acceptable foreign
currency that is accounted for in
accordance with the regulations of the
BSP.
In that case, the Court held that a ruling
providing that the service must be “destined
for consumption outside of the Philippines” in
order to qualify for zero rating contravenes
both the law and the regulations issued
pursuant to it. The Court held that such ruling
was ultra vires and therefore void.
The law neither makes a qualification nor adds
a condition in determining the tax situs of a
zero-rated service. Under this criterion, the
place where the service is rendered determines
the jurisdiction to impose the VAT. Performed
in the Philippines, such service is necessarily
subject to its jurisdiction, for the State
necessarily has to have “a substantial
connection” to it, in order to enforce a zero
rate. The place of payment is immaterial; much
less is the place where the output of the service
will be further or ultimately used. [CIR v.
American Express International (2005)]
G. PERSONS LIABLE
Transactions subject to VAT:
1. Sale, Barter or Exchange of Goods or
Properties
2. Sale of Services, including Lease or use of
Properties
3. Importation of Goods.
Persons Liable:
1. Any person who sells, barters, exchanges,
or leases goods or properties, or who
renders services, in the course of trade or
business
a. Exception – A non-VAT-
registered person whose annual
gross sales or receipts does not
exceed P1,919,500.
2. Any person who imports goods, whether
or not in the course of business
outside the Philippines when the services were
performed, the consideration for which is paid for in
acceptable foreign currency and accounted for in
accordance with the rules and regulations of the BSP.
UP COLLEGE OF LAW TAXATION 2 TAXATION LAW

The term “person” refers to any individual, (i) Actual/deemed sale for a valuable
trust, estate, partnership, corporation, joint consideration
venture, cooperative or association (Sec. (ii) For use or consumption in the Phil
4.105-1, RR 16-2005). (regardless of the payment arrangements)
(iii) Not exempt from VAT (NIRC, special law,
General Rule: VAT and Percentage Tax cannot special agreement)
be charged together. It’s either the transaction
is under VAT or Other Percentage Tax. Special rules
Sale of Real Properties (RP)
Exception: When one erroneously declares Casual Sale Subject to CGT (6%)
himself to VAT registered. (Capital
Assets)
H. VAT ON SALE OF GOODS OR Regular Sales
PROPERTIES (Ordinary
Assets)
Sale of goods or properties in general Commercial Subject to 12% VAT
Rate: 12% VAT beginning 1 February 2006 Property
[RMC No. 7-06] (Sale/Lease)
Transactions: Residential If monthly rental ≤ 12,800
1. Every sale, barter or exchange (actual Units = VAT and OPT-exempt
sale) (Lease) If monthly rental > 12,800
2. Transactions “deemed sale” of taxable but aggregate annual
goods or properties (RR 16-2005) (See rentals ≤1,919,500 =
also Sec. J, infra) subject to OPT
Basis: Gross selling price or gross value in If monthly rental > 12,800
money of the goods or properties sold, and aggregate annual
bartered or exchanged. rentals > 1,919,500 =
Who Pays: Paid by SELLER/TRANSFEROR. subject to VAT
(Sec. 106, NIRC); N.B. – the end-user is the one Residential If SP > 1,919,500.00 =
who is actually burdened with the tax since the Lot subject to VAT
tax is passed on to him. IF SP ≤ 1,919,500.00 =
VAT-exempt
Residential If SP > 3,199,200.00 =
Meaning of goods or properties House and subject to VAT
Goods or properties – all tangible and Lot IF SP ≤ 3,199,200.00 =
intangible objects which are capable of VAT-exempt
pecuniary estimation, including:
(1) Real properties held primarily for sale to Sales of real properties subject to VAT – Sale of
customers or held for lease in the ordinary real properties held primarily for sale to
course of trade or business; customers or held for lease in the ordinary
(2) The right or the privilege to use patent, course of trade or business of the seller shall
copyright, design, or model, plan, secret be subject to VAT. (Sec. 4.106-3, RR 16-2005)
formula or process, goodwill, trademark,
trade brand or other like property or right;
(3) The right or the privilege to use in the Types of sales of real estate; Effects
Philippines of any industrial, commercial 1. Cash sale – entire selling price taxable in
or scientific equipment; the month of the sale.
(4) The right or the privilege to use motion 2. Installment sales
picture films, films tapes and discs; a. Meaning of installment sale –
(5) Radio, television, satellite transmission initial payments of which in the
and cable television time. year of sale ≤ 25% GSP
b. Effect – the real estate dealer
Goods/Personal Properties shall be subject to VAT on the
installment payments, including
PAGE 160 OF 275
UP COLLEGE OF LAW TAXATION 2
interest and penalties, actually
and/or constructively received by
the seller.
3. Deferred sales
a. Meaning – initial payments
exceed 25% of the GSP
b. Effect – Treated as a cash sale
which makes the entire selling
price taxable in month of sale
4. Tax free exchanges under Sec. 40[C][2]
are not subject to VAT.
Reference: Sec. 4.106-3, RR 16-2005
Meaning of GSP – total amount of money or its
equivalent which the purchaser pays or is
obligated to pay to the seller in consideration
of the sale, barter or exchange of the goods or
properties, excluding VAT. The excise tax, if
any, on such goods or properties shall form
part of the gross selling price.
In the case of sale, barter or exchange of real
property subject to VAT, GSP shall mean:
1. The consideration stated in the sales
document or
2. The fair market value (FMV) whichever is
higher.
Meaning of FMV – Whichever is higher of the
following:
1. The fair market value as determined by the
CIR (zonal value) or
2. The fair market value as shown in
schedule of values of the Provincial and
City Assessors (real property tax
declaration).
General Rule: GSP is the total amount of
money paid in consideration of sale, barter,
exchange, or lease.
Excludes: VAT, sales discounts and,
allowances and returns (See Section on
Allowable Discounts)
Includes: Excise tax paid, initial payments 15 ,
interests and penalties (if instalment),
commission income (if exported), purchase
15
Initial payments does not include the amount of
mortgage on RP sold (except excess when mortgage
exceeds the cost of the property), notes and other
evidence on=f indebtedness issued by the purchaser
at the time of the sale
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TAXATION LAW
price, charges for packing, delivery and
insurance
If goods/personal properties,
GSP = amount paid in consideration
IF DEEMED SALE: FMV at the time of the
transaction
NB: in retirement/cessation, inventory (raw
materials, finished goods, machinery,
equipment, furniture, fixture), tax base =
whichever is lower,
i. acquisition cost
ii. current market price of goods
N.B.: CIR has the power to determine the
appropriate tax base in 1) SBE in deemed sales
and 2) when GSP is unreasonably lower than
AMV16
Not taxable: [Sec. 109 (P)(Q)]
(1) Not primarily held for sale or lease in the
course of trade or business
(2) Low cost or socialized housing
(3) Residential lot when value does not
exceed P1,919,500
(4) House and lot/other residential dwelling <
P3,199,200
(5) Lease (rental per unit < 12,800/month
and total rental from all units <
P1,919,500/ year)
(6) Transmission to a trustee (Except:
transmission is deemed sale transaction)
General Rule: Transmission of property
to a trustee shall NOT be subject to VAT if
the property is to be merely held in trust
for the trustor and/or beneficiary.
Exception: However, if the property
transferred is originally intended for sale,
lease or use in the ordinary course of trade
or business AND the transfer constitutes a
completed gift, the transfer is subject to
VAT as a deemed sale transaction. The
transfer is a completed gift if the
transferor divests himself absolutely of
control over the property, i.e., irrevocable
transfer of corpus and/or irrevocable
designation of beneficiary.
16
GSP is unreasonably lower than the actual market
value if it is lower than 30% of AMV of the same
goods of the same quantity or quality sold in the
immediate locality or the nearest date of sale.
UP COLLEGE OF LAW TAXATION 2
(7) Transfer to corporation in exchange of
shares of stocks (see Sec. 40, NIRC for
Tax-free exchange)
(8) Advance payment by the lessee
(9) Security deposits for lease agreements.17
Allowable Deductions from GSP
The following are deductible from the gross
selling price:
(1) Sales returns and allowances – the selling
price of the goods or properties returned
and not sold necessarily reduces the gross
sales on which the rate is applied.
(a) Sales returns and allowances for
which a proper credit/refund was
made during the month or quarter to
the buyer for sales previously recorded
as table sales are allowed as a
deduction in the period when they are
made. Excess may be carried over to
the succeeding period.
(b) The value of goods or properties sold
and subsequently returned or for
which allowances were granted by a
VAT-registered person may be
deducted from the gross sales or
receipts for the quarter in which a
refund is made or a credit
memorandum is issued.
(2) Sales Discounts – bona fide or regular
discounts given to purchasers, which are
ascertainable and definitely agreed upon
between the vendor and the vendee at the
time of sale are deductible from the GSP.
(a) If given after the sale or are in the
nature of a rebate or partial remission
of indebtedness, they will not be
allowed as a deduction from the GSP.
(b) Furthermore the discount must be
expressly indicated in the sales invoice
and the amount forming part of the
gross sales duly recorded in the books
of accounts.
(c) Credits for allowances to cover roll
back in prices and other adjustments
are not deductible.
I. ZERO-RATED SALES OF GOODS OR
PROPERTIES, AND EFFECTIVELY ZERO-
17 Please take note of the difference between
security deposits and those applied to rent.
PAGE 162 OF 275
TAXATION LAW
RATED SALES OF GOODS OR
PROPERTIES
Rate: 0% Output VAT; 12% Input VAT
Transactions: Every sale, barter or exchange,
or transactions “deemed sale” of taxable
goods or properties (RR 16-2005)
Concept – A zero-rated sale of goods or
properties by a VAT-registered person is a
taxable transaction for VAT purposes, but
shall not result in any output tax. However, the
input tax on purchases of goods, properties or
services, related to such zero-rated sale, shall
be available as tax credit or refund.
Transaction is subject to VAT but at 0%
instead of 12%.
(1) Export Sales
(2) Foreign Currency Denominated Sales
(3) Sales of Goods or Property to persons or
entities who are tax-exempt/Effectively
Zero-Rated Sales
Export Sales [Sec. 106(A)(2)(a), NIRC]
(1) The (i) sale and actual shipment of goods
from the Philippines to a foreign country
AND (ii) paid for in acceptable foreign
currency or its equivalent in goods or
services, AND (iii) accounted for in
accordance with the rules and regulations
of the BSP
(2) (i) Sale of raw materials or packaging
materials to a nonresident buyer (ii) for
delivery to a resident local export-oriented
enterprise (iii) to be used in manufacturing,
processing, packing or repacking in the
Philippines of the said buyer's goods AND
(iv) paid for in acceptable foreign currency
AND (v) accounted for in accordance with
the rules and regulations of the BSP.
(3) (i) Sale of raw materials or packaging
materials (ii) to export-oriented enterprise
(iii) whose export sales exceed seventy
percent (70%) of total annual production.
(a) Any enterprise whose export sales
exceed 70% of the total annual
production of the preceding taxable
year shall be considered an export-
oriented enterprise upon
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accreditation under the rules &
regulations of Export Development
Act, RA 7844 (RR 7-95)
(4) Sale of gold to the Bangko Sentral ng
Pilipinas (BSP)
(5) The sale of goods, supplies, equipment
and fuel to persons engaged in
international shipping or international air
transport operations (RA 9337)
(a) Limited to goods, supplies, equipment
and fuel pertaining to or attributable
to the transport of goods and
passengers from a port in the Phil.
directly to a foreign port without
docking or stopping at any other port
in the Phil.
(b) If any portion of such fuel, goods, or
supplies is used for purposes other
than that mentioned, such portion of
fuel, goods, and supplies shall be
subject to 12% VAT. (RR 16-2005)
(6) Those considered export sales under the
Omnibus Investment Code of 1987, and
other special laws (ex. Bases Conversion &
Development Act of 1992)
Under Omnibus Investment Code (EO 226):
Considered Export Sales
(1) Phil. port FOB value of export products
exported directly by a registered export
producer; OR
(2) Net selling price of export products sold
by a registered export producer to
another export producer, or to an export
trader that subsequently exports the
same (only when actually exported by the
latter) evidenced by landing certificates.
Constructive Exports (without actual
exportation):
(1) Sales to bonded manufacturing
warehouses of export-oriented
manufacturers;
(2) Sales to export processing zones (RA
7916);
(3) Sales to registered export traders
operating bonded trading warehouses
supplying raw materials in the
manufacture of export products (RA
7227)
(4) Sales to diplomatic missions and other
agencies and/or instrumentalities
granted tax immunities, of locally
manufactured, assembled or repacked
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TAXATION LAW
products, whether paid for in foreign
currency or not.
(5) Sales by a VAT-registered supplier to a
manufacturer/producer whose products
are 100% exported are considered export
sales. A certification to this effect must be
issued by the Board of Investment which
shall be good for 1 year unless
subsequently re-issued. (RR 16-2005)
Export sales of registered export traders
shall include commission income, and
that exportation of goods on
consignment shall not be deemed export
sales until the export products consigned
are in fact sold by the consignee.
Foreign Currency Denominated Sale (FCDS)
(1) (i) Sale to a nonresident of goods (except
those mentioned in Sections 149 and 150
i.e., automobiles and non-essential goods
like jewelry, perfume, and yachts), (ii)
assembled or manufactured in the
Philippines (iii) for delivery to a resident in
the Philippines (iv) paid for in acceptable
foreign currency AND (v) accounted for in
accordance with the rules and regulations
of the BSP.
(2) (i) Sales of locally manufactured or
assembled goods (ii) for household and
personal use (iii) to Filipinos abroad and
other non-residents of the Philippines as
well as returning Overseas Filipinos under
the Internal Export Program of the
government (iv) paid for in convertible
foreign currency AND (v) accounted for in
accordance with the rules and regulations
of the BSP shall also be considered export
sales. (RR 16-2005)
Effectively Zero-Rated Sales
(1) Sales to persons or entities whose
exemption under special laws or
international agreements to which the
Philippines is a signatory effectively
subjects such sales to zero rate.
(2) (i) The local sale of goods and properties
(ii) by a VAT-registered person (iii) to a
person or entity who was granted indirect
tax exemption under special laws or
international agreement. (RR 16-2005)
ECOZONES
UP COLLEGE OF LAW TAXATION 2 TAXATION LAW

The ECOZONES shall be managed and (b) Sale of Services by a PEZA registered
operated by the PEZA as separate customs enterprise to a buyer from the
territory. (Sec. 8, RA 7916 “Special Economic Customs Territory – this is NOT
Zone Act of 1995”). Consequently, sales made embraced by the 5% special tax
by a person in the customs territory to a PEZA- regime, hence, such seller shall be
registered entity are considered exports to a SUBJECT TO 12% VAT.
foreign country and thus, zero-rated.
(c) Sale of Goods by a PEZA registered
Conversely, sales by a PEZA-registered entity
enterprise to Another PEZA registered
to a person in the customs territory are
enterprise (ie Intra-ECOZONE Sales of
deemed imports from a foreign country.
Goods) – this shall be EXEMPT from
VAT.
Tax treatment of sales to & by PEZA-
registered enterprise within & without the
ecozone [RMC 74-99]: (4) Sale of Services by ECOZONE enterprise,
(1) Any sale of goods, property or services to Another ECOZONE enterprise (Intra-
made by a VAT registered supplier from ECOZONE enterprise Sale of Service)
the Customs Territory** to any registered (a) if PEZA registered seller is subject to
enterprise operating in the ecozone, 5% special tax regime - EXEMPT from
REGARDLESS of the class or type of the VAT
latter’s PEZA registration, is actually (b) if PEZA registered seller is subject to
qualified and thus LEGALLY ENTITLED TO taxes under NIRC (ie not subject to 5%
THE 0% VAT. special tax regime) – subject to 0%
VAT pursuant to “cross border
“Customs Territory” shall mean the national doctrine”
territory of the Philippines outside of the
proclaimed boundaries of the ECOZONES Difference between Zero-rated and VAT-
except those areas specifically declared by exempt
other laws and/or presidential proclamations Zero-rated VAT-exempt
to have the status of special economic zones It is a taxable Not subject to output
and/or free ports. [Sec. 2(g), Rule 1, Part I, RA transaction but does tax
7916-IRR] not result in an output
tax
(2) By a VAT-Exempt Supplier from the The input VAT on the The seller in an
Customs Territory to a PEZA registered purchases of a VAT- exempt transaction is
enterprise registered person with not entitled to any
zero-rated sales may input tax on his
Sale of goods, property and services by VAT- be allowed as tax purchases despite the
Exempt supplier from the Customs Territory to credits or refunded issuance of a VAT
a PEZA registered enterprise shall be treated invoice or receipt;
EXEMPT FROM VAT, regardless of whether or
Persons engaged in Registration is
not the PEZA registered buyer is subject to
transactions which are optional for VAT-
taxes under the NIRC or enjoying the 5%
zero-rated, being exempt persons.
special tax regime.
subject to VAT, are
required to register
(3) By a PEZA Registered Enterprise
(a) Sale of Goods by a PEZA registered
enterprise to a buyer from the J. TRANSACTIONS DEEMED SALE (SEC.
Customs Territory (i.e., domestic 106 (B)
sales) -- this case shall be treated as a
technical IMPORTATION made by the Rate: 12% VAT
buyer. Such buyer shall be treated as Basis: Market value of the goods deemed sold
an IMPORTER thereof and shall be as of the time of the occurrence of the
imposed with the corresponding VAT. transactions or as the CIR shall prescribe. In
the case of retirement/cessation of business,
the tax base shall be the acquisition cost or the
PAGE 164 OF 275
UP COLLEGE OF LAW TAXATION 2
current market price of the goods or
properties, whichever is lower. In the case of a
sale where the gross selling price is
unreasonably lower than the fair market
value, the actual market value shall be the tax
base. The gross selling price is unreasonably
lower than the actual market value if it is lower
by more than 30% of the actual market value
of the same goods of the same quantity and
quality sold in the immediate locality on or
nearest the date of sale. (RR 16-2005)
Transactions Deemed Sale
(1) Transfer, use or consumption not in the
course of business of goods or properties
originally intended for sale or for use in the
course of business.
Example: when a VAT-registered person
withdraws goods from his business for his
personal use. (RR 16-2005)
(2) Distribution or transfer to shareholders,
investors or creditors
(a) Shareholders or investors as share in
the profits of the VAT-registered
persons;
(b) Creditors in payment of debt;
(3) Consignment of goods if actual sale is not
made within 60 days following the date
such goods were consigned
(4) Retirement from or cessation of business,
with respect to inventories of taxable
goods existing as of such retirement or
cessation
Distribution or transfer to shareholders,
investors or creditors
As regards distribution to shareholders or
investors as share in the profits of the VAT-
registered persons, property dividends which
constitute stocks in trade or properties
primarily held for sale or lease declared out of
retained earnings on or after Jan. 1, 1996 and
distributed by the company to its shareholders
shall be subject to VAT based on the zonal
value or FMV at the time of the distribution,
whichever is applicable. (RR 16-2005)
Consignment of goods
Consigned goods returned by the consignee
within the 60-day period are not deemed sold.
(RR 16-2005)
Retirement from or cessation of business
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TAXATION LAW
With respect to ALL goods on hand, whether
capital goods, stock-in-trade, supplies or
materials, as of the date of such retirement or
cessation, whether or not the business is
continued by the new owner or successor ARE
CONSIDERED DEEMED SALES
Examples: change of ownership of the
business (e.g., when a sole proprietorship
incorporates, or the proprietor sells his entire
business) and dissolution of a partnership and
creation of a new partnership which takes over
the business. (RR 16-2005)
K. CHANGE OR CESSATION OF STATUS
AS VAT-REGISTERED PERSON (SEC
106[C])
Rate: 12% VAT
Basis: the acquisition cost or the current
market price of the goods or properties,
whichever is LOWER.
VAT shall apply to goods disposed of or
existing as of a certain date if under the
circumstances to be prescribed in rules and
regulations to be promulgated by the
Secretary of Finance, upon recommendation
of the CIR, the status of a person as a VAT-
registered person changes or is terminated.
Subject to output VAT (RR 16-2005, Sec. 4.106
(b))
12% VAT is applicable to goods/properties
originally intended for sale or use in business
and capital goods which are existing as of the
occurrence of the following:
(1) Change of business activity from VAT
taxable status to VAT-exempt status
Example: A VAT-registered person
engaged in a taxable activity like
wholesaler or retailer who decides to
discontinue such activity and engages
instead in life insurance business or in any
other business not subject to VAT.
(2) Approval of request for cancellation of a
registration due to reversion to exempt
status
(3) Approval of request for cancellation of
registration due to desire to revert to
exempt status after lapse of 3 consecutive
years from the time of registration by a
person who voluntarily registered despite
being exempt under Sec. 109 (2)
UP COLLEGE OF LAW TAXATION 2
(4) Approval of request for cancellation of
registration of one who commenced
business with the expectation of gross
sales/receipts exceeding P1,919,500 (per
RR 16-2011) but who failed to exceed this
amount during the first 12 months of
operation
Not Subject to Output Vat – goods or
properties existing as of the occurrence of the
following:
(1) Change of control of a corporation by the
acquisition of the controlling interest of
such corporation by another stockholder
(individual or corporate) or group of
stockholders.
Note: Exchange of goods or properties
including the real estate properties used
in business or held for sale or for lease by
the transferor, for shares of stocks,
whether resulting in corporate control or
not, is SUBJECT TO VAT (RR 10-11)
(2) Change in the trade or corporate name of
the business
(3) Merger or consolidation of corporations.
The unused input tax of the dissolved
corporation, as of the date of merger or
consolidation, shall be absorbed the
surviving or new corporation.
Note: The INPUT VAT of the dissolved
corporation will be absorbed by the
surviving corporation
(4) Inventory used for promotions and Office
Supplies
L. VAT ON IMPORTATION OF GOODS
Rate: 12% VAT
Basis: total value used by the Bureau of
Customs in determining tariff and customs
duties, plus customs duties, excise taxes, if
any, and other charges (such as postage,
commission).
Where the customs duties are determined on
the basis of the quantity or volume of the
goods, VAT shall be based on the landed cost
plus excise taxes, if any.
Who Pays: IMPORTER prior to the release of
such goods from customs custody (Sec. 107
(A), NIRC)
Importer: any person who brings goods into
the Philippines, whether or not made in the
course of his trade or business, including
PAGE 166 OF 275
TAXATION LAW
non-exempt persons or entities who acquire
tax-free imported goods from exempt
persons, entities or agencies (RR 16-2005)
Importation of Goods
Importation of goods BEGINS when the
carrying vessel/aircraft enters the Philippine
jurisdiction with an intention to unload its
cargoes. It ENDS when there is already
payment of duties/taxes/other charges and
issuance of permit to withdraw.
Note: Importation of goods to bonded
warehouse for processing is not importation.
Importation connotes permanency and gain.
Thus, if goods are only for exhibit, such goods
are VAT-exempt.
Customs duty – amount of customs duty
legally due and paid by the importer.
Therefore, if importer is entitled to 90%
customs duty exemption, the 10% duty paid
should be the base in computation of the VAT.
Other similar chargers – specific charges
which an importer has to pay.
(a) Other taxes (special import tax)
(b) Bank charges
(c) Arrastre charges
(d) Wharfage dues
(e) Brokerage fees
(f) All other charges or expenses
Landed Cost - invoice amount including costs
of loading, shipping and unloading, customs
duties, freight, insurance, other charges,
excise tax (if any)
Expenses incurred after the release of the
goods such as those incurred in delivering
goods do not form part of the landed cost.
Transfer of goods by tax exempt persons:
(1) If importer is tax-exempt, the subsequent
purchasers, transferees or recipients of
such imported goods shall be considered
as importers who shall be liable for the tax
on importation.
(2) The tax due on such importation shall
constitute a lien on the goods superior to
all charges or liens on the goods,
irrespective of the possessor thereof. (As
amended by RA 9337)
UP COLLEGE OF LAW
M. VAT ON SALE OF SERVICE AND USE
OR LEASE OF PROPERTIES
[Sec 108]
Rate: 12%
Basis: Gross receipts derived from the sale or
exchange of services, including the use or
lease of properties.
Gross Receipts - the total amount of money or
its equivalent representing the contract price,
compensation, service fee, rental or royalty,
including the amount charged for materials
supplied with the services and deposits and
advanced payments actually or constructively
received during the taxable quarter for the
services performed or to be performed for
another person, excluding VAT. (Sec. 108 (A),
NIRC)
“Constructive receipt” occurs when the money
consideration or its equivalent is placed at the
control of the person who rendered the service
without restrictions by the payor.
(a) Deposit in banks which are made available
to the seller of services without restrictions
(b) Issuance by the debtor of a notice to offset
any debt or obligation and acceptance
thereof by the seller as payment for
services rendered
(c) Transfer of the amounts retained by the
contractee to the account of the contractor.
(RR 16-2005)
Requisites for taxability
(1) The service must be performed or is to be
performed (which may be performed by a
subcontractor) in the course of trade or
business in the Philippines;
(2) For a valuable consideration actually or
constructively received; and
(3) The service is not exempt under the Tax
Code, special law or international
agreement
(4) Person selling or rendering service is liable
to VAT
24
SUBJECT TO NOT SUBJECT TO
VAT VAT
Loan to the lessor
from the lessee
Pre-Paid Rental Option money for
the property
PAGE 167 OF 275
TAXATION 2 TAXATION LAW
“Sale/Exchange of Services”: means the
performance of all kinds of services in the
Philippines for others for a fee, remuneration
or consideration.” (Sec 108, Diaz v Secretary of
Finance, 2011). It includes:
(1) Construction and service contractors
(2) Stock, real estate, commercial, customs
and immigration brokers
(3) Lessors of property, whether personal or
real18
(4) Persons engaged in warehousing service.
(5) Lessors or distributors of cinematographic
films
(6) Persons engaged in milling, processing,
manufacturing or repacking goods for
others are subject to VAT,
EXCEPT palay into rice, corn into corn
grits, and sugarcane into raw sugar (not
subject to VAT)
(7) Proprietors, operators, or keepers of
hotels, motels, rest houses, pension
houses, inns, resorts, theaters, and movie
houses
(8) Proprietors or operators of restaurants,
refreshment parlors, cafes and other
eating places, including clubs and
caterers
(9) Dealers in securities including pre-need
companies
“Gross receipts” means gross selling
price less cost of the securities sold. RR 7-
95:
(10) Lending investors: All persons OTHER
than banks, non-bank financial
intermediaries, finance companies and
other financial intermediaries NOT
performing quasi-banking functions who
make a practice of lending money for
themselves or others at interest.
(11) Transportation contractors on their
transport of goods or cargoes, including
persons who transport goods or cargoes
for hire and other domestic common
carriers by land relative to their transport
of goods or cargoes
(12) Common carriers by air and sea relative to
their transport of passengers, goods or
Security deposit Security deposit to
when applied to insure the faithful
the rental performance of
certain obligations
of the lessee to the
lessor
UP COLLEGE OF LAW TAXATION 2
cargoes from one place in the Philippines
to another place in the Philippines
(13) Sales of electricity by generation,
transmission, and/or distribution
companies
EXCEPT sale of power or fuel
generated through renewable sources of
energy, such as, but not limited to,
biomass, solar, wind hydropower,
geothermal, ocean energy, and other
emerging energy sources using
technologies such as fuel cells and
hydrogen fuels, which shall be subject to
0% rate of VAT (zero-rated).
(14) Franchise grantees of electric utilities,
telephone and telegraph, radio and/or
television broadcasting and all other
franchise grantees (including PAGCOR
and its licensees/franchisees)
EXCEPT franchise grantees of radio
and/or television broadcasting whose
annual gross receipts of the preceding
year do not exceed Ten Million Pesos
(P10,000,000.00) (which shall be subject
to 3% franchise tax under Sec. 119, subject
to optional registration), and franchise
grantees of gas and water utilities (under
Sec. 109, subject to 2% franchise tax)
With respect to franchise grantees of
telephone and telegraph services,
amounts received for overseas dispatch,
message, or conversation originating from
the Philippines are subject to the
percentage tax under Sec. 120 and hence
exempt from VAT
(15) Non-life insurance companies including
surety, fidelity, indemnity and bonding
companies;
EXCEPT crop insurance, life and
disability insurance, and health and
accident insurance
Insurance and reinsurance
commissions, as opposed to premiums,
whether life or non-life, are subject to VAT
while non-life insurance premiums are
subject to VAT.
(16) Similar services regardless of whether or
not the performance thereof calls for the
exercise or use of the physical or mental
faculties
“Lease of Properties“: subject to the VAT
imposed irrespective of the place where the
contract of lease or licensing agreement was
PAGE 168 OF 275
TAXATION LAW
executed if the property is leased or used in the
Philippines.
(1) The lease or the use of or the right or
privilege to use any copyright, patent,
design or model, plan secret
(2) formula or process, goodwill, trademark,
trade brand or other like property or right
(3) The lease of the use of, or the right to use
of any industrial, commercial or scientific
equipment
(4) The supply of scientific, technical,
industrial or commercial knowledge or
information
(5) The supply of any assistance that is
ancillary and subsidiary to and is furnished
as a means of enabling the application or
enjoyment of any such property, or right as
is mentioned in #2 or any such knowledge
or information as is mentioned in #3
(6) The supply of services by a nonresident
person or his employee in connection with
the use of property or rights belonging to,
or the installation or operation of any
brand, machinery or other apparatus
purchased from such nonresident person
(7) The supply of technical advice, assistance
or services rendered in connection with
technical management or administration
of any scientific, industrial or commercial
undertaking, venture, project or scheme
(8) The lease of motion picture films, films,
tapes and discs
(9) The lease or the use of or the right to use
radio, television, satellite transmission
and cable television time
Additional services subject to VAT:
(1) Services performed in the exercise or
practice of profession or calling by
individuals subject to professional tax
under the LGC, and professional services
rendered by general professional
partnerships (GPPs);
(2) Services performed by actors/actresses,
talents, singers, emcees, radio/television
broadcasters, choreographers,
musical/radio/movie/television/stage
directors, and professional athletes;
(3) Services rendered by customs, real estate,
stock, immigration and commercial
brokers;
(4) Services rendered by doctors, and lawyers.
(5) Association dues or membership fees and
other assessment or charges for the
UP COLLEGE OF LAW TAXATION 2
beneficial services of the homeowner’s
association (RMC No. 9-2013)
(6) Lease/use of sports facilities and
equipment (RA 6847)
The performance of the services should not be
in pursuit of an employer-employee
relationship between the service-provider and
the service-recipient.
N. ZERO-RATED SALE OF SERVICES
The following services performed in the
Philippines by VAT-registered persons are
effectively 0% VAT sales of services:
(1) Processing, manufacturing or repacking
goods for other persons doing business
outside the Philippines which goods are
subsequently exported, where the services
are paid for in acceptable foreign currency
AND accounted for in accordance with the
rules and regulations of the BSP
(2) Services other than those mentioned in
the preceding paragraph rendered to a
person engaged in business conducted
outside the Philippines or a nonresident
person not engaged in business who is
outside the Philippines when the services
are performed, the consideration for which
is paid for in acceptable foreign currency
AND accounted for in accordance with the
rules and regulations of the BSP
The services referring to ‘processing,
manufacturing, repacking’ and ‘services
other than those in (1)’ both require
(i) payment in foreign currency;
(ii) inward remittance;
(iii) accounted for by the BSP;
(iv) AND that the service recipient is
doing business outside the
Philippines.
If this is not the case, taxpayers can
circumvent just by stipulating payment in
foreign currency. (CIR v. Burmeister, G.R.
No. 153205 [2007[))
(3) Services rendered to persons or entities
whose exemption under special laws or
international agreements to which the
Philippines is a signatory effectively
subjects the supply of such services to zero
percent (0%) rate (as amended by RA
9337)
(4) Services rendered to persons engaged in
international shipping or international air
PAGE 169 OF 275
TAXATION LAW
transport operations, including leases of
property for use thereof [as amended by
RA 9337];
Provided, however, that the services
referred to herein shall not pertain to
those made to common carriers by air and
sea relative to their transport of
passengers, goods or cargoes from one
place in the Phil. to another place in the
Phil. (the same being subject to 12% VAT
under Sec. 108)
(5) Services performed by subcontractors
and/or contractors in processing,
converting, or manufacturing goods for an
enterprise whose export sales exceed
seventy percent (70%) of total annual
production.
(6) Transport of passengers and cargo by air
or sea vessels from the Philippines to a
foreign country (as added by RA 9337)
and;
(7) Sale of power or fuel generated through
renewable sources of energy such as, but
not limited to, biomass, solar, wind,
hydropower, geothermal, ocean energy,
and other emerging energy sources using
technologies such as fuel cells and
hydrogen fuels. (as added by RA 9337)
Zero-rating shall apply strictly to the
sale of power or fuel generated through
renewable sources of energy, and shall
not extend to the sale of services related
to the maintenance or operation of plants
generating said power.
Effectively zero-rated sale of service – a local
sale of services by a VAT-registered person to
a person or entity granted indirect tax
exemption under special laws or international
agreement.
 The taxpayer must seek prior approval or
prior confirmation from the appropriate
offices of the BIR so that a transaction is
qualified for effective zero-rating except in
export sales and foreign denominated
sales.
 RR 4-2007 removed the distinction
between automatic and effectively zero-
rated transactions found in prior Revenue
Regulations (inc. RR 16-2005) with
respect to prior application from the BIR.
O. VAT EXEMPT TRANSACTIONS
UP COLLEGE OF LAW TAXATION 2
Vat Exempt Transactions, in general
(a) Sale of goods or properties and/or
services and the use or lease of properties
that is NOT subject to VAT (output tax)
and the seller is not allowed any tax credit
of VAT (input tax) on purchases.
(b) The person making the exempt sale of
goods, properties or services shall not bill
any output tax to his customers. (RR 16-
2005)
(c) But, the VAT-registered person may elect
that the exemption not apply to its sale of
goods or properties or services; provided
that the election made shall be irrevocable
for a period of three (3) years from the
quarter the election was made (Sec. 109(2),
NIRC).
Exempt Transactions Enumerated
[4.109-1 of RR 16-2005]
(1) Sale/import of agricultural and marine
food products in their original state,
livestock and poultry of a kind generally
used as or yielding or producing foods for
human consumption and breeding stock
and genetic materials therefor;
 Original state even if they have
undergone the simple processes of
preparation or preservation for the
market, such as freezing, drying,
salting, broiling, roasting, smoking or
stripping. Also includes preservation
using advanced technological means
of packaging, such as shrink wrapping
in plastics, vacuum packing, tetra-
pack, and other similar packaging
methods (RR 16-2005)
 Polished and/or husked rice, corn
grits, raw cane sugar and molasses,
ordinary salt, AND COPRA shall be
considered in their original state
 Livestock or poultry do not include
fighting cocks, race horses, zoo
animals and other animals generally
considered as pets.
(2) Sale/ importation of fertilizers, seeds,
seedlings and fingerlings, fish, prawn,
livestock and poultry feeds including
ingredients, whether locally produced or
imported, used in the manufacture of
finished feeds (EXCEPT specialty feeds for
race horses, fighting cocks, aquarium fish,
zoo animals, and other animals generally
considered pets);
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TAXATION LAW
(3) Importation of personal and household
effects belonging to Philippine residents
returning from abroad and non-resident
citizens coming to resettle in the
Philippines; provided, that such goods are
also exempt from customs duties under
the TCC (now CMTA)
(4) Importation of professional instruments
and implements, wearing apparel,
domestic animals, and personal
household effects belonging to persons
coming to settle in the Philippines, for
their own use and not for sale, barter or
exchange, accompanying such persons, or
arriving within 90 days before or after their
arrival, upon production of evidence
satisfactory to the CIR that such persons
are actually coming to settle in the
Philippines and that the change of
residence is bona fide;
 EXCEPT vehicles, vessels, aircrafts,
machineries, and other goods for use
in manufacturing and merchandise of
any kind in commercial quantity)
(5) Services subject to percentage tax under
the NIRC;
(6) Services by agricultural contract growers
and milling for others of palay into rice,
corn into grits, and sugar cane into raw
sugar;
(7) Medical, dental, hospital and veterinary
services, except those rendered by
professionals:
 Laboratory services are exempted. If
the hospital or clinic operates a
pharmacy or drug store, the sale of
drugs and medicine is subject to VAT.
[RR 16-2005]
 Note: RR-2004 granting VAT-
exemption to doctors registered with
the PRC and lawyers registered with
the IBP was superseded by RA 9337
and RR 16-2005.
(8) Educational services rendered by private
educational institutions, duly accredited
by DepED, CHED, TESDA, and those
rendered by government educational
institutions;
 “Educational services” does not
include seminars, in-service training,
review classes and other similar
services rendered by persons who are
not accredited by the DepED, CHED,
and/or TESDA. [RR 16-2005]
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(9) Services rendered by individuals pursuant
to an employer-employee relationship;
(10) Services rendered by regional or area
headquarters established in the
Philippines by multinational corporations
which act as supervisory, communications
and coordinating centers for their
affiliates, subsidiaries or branches in the
Asia-Pacific Region and do not earn or
derive income from the Philippines;
(11) Transactions which are exempt under
international agreements to which the
Philippines is a signatory or under special
laws, except those under PD No. 529
(Petroleum Exploration Concessionaires
under the Petroleum Act of 1949);
(12) Sales by agricultural cooperatives duly
registered with the Cooperative
Development Authority (CDA) to their
members, as well as sale of their produce,
whether it is original state or processed
form, to non-members; their importation
of direct farm inputs, machineries and
equipment, including spare parts thereof,
to be used directly and exclusively in the
production and/or processing of their
produce.
 Sale by agricultural cooperatives to
non-members can only be exempted
from VAT if the producer of the
agricultural products sold is the
cooperative itself. If the cooperative is
not the producer (e.g., trader), then
only those sales to its members shall
be exempted from VAT. [RR 16-2005]
(13) Gross receipts from lending activities by
credit or multi-purpose cooperatives duly
registered with the CDA
(14) Sales by non-agricultural, non- electric
and non-credit cooperatives duly
registered and in good standing with the
CDA; Provided, that the share capital
contribution of each member does not
exceed P15,000 and regardless of the
agrgregate capital and net surplus ratably
distributed among the members. BUT
their importation of machineries and
equipment, including spare parts thereof,
to be used by them are SUBJECT to VAT.
(15) Export sales by persons who are not VAT-
registered;
(16) Sale of real properties as follows:
(a) Sale of real properties NOT primarily
held for sale to customers or held for
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TAXATION LAW
lease in the ordinary course of trade or
business.
 However, even if the real property
is not primarily held for sale to
customers or held for lease in the
ordinary course of trade or
business but the same is used in
the trade or business of the seller,
the sale thereof shall be subject to
VAT being a transaction incidental
to the taxpayer’s main business.
[RR 4-2007]
(b) Sale of real properties utilized for low-
cost housing as defined by RA 7279,
("Urban Development and Housing
Act of 1992") and other related laws,
such as RA 7835 and RA 8763;
 “Low-cost housing" refers to
housing projects intended for
homeless low-income family
beneficiaries, undertaken by the
Government or private developers,
which may either be a subdivision
or a condominium registered and
licensed by the Housing and Land
Use Regulatory Board/Housing
(HLURB) under BP 220, PD 957 or
any other similar law, wherein the
unit selling price is within the
selling price ceiling per unit of
P750,000.00 under RA 7279, and
other laws, such as RA 7835 and
RA 8763.
(c) Sale of real properties utilized for
socialized housing as defined under
RA 7279, and other related laws, such
as RA 7835 and RA 8763, wherein the
price ceiling per unit is P225,000 or as
may from time to time be determined
by the HUDCC and the NEDA and
other related laws.
 "Socialized housing" refers to
housing programs and projects
covering houses and lots or home
lots only undertaken by the
Government or the private sector
for the underprivileged and
homeless citizens which shall
include sites and services
development, long-term
financing, liberated terms on
interest payments, and such other
benefits in accordance with the
UP COLLEGE OF LAW TAXATION 2
provisions of RA 7279 and RA
7835 and RA 8763.
 "Socialized housing" shall also
refer to projects intended for the
underprivileged and homeless
wherein the housing package
selling price is within the lowest
interest rates under the Unified
Home Lending Program (UHLP) or
any equivalent housing program
of the Government, the private
sector or non-government
organizations.
(d) Sale of residential lot valued at
P1,919,500 and below, or house & lot
and other residential dwellings valued
at P3,199,200 and below
 If two or more adjacent residential
lots are sold or disposed in favor of
one buyer, for the purpose of
utilizing the lots as one residential
lot, the sale shall be exempt from
VAT only if the aggregate value of
the lots does not exceed
P1,919,500. [RR 13-2012]
 Adjacent residential lots,
although covered by separate
titles and/or separate tax
declarations, when sold or
disposed to one and the same
buyer, whether covered by one or
separate Deed of Conveyance,
shall be presumed as a sale of one
residential lot. [RR 16-2005]
 Sale, transfer or disposal within a
12-month period of 2 or more
adjacent residential lots, house
and lots or other residential
dwellings to one buyer, whether
from the same or from different
sellers shall be considered one
single transaction. Hence, the sale
of the adjacent lots shall be
subject to VAT if the aggregate
value exceeds P1,919,500 for
residential lots and P3,199,200
for residential house lots or
residential dwellings,
notwithstanding that the value of
the individual properties do not
exceed the VAT exemption
thresholds.
 Sale/purchase of parking lots
shall not be considered a sale of
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TAXATION LAW
residential lot/dwelling. Hence, it
shall be subject to VAT regardless
of its selling price. [RR 13-2012]
(17) Lease of residential units with a monthly
rental per unit not exceeding P12,800,
regardless of the amount of aggregate
rentals received by the lessor during the
year.
 Lease of residential units where the
monthly rental per unit exceeds
P12,800 but the aggregate of such
rentals of the lessor during the year do
not exceed P1,919,500 shall likewise
be exempt from VAT, however, the
same shall be subjected to 3%
percentage tax.
 In cases where a lessor has several
residential units for lease, some are
leased out for a monthly rental per
unit of not exceeding P12,800 while
others are leased out for more than
P12,800 per unit, his tax liability will
be as follows:
(a) The gross receipts from rentals
not exceeding P12,800 per
month per unit shall be exempt
from VAT regardless of the
aggregate annual gross receipts.
(b) The gross receipts from rentals
exceeding P12,800 per month
per unit shall be subject to VAT IF
the aggregate annual gross
receipts from said units only (not
including the gross receipts from
units leased for not more than
P12,800) exceeds P1,919,500.
Otherwise, the gross receipts will
be subject to the 3% tax imposed
under Sec. 116 of the Tax Code.
 The term 'residential units' shall refer
to apartments and houses & lots used
for residential purposes, and buildings
or parts or units thereof used solely as
dwelling places (e.g., dormitories,
rooms and bed spaces) except motels,
motel rooms, hotels and hotel rooms.
 The term 'unit' shall mean an
apartment unit in the case of
apartments, house in the case of
residential houses; per person in the
case of dormitories, boarding houses
and bed spaces; and per room in case
of rooms for rent. [RR 16-2005]
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(18) Sale, importation, printing or publication
of books and any newspaper, magazine
review or bulletin which appears at
regular intervals with fixed prices for
subscription and sale and which is not
devoted principally to the publication of
paid advertisements;
(19) Transport of passengers by international
carriers [Added by RA 10378 (2013)]
(20) Sale, importation or lease of passenger
or cargo vessels and aircraft, including
engine, equipment and spare parts
thereof for domestic or international
transport operations [added by RA 9337];
 The exemption from VAT on the
importation and local purchase of
passenger and/or cargo vessels shall
be limited to those of 150 tons and
above, including engine and spare
parts of said vessels;
 The vessels to be imported shall
comply with the age limit requirement,
at the time of acquisition counted
from the date of the vessel's original
commissioning, as follows:
o for passenger and/or cargo
vessels, the age limit is 15 years
old,
o for tankers, the age limit is 10
years old, and
o for high-speed passenger crafts,
the age limit is 5 years old [RR 16-
2005]
(21) Importation of fuel, goods, and supplies
by persons engaged in international
shipping or air transport operations;
[added by RA 9337]
 The said fuel, goods and supplies shall
be used exclusively or shall pertain to
the transport of goods and/or
passenger from a port in the
Philippines directly to a foreign port
without stopping at any other port in
the Philippines;
 If any portion of such fuel, goods or
supplies is used for purposes other
than that mentioned in this paragraph,
such portion of fuel, goods and
supplies shall be subject to 12% VAT
starting Feb. 1, 2006. [RR 16-2005]
(22) Services of banks, non-bank financial
intermediaries performing quasi-
banking functions and other non-bank
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TAXATION LAW
financial intermediaries subject to
Percentage Tax; and
(23) Sale or lease of goods or properties or the
performance of services other than the
transactions mentioned in the preceding
paragraphs, the gross annual sales
and/or receipts do not exceed the amount
of P1,919,500
 For purposes of the threshold of
P1,919,500, the husband and the wife
shall be considered separate
taxpayers. However, the aggregation
rule for each taxpayer shall apply.
 For instance, if a professional, aside
from the practice of his profession,
also derives revenue from other lines
of business which are otherwise
subject to VAT, the same shall be
combined for purposes of determining
whether the threshold has been
exceeded.
 The VAT-exempt sales shall NOT be
included in determining the threshold.
[RR 16-2005]
Other Services Exempt from VAT – such
services are those subject to percentage tax
(infra)
(1) Services rendered by domestic common
carriers by land for the transport of
passengers and keepers of garages;
(2) Services rendered by international
air/shipping carriers;
(3) Services rendered by franchise grantees of
radio and/or television broadcasting
whose annual gross receipts of the
preceding year do not exceed
P10,000,000 and by franchise grantees of
gas and water utilities; [N.B. – Compare
with other franchise grantees which are
subject to VAT]
(4) Services rendered for overseas dispatch,
message, by franchise grantees or
conversation originating from the
Philippines;
(5) Services by any person, company or
corporation (except purely cooperative
(6) companies or associations) doing life
insurance business of any sort in the
Philippines;
(7) Services rendered by fire, marine or
miscellaneous insurance agents of foreign
insurance companies;
UP COLLEGE OF LAW TAXATION 2 TAXATION LAW

(8) Services rendered by proprietors, lessees

or operators of cockpits, cabarets, night or
day clubs, boxing exhibitions, professional
basketball games, jai-alai and race tracks;
and
(9) Receipts on sale, barter for exchange of
shares of stock listed and traded through
the local stock exchange or through initial
public offering.

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SUMMARY TABLE OF VAT-EXEMPTIONS (SEC. 109)

A Of agricultural and marine products in their original state

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

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Q. SOURCES OF INPUT TAX
(1) Purchase or importation of goods (evidenced
by VAT invoice/receipt)
(a) For sale; or
(b) For conversion into or intended to form
part of a finished product for sale
including packaging materials; or
(c) For use as supplies in the course of
business; or
(d) For use as materials supplied in the sale
of service; or
(e) For use in trade or business for which
deduction for depreciation or
amortization is allowed under the Code.
(2) Purchase of real properties for which VAT has
actually been paid
(3) Purchase of services in which VAT has
actually been paid
(4) Transactions deemed sale
(5) Presumptive Input Tax
(6) Transitional Input Tax
Presumptive Input Tax (Sec. 111(B))
Persons or firms engaged in the processing of
sardines, mackerel and milk, and in
manufacturing refined sugar and cooking oil and
packed noodle based instant meals, shall be
allowed a presumptive input tax, creditable
against the output tax, equivalent to FOUR
PERCENT (4%) of the gross value in money of
their purchases of primary agricultural products
which are used as inputs to their production.
“Processing” means pasteurization, canning and
activities which through physical or chemical
process alter the exterior texture or form or inner
substance of a product in such manner as to
prepare it for special use to which it could not
have been put in its original form or condition.
Transitional Input Tax (Sec 111)
Who may avail: (i) By a person who becomes VAT-
liable for the 1st time, or (ii) any person who elects
to be a VAT-registered person
Rate: 2% Input VAT of the value of the beginning
inventory on hand or actual VAT paid on such,
goods, materials and supplies, whichever is
HIGHER, which amount shall be creditable
against the output tax of VAT-registered person.
19 Please refer below for the example.
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TAXATION LAW
Tax base: The value allowed for income tax
purposes on inventories shall be the basis for the
computation of the 2% transitional input tax,
EXCLUDING goods that are exempt from VAT
under Sec. 109 of the Tax Code. (RR 16-2005)
Note: A real estate dealer is entitled to claim
transitional input VAT based on the value of the
entire (including the value of the land and the
improvements thereon) real property sold
regardless of whether there was in fact actual
payment of VAT on the purchase of the real
property. At the time the purchase was made,
there was still no VAT imposed. (Fort Bonifacio
Development Corp. v. CIR)
R. PERSONS WHO CAN AVAIL OF INPUT
TAX CREDIT
Input tax on domestic purchase or importation of
goods or properties shall be creditable:
(1) To the purchaser upon consummation of sale
and on importation of goods or properties;
and
(2) To the importer upon payment of the VAT
prior to the release of the goods from the
custody of the Bureau of Customs.
(a) The input tax on goods purchased or
imported in a calendar month for use in
trade or business for which deduction for
depreciation is allowed under the Code,
shall be spread evenly over the month of
acquisition and the fifty-nine (59)
succeeding months if the aggregate
acquisition cost for such goods, excluding
the VAT component thereof, exceeds One
million pesos (P1,000,000). If the
aggregate acquisition cost does not
exceed P1,000,000, the total input taxes
will be allowable as credit against output
tax in the month of acquisition.19
(b) However, if the estimated useful life of
the capital good is less than five (5) years,
as used for depreciation purposes, then
the input VAT shall be spread over such a
shorter period
(3) To the purchaser of services or the lessee or
licensee upon payment of the compensation,
rental, royalty or fee.
Input tax on purchase of services, lease or use of
properties shall be creditable:
UP COLLEGE OF LAW
(1) To the purchaser upon payment of the
compensation, royalty or fee
(2) To lessee or licensee upon payment of the
compensation, royalty or fee
Claiming of input Tax on motor vehicles subject to
the following conditions:
(1) Purchase of vehicle must be substantiated
with official receipts and other records;
(2) Taxpayer has to prove the direct connection
of the motor vehicle to the business;
(3) Only one vehicle for land transport is allowed
for the use of an official/employee with value
not exceeding P2.4 million;
(4) No depreciation shall be allowed for yachts,
helicopters, airplanes
S. DETERMINATION OF OUTPUT/INPUT
TAX; VAT PAYABLE; EXCESS INPUT TAX
CREDITS
Output VAT – Input VAT = VAT Payable
S.1. DETERMINATION OF OUTPUT TAX
(RR 16-2005)
Output VAT in a sale of goods/properties shall be
computed by multiplying the total amount
indicated in the invoice or receipt by 12%.
OUTPUT VAT=
Gross Selling Price x Rate of VAT (or 12%)
Output VAT in a sale of services shall be
computed by multiplying the total amount
indicated in the invoice or receipt by 12%.
OUTPUT VAT=
Gross Receipts x Rate of VAT (or 12%)
S.2. DETERMINATION OF INPUT
CREDITABLE
(1) The sum of the excess input tax carried over
from the preceding month or quarter and the
input tax creditable to a VAT-registered
person during the taxable month or quarter
shall be reduced by the amount of claim for
refund or tax credit for value-added tax and
20 Please refer below for the example
TAXATION 2 TAXATION LAW
other adjustments, such as purchase returns
or allowances and input tax attributable to
exempt sale.
(2) The claim for tax credit referred to includes
not only those filed with the BIR but also
those filed with other government agencies,
such as the Board of Investments the Bureau
of Customs.
S.3. ALLOCATION OF INPUT TAX ON MIXED
TRANSACTIONS20
There are four possible transactions a VAT-
registered person may enter into:
(i) VAT taxable,
(ii) VAT-exempt,
(iii) zero-rated VAT and
(iv) sale to governments.
A VAT-registered person who is also engaged in
transactions not subject to VAT shall be allowed
to recognize input tax credit on transactions
subject to VAT as follows:
(1) All the input taxes that can be directly
attributed to transactions subject to VAT may
be recognized for input tax credit. Input taxes
that can be directly attributable to VAT
taxable sales of goods and services to the
Government or any of its political
subdivisions, instrumentalities or agencies,
including GOCCs shall not be credited
against output taxes arising from sales to
non-Government entities
(2) If any input tax cannot be directly attributed
to either a VAT taxable or VAT-exempt
transaction, the input tax shall be pro-rated
to the VAT taxable and VAT-exempt
transactions and ONLY the ratable portion
pertaining to transactions subject to VAT may
be recognized for input tax credit.
T. SUBSTANTIATION OF INPUT TAX
TAX CREDITS
(1) INPUT TAXES must be substantiated and
supported by the following documents, and
must be reported in the information returns
required to be submitted to the Bureau:
(a) For the importation of goods = Import
entry or other equivalent document
PAGE 177 OF 275
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showing actual payment of VAT on the
imported goods.
(b) For the domestic purchase of goods and
properties = Invoice showing the
information required under Secs. 113
(Invoicing and Accounting Requirements
for VAT-Registered Persons) and 237
(Issuance of Receipts or Sales or
Commercial Invoices) of the Tax Code.
(c) For the purchase of real property = public
instrument i.e., deed of absolute sale,
deed of conditional sale,
contract/agreement to sell, etc., together
with VAT invoice issued by the seller.
(d) For the purchase of services = official
receipt showing the information required
under Secs. 113 and 237 of the Tax Code.
A cash register machine tape issued to
a registered buyer shall constitute valid
proof of substantiation of tax credit only
if it shows the information required under
Secs. 113 and 237 of the Tax Code.
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TAXATION LAW
(2) TRANSITIONAL INPUT TAX shall be
supported by an inventory of goods as shown
in a detailed list to be submitted to the BIR.
(3) Input tax on "deemed sale" transactions shall
be substantiated with the invoice required.
(4) Input tax from payments made to non-
residents (such as for services, rentals and
royalties) shall be supported by a copy of the
Monthly Remittance Return of Value Added
Tax Withheld (BIR Form 1600) filed by the
resident payor in behalf of the non-resident
evidencing remittance of VAT due which was
withheld by the payor.
(5) Advance VAT on sugar shall be supported by
the Payment Order showing payment of the
advance VAT.
UP COLLEGE OF LAW TAXATION 2 TAXATION LAW

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

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

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

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

Accounting:
SELLER BUYER
Oct. 1, 2005 Oct. 1, 2005
Cash P 1,100,000.00 Asset P 5,000,000.00
Installment Receivable Input Tax 500,000.00
4,400,000.00 AccumulatedDepreciation
1,000,000.00 Cash 1,100,000.00
Output Tax Installment Payable 4,400,000.00
500,000.0
0 Asset 3,000,000.00
Gain on sale of asset 3,000,000.00
------------
To Record VAT Liability:
Output Tax 500,000.00
Input Tax 100,000.00
VAT Payable 400,000.00
Periodic Subsequent Payment:
Periodic Receipt of Installment: Installment Payable 1,100,000.00
Cash 1,100,000.00 Cash 1,100,000.00
Installment Receivable 1,100,000.00

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

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

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

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

Sale to private entities subject to 0% - 100,000.00
Sale of exempt goods - 100,000.00
Sale to gov’t. subjected to 5% final VAT WH - 100,000.00
Total sales for the month - P400,000.00

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

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

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

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

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

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

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

P100,000.00 X P20,000.00 - P5,000.00

400,000.00

Total input tax attributable to sales - P9,000.00

to government

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

Input tax on sale to gov’t. - P 4,000.00

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

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

P100,000.00 X P20,000.00 - P5,000.00

400,000.00

Total input tax attributable to sales - P 9,000.00

to government

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

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

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

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

Total Sales

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

400,000.00

Total input tax attributable to - P 7,000.00

VAT-exempt sales

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U. REFUND OR TAX CREDIT OF EXCESS
INPUT TAX (CF REFUND OF
ERRONEOUSLY PAID TAXES)
Who may claim for refund/apply for issuance of
tax credit certificate
(1) Zero-Rated Sales (Sec. 112(A), NIRC)
(a) Any VAT-registered person, whose sales are
zero-rated or effectively zero-rated may
apply for the issuance of a tax credit
certificate/refund of creditable input tax due
or paid attributable to such sales, EXCEPT
transitional input tax, to the extent that such
input tax has not been applied against
output tax, within two (2) years after the
close of the taxable quarter when the sales
were made. The input tax that may be
subject of the claim shall exclude the portion
of input tax that has been applied against
the output tax.
(b) The acceptable foreign currency exchange
proceeds must have been duly accounted for
in accordance with the rules and regulations
of the Bangko Sentral ng Pilipinas (BSP) in
the case of zero-rated transactions paid for
in acceptable foreign currency and requiring
that such be accounted for in accordance
with BSP rules & regulations (Secs.
106(A)(2)(a)(1) and (2), and Sec. 106(A)(2)(b)
and Sec. 108(B)(1) and (2), NIRC).
(c) Where the taxpayer is engaged in zero-rated
or effectively zero-rated sale and also in
taxable or exempt sale of goods of
properties or services, and the amount of
creditable input tax due or paid cannot be
directly and entirely attributed to any one of
the transactions, it shall be allocated
proportionately on the basis of the volume of
sales.
(d) In the case of a person engaged in the
transport of passenger and cargo by air or
sea vessels from the Philippines to a foreign
country, the input taxes shall be allocated
ratably between his zero-rated sales and
non-zero-rated sales (sales subject to
regular rate, subject to final VAT withholding
and VAT-exempt sales). (RR 16-2005)
Requirements: (Summary)
(i) The claimant should be a VAT-registered
person
(ii) There should be an application filed with the
BIR or DOF center, as the case may be,
within 2yrs after close of taxable quarter.
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TAXATION LAW
(iii) The claimed input tax must not have been
applied to any output tax during the period
covered and subsequent periods covered by
the claim.
(iv) The claimed input tax must have been
declared from the VAT quarterly return.
(v) The claimed input tax are directly
attributable to 0%-rated transactions.
(vi) Acceptable foreign currency exchange
proceeds must have been duly accounted for
(vii) Claimed input tax must be duly supported by
VAT invoices/receipts.
(viii) VAT returns for the succeeding quarters
must have been submitted.
(2) Cancellation of VAT Registration.
(a) A person whose registration has been
cancelled due to (i) retirement from or
cessation of business, or due to changes in or
(ii) cessation of status under Section 106(C)
of the Code may, within two (2) years from
the date of cancellation, apply for the
issuance of a tax credit certificate for any
unused input tax which may be used in
payment of his other internal revenue taxes.
(b) He shall be entitled to a refund if he has no
internal revenue tax liabilities against which
the tax credit certificate may be utilized.
Period to file claim/apply for issuance of tax credit
certificate
This period must be distinguished from normal
tax refunds for erroneous payments where an
administrative claim and judicial claim may be
made together, and the reckoning point of the 2
years is from the date of the erroneous payment.
(1) Application for issuance of tax credit
certificate or refund of creditable input tax
(except transitional input tax)
 WITHIN 2 YEARS after the close of the
taxable quarter when the sale was made,
not from the payment of the VAT. Sec.
229 is not applicable in claiming refunds
for VAT.
 If the VAT registration has been cancelled
due to retirement or cessation of business,
or change of status, the 2 year period
shall be after the date of cancellation
(2) Administrative Claim
 The CIR shall grant the tax credit/refund
within 120 days from the date of
submission of complete documents in
support of the application
UP COLLEGE OF LAW TAXATION 2
 “Complete Documents” is determined by
taxpayer himself.
 Taxpayer may only resort to a Judicial
Claim within 30 days either after the end
of the 120 day period or after a decision is
made by the Commission, whichever
comes first.
(3) Judicial Claim
 In case of denial of the application or the
expiry of the 120 days, the taxpayer may
appeal to the CTA within 30 days from
the receipt of said denial or inaction.
Manner of refund
Revenue Memorandum Circular no. 57-2013
(August 23, 2013): Unutilized creditable input
taxes attributed to zero-rated sales can only be
recovered through the application for refund or
tax credit. There is no other mode of recovering
unapplied input taxes aside from an application
for refund or tax credit. The Memorandum
Circular also instructed the disallowance of
unutilized creditable input taxes attributable to
VAT zero-rated sales that is claimed as a
deduction for income tax purposes.
Refunds shall be made upon warrants drawn by
the CIR or by his duly authorized representative
without the necessity of being countersigned by
the Chairman, Commission on Audit, the
provisions of the Administrative Code of 1987
notwithstanding: provided that refunds shall be
subject to post audit by the Commission on Audit.
(Sec. 112(D), NIRC)
V. INVOICING REQUIREMENTS
(Sec 113)
Invoicing requirements in general
A VAT-registered person shall issue:
(1) A VAT invoice for every sale, barter or
exchange of goods or properties; and
(2) A VAT official receipt for every lease of goods
or properties, and for every sale, barter or
exchange of services
Only VAT-registered persons are required to print
their TIN followed by the word “VAT” in their
invoice or ORs. Said documents shall be
considered as a “VAT Invoice” or VAT official
receipt. All purchases covered by
invoices/receipts other than VAT Invoice/VAT OR
shall not give rise to any input tax. [RR 16-05]
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TAXATION LAW
Note: VAT component of all transactions shall be
separately indicated in the VAT invoice or receipt.
(RR 18-2011)
Information Contained in the VAT Invoice or VAT
Official Receipt:
(1) A statement that the seller is a VAT-
registered person, followed by his taxpayer's
identification number (TIN);
(2) The total amount which the purchaser pays
or is obligated to pay to the seller with the
indication that such amount includes the
VAT:
(a) The amount of the tax shall be shown as
a separate item in the invoice/receipt;
(b) If the sale is exempt from VAT, the term
"VAT-exempt sale" shall be written or
printed prominently on the invoice or
receipt;
(c) If the sale is subject to zero percent (0%)
value-added tax, the term "zero-rated
sale" shall be written or printed
prominently on the invoice or receipt;
(d) If the sale involves goods, properties or
services some of which are subject to and
some of which are VAT zero-rated or
VAT-exempt, the invoice or receipt shall
clearly indicate the breakdown of the sale
price between its taxable, exempt and
zero-rated components, and the
calculation of the value-added tax on
each portion of the sale shall be shown on
the invoice or receipt. The seller has the
option to issue separate invoices or
receipts for the taxable, exempt, and
zero-rated components of the sale.
(3) The date of transaction, quantity, unit cost
and description of the goods or properties or
nature of the service; and
(4) In the case of sales in the amount of one
thousand pesos (P1,000) or more where the
sale or transfer is made to a VAT-registered
person, the name, business style, if any,
address and taxpayer identification number
(TIN) of the purchaser, customer or client.
(5) Name of buyer and seller
UP COLLEGE OF LAW TAXATION 2 TAXATION LAW

Invoicing Requirements and Recording in Deemed Sale Transactions

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

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

* Beginning Nov. 1, 2005, when R.A. 9337 (3) Other services rendered in the Philippines
became effective, all sales of goods, by non-residents
properties, or services to the government shall
be subject to the 5% final withholding tax. The
government shall, before making payment on
account of each purchase of goods and/or
services taxed at 12% VAT (Sec. 106 and 108)
deduct and withhold a final VAT due at the
rate of 5% of the gross payment thereof.
(Mamalateo, Reviewer on Taxation, 2008)

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

Should actual input VAT exceed 7% of the

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

However, 12% final VAT shall be withheld with

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

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VAT FORMULA (IN GENERAL)

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

Less: Sales Returns and Allowances xxx

Sales Discounts xxx xxx

Total Sales (Taxable Base) xxx

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

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

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

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

OUTPUT VAT Payable:

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

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Quick Notes on VAT

Transactions subject to VAT

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

Taxable Transactions and Specific Requirements

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

Persons Liable to pay VAT

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

21 Sec 106
22

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

Regular Sales (Ordinary
Assets)
Commercial Property Subject to 12% VAT
(Sale/Lease)
Residential Units (Lease) If monthly rental ≤ 12,800 = VAT and OPT-exempt
If monthly rental > 12,800 but aggregate annual rentals ≤1,919,500 = subject to OPT
If monthly rental > 12,800 and aggregate annual rentals > 1,919,500 = subject to VAT
Residential Lot If SP > 1,919,500.00 = subject to VAT
IF SP ≤ 1,919,500.00 = VAT-exempt
Residential House and If SP > 3,199,200.00 = subject to VAT
Lot IF SP ≤ 3,199,200.00 = VAT-exempt

23 Sec 108
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(iv) Non-stock, non-profit corporations engaged in SBE of real properties ICT/B, regardless of
disposition of income
(v) Gov’t inc GOCCs in SBEL of RP ICT/B
(2) Renders services
(3) Imports goods
 if importer is tax-exempt/VAT-exempt AND goods are subsequently SBE to non-exempt persons,
purchasers/recipients = importer
 if the Philippine branch of an NRFC “imported”, first local buyer = importer

Tax Bases of VAT

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

o IF ON INSTALLMENT:
GSP = down payments received + interests + penalties + other charges – amount of
mortgage (paid)
NB: If zonal/FMV, tax base =
Actual Consideration (exclusive VAT)
x zonal value or FMV, higher
Agreed Consideration (exclusive VAT)

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

(2) Gross Value in money of goods

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

24 It should be determined at the time of the sale, indicated in the invoice and granting does not depend on the happening
of a future event
25 Initial payments does not include the amount of mortgage on RP sold (except excess when mortgage exceeds the cost

of the property), notes and other evidence on=f indebtedness issued by the purchaser at the time of the sale
26 GSP is unreasonably lower than the actual market value if it is lower than 30% of AMV of the same goods of the same

quantity or quality sold in the immediate locality or the nearest date of sale.
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services + deposits and advanced payments actually or constructively received + costs items of
construction projects – (VAT + amounts earmarked for payments to unrelated 3rd party + amounts
received as reimbursement + monies/receipts held in trust w/c do not redound to the benefit of
taxpayer + universal charge passed on and collected by distribution companies and electric coop (if
sale of electricity) + receivables + local taxes)

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

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

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

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

Creditable Input VAT Requirements

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

Formula Input Tax Treatment

(VAT taxable sales)
Untraceable Input VAT x Creditable Input VAT
Total Sales
(Zero-rated sales)
Untraceable Input VAT x Input VAT Credit, eligible for tax refund or TCC
Total Sales
(VAT-exempt sales)
Untraceable Input VAT x Cost of Sales or Operating Expense
Total Sales
(Sale to Gov't) Compare to Standard Input VAT (Creditable
Untraceable Input VAT x
Total Sales against Standard input VAT)

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NB: Creditable Input VAT is

(1) increased by any input VAT carried over from the preceding month or quarter
(2) decreased by
(i) amount of the claim for refund or tax credit for VAT filed during the same period
(ii) input tax attributable to exempt sales and unauthorized input tax attributable of depreciable
capital goods
(iii) amount of input VAT wrt uncollected portion of instalment receivable in instalment sales

VAT-EXEMPT and 0% VAT

VAT-Exempt 0% VAT
 Non-VAT taxable transaction  Taxable transaction
 Taxpayer is relieved from payment of VAT for
w/c he is directly liable
 NO output and input VAT  No output VAT, but input VAT is available as
 Optional VAT Registration tax credit or refund
 Partial relief  Total relief
 Only removes VAT at the exempt stage  All VAT is removed at whatever stage
On Sales: On Sales:
 No VAT  No VAT
 Not within the VAT system  Still within the VAT system
 Not subject to VAT  Subject to 0% VAT
On Purchases: On Purchases:
 VAT passed is on cost  VAT passed on is input tax
 Input tax is a cost component thus item of  Input tax is creditable against output tax thus
deduction reducing only taxable income reducing VAT liability

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

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crop insurance; health and accident

insurance

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

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

27 Under Omnibus Investment Code (EO226)

28 Ibid
29 RA7227
30 RA 7916

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(ii) Intra-ecozone enterprise sale of service, if (iv) Docking/Undocking services to foreign vessels
PEZA registered seller is subject to 5%
special tax regime Foreign currency denominated goods
(iii) Intra-ecozone sales of goods (i) To a NRC/NRA of goods (5)
(ii) To a NRC/NRA of goods locally manufactured for
household and personal use (2)
E: automobiles and non-essential goods

Effectively-zero rated sales (3)

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

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Taxable Activity/Property TR Tax Base Tax Payable

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

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

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

Before start of business or Certificate of Non-VAT Cancellation/Update Minor change in

within 10d before the
necessitating cancellation original registration
beginning of taxable quarter

APPROVE w/in 15d

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

UPDATE his registration:

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

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

w/in 30 days w/in 30 days

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

Appeal to CTA ISSUANCE

Related INPUT VAT shall

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

DENIED GRANTED

Related INPUT VAT Related OUTPUT

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

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ANNEX: Illustration of the VAT System

VAT System (All VAT)

Raw Material (VAT) Manufacturer (VAT) Trader (VAT) End-User
SP (100+12) 100 112 SP (300 + 36) 300 336 SP (450 +54) 450 504
Cost 50 Cost (100 + 12) 100 112 Cost (300+36) 300 336
Profit 50 Profit 200 Profit 150
Purchase 112 Purchases 336 Purchases 504
Input VAT 12 12% VAT 36 12% VAT 54

OT 12% 12 OT 12% 36 OT 12% 54

IT 0 IT 12 IT 36
VAT Payable 12 Vat Payable 24 VAT Payable 18
VAT to BIR 12 VAT to BIR 24 VAT to BIR 18 Total VAT 54

VAT System (VAT Exempt 1st chain)

Raw Material (VAT
Manufacturer Trader End-User
Exempt)
SP (100+ 0) 100 SP (300 + 36) 300 336 SP (450 +54) 450 504
Cost 50 Cost (100) 100 Cost (300+36) 300 336
Profit 50 Profit 200 Profit 150
Purchase 100 Purchases 336 Purchases 504
Input VAT 0 12% VAT 36 12% VAT 54

OT 12% 0 OT 12% 36 OT 12% 54

IT 0 IT 0 IT 36
VAT Payable 0 Vat Payable 36 VAT Payable 18
VAT to BIR 0 VAT to BIR 36 VAT to BIR 18 Total VAT 54

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VAT System (VAT Exempt mid-chain)

Manufacturer (VAT
Raw Material Trader End-User
Exempt)
SP (100+12) 100 112 SP (300) 300 SP (450 +54) 450 504
Cost 50 Cost (100 + 12) 100 112 Cost (300) 300
Profit 50 Profit 188 Profit 150
Purchase 112 Purchases 300 Purchases 504
No Input VAT 0 No VAT 0 12% VAT 54

OT 12% 12 OT 12% 0 OT 12% 54

IT 0 IT 0 IT 0
VAT Payable 12 Vat Payable 0 VAT Payable 54
VAT to BIR 12 VAT to BIR 0 VAT to BIR 54 Total VAT 66

VAT System (VAT zero-rate mid-chain)

Manufacturer (VAT Zero-
Raw Material Trader End-User
rate)
SP (100+12) 100 112 SP (300+ 0) 300 SP (450 +54) 450 504
Cost 50 Cost (100 + 12) 100 112 Cost (300) 300
Profit 50 Profit 188 Profit 150
Purchase 112 Purchases 300 Purchases 504
No Input VAT 12 No VAT 0 12% VAT 54

OT 12% 12 OT 12% 0 OT 12% 54

IT 0 IT 12 IT 0
VAT Payable 12 Vat Payable ( 12) VAT Payable 54
VAT to BIR 12 VAT to BIR (12) VAT to BIR 54 Total VAT 54

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ANNEX: CARRIERS BY LAND / AIR / SEA

Area Object Kind Business Tax Income Tax
By Land Person Domestic 3% Percentage Regular Tax
Tax
Cargo/Goods Domestic 12% VAT Regular Tax

By Air Person / Cargo / Domestic Domestic flight - Regular Tax

Goods 12% VAT
International Regular tax
flight – 0% VAT
International 3% Percentage Gross Philippine
Tax Billing
By Sea Person / Cargo Domestic Domestic flight - Regular Tax
/Goods 12% VAT
International Regular tax
flight – 0% VAT
International 3% Percentage Gross Philippine
Tax Billing

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IV. Tax Remedies under
the NIRC
A. TAXPAYER’S REMEDIES
(1) ADMINISTRATIVE (BIR)
(a) Before payment
(i) Filing a petition or reconsideration or
reinvestigation; and
(ii) Entering into a compromise
(b) After payment
(i) Filing a claim for refund; and
(ii) Filing a claim for tax credit
(2) JUDICIAL (CTA/RTC)
(a) Civil action
(i) Appeal to the CTA
(ii) Action to contest forfeiture of chattel;
and
(iii) Action for damages
(b) Criminal action
(i) Filing a criminal complaint against
erring BIR officials and employees
Periods:
 Assessment (3 or 10 years)
o Return was filed
(i) Not false or fraudulent – 3 years
from date of filing of the return
OR date legally due or actual
date of filing after it wad due,
whichever is LATER
(ii) False or fraudulent – 10 years
from date the fraud or falsity was
discovered
o No return filed – 10 years from the
discovery of omission
 Collection (3 or 5 years)
o Collections with assessments – 5
years from date of finality of
assessment (FAN if unprotested or
the Final Decision on Disputed
Assessment [FDDA] if protested)
o Collections without assessments –
must be made within the period of
making an assessment.
(i) With a REGULAR return filed, i.e.,
one which is not false or
fraudulent – 3 years from date of
filing of the return OR date or
actual date of filing after it was
due, whichever is LATER
PAGE 200 OF 275
TAXATION LAW
(ii) Return filed was false or
fraudulent – 10 years from date of
discovery of fraud or falsity
No return filed – 10 years from date of discovery
of omission
 Criminal offense
o 5 years from date of commission, and
if not known then, from discovery and
the institution of judicial proceedings
for its investigation and punishment.
Assessment
(i) Concept of assessment
Assess means to impose a tax; to charge
with a tax; to declare a tax to be payable; to
apportion a tax to be paid or contributed, to fix a
rate; to fix or settle a sum to be paid by way of tax;
to set, fix or charge a certain sum to each
taxpayer; to settle determine or fix the amount of
tax to be paid (84 C.J.S 74-750)
An assessment is the notice to the effect
that the amount therein stated is due from a
taxpayer as a tax with a demand for payment of
the same within a stated period of time. (CIR v.
CTA, 27 SCRA 1159)
Forms of assessment
1. Self-assessment – Assessments made by
taxpayers who then file returns.
2. Deficiency assessment – Assessments
made by the BIR after the conduct of an
investigation or audit when it finds that
the tax return filed by the taxpayer
contains an under-declaration of income
or when the taxpayer does not at all file a
tax return.
3. Jeopardy assessment (Section D, infra)
A. Requisites for valid assessment
(a) The taxpayer shall be informed in writing of
the law and the facts on which the
assessment is made (Sec. 228, NIRC)
(b) An assessment contains not only a
computation of tax liabilities, but also a
demand for payment within a prescribed
period (CIR v. PASCOR)
(c) An assessment must be served on and
received by the taxpayer (CIR v. PASCOR)
Note: The presumption of the correctedness of
assessment CANNOT be made to rest on another
UP COLLEGE OF LAW TAXATION 2 TAXATION LAW

presumption, e.g., presumption of regularity of Less: Non-taxable income or receipts

performance of official functions. subjected to final tax transfer taxes
Taxable Net Income
B. Constructive methods of income determination Less: Personal and additional exemptions
(a) Rely upon circumstantial evidence of NET INCOME SUBJECT TO TAX
determining the correct income or
transaction of a taxpayer (Indirect Method) D. Jeopardy assessment
(b) Expenditure Method: It proceeds on the
Under BIR Regulations, a jeopardy assessment is
theory that where the amount of money
a tax assessment which was assessed without the
which a taxpayer spends during a given year
benefit of complete or partial audit by an
exceeds his reported income, and the source
authorized revenue officer, who has reason to
of such money is otherwise unexplained, it
believe that the assessment and collection of a
may be inferred that such expenditures
deficiency tax will be jeopardized by delay
represent unreported income.
because of the taxpayer’s failure to comply with
(c) Percentage Method: This method is a the audit and investigation requirements to
computation whereby determinations are present his books of accounts and/or pertinent
made by the use of percentages or ratios records, or to substantiate all or any of the
considered typical of the business under deductions, exemptions, or credits claimed in his
investigation. By reference to similar return. (As defined in Sec. 3(1)(a), RR 30-2002 for
business or situations, percentage the purposes of entering into a compromise)
computations are secured to determine sales,
gross profit or even net profit. E. Tax delinquency and tax deficiency
(d) Unit and Value Method: The determination of
gross receipts may be computed by applying
Deficiency is defined as the amount still due and
collectible from a taxpayer upon audit or
price and profit figures to the known
investigation; whereas delinquency is defined as
ascertainable quality of business done by
the failure of the taxpayer to pay the tax due on
taxpayer
the date fixed by law or indicated in the
assessment notice or letter of demand.
C. Inventory method for income determination Deficiency interest is imposed for the shortage of
(Net Worth Method) taxes paid, while delinquency interest is imposed
Holland v. US: In a typical net worth prosecution, for the delay in payment of taxes. [Takenaka
the Government, having concluded that the Corporation Philippine Branch v. CIR (2012); First
taxpayer's records are inadequate as a basis for Lepanto Taisho Insurance Corporation v. CIR,
determining income tax liability, attempts to (2013)]
establish an "opening net worth" or total net
value of the taxpayer's assets at the beginning of Deficiency Delinquency
a given year. It then proves increases in the Basic tax +
taxpayer's net worth for each succeeding year deficiency
Base Basic tax
during the period under examination, and interest and
calculates the difference between the adjusted surcharge
net values of the taxpayer's assets at the
From the due
beginning and end of each of the years involved.
From the date date appearing
The taxpayer's nondeductible expenditures,
prescribed for its in the notice and
including living expenses, are added to these Reckoning
payment until demand of the
increases, and if the resulting figure for any year date
is substantially greater than the taxable income the full payment CIR until the
reported by the taxpayer for that year, the thereof amount is fully
Government claims the excess represents paid
unreported taxable income. Rate 20% p.a.

Formula
Increase in Net worth Tax Delinquency v. Tax Deficiency
Add: Non-deductible Item Tax Delinquency Tax Deficiency
PAGE 201 OF 275
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It is when: It is when: Prescriptive period for assessment (Sec. 203,

Self-assessed taxpayer The amount of tax NIRC)
filed his tax return but imposed by law is General Rule: 3 years
did not pay or only greater than the  If the taxpayer filed a return: internal revenue
partially paid the tax amount shown in the
tax return
taxes shall be assessed within 3 years after
Deficiency Tax assessed the last day prescribed by law for the filing of
by the BIR became final If no amount is shown in the return.
and executory the return, or if there is  If a return is filed beyond the period
no return, amount by prescribed by law: the 3-year period shall be
which the tax as counted from the day the return was filed.
determined by the CIR
exceeds the amount Exception: (i) False return, (ii) Fraudulent return
previously assessed as a
with intent to evade tax, (iii) Failure to file a return
deficiency
(Sec. 222, NIRC)
CAN be collected CANNOT be
IMMEDIATELY through immediately collected.
1. Administrative CAN be collected only NB: Waiver
Actions (warrant of AFTER the process of The taxpayer and the CIR may agree in writing,
distraint or levy) protest before the expiration of the time prescribed in Sec.
2. Judicial Actions 203, to extend the period of assessment (Sec.
Thus, a civil action for 222(b), NIRC)
Thus, civil action for collection to ordinary (1) The waiver of prescription must be executed
collection to ordinary courts pending protest properly, otherwise, invalid and results to
courts is the proper may be subject to prescription of the right to assess/collect.
remedy. Motion to Dissmiss
(Philippine Journalists Inc. vs. CIR, December
SUBJECT to SUBJECT to
administrative penalties administrative penalties
16, 2004)
of: of: (2) Requirements for a valid waiver under RMO
1. 25% surcharge 1. interest 20-90 and RMO 14-2016:
2. interest 2. compromise penalty i. In writing (may be but need not be
3. compromise penalty notarized);
Mamalateo: Reviewer on Taxation (2014) ii. Indicate the date of execution by the
taxpayer, which must be before the
expiration of the period to assess or
(ii) Power of the CIR to make assessments and collect taxes, or before the lapse if the
prescribe additional requirements for tax period previously agreed upon in a prior
administration and enforcement
agreement;
iii. Indicate the definite agreed date;
Powers of the CIR –
iv. Indicate the date of acceptance, which
1. Examination of returns and determination of
must be before the expiration of the
tax due
period to assess or to collect taxes, or
2. Use of the best evidence obtainable
 before the lapse of the period agreed
3. Authority to conduct inventory-taking, upon in a prior agreement; and
surveillance, and to prescribe presumptive gross v. Taxpayer must be furnished with a copy
sales and receipts
 of the waiver.
4. Authority to terminate the taxable period

5. Authority to prescribe real estate values
 Suspension of running of statute of limitations
6. Authority to inquire into bank deposits

(1) Period during which the CIR is prohibited
7. Authority to accredit and register tax agents
 from making the assessment or beginning
8. Authority to prescribe additional procedural or distraint or levy or a proceeding in court, and
documentary requirements for sixty (60) days thereafter
9. Obtain information, and to summon/examine, (2) When the taxpayer requests for a
and take testimony of persons reinvestigation which is granted by the CIR
(3) When the taxpayer cannot be located in the
address given by him in the return filed upon
(iii) When assessment is made
PAGE 202 OF 275
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which a tax is being assessed or collected,
BUT if the taxpayer informs the CIR of any
change in address, the running of the statute
of limitations shall not be suspended
(4) When the warrant of distraint or levy is duly
served upon the taxpayer, his authorized
representative, or a member of his household
with sufficient discretion, and No Property is
located
(5) When the taxpayer is out of the Philippines
(iv) General provisions on additions to the tax
(a) Civil penalties (Sec. 248, NIRC)
1. 25% surcharge
a. Failure to file a return and pay tax due
thereon
b. Filing with unauthorized revenue
office
c. Failure to pay deficiency tax within
time prescribed in assessment notice
d. Failure to pay full or part of the
amount shown in ITR required to be
filed or the full amount of tax due for
which no return is required to be filed
on or before the date prescribed for its
payment
2. 50% surcharge
a. Willful neglect to file the return within
the period prescribed
b. False or fraudulent return is willfully
made
(b) Interest (Sec. 249)
1. General – there shall be assessed and
collected any unpaid amount of tax,
interest at the rate of 20% per annum or
such higher rate as may be prescribed
from the date prescribed for payment
until fully paid
2. Deficiency interest – 20% p.a. on the tax
due
3. Delinquency interest – 20% p.a. on the
unpaid amount of
a. Failure to pay the amount of tax due
on any return required to be filed
b. Failure to pay the amount of tax due
for which no return is required
c. Failure to pay a deficiency tax or
surcharge or interest thereon on the
due date appearing on the notice
and demand of the CIR
4. Interest on extended payments – if any
person is qualified and elects to pay
installments but fails to pay the tax or any
installment on or before the date
PAGE 203 OF 275
TAXATION LAW
prescribed, there shall be assessed and
collected interest at the rate of 20% per
annum on the tax or deficiency tax or part
thereof unpaid
(c) Compromise penalties
ADMINISTRATIVE REMEDIES
Assessment process [Sec. 228, NIRC; RR 12-99;
RR 18-13]
(a) Tax audit – In a tax audit, revenue officers
examine the books of account and other
accounting records of taxpayers to determine the
correct tax liability. This is through the issuance
of a Letter of Authority.
Letter of Authority: An official document that
empowers a Revenue Officer to examine and
scrutinize a taxpayer’s books of accounts and
other accounting records, in order to determine
the taxpayer’s correct internal revenue tax
liabilities.
Cases which need not be covered by a valid LA:
Cases involving civil/criminal tax fraud which fall
under the jurisdiction of the tax fraud division of
the Enforcement Services, and Policy cases under
audit by the special teams in national offices
(b) Notice of informal conference
N.B. – RR 18-2013 amended RR 1812-99 and
deleted the service of notice of informal
conference.
(c) Issuance of preliminary assessment notice
(PAN) – The Assessment Division issues PAN if it
determines that there exists sufficient basis to
assess the taxpayer for any deficiency tax. It shall
show in detail the facts and the law on which the
proposed assessment is based.
(d) Exceptions to issuance of preliminary
assessment notice (PAN)
The notice for informal conference and the PAN
shall not be required in any of the ff cases, in
which case, issuance of the Formal Assessment
Notice (FAN) shall be sufficient:
1. The finding for any deficiency tax is the
result of mathematical error in the
computation of the tax as appearing on
the face of the return; or
2. A discrepancy has been determined
between the tax withheld and the
UP COLLEGE OF LAW TAXATION 2
amount actually remitted by the
withholding agent; or
3. A taxpayer who opted to claim a refund or
tax credit of excess creditable
withholding tax for a taxable period was
determined to have carried over and
automatically applied the same amount
claimed against the estimated tax
liabilities for the taxable quarter or
quarters of the succeeding taxable year;
or
4. The excise tax due on excisable articles
has not been paid; or
5. An article locally purchased or imported
by an exempt person, such as, but not
limited to, vehicles, capital equipment,
machineries and spare parts, has been
sold, traded or transferred to a non-
exempt person.
(e) Reply to preliminary assessment notice (PAN)
Taxpayer is given 15 days from date of receipt of
PAN to respond
 If he/she fails to respond: taxpayer is
considered in default; a formal letter of
demand and assessment notice shall be
issued to the taxpayer
 N.B. – In Oakwood Management Services, Inc.
v. CIR (2013), the CTA held that the issuance
of the FAN before the lapse of the 15-day
period to reply to PAN does not violate due
process. A protest against the PAN, unlike the
protest against the FAN, is not indispensable.
A PAN may or may not be protested by the
taxpayer, and the non-filing of such protest
does not render the PAN final and
unappealable. Therefore, the issuance of the
FAN before the lapse of the 15-day period for
the taxpayer to file its protest to the PAN does
not inflict prejudice on the taxpayer, for as
long as the BIR properly served a FAN and
the taxpayer was able to intelligently contest
the FAN by filing a protest letter within the
period provided by law.
If he/she responds: a FAN/FLD shall be issued
within 15 days from filing/submission of the
taxpayer’s response, calling for payment of the
taxpayer’s deficiency tax liability, inclusive of the
applicable penalties.
PAGE 204 OF 275
TAXATION LAW
(f) Issuance of formal letter of demand and
assessment notice/final assessment notice
(FAN/FLD)
A Final Assessment Notice (FAN) is a declaration
of deficiency taxes issued to a taxpayer who:
 fails to respond to a pre-assessment notice
within the prescribed period of time, or
 whose reply to the PAN was found to be
without merit.
 Sec 228: The taxpayer shall be informed in
writing of the law and the facts on which the
assessment is made; otherwise the
assessment shall be void
An assessment contains not only a computation
of tax liabilities, but also a demand for payment
within a prescribed period.
(g) Disputed assessment
The taxpayer or his duly authorized
representative may protest administratively
against the formal letter of demand and
assessment notice within thirty days (30) from
date of receipt. The taxpayer protesting an
assessment may file a written request for
reconsideration or reinvestigation
 RECONSIDERATION – refers to a plea of re-
evaluation of the assessment on the basis of
existing records without need of additional
evidence. It may involve both question of fact
or of law or both
 REINVESTIGATION – refers to a plea of re-
evaluation of an assessment on the basis of
newly-discovered evidence that a taxpayer
intends to present in the reinvestigation. It
may also involve a question of fact or law or
both.
Failure to file a protest against FLD/FAN within
30 days, the assessment shall become final,
executory and demandable
(h) Administrative decision on a disputed
assessment (FDDA)
(vi) Protesting the assessment
(a) Protest of assessment by taxpayer
(1) Protested assessment – After issuance of FAN,
taxpayer may protest the assessment either by a
request for reconsideration or reinvestigation.
(2) When to file a protest – 30 days after receipt of
FAN/FLD.
UP COLLEGE OF LAW TAXATION 2
(3) Forms of protest – for the general concept of a
request for reconsideration and reinvestiation,
see (g), supra.
(3.1) – Request for RECONSIDERATION
Effect on prescriptive period to COLLECT – A
request for reconsideration does not toll the
running of the prescriptive period for the
collection of an assessed tax. (CIR vs. Philippine
Global Communication Inc., G.R. No. 167146,
October 31, 2006)
(3.2) – Request for REINVESTIGATION
Effect on prescriptive period to COLLECT – A
Request for Reinvestigation will only toll the
prescriptive period to COLLECT if the request for
reinvestigation is granted by the BIR.
(b) If request for REINVESTIGATION and
GRANTED – Submission of documents within 60
days from filing of protest
 Within sixty (60) days from filing of the
protest, all relevant supporting documents
must be submitted, otherwise the
assessment shall become final.
 “Relevant supporting documents” –  Issuing a warrant of distraint and levy (CIR v.
documents necessary to support the legal
and factual bases in disputing a tax
assessment as determined by the taxpayer
 “Assessment shall become final” – taxpayer is
barred from disputing the correctness of the
issue assessment by introduction of newly
discovered or additional evidence, and the
FDDA shall consequently be denied.
 Only applies to request for reinvestigation
(4) Content and validity of protest
The protest shall state: (Failure to state shall
render protest null and void)
 Nature of protest, whether Reconsideration
or reinvestigation, specifying new or
additional evidence if request for
reinvestigation
 Date of the assessment notice
 Applicable law, rules and regulations, or
jurisprudence on which his protest is based.
(c) Effect of failure to protest – FAN/FLD becomes
final and demandable.
(d) Period provided for the protest to be acted
upon – 180 DAYS from
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a. Submission of documents if request
for REINVESTIGATION; or
b. Filing of protests if request for
RECONSIDERATION
(vii) Rendition of decision by CIR
N.B. – An administrative appeal to the CIR may
only be availed of upon the denial of the protest
to the FAN by the CIR representative. Under RR
18-2013, there is no administrative appeal to the
CIR for inaction by the CIR representative. The
remedy is to await the decision or file a petition
for review to the CTA 30 days after the lapse of
180-day waiting period.
Denial of protest – Issuance of a Final Decision on
a disputed assessment (FDDA): The decision of
the CIR or his duly authorized representatives
shall state the facts, the applicable law, rules and
regulations or jurisprudence on which such
decision is based, and that the same is his final
decision.
(1) CIR’s actions equivalent to denial of protest:
 Filing of collection suit against taxpayer (CIR
v. Union Shipping)
Algue)
 Where there is a request for reconsideration,
final demand letter from BIR (CIR v. Isabela
Cultural Corp.)
 Notice of delinquency (CIR v. Ayala
Securities)
 Inaction by CIR - If the protest is not acted
upon within one hundred eighty (180) days
from submission of documents, the inaction
by the CIR is considered as a denial of protest.
 Filing of criminal action against taxpayer
 Issuing a warrant of distraint and levy
(2) Inaction by CIR
(viii) Remedies of taxpayer to action by CIR
(a) In case of denial of protest
If the protest is denied, in whole or in part, by the
CIR’s duly authorized representative, the taxpayer
may either:
(a) Appeal to the CTA within 30 days from the
date of receipt of the decision
(b) Elevate his protest through request for
reconsideration to the CIR (the only case
where an administrative appeal is possible)
UP COLLEGE OF LAW TAXATION 2
If the CIR denies the protest filed by the taxpayer,
the latter may appeal to the CTA within 30 days
from receipt of the decision denying the protest.
A motion for reconsideration of the CIR’s denial
of the protests shall not toll the 30 day period to
appeal to the CTA.
(b) In case of inaction by CIR within 180 days from
submission of documents
If the protest is not acted upon by the CIR’s duly
authorized representative within 180 days from
filing of the protest or from submission of
required documents, the taxpayer may either:
(a) Appeal to the CTA within 30 days after the
expiration of the 180 days,
(b) Await the final decision of the CIR’s duly
authorized representative.
If the CIR did not act upon the petition within 180
days from the time the documents were
submitted, the taxpayer may either:
(a) Appeal to the CTA within thirty days from the
lapse of the 180-day period OR
(b) Wait until the CIR decides before he elevates
the case to the CTA.
These options are mutually exclusive, and resort
to one bars the application of the other. [Rizal
Commercial Banking Corporation vs. CIR 
 ruling of the CTA en banc may file with the
(2007)]
N.B. – if the protest is a request for
RECONSIDERATION, count the 180 days from
the filing of the protest. The submission of
documents is only for a request for
reinvestigation.
(c) Effect of failure to appeal – Assessment
becomes final and demandable.
JUDICIAL REMEDIES
Petition for Review at the CTA
Remedy if the taxpayer is not satisfied with the
CTA Division’s ruling:
 FIRST, he may file a motion for
reconsideration before the same Division of
the CTA within fifteen (15) days from notice
thereof. (Sec. 11, RA 1125 as amended by RA
9282 [2004])
 THEN, a party adversely affected by a
resolution of a Division of the CTA on a
motion for reconsideration may file a petition
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TAXATION LAW
for review with the CTA en banc. (Sec. 18, RA
1125 as amended by RA 9282 [2004])
Remedy of injunction; generally unavailable
No court may grant injunction to restrain the
collection of any national internal revenue tax,
fee or charge. (Sec. 218, NIRC)
Exception:
When the all of the following conditions concur:
(1) It is an appeal to the CTA from a decision of
the CIR, or Commissioner of Customs or the
RTC, provincial, city or municipal treasurer or
the Secretary of Finance, the case may be,
AND
(2) In the opinion of the Court of Tax Appeals, the
collection may jeopardize the interest of the
Government and/or the taxpayer. (Sec. 11,
R.A. 1125 as amended by R.A. 9282)
Requisite before availing of injunction
(1) Taxpayer has to deposit the amount claimed;
OR
File an injunction bond with the Court for not
more double the amount (R.A. 1125)
Petition for Review with the SC
Remedy if the taxpayer is not satisfied with the
decision of the CTA en banc:
 A party adversely affected by a decision or
Supreme Court a verified petition for review
on certiorari pursuant to Rule 45 of the 1997
Rules of Court. (Sec. 19, RA 1125 as amended
by RA 9282 [2004])
Modes of Service - The notices to the taxpayer
required may be served by the CIR or his duly
authorized representative through the following
modes:
(1) PERSONAL SERVICE – the notice shall be
served through personal service by delivering
personally a copy thereof to the party at his
registered or known address or wherever he
may be found. A known address shall mean a
place other than the registered address
where business activities of the party are
conducted or his place of residence.
In case personal service is not practicable, the
notice shall be served by substituted service
or by mail.
UP COLLEGE OF LAW TAXATION 2
(2) SUBSTITUTED SERVICE – substituted service
can be resorted to when the party is not
present at the registered or known address
under the following circumstances:
 May be left at the party’s registered
address, with his clerk or with a person
having charge thereof.
 May be left in place where business
activities of the party are conducted with
his clerk or person having charge thereof.
 May be left in the place of residence with
a person of legal age residing therein.
 If no person is found, the revenue officers
concerned shall bring a barangay official
and 2 disinterested witnesses to the
address so that they may personally
observe and attest to such absence. The
notice shall then be given to said
barangay official.
 Should party be present but refuses to
receive the notice, the revenue officers
shall bring a barangay official and 2
disinterested witnesses in the presence of
the party so that they may personally
observe and attest such act of refusal.
The notice shall then be left with the
barangay official.
 Service to the tax practitioner, who is
appointed by the taxpayer under
circumstances prescribed in the pertinent
regulations on accreditation of tax
agents, shall be deemed service to the
taxpayer (RR 18-2013)
(3) SERVICE BY MAIL – Service by mail is done by
sending a copy of the notice by registered
mail to the registered or known address of
the party with instruction to the Postmaster
to return the mail to the sender after 10 days
if undelivered. A copy of the notice may also
be sent through reputable professional
courier service. If no registry or reputable
professional courier service is available,
service may be done by ordinary mail
Refund
Nature of a claim for refund: It partakes of the
nature of an exemption and is strictly construed
against the claimant. The burden of proof is on
the taxpayer claiming the refund that he is
entitled to the same. (CIR v. Tokyo Shipping,
1995)
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TAXATION LAW
(i) Grounds and requisites for refund
1. There is a tax collected erroneously or
illegally, or a penalty collected without
authority, or a sum excessively or wrongfully
collected (see Section 229, Tax Code)
2. There must be a written claim for refund filed
by the taxpayer to the CIR (see Vda. De
Aguinaldo v. CIR [February 26, 1965])
Exceptions
a. When on the face of the return upon
which payment was made, such
payment appears clearly to have been
erroneously paid, the CIR may refund
or credit the tax even without a written
claim (Section 229, Tax Code)
b. A return filed showing an
overpayment shall be considered as a
written claim for credit or refund. (Sec.
204(C), Tax Code)
3. The
 claim must be a categorical claim for
reimbursement (see Bernejo v. CIR [July 25,
1950])
4. The claim for refund must be filed within 2
years from the date of the payment of the tax
regardless of any supervening cause
(Section 229, Tax Code)
5. Taxpayer must show proof of the tax (Sec.
229)
(ii) Requirements for refund as laid down by cases
(1) Necessity of written claim for refund
(2) Claim containing a categorical demand for
reimbursement
(3) Filing of administrative claim for refund and
the suit/proceeding before the CTA within 2
years from date of payment regardless of any
supervening cause
 The claim for refund must be filed within
2 years from the date of payment of the
tax regardless of any supervening cause
(Section 229, Tax Code)
Judicial remedy for refund – File with suit with the
CTA
1. Within 30 days from receipt of denial by
the CIR; and
2. Before the expiration of the 2-year period
Simultaneous filing allowed
If the 2 year period is about to lapse, the taxpayer
may already appeal to the CTA even if the CIR has
not yet made any decision on the claim for refund.
UP COLLEGE OF LAW TAXATION 2
In GIBBS V. COLLECTOR OF INTERNAL
REVENUE [FEBRUARY 29, 1960], the Supreme
Court noted that if the CIR takes time in deciding
the claim and the period of two years is about to
end, the suit or proceeding must be started in the
CTA before the end of the 2 year period without
awaiting the decision of the CIR.
N.B. – Compare with the rule on refunds of input
VAT. The awaiting of the decision of CIR or the
lapse of the 180-day period is mandatory.
Legal basis of tax refunds – solutio indebitii and
the rules on quasi-contracts (prevention of unjust
enrichment)
Statutory basis for tax refund under the tax code
(Sec. 204[c] and Sec. 229)
(a) Scope of claims for refund
The CIR may:
 Credit or refund taxes erroneously or illegally
received or penalties imposed without
authority;
 Refund the value of internal revenue stamps
when they are returned in good condition by
the purchaser; and
 In the CIR’s discretion, redeem or change
unused stamps that have been rendered
unfit for use and refund their value upon
proof of destruction
(b) Necessity of proof for claim or refund -
No credit or refund of taxes or penalties shall be
allowed unless the taxpayer files in writing with
the CIR a claim for credit or refund within two (2)
years after the payment of the tax or penalty. (Sec.
204, NIRC)
A return filed showing an overpayment shall be
considered as a written claim for credit or
refund.(Sec. 204, NIRC)
(c) Burden of proof for claim of refund
Tax refunds, like tax exemptions, are construed
strictly against the taxpayer and liberally in favor
of the taxing authority. (United Airlines, Inc. v.
CIR, G.R. No. 178788, Sept. 29, 2010)
(d) Nature of erroneously-paid tax/illegally
assessed collected
A claim for tax refund is in the nature of a claim
for exemption and should be construed
strictissimi juris against the taxpayer. (see CIR V.
TOKYO SHIPPING [MAY 26, 1995])
PAGE 208 OF 275
TAXATION LAW
Taxes are erroneously paid when a taxpayer pays
under a mistake of fact, such as, he is not aware
of an existing exemption in his favor at the time
that payment is made. Taxes are illegally
collected when payments are made under duress.
(e) Tax refund vis-à-vis tax credit
REFUND takes place when there is actual
reimbursement while TAX CREDIT takes place
upon the issuance of a tax certificate or tax credit
memo, which can be applied against any sum
that may be due and collected from the taxpayer.
(f) Essential requisites for claim of refund
(Comm. v. CA and Citytrust, cited in United
Airlines Inc. v. CIR, 2010): The grant of a refund is
founded on the assumption that the tax return is
valid, that is, the facts stated therein are true and
correct. The deficiency assessment, although not
yet final, created a doubt as to and constitutes a
challenge against the truth and accuracy of the
facts stated in said return which, by itself and
without unquestionable evidence, cannot be the
basis for the grant of the refund. To grant the
refund without determination of the proper
assessment and the tax due would inevitably
result in multiplicity of proceedings or suits. If the
deficiency assessment should subsequently be
upheld, the Government will be forced to institute
anew a proceeding for the recovery of erroneously
refunded taxes which recourse must be filed
within the prescriptive period of ten years after
discovery of the falsity, fraud or omission in the
false or fraudulent return involved.
Who may claim/apply for tax refund/tax credit
Taxpayer/withholding agents of non-resident
foreign corporation – the withholding agent is
directly and independently liable for the correct
amount of tax that should be withheld and for
deficiency assessments, surcharges and
penalties.
General Rule: The taxpayer must file a written
claim for refund stating a categorical demand for
reimbursement before the CIR within two years
from the date of payment. (Sec. 229, NIRC)
When it comes to recovery of unutilized input VAT,
Section 112, and not Section 229 of the 1997 Tax
Code, is the governing law. Second, prior to 8
June 2007, the applicable rule is neither Atlas nor
Mirant, but Section 112(A). The Atlas doctrine,
which held that claims for refund or credit of
UP COLLEGE OF LAW TAXATION 2
input VAT must comply with the two-year
prescriptive period under Section 229, should be
effective only from its promulgation on 8 June
2007 until its abandonment on 12 September
2008 in Mirant. (CIR v. San Roque)
Exceptions to requirement of a written claim:
When on the face of the return upon which
payment was made, such payment appears
clearly to have been erroneously paid (e.g.,
mathematical errors), the CIR may refund or
credit the tax even without a written claim
therefore. (Sec. 229, NIRC)
A return filed showing an overpayment shall be
considered as a written claim for credit or refund.
(Sec. 204(C), NIRC)
Prescriptive period for recovery of tax erroneously
or illegally collected
Note: Under Sec. 229, there is no exception to the
2-year prescriptive period.
Two-year period when counted:
From the date that tax was paid.
How date of payment determined:
If the income tax is withheld at source – payment
is at the end of the taxable year.
If the income is paid on a quarterly basis –
payment is from the time of filing the final
adjustment return.
CIR vs. TMX Sales (January 16, 1992): When a tax
is paid in installments, the prescriptive period
should be counted from the date of final payment
or the last installment. This rule proceeds from
the theory that there is no payment until the
entire tax liability is completely paid.
Installments should be treated as advances or
portions of the annual tax due.
Other consideration affecting tax refunds
Remedy of the taxpayer upon denial or inaction on
the claim for refund:
(a) CIR denies claim - appeal to the CTA within
thirty (30) days from the receipt of the CIR’s
PAGE 209 OF 275
TAXATION LAW
decision and within two years from the date
of payment.
(b) CIR does not act on the claim and the 2-year
period is about to lapse - file a claim before
the CTA before the 2-year period lapses.
Otherwise, he may no longer file a claim
before the CTA in case the CIRrenders an
adverse decision beyond the 2-year period.
(Revised Rules of the CTA, as amended)
Period for claiming refund once granted:
Within five years from the date such warrant or
check was mailed or delivered, otherwise it shall
be forfeited in favor of the government and the
amount thereof shall revert to the general fund.
(Sec. 230, NIRC)
Period for using the Tax Credit Certificate (TCC):
Tax credit certificates (TCCs) can be applied
against all internal revenue taxes, excluding
withholding tax. TCCs which remain unutilized
after five years from the date of issue shall be
considered as invalid, unless revalidated. If not
revalidated, the amount covered by the TCC shall
revert to the general fund. (Sec. 230, NIRC)
B. GOVERNMENT’S REMEDIES
Collection
Remedies of the Government in Collection
Administrative
Distraint of Personal Property including
garnishment deposit
Summary remedy of levy on real property
Forfeiture to the government for want of
bidder
Further Distraint or Levy
Tax Lien
Compromise and Abatement
Penalties and Fines
Judicial
Civil
Criminal
(i) Requisites
Delinquency tax – can be immediately collected
administratively through issuance of a warrant of
distraint or levy and/or through judicial action
(see Section 205, Tax Code)
Deficiency tax – can be collected also through
administrative and/or judicial remedies but has
to go through the process of filing the protest by
UP COLLEGE OF LAW TAXATION 2
the taxpayer against the assessment and the
denial of such protest by the CIR.
(ii) Prescriptive periods
Collections with assessments
FIVE YEARS after the assessment becomes final,
executory, and demandable.
Collections without assessments
 In case of false or fraudulent return with
intent to evade tax or of failure to file a return,
collection without assessment (or
assessment) may be made within 10 years
from discovery of falsity, fraud or omission.
(Sec. 222(a), NIRC)
o An assessment may also be made
which carries its own 5-year
prescriptive period to collect.
 Collections without assessment may be
made within the period for making an
assessment (3 years from the required date of
filing or actual filing, whichever is later) (See
Sec. 203, NIRC)
Waiver of prescriptive period
If tax was assessed within the different period
agreed upon by the CIR and the taxpayer, it may
be collected by distraint or levy or by a proceeding
in court within the period agreed upon in writing
before the expiration of the 5-yr period.(Sec.
222d, NIRC)
(iii) Distraint of Personal Property
Distraint – remedy enforced on the goods,
chattels, or effects, and other personal property
of whatever character including stocks and other
securities, debts, credits, bank accounts, and
interest in and rights to personal property (Sec.
205(a), NIRC)
Kinds of Distraint:
(1) Constructive Distraint
(2) Actual Distraint
Constructive Distraint – may be placed by the CIR
or any taxpayer to safeguard the interest of the
Government (Sec. 206, NIRC). Delinquency of the
taxpayer is not necessary.
Grounds for Constructive Distraint:
When in the opinion of the CIR,
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TAXATION LAW
(1) the taxpayer is retiring from any business
subject to tax; or
(2) the taxpayer is intending to leave the
Philippines; or
(3) the taxpayer is intending to remove his
property from the Philippines or to hide or
conceal his property; or
(4) the taxpayer is planning to perform any act
tending to obstruct the proceedings for
collecting the tax due or which may be due
from him (Sec. 206, NIRC)
How constructive distraint is effected:
(1) Signing of receipt by the taxpayer
By requiring the taxpayer or any person
having possession or control of such property
to sign a receipt covering the property
distrained and obligate himself to preserve
the same intact and unaltered and not to
dispose of the same in any manner whatever,
without the express authority of the CIR
(2) If the taxpayer refuses to sign the receipt:
signing of receipt by revenue officer in the
presence of two witnesses
In case the taxpayer or the person having the
possession and control of the property
refuses or fails to sign the receipt, the revenue
officer effecting the constructive distraint
shall proceed to prepare a list of such
property and, in the presence of two (2)
witnesses, leave a copy thereof in the
premises where the property distrained is
located (Sec. 206, NIRC)
Note: In constructive distraint, the property is
not actually confiscated or seized by the
revenue officer.
Actual distraint - placed on a person who owes
any delinquent tax or delinquent revenue (see
Sec. 207, NIRC); involves actual seizure of the
property
Garnishment – taking of personal properties,
usually cash or sums of money, owned by a
delinquent taxpayer which is in the possession of
a third party
Distraint of intangible properties (Sec. 208, NIRC)
(1) Stocks and other securities: by serving a copy
of the warrants of distraint on the taxpayer,
AND upon the president, manager, treasurer
or other responsible officer of the corporation,
company or association which issued the
stocks or securities.
UP COLLEGE OF LAW TAXATION 2
(2) Debts and credits: by leaving with the person
owing the debts or having in his possession or
under his control such credits, or with his
agent, a copy of the warrant of distraint. The
person owing the debts shall then pay the
CIR instead of his creditor (taxpayer) on the
strength of such warrant.
(3) Bank accounts: by serving a warrant of
garnishment upon the taxpayer AND upon
the president, manager, treasurer or other
responsible officer of the bank. The bank
shall then turn over to the CIR so much of the
bank accounts as may be sufficient to satisfy
the claim of the Government. (NOTE:
distraint of bank accounts is called
GARNISHMENT)
Summary remedy of distraint of personal property
(1) Purchase by the government at sale upon
distraint
(2) Report of sale to the Bureau of Internal
Revenue (BIR)
(3) Constructive distraint to protect the interest
of the government
Procedure for Actual Distraint
(1) Commencement of Distraint Proceedings
Who issues the warrant of distraint:
(a) CIR or his duly authorized representative
– where the amount involved is more
than P1M
(b) Revenue District Officer – where the
amount involved is P1M or less (Sec.
207(A), NIRC)
(2) Service of Warrant of Distraint
How actual distraint is effected:
The proper officer shall seize and distraint
any goods, chattels, or effects, and the
personal property, including stocks and other
securities, debts, credits, bank accounts and
interests in and rights to personal property of
the taxpayer in sufficient quantity to satisfy
the tax, expenses of distraint and the cost of
the subsequent sale. (Sec. 207(A), NIRC)
(3) Report on the Distraint
A report shall be submitted by the distraining
officer to the Revenue District Officer, and to
the Revenue Regional Director.
(4) Power of the CIR or proper officer to lift the
order of distraint
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TAXATION LAW
The taxpayer may request that the warrant be
lifted. The CIR may, in his discretion, allow
the lifting of the order of distraint. He may ask
for a bond as a condition for the cancellation
of the warrant. (Sec. 207(A), NIRC)
(5) Notice of Sale of Distrained Properties
 The Revenue District Officer or his duly
authorized representative (not the officer
who served the warrant), shall cause a
notification of the public sale to be
posted in not less than two (2) public
places in the municipality or city (one of
which is the Office of the Mayor) where
the distraint was made.
 The notice shall specify the time and
place of the sale. The time of sale shall
not be less than twenty (20) days after
notice to the owner and the publication or
posting of such notice. (Sec. 209, NIRC)
(6) Sale at Public Auction
(a) At the time of the public sale, the revenue
officer shall sell the goods, chattels, or
effects, or other personal property,
including stocks and other securities so
distrained at a PUBLIC AUCTION, to the
HIGHEST BIDDER for CASH or with the
approval of the CIR, through a DULY
LICENSED COMMODITY or STOCK
EXCHANGES.
(b) Any residue over and above what is
required to pay the entire claim,
including expenses of sale and distraint,
shall be RETURNED to the owner of the
property sold. Expenses shall be limited
to actual expenses of SEIZURE and
PRESERVATION of the property pending
the sale, no charge shall be imposed for
the services of the local internal revenue
officer or his deputy. (Sec. 209, NIRC)
(c) If the proceeds from the sale of the
distrained properties are not sufficient to
satisfy the tax delinquency, the CIR or his
duly authorized representative shall
within thirty (30) days after execution of
the distraint, proceed with the levy on the
taxpayer’s real property. (Sec. 207(B),
NIRC)
(7) Release of the Properties from Distraint
If at any time prior to the consummation of
the sale all proper charges are paid to the
officer conducting the sale, the goods or
UP COLLEGE OF LAW TAXATION 2
effects distrained shall be restored to the
owner. (Sec. 210, NIRC)
(8) Purchase by the government at sale upon
distraint
If the amount offered by the highest bidder is
not equal to the amount of the tax or is very
much less than the actual market value of the
articles offered for sale, the CIR or his deputy
may purchase the same in behalf of the
National Government for the amount of taxes,
penalties and costs due. The property so
purchased may be resold by the CIR or his
deputy. (Sec. 212, NIRC)
(9) Report of sale to BIR
Within two (2) days after the sale, the officer
making the same shall make a report of his
proceedings in writing to the CIR and shall
himself preserve a copy of such report as an
official record. (Sec. 211, NIRC)
(iv) Summary remedy of levy on real property
(1) Release of the Properties from Distraint
If at any time prior to the consummation of
the sale all proper charges are paid to the
officer conducting the sale, the goods or
effects distrained shall be restored to the
owner. (Sec. 210, NIRC)
(2) Purchase by the government at sale upon
distraint
If the amount offered by the highest bidder is
not equal to the amount of the tax or is very
much less than the actual market value of the
articles offered for sale, the CIR or his deputy
may purchase the same in behalf of the
National Government for the amount of taxes,
penalties and costs due. The property so
purchased may be resold by the CIR or his
deputy. (Sec. 212, NIRC)
(3) Report of sale to BIR
Within two (2) days after the sale, the officer
making the same shall make a report of his
proceedings in writing to the CIR and shall
himself preserve a copy of such report as an
official record. (Sec. 211, NIRC)
(4) Forfeiture in Favor of the Government
If there is no bidder for the real property OR if
the highest bid is not sufficient to pay the
taxes, penalties and costs, the IR Officer
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TAXATION LAW
conducting the sale shall declare the
property FORFEITED to the GOVERNMENT
in satisfaction of the claim. (Sec. 215, NIRC)
(5) Redemption of Property Sold
 At any time before the day fixed for the
sale, the taxpayer may discontinue all
proceeding by paying the taxes, penalties
and interest. (Sec. 213, NIRC)
 Within one (1) year from the date of sale,
the taxpayer or anyone for him, may pay
to the Revenue District Officer the total
amount of the following: public taxes +
penalties + interest from the date of
delinquency to the date of sale + interest
on said purchase price at the rate of
fifteen percent (15%) per annum from the
date of sale to the date of redemption.
(Sec. 214, NIRC)
Note: If the property was forfeited in favor of the
government, the redemption price shall include
only the taxes, penalties and interest plus costs
of sale (no interest on purchase price since the
Government did not “purchase” the property
anyway, it was forfeited)
Note: The taxpayer-owner shall not be deprived
of possession of the said property and shall be
entitled to rents and other income until the
expiration of the period for redemption (Sec. 214,
NIRC)
(6) Final Deed of Purchaser
After the period of redemption, a final deed of
sale is issued in favor of the purchaser.
(v) Forfeiture to government for want of bidder
Forfeiture implies a divestiture of property
without compensation in consequence of a
default or offense. The effect of forfeiture is to
transfer the title of the specific thing from the
owner to the government. (De Leon, NIRC
Annotated, p. 412)
Instances when forfeiture is appropriate
(1) All chattels, machinery, and removable
fixtures of any sort used in the unlicensed
production of articles (Sec. 268, NIRC)
(2) Dies and other equipment used for the
printing or making of any internal revenue
stamp, label or tag which is in imitation of or
purports to be a lawful stamp, label or tag.
(Sec. 268, NIRC)
UP COLLEGE OF LAW TAXATION 2
(3) Liquor or tobacco shipped under a false name
or brand (Sec. 262, NIRC)
Remedy of enforcement of forfeitures
(1) Forfeiture of chattels and removable fixtures:
enforced by the seizure, sale or destruction of
the specific forfeited property.
(2) Forfeiture of real property: enforced by a
judgment of condemnation and sale in a
legal action or proceeding civil or criminal as
the case may require (Sec. 224, NIRC)
Resale of real estate taken for taxes (RR No. 22-
2002)
(1) All acquired/forfeited properties transferred
in the name of the Republic of the Philippines,
having passed the one-year redemption
period, shall be converted into cash from the
date of acquisition or forfeiture.
(2) The sale of acquired/forfeited real properties
shall be by sealed bids in a public auction to
be witnessed by a representative of the COA.
(3) The Notice of Sale of the acquired real
properties shall be published once a week for
two (2) consecutive weeks in a newspaper of
general circulation in the Philippines which
must be completed at least 20 days prior to
the date of such public auction.
(4) Unless the CIR provides otherwise, the
Minimum Bid Price/Floor Price shall be the
latest fair market value as determined by the
CIR or the fair market value shown in the
latest tax declaration issued by the provincial,
city or municipal assessor, whichever is
higher, pursuant to Sec. 6(E) of the Tax Code.
(5) Anyone could bid except foreign nationals,
corporate or otherwise, and those qualified
under existing laws, rules and regulations,
including employees of the Bureau of Internal
Revenue.
(6) Bidders shall be required to post a bond in
cash or manager’s check in an amount
representing 10% of the minimum bid price at
least one day before the scheduled public
auction.
(7) Unless the CIR allows extension of time to
pay, in meritorious cases, the winning bidder
shall pay the full amount of his bid cash or
manager’s check within two days after receipt
of notice of award.
(8) All taxes and expenses relative to the
issuance of title shall be borne by the winning
bidder.
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TAXATION LAW
(9) The winning bidder shall be responsible at his
own expense for the ejectment of squatters
and/or occupants, if any, of the auctioned
property.
(10) Negotiated or private sale shall be resorted to
as a consequence of failed public bidding for
two consecutive times.
(11) Negotiated or private sale shall in all cases be
approved by the Secretary of Finance.
(12) Public auction sale shall be approved by the
CIR or his authorized representative.
(13) The Government reserves the right to reject
or cancel any or all bids.
When property to be sold or destroyed
(1) Forfeited chattels and removable fixtures:
sold in the same manner and under the
same conditions as the public notice and the
time and manner of sale as are prescribed
for sales of personal property distrained for
the non-payment of taxes
(2) Distilled spirits, liquors, cigars, cigarettes,
other manufactured products of tobacco and
all apparatus used in or about the illicit
production of such articles: destroyed by the
order of the CIR when the sale or use would
be injurious to public health pr prejudicial to
the enforcement of the law
(3) All other articles subject to excise tax
manufactured or removed in violation of the
Code, dies for the printing or making of
internal revenue stamps and labels: sold or
destroyed in the discretion of the CIR
(4) Forfeited property shall not be destroyed
until at least 20 days after seizure. (Sec. 225,
NIRC)
Disposition of funds recovered in legal
proceedings or obtained from forfeiture
All judgments and monies recovered and
received for taxes, costs, forfeitures, fines and
penalties shall be paid to the CIR or his
authorized deputies as the taxes themselves are
required to be paid, and except as specially
provided, shall be accounted for and dealt within
the same way. (Sec. 226, NIRC)
(vi) Further distraint or levy
The remedy by distraint of personal property and
levy on realty may be repeated if necessary until
the full amount due, including all expenses, is
collected. (Sec. 217, NIRC)
(vii) Tax lien
UP COLLEGE OF LAW TAXATION 2
Tax liens
(1) When a taxpayer neglects or refuses to pay
his internal revenue tax liability after demand,
the amount so demanded shall be a lien in
favor of the government from the time the
assessment was made by the CIR until paid
with interest, penalties, and costs that may
accrue in addition thereto upon ALL
PROPERTY AND RIGHTS TO PROPERTY
BELONGING to the taxpayer.
(2) HOWEVER, the lien shall not be valid against
any mortgagee, purchaser or judgment
creditor until NOTICE of such lien shall be
filed by the CIR in the Office of the Register of
Deeds of the province or city where the
property of the taxpayer is situated or located.
(Sec. 219, NIRC)
Seizure under forfeiture vs. Seizure to enforce a
tax lien
In the former all the proceeds derived from the
sale of the thing forfeited are turned over to the
Collector of Internal Revenue; in the latter, the
residue of such proceeds over and above what is
required to pay the tax sought to be realized,
including expenses, is returned to the owner of
the property. (BPI v. Trinidad)
(viii) Compromise
Authority of the CIR to compromise and abate
taxes
Compromise – to reduce the amount of tax
payable
Grounds for a compromise
The CIR may compromise the payment of any
internal revenue tax in the following cases:
(1) A REASONABLE DOUBT as to the validity of
the claim against the taxpayer exists; or
(2) The financial position of the taxpayer
demonstrates a clear inability to pay the
assessed tax. (FINANCIAL INCAPACITY)
Limits of the CIR’s power to compromise:
(1) For cases of financial incapacity: a minimum
compromise rate equivalent to ten percent
(10%) of the basic assessed tax
(2) For other cases: a minimum compromise rate
equivalent to forty percent (40%) of the basic
assessed tax
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TAXATION LAW
Note: When the basic tax involved exceeds One
Million Pesos (P1,000,000), or where the
settlement offered is less than the prescribed
minimum rates, the compromise must be
approved by the National Evaluation Board
(composed of the CIR and 4 Deputy
Commissioners)
Abatement - to cancel the entire amount of tax
payable
When the CIR may abate or cancel a tax liability:
(1) The tax or any portion thereof appears to be
UNJUSTLY or EXCESSIVELY ASSESSED; or
(2) The ADMINISTRATION and COLLECTION
COSTS do not justify the collection of the
amount due. (e.g., when the costs of
collection are greater than the amount of tax
due)
(ix) Civil and criminal action
Civil Action
Two ways by which civil liability is enforced:
(1) By filing a civil case for the collection of sum
of money with the proper regular court; and
(2) By filing an answer to the petition for review
filed by the taxpayer with the Court of Tax
Appeals. (Mamalateo, 2008)
Criminal Action
Any person convicted of a crime under the Code
shall:
(1) Be liable for the payment of the tax, and
(2) Be subject to the penalties imposed under
the Code. (Sec. 253(A), NIRC)
Form and Mode of Proceeding:
Civil and criminal action and proceedings
instituted in behalf of the Government under the
authority of this Code or other law enforced by the
BIR:
(1) Shall be BROUGHT IN THE NAME OF THE
GOVERNMENT of the Philippines; and
(2) Shall be CONDUCTED BY LEGAL OFFICERS
OF THE BIR
(3) Shall be filed in court with the approval of the
CIR. (Sec. 220, NIRC)
Criminal action as a collection remedy
The judgment in the criminal case shall impose
the penalty; and order payment of the taxes
UP COLLEGE OF LAW TAXATION 2 TAXATION LAW

subject of the criminal case as finally decided by

the CIR. (Sec. 205, NIRC) Offender Penalty

Assessment not necessary before filing a criminal shall be dismissed from

charge for tax evasion public office, and
perpetually disqualified
An assessment is not necessary before a criminal
from holding any public
charge can be filed. The criminal charge need office, to vote, and to
only be proved by a prima facie showing of a participate in any election
wilful attempt to file taxes, such as failure to file CPA his license shall be
a required tax return. [CIR v. Pascor Realty, automatically revoked or
(1999)] cancelled once he is
convicted
Suit to recover tax based on false or fraudulent Corporations, imposed on the partner,
returns associations, president, general
A proceeding in court for the collection of the tax partnerships etc. manager, branch manager,
assessed may be filed without assessment at any treasurer, officer-in-charge
and employees responsible
time within ten (10) years after the discovery of for the violation (Sec. 253,
the falsity, fraud or omission. Provided, that in a NIRC)
fraud assessment which has become final and
executor, the fact of fraud shall be judicially taken Minimum amount of fine:
cognizance of in the civil or criminal action for the The fines imposed for any violation of the Code
collection thereof. (Sec. 222, NIRC) shall not be lower than the fines imposed herein
False Return v. Fraudulent Return or twice the amount of taxes, interests and
A false returns is due to mistakes, carelessness or surcharges due from the taxpayer, whichever is
ignorance and a fraudulent return is filed with higher. (Sec. 253, NIRC)
intent to evade taxes.
Prescriptive period for criminal action:
The fraud contemplated by law is actual and not All violations of any provision of the Code shall
constructive, and must amount to intentional prescribe after five (5) years. (Sec. 281, NIRC)
wrongdoing with the sole object of avoiding the
tax. (Aznar v. CTA, 1974)
3. Statutory offenses and penalties
Payment of tax not defense a. Civil Penalties
Payment of the tax due after a case has been filed
shall not constitute a valid defense in any (i) Surcharge – penalty imposed in addition to the
prosecution for violation of the provisions under tax required to be paid (Sec. 248(A), NIRC)
the Code. (Sec. 253(A), NIRC)
Rates of Surcharge (25% or 50%)
Liability of person who aids or abets: 25% of the amount due in the following cases:
Any person who wilfully aids or abets in the (1) Failure to file any return and pay the tax
commission of a crime penalized under the Code due on the date prescribed; or
or who causes the commission of any such (2) Filing a return with an internal revenue
offense by another shall be liable in the same officer other than those with whom the
manner as the principal. (Sec. 253(B), NIRC) return is required to be filed unless the
CIR authorizes otherwise; or
(3) Failure to pay the deficiency tax within
Offender Penalty
the time prescribed for its payment in the
Not a citizen of the he shall be deported notice of assessment; or
Philippines immediately after serving (4) Failure to pay the full or part of the
the sentence amount of tax due on or before the date
A public officer or the maximum penalty prescribed for its payment (Sec. 246 (A),
employee prescribed for the offense NIRC)
shall be imposed on him

PAGE 215 OF 275

UP COLLEGE OF LAW TAXATION 2
50% of the tax or of the deficiency tax in the
following cases:
(1) Willful neglect to file the return within the
period prescribed; or
(2) A false or fraudulent return is willfully
made (Sec. 248(B), NIRC)
Prima facie evidence of a false or fraudulent
return: Substantial underdeclaration of taxable
sales, receipts or income, or a substantial
overstatement of deductions. Failure to report
sales, receipts or income in an amount exceeding
thirty percent (30%) of that declared per return,
and a claim ofdeductions in an amount exceeding
(30%) of actual deductions, shall render the
taxpayer liable for substantial underdeclaration
or for overstatement. (Sec. 248(B), NIRC)
(ii) Interest
In General
20% per annum on the unpaid amount of tax,
interest at the rate of twenty percent (20%) per
annum from the date prescribed for payment
until the amount is fully paid. (Sec. 249(A), NIRC)
Deficiency Interest
20% per annum on any deficiency in the tax due
from the date prescribed for its payment until the
full payment thereof. (Sec. 249(B), NIRC)
Delinquency interest
20% per annum on the unpaid amount in case of
failure to pay:
(a) The amount of the tax due on any return
required to be filed; or
(b) The amount of the tax due for which no return
is required; or
(c) A deficiency tax, or any surcharge or interest
thereon on the due date appearing in the
letter of demand and assessment notice (Sec.
249(C), NIRC)
Interest on extended payment
20% per annum on the tax or deficiency tax or any
part thereof unpaid from the date of notice and
demand until it is paid if any person required to
pay the tax is:
(a) Qualified and elects to pay the tax on
installment but fails to pay the tax or any
installment or any part of such amount or
installment or before the date prescribed for
its payment; or
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TAXATION LAW
(b) Where the CIR has authorized an extension of
time within which to pay a tax or a deficiency
tax or any part thereof (249(D), NIRC)
Penalties Imposed on Public Officers(Sec. 269,
NIRC)
The law imposes a fine of not less than P50,000
nor more than P100,000 or imprisonment for not
less than 10 years nor more than fifteen years on
every official, agent or employee of the BIR or of
any agency or employee of the Government
charged with the enforcement of the Tax Code,
who shall: (CONED- FRAP)
(a) Extort or willfully oppress under color of law;
(b) knowingly Demand other or greater sums
than are authorized by law or receive any fee,
compensation or reward, except as by law
prescribed, for the performance of any duty;
(c) willfully Neglect to give receipts, as by law
required, for any sums collected in the
performance of duty, or who willfully
neglect to perform any of the duties enjoined
by law;
(d) Conspire or collude with another or others to
defraud the revenues or otherwise violate the
law;
(e) willfully make Opportunity for any person to
defraud the revenues, or who do or omit to do
any act with intent to enable any other person
to defraud the revenues;
(f) negligently or by design Permit the violation
of the law by any other person;
(g) make or sign any False certificate or return in
any case where the law requires the making
by them of such entry, certificate or return;
(h) having knowledge or information of a
violation of any provision of the Code or of any
fraud committed on the revenues collectible
by the BIR, fail to Report such knowledge or
information to their superior officer, or to
report as otherwise required by law; or
(i) without the authority of law, demand or
Accept or attempt to collect, directly or
indirectly, as payment or otherwise, any sum
of money or other thing of value for the
compromise, adjustment or settlement of
any charge or complaint for any violation or
alleged violation of law.
Informer’s Reward[Sec. 282, NIRC]
To whom given:
UP COLLEGE OF LAW TAXATION 2 TAXATION LAW

Persons instrumental in the discovery of resulting to reduction in the original

violations of the NIRC and in discovery and assessment and the taxpayer is agreeable to
seizure of smuggled goods. such decision by signing the required
agreement form for the purpose. On the other
Amount of reward: hand, other protested cases shall be handled
10% of the revenues, surcharges or fees recovered by the Regional Evaluation Board (REB) or
and/or fine/penalty imposed, or P1,000,000, the National Evaluation Board (NEB) on a
whichever is LOWER. case to case basis
(6) Cases which become final and executory after
The same amount shall be given if the offender final judgment of a court, where compromise
offered to compromise and such offer has been is requested on the ground of doubtful
accepted and collected by the CIR. validity of the assessment; and
(7) Estate tax cases where compromise is
If no revenue, surcharge or fees be actually requested on the ground of financial
collected, such person is not entitled to a reward. incapacity of the taxpayer

For discovery and seizure of SMUGGLED GOODS: Compromise penalty v. Compromise

The cash reward is 10% of the FMV of the
smuggled and confiscated goods, or P1,000,000,
whichever is LOWER.
4. Compromise and Abatement of Taxes (See also
notes above regarding compromise)
Compromise penalty – an amount of money paid
by a taxpayer to compromise a tax violation that
he has committed, which may be the subject of
criminal prosecution. The basis of the amount
paid is the gross sales or receipts during the year
or the tax due.

Cases which may be compromised: (Sec. 2, R.R. Compromise – an amount of money paid by the
30-2002) taxpayer to settle his civil liability for tax assessed
(1) Delinquent accounts by the government. The basis of the amount paid
(2) Cases under administrative protest after is the basic tax assessed. (Mamalateo, 2008)
issuance of the Final Assessment Notice to
the taxpayer which are still pending in the
Regional Offices, Revenue District Offices,
Legal Service, Large Taxpayer Service (LTS),
Collection Service, Enforcement Service and
other offices in the National Office
(3) Civil tax cases being disputed before the
courts
(4) Collection cases filed in courts
(5) Criminal violations, other than those already
filed in court or those involving criminal tax
fraud

Cases which cannot be compromised: (Sec. 2, R.R.

30-2002)
(1) Withholding tax cases, unless the applicant-
taxpayer invokes provisions of law that cast
doubt on the taxpayer's obligation to
withhold
(2) Criminal tax fraud cases confirmed as such by
the CIR or his duly authorized representative
(3) Criminal violations already filed in court
(4) Delinquent accounts with duly approved
schedule of installment payments
(5) Cases where final reports of reinvestigation
ore reconsideration have been issued

PAGE 217 OF 275

UP COLLEGE OF LAW TAXATION 2 TAXATION LAW

V. Organization and Terminating taxable period and ordering

Function of the Bureau of
Internal Revenue
A. POWERS OF THE CIR
(A) To make assessments and prescribe
additional requirements for tax
administration and enforcement (Sec. 6,
NIRC)
(1) Examination of Returns and
Determination of Tax Due
(a) After a return has been filed, the CIR
may authorize the examination of any
taxpayer and the assessment of the
correct amount of tax.
(b) Failure to file a return shall not
prevent the CIR from authorizing the
examination.
(2) Best evidence obtainable
The CIR shall assess the proper tax on the
best evidence obtainable when:
 The taxpayer fails to submit the
required returns, statements reports
and other documents
 There is a reason to believe that any
such report is false, incomplete or
erroneous
(3) Conduct inventory-taking, survaillance
and to prescribe presumptive gross sales
and receipts
 Inventory-taking – at any time during
the taxable year, for the purpose of
determining the correct tax liabilities.
 Surveillance – done if there is reason
to believe that the taxpayer is not
declaring his correct income, sales or
receipts for tax purposes.
 Prescribe presumptive gross sales
and receipts if:
o It is found that the taxpayer
has failed to issue receipts
and invoices, or
o When there is reason to
believe that the books of
accounts or other records do
not correctly reflect the
declarations made by the
taxpayer
(4) Terminate Taxable Period
PAGE 218 OF 275
the immediate payment of the tax for the
terminated period and any remaining tax
that is unpaid, when the taxpayer is:
 Retiring from business subject to tax,
or
 Intending to leave the Philippines or
to remove his property therefrom or
to hide or conceal his property;
 Performing any act tending to
obstruct the proceedings for the
collection of the tax for the past or
current quarter or year or to render
the same totally or partially
ineffective unless such proceedings
are begun immediately
(5) Prescribe Real Property Values
 Dividing the Philippines into different
zones or areas, and determining the
FMV of real properties in each zone or
area, upon consultation with
competent appraisers from private
and public sectors.
 For the purpose of computing any
internal revenue tax, the value of the
property shall be WHICHEVER IS
HIGHER OF:
o The FMV as determined by
the CIR, or
o The FMV as shown in the
schedule of values of the
provincial and city assessors
(6) Inquire into Bank Deposit Accounts
Notwithstanding any contrary provision
of R.A. 1405 (Bank Secrecy Law) and
other general or special laws, the CIR is
authorized to inquire into bank deposits
of:
 A decedent to determine his gross
estate, and
 Any taxpayer who has filed an
application for compromise of tax
liability by reason of financial
incapacity: the taxpayer must waive
in writing his privilege under R.A.
1405 and other relevant laws, before
the CIR may inquire into his bank
accounts.
(7) Accredit and register Tax Agents
Accrediting and registering tax agents
(may be individuals or general
professional partnerships) based on the
following criteria:
 Professional competence
UP COLLEGE OF LAW TAXATION 2
 Integrity
 Moral fitness
(8) Prescribe additional procedural or
documentary requirements
In relation to the manner of compliance
of any requirement in connection with the
submission or preparation of financial
statements accompanying the tax
returns.
(B) To obtain information and to summon,
examine, and take testimony of persons (Sec.
5, NIRC)
(1) Examine Returns and Determine Tax due
Authorizing the examination of any
taxpayer and the assessment of the
correct amount of tax, WON a return has
been filed by such taxpayer.
(2) Access Letter
 Obtaining on a regular basis, from
any person other than the person
whose tax liability is subject to audit
or investigation, or from any office or
officer of the national and local
governments, government agencies
or instrumentalities, including BSP
and GOCCs;
 Any information such as, but not
limited to, costs and volumes of
production, receipts or sales and
gross incomes of taxpayers, and the
names addresses, and financial
statements of corporations, mutual
fund companies, insurance
companies etc.
(C) Interpret Tax Laws and to Decide Tax cases
(1) Shall be under the exclusive and original
jurisdiction of the CIR, subject to review
by the Secretary of Finance.
(2) A ruling by the BIR Commissioner shall
be presumed valid unless modified,
reversed or superseded by the Secretary
of Finance.
(3) A taxpayer who receives an adverse
ruling from the CIR may, within thirty (30)
days from the date of receipt of such
ruling, seek its review by the Secretary of
Finance, either by himself/itself or
though his/its duly authorized
representative.
(4) A reversal or modification of the BIR
ruling shall terminate its effectivity upon
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TAXATION LAW
(9) The receipt by the taxpayer or the BIR of
written notice of reversal or modification,
whichever came earlier.
**The Secretary of Finance may now also review
the rulings MOTU PROPRIO. (DOF ORDER 7-02)
B. ORGANIZATION AND FUNCTION OF
THE BIR
RULE-MAKING AUTHORITY OF THE SECRETARY
OF FINANCE
AUTHORITY OF SECRETARY OF FINANCE TO
PROMULGATE RULES AND REGULATIONS (Sec.
244, NIRC)
The Secretary of Finance, upon recommendation
of the CIR, shall promulgate all needful rules and
regulations for effective enforcement of the
provisions of the Code.
SPECIFIC PROVISIONS TO BE CONTAINED IN
RULES AND REGULATIONS (Sec. 245, NIRC)
(a) The time and manner in which Revenue
Regional Director shall canvass their
respective Revenue Regions for the purpose
of discovering persons and property liable to
national internal revenue taxes, and the
manner in which their lists and records of
taxable persons and taxable objects shall be
made and kept;
(b) The forms of labels, brands or marks to be
required on goods subject to an excise tax,
and the manner in which the labelling,
branding or marking shall be effected;
(c) The conditions under which and the manner
in which goods intended for export, which if
not exported would be subject to an excise
tax, shall be labelled, branded or marked;
(d) The conditions to be observed by revenue
officers respecting the institutions and
conduct of legal actions and proceedings;
(e) The conditions under which goods intended
for storage in bonded warehouses shall be
conveyed thither, their manner of storage
and the method of keeping the entries and
records in connection therewith, also the
books to be kept by Revenue Inspectors and
the reports to be made by them in connection
with their supervision of such houses;
(f) The conditions under which denatured
alcohol may be removed and dealt in, the
character and quantity of the denaturing
material to be used, the manner in which the
UP COLLEGE OF LAW TAXATION 2
process of denaturing shall be effected, so as
to render the alcohol suitably denatured and
unfit for oral intake, the bonds to be given,
the books and records to be kept, the entries
to be made therein, the reports to be made to
the CIR, and the signs to be displayed in the
business ort by the person for whom such
denaturing is done or by whom, such alcohol
is dealt in;
(g) The manner in which revenue shall be
collected and paid, the instrument,
document or object to which revenue stamps
shall be affixed, the mode of cancellation of
the same, the manner in which the proper
books, records, invoices and other papers
shall be kept and entries therein made by the
person subject to the tax, as well as the
manner in which licenses and stamps shall be
gathered up and returned after serving their
purposes;
(h) The conditions to be observed by revenue
officers respecting the enforcement of Title III
imposing a tax on estate of a decedent, and
other transfers mortis causa, as well as on
gifts and such other rules and regulations
which the CIR may consider suitable for the
enforcement of the said Title III;
(i) The manner in which tax returns, information
and reports shall be prepared and reported
and the tax collected and paid, as well as the
conditions under which evidence of payment
shall be furnished the taxpayer, and the
preparation and publication of tax statistics;
(j) The manner in which internal revenue taxes,
such as income tax, including withholding tax,
estate and donor's taxes, value-added tax,
other percentage taxes, excise taxes and
documentary stamp taxes shall be paid
through the collection officers of the Bureau
of Internal Revenue or through duly
authorized agent banks which are hereby
deputized to receive payments of such taxes
and the returns, papers and statements that
may be filed by the taxpayers in connection
with the payment of the tax:
Provided, however, That notwithstanding the
other provisions of this Code prescribing the
place of filing of returns and payment of taxes,
the CIR may, by rules and regulations, require
that the tax returns, papers and statements
that may be filed by the taxpayers in
connection with the payment of the tax.
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TAXATION LAW
Provided, however, That notwithstanding the
other provisions of this Code prescribing the
place of filing of returns and payment of taxes,
the CIR may, by rules and regulations require
that the tax returns, papers and statements
and taxes of large taxpayers be filed and paid,
respectively, through collection officers or
through duly authorized agent banks:
Provided, further, That the CIR can exercise
this power within six (6) years from the
approval of Republic Act No. 7646 or the
completion of its comprehensive
computerization program, whichever comes
earlier:
Provided, finally, That separate venues for
the Luzon, Visayas and Mindanao areas may
be designated for the filing of tax returns and
payment of taxes by said large taxpayers.
For the purpose of this Section, 'large taxpayer'
means a taxpayer who satisfies any of the
following criteria:
(1) Value-Added Tax (VAT) - Business
establishment with VAT paid or payable of at
least P100,000 for any quarter of the
preceding taxable year;
(2) Excise tax - Business establishment with
excise tax paid or payable of at least
P1,000,000 for the preceding taxable year;
(3) Corporate Income Tax - Business
establishment with annual income tax paid
or payable of at least P1,000,000 for the
preceding taxable year; and
(4) Withholding tax - Business establishment
with withholding tax payment or remittance
of at least P1,000,000 for the preceding
taxable year.
Provided, however, That the Secretary of Finance,
upon recommendation of the CIR, may modify or
add to the above criteria for determining a large
taxpayer after considering such factors as
inflation, volume of business, wage and
employment levels, and similar economic factors.
The penalties prescribed under Section 248 shall
be imposed on any violation of the rules and
regulations issued by the Secretary of Finance,
upon recommendation of the CIR, prescribing the
place of filing of returns and payments of taxes by
large taxpayers.
UP COLLEGE OF LAW TAXATION 2 TAXATION LAW

NON-RETROACTIVITY OF RULINGS (Sec. 246,

NIRC)
General Rule: No retroactive application if the
revocation, modification or reversal of rules and
regulations, rulings or circulars will be prejudicial
to the taxpayers Exceptions:
(a) Where the taxpayer deliberately misstates
or omits material facts from his return or any
document required of him by the BIR;
(b) Where the facts subsequently gathered by
the BIR are materially different from the
facts on which the ruling is based; or
(c) Where the taxpayer acted in bad faith.

POWER OF THE CIR TO SUSPEND THE

BUSINESS OPERATION OF A TAXPAYER (Sec 115,
NIRC)
The CIR or his authorized representative is
empowered to suspend the business operations
and temporarily close the business
establishment of any person for any of the
following violations:
(a) IN THE CASE OF A VAT-REGISTERED
PERSON. -
(i) Failure to issue receipts or invoices;
(ii) Failure to file a value-added tax return as
required under Section 114; or
(iii) Understatement of taxable sales or
receipts by thirty percent (30%) or more
of his correct taxable sales or receipts for
the taxable quarter.
(b) FAILURE OF ANY PERSON TO REGISTER AS
REQUIRED UNDER SECTION 236. -

The temporary closure of the establishment shall

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

PAGE 221 OF 275

UP COLLEGE OF LAW
Offense
Willful attempt to evade or defeat
tax. (Sec. 254)
Failure to File Return, Supply
Correct and Accurate Information,
Pay Tax, Withhold and Remit Tax
and Refund Excess Taxes Withheld
on Compensation (Sec. 255)
Making false entries, records, or
reports, or using falsified or fake
accountable forms (Sec. 257)
Unlawful pursuit of business (Sec.
258)
Illegal Collection of Foreign
Payments (Sec. 259)
Unlawful Possession of Cigarette
Paper in Bobbins or Rolls, Etc. (Sec.
260)
Unlawful Use of Denatured Alcohol
(Sec. 261)
TAXATION 2
Who is liable
Any person who willfully attempts
in any manner to evade or defeat
any tax or the payment thereof.
Any person required to pay any tax,
make a return, keep any record, or
supply correct and accurate
information
Any person who attempts to make it
appear for any reason that he or
another has in fact filed a return or
statement, or actually files a return
or statement and subsequently
withdraws the same return or
statement
Any financial officer or Independent
CPA engaged to examine and audit
books of accounts of taxpayers
under Sec.232 (A) and any person
under his direction.
Any person who carries on any
business for which in annual
registration fee is imposed without
paying the tax as required by law.
A person engaged in the business of
distilling, rectifying, repacking,
compounding or manufacturing any
article subject to excise tax.
Any person who knowingly
undertakes the collection of foreign
payments under Sec. 67 without a
license or without complying with
the implementing rules and
regulations.
Any person, manufacturer or
importer of cigar or cigarettes
Any person who for the purpose of
manufacturing any beverage, uses
denatured alcohol or alcohol
specially denatured to be used for
motive power or withdrawn under
bond for industrial uses or alcohol
knowingly misrepresented to be
denatured to be unfit for oral intake
or who knowingly sells or offers for
sale such preparations containing
as an ingredient such alcohol.
Any person who unlawfully recovers
or attempt to recover by distillation
or other process any denatured
alcohol or who knowingly sells or
offers for sale, conceals or
PAGE 222 OF 275
TAXATION LAW
Penalty
Fine: P30,000 - P100,000
AND
Imprisonment: 2-4 years
Plus other penalties
Fine: P10,000 or more
AND
Imprisonment:1-10 years
Plus other penalties
Fine - P10,000 - P20,000
AND
Imprisonment: 1-3 years
Plus other penalties
Fine - P50,000 - P100,000
AND
Imprisonment: 2-6 years
Fine: P5,000 - P20,000
AND
Imprisonment: 6 months-2
years
Fine: P30,000 - P50,000
AND
Imprisonment: 1-2 years
Fine: P20,000 - P50,000;
AND
Imprisonment: 1-2 years
Fine: P20,000 - P100,000;
AND
Imprisonment - 6 years 1 day
- 12 years
Fine: P20,000 - P100,000;
AND
Imprisonment - 6 years 1 day
- 12 years
UP COLLEGE OF LAW
Offense
Shipment or Removal of
Liquor/Tobacco Products under
False Name or Brand or as an
Imitation of any Existing or Known
Product Name or Brand (Sec. 262)
Unlawful Possession or Removal of
Articles Subject to Excise Tax W/o
Payment of the Tax (Sec. 263)
Failure or Refusal to Issue Receipts
or Sales or Commercial Invoices,
Violations Related to the Printing
of Such Receipts or Invoices and
Other Violations (Sec. 264)
Offenses Relating to Stamps (Sec.
265)
Failure to Obey Summons (Sec.
266)
Declaration under Penalties of
Perjury (Sec. 267)
Misdeclaration or
Misrepresentation of
Manufacturers Subject to Excise
Tax (Sec. 268)
Use of Property in Unlicensed
Business or Use of Dies for Printing
False Stamps, Etc. (Sec. 268)
Illegal Storage or Removal of
Goods (Sec. 268)
TAXATION 2
Who is liable
otherwise disposes of alcohol as
recovered or redistilled
Any person who ships, transports or
removes
Any person who owns or is found in
possession of these articles
Where:
Value of goods < P1,000
Value of goods < P50,000 but
>P1000
Value of goods < P150,000, but
>P50,000
Value of goods > P150,000
Any person who, being required
under Section 237 to issue receipts
or sales or commercial invoices
Any person who being duly
summoned to appear to testify, or
to appear and produce books of
accounts, records, memoranda or
other papers, or to furnish
information as required under the
pertinent provisions of this Code.
Any person who willfully files a
declaration, return or statement
containing information which is not
true and correct as to every material
matter
Any manufacturer subject to excise
tax
Any person who conducts an
unlicensed business or uses dies for
printing false stamps
Any person subject to excise tax
who fails to store the goods in
proper place, or removes goods
without payment of excise tax
PAGE 223 OF 275
TAXATION LAW
Penalty
Fine: P20,000 – P 100,000;
AND
Imprisonment: 6 years 1 day -
12 years
Fine: P1,000 - P2,000 AND
Imprisonment: 60-100 days
Fine: P10,000-P20,000 AND
Imprisonment: 2-4 years
Fine: P30,000 - P60,000
AND
Imprisonment: 4-6 years
Fine: P50,000 - P100,000
AND
Imprisonment: 10-12 years
Fine: P 1,000 - P50,000
AND
Imprisonment: 2- 4 years
Fine: P20,000 - P50,000
AND
Imprisonment: 4-8 years
Fine: P 5,000 - 10,000;
AND
Imprisonment:1-2 years
Penalty for Perjury under the
Revised Penal Code
Summary cancellation or
withdrawal of the permit to
engage in business as a
manufacturer of articles
subject to excise tax
Forfeiture of property used
Forfeiture of goods
UP COLLEGE OF LAW
Offense
Penalty for Second and
Subsequent Offenses (Sec. 274)
Violation of Other Provisions of the
Tax Code or Rules or Regulations in
General (Sec. 275)
Penalty for Selling, Transferring,
Encumbering or in any way
disposing of property Placed under
Constructive Distraint (Sec. 276)
Failure to Surrender Property
Placed under Distraint and Levy
(Sec. 277)
Procuring Unlawful Divulgence of
Trade Secrets (Sec. 278)
TAXATION 2 TAXATION LAW
Who is liable Penalty
Maximum of the penalty
prescribed for the offense
Any person who violates any Fine: P1000 or less
provision of this Code or any rule or OR
regulation promulgated by the Imprisonment: 6 months or
Department of Finance for which no less
specific penalty is provided by law OR Both
Any taxpayer, whose property has Fine: at least P5,000 AND
been placed under constructive at least twice the value of the
distraint property
OR
Imprisonment: 2 years 1 day -
4 years
OR Both
Any person having in his possession Fine: P 5,000 or more
or under his control any property or OR
rights to property, upon which a Imprisonment: 6 months 1
warrant of constructive distraint or day - 2 years,
actual distraint and levy has been OR Both
issued
Any person procures an officer or Fine: not more than P 2,000
employee of the BIR to divulge any OR
confidential information regarding Imprisonment: 6 months - 5
the business, income or inheritance years
of any taxpayer, knowledge of which OR Both
was acquired by him in the
discharge of his official duties, and
which it is unlawful for him to
reveal, and any person who
publishes or prints in any manner
whatever, not provided by law, any
income, profit, loss or expenditure
appearing in any income tax return
PAGE 224 OF 275
UP COLLEGE OF LAW TAXATION 2 TAXATION LAW

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

START

Commissioner or Revenue Officer (RO)

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

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

File protest w/n 30 Protest made w/in

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

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

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

ASSESSMENT
ENDS NO NO

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

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

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

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

If CTA decision is unfavorable to

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

PAGE 225 OF 275

UP COLLEGE OF LAW
Flowchart II: Procedures for Distraint and Levy-NIRC
START
Person owing any
delinquent tax to
fails to pay w/in
the time required
RDO posts notice in at least 2 public
places in the municipality/city where
the distraint is made. One place of
posting must be at the mayor’s office.
Time of sale shall not be less than 20
days after the notice (Sec. 209)
Goods shall be restored to owner,
if charges are paid (Sec. 210)
W/in 5 days after sale,
distraining officer shall enter
return of proceedings in the
records of RCO, RDO and
RRD (Sec. 213)
Real property may be levied
on before, simultaneously, or
after the distraint of personal
property (207 (B))
W/n 10 days after receipt of the
warrant, levying officer shall
report to the Commissioner who
shall have the authority to lift the
warrant of levy (Sec. 207 B)
W/n 1 year from forfeiture,
the taxpayer, may redeem
said property by paying full
amount of the taxes and
charges (Sec. 215)
The Commissioner may,
after 20 days notice, sell
property at public auction
or at private sale with
approval of the SoF.
Proceeds shall be
deposited with the National
Treasury (Sec. 216)
TAXATION 2 TAXATION LAW
RCO - Revenue Collection Officer RDO - Revenue District officer
RRD - Revenue Regional Director LGU- Local Government Unit
Commissioner seizes sufficient
Delinquent tax personal property to satisfy the
Yes
more than 1M? tax, charge & expenses of seizure
(Sec. 207 (A))
RDO seizes sufficient
personal property to satisfy
No
the tax, charges & expenses
Property may be resold and
of seizure (Sec. 207 (A))
the net proceeds shall be
remitted to the National
Treasury as internal revenue.
Distraining Officer accounts for (Sec. 212)
the goods distrained (Sec. 208)
Bid less than
Officer Commissioner may purchase
amount of tax/
conducts Yes property for the National
FMV of goods
public auction Government (Sec. 212)
distrained?
No, bid just right
W/in 2 days after Excess of proceeds over the Officer sells the goods to the
the sale, officer entire claim, shall be returned highest bidder for cash or
shall report to the to the owner. No charge shall with the Commissioner’s
Commissioner. be imposed for the services of approval, through commodity/
(Sec. 211) the officer (Sec. 209) stock exchanges. (Sec. 209)
Internal revenue officer,
Levy shall be affected by writing upon said certificate a
designated by the Commissioner,
description of the property. Notice of the levy shall be
shall prepare a certificate with the
served upon the Register of Deeds of LGU where the
force of a nationwide legal
property is located and upon the owner (Sec. 207 B)
execution (Sec. 207 B)
W/n 20 days after levy, officer shall post
notice at the main entrance of the Sale shall be held at the
municipal/city hall & in public place in the main entrance of the
barrio/district where the real estate lies for municipal/city hall, or on the
at least 30 days by AND publish it once a premises of the levied
week for 3 weeks. Owner may prevent property. (Sec. 213)
sale by paying all charges (Sec. 213)
W/n 2 days, he shall make a return
Officer conducting the
of the forfeiture. Register of Deeds, No bidder or
sale shall forfeit the
upon registration of forfeiture shall Yes highest bid
property to the
transfer title to the Government w/o insufficient?
Government (Sec. 215)
court order. (Sec. 215)
No, bid ok
W/n 1 year from sale, the W/n 5 days after the sale, Excess of proceeds
owner may redeem, by paying levying officer shall enter of the sale over claim
to the RDO the amount of the return of the proceedings and cost of sale shall
taxes, penalties, and interest upon the records of the RCO, be turned over to the
thereon from the date of RDO and RRD (Sec. 213) owner (Sec. 213)
delinquency to the date of sale,
and 15% per annum interest on
purchase price from the date
Owner shall not be
of purchase to the date of Levy and distraint
deprived of the
redemption. (Sec. 214) may be repeated until
possession and shall
the full amount due,
be entitled to the
and all expenses are
fruits until 1 year
collected. (Sec. 217)
expires (Sec. 214)
PAGE 226 OF 275
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PAGE 227 OF 275

UP COLLEGE OF LAW TAXATION 2
VI. Local Government
Code of 1991, As
Amended
A. LOCAL GOVERNMENT TAXATION
1. Fundamental principles (UEPIP)
a. Taxation shall be Uniform in each local
government unit;
b. Taxes, fees, charges and other impositions
shall: (EPUC)
 be Equitable and based as far as
practicable on the taxpayer's ability
to pay;
 be levied and collected only for
Public purposes;
 not be Unjust, excessive, oppressive,
or confiscatory;
 not be Contrary to law, public policy,
national economic policy, or in the
restraint of trade;
c. The collection of local taxes, fees, charges
and other impositions shall not be let to any
Private person;
d. The revenue collected shall inure solely to the
benefit of, the local government unit levying
the tax, fee, charge or other Imposition unless
otherwise specifically provided herein; and,
e. Each local government unit shall, as far as
Practicable, evolve a Progressive system of
taxation. (SEC. 130, LGC)
2. Nature and Source of Taxing Power
a. Grant of local taxing power under the Local
Government Code
“Each local government unit shall have the power
to create its own sources of revenues and to levy
taxes, fees and charges subject to such guidelines
and limitations as the Congress may provide,
consistent with the basic policy of local autonomy.
Such taxes, fees, and charges shall accrue
exclusively to the local governments.” (Sec. 5, Art.
X, 1987 Constitution)
Each local government unit shall exercise its
power to create its own sources of revenue and to
levy taxes, fees, and charges subject to the
provisions herein, consistent with the basic policy
of local autonomy. Such taxes, fees, and charges
PAGE 228 OF 275
TAXATION LAW
shall accrue exclusively to the local government
units. (Sec. 129, LGC)
b. Authority to prescribe penalties for tax
violations
Vested in the sanggunian
The sanggunian of a local government unit is
authorized to prescribe fines or other penalties
for violation of tax ordinances but in no case shall
such fines be less than One thousand pesos
(P1,000.00) nor more than Five thousand pesos
(P5,000.00), nor shall imprisonment be less
than one (1) month nor more than six (6) months.
Such fine or other penalty, or both, shall be
imposed at the discretion of the court. The
sangguniang barangay may prescribe a fine of
not less than One hundred pesos (P100.00) nor
more than One thousand pesos (P1,000.00). (Sec.
516, LGC)
c. Authority to grant local tax exemptions
LGUs may, through ordinances duly approved,
grant tax exemptions, incentives or reliefs under
such terms and conditions as they may deem
necessary. (Sec. 192, LGC)
d. Withdrawal of exemptions
General rule (Sec. 193, LGC): Unless otherwise
provided, tax exemptions or incentives granted to,
or presently enjoyed by all persons, whether
natural or judicial, including government-owned
or controlled corporations are withdrawn upon
the effectivity of the Code.
Exceptions: Tax exemptions not withdrawn
 Local water districts
 Cooperatives duly registered under R.A.
No. 6938,
 Non-stock and non-profit hospitals and
education institutions
“[Sec. 193 is] an express and general repeal of all
statutes granting exemptions from local taxes,
withdrew the sweeping tax privileges previously
enjoyed by the National Power Corporation under
its Charter.” (NPC v. Cabanatuan, G.R. No.
149110)
e. Authority to adjust local tax rates
LGUs shall have the authority to adjust the tax
rates as prescribed not oftener than once every
five (5) years, but in no case shall the adjustment
UP COLLEGE OF LAW TAXATION 2 TAXATION LAW

exceed ten percent (10%) of the rates fixed by the must be posted in at least two (2) conspicuous
Code. (Sec. 191, LGC) and publicly accessible places. (Sec. 188, LGC)

f. Residual taxing power of local governments N.B. – Requisites for substantive validity of an
LGU may exercise the power to levy taxes or ordinance:
charges on ANY base or subject  It must not contravene the Constitution
Required: or any statute
 Not otherwise specifically enumerated in the  It must not be unfair or oppressive
LGC or taxed under NIRC or other applicable  It must not be partial or discriminatory
laws  It must not prohibit but may regulate
 Not unjust, excessive, oppressive, trade
confiscatory or contrary to declared national  It must be general and consistent with
policy public policy
 Pursuant to an ordinance enacted with  It must not be unreasonable (Magtajas v.
public hearing conducted for the purpose. Pryce Properties [234 SCRA 225])
(Sec. 186, LGC)
4. Scope of Taxing Power
g. Authority to issue local tax ordinances
The power to impose a tax, fee, or charge, or to LGU Scope of Taxing Power
generate revenue under this Code shall be
exercised by the sanggunian of the local Provinces May levy only:
government unit concerned through an (Sec. 134, Transfer of Real Property
appropriate ordinance. (Sec. 132, LGC) LGC) Ownership
Business of Printing and
3. Local Taxing Authority Publication
Franchise Tax
Tax on Sand, Gravel and Other
a. Power to create revenues exercised thru LGUs Quarry Resources
Each LGU shall exercise its power to create its Professional Tax
power to create its own sources of revenue and to Amusement Tax
levy taxes, fees and charges. (Sec. 128, LGC) Annual Fixed Tax for every delivery
Exercised by the Sanggunian concerned through truck or van
an appropriate ordinance. (Sec. 132, LGC) Municipalities May levy taxes, fees and charges
not otherwise levied by provinces
Ordinances may be vetoed by local chief (Sec. 142, LGC)
executives of the LGUs, except the Punong Cities May levy taxes, fees and charges
Barangay, on the ground that it is ultra vires or which the province or municipality
may impose (Sec. 151, LGC)
prejudicial to public welfare. His reasons shall be
Barangays May levy only:
stated in writing. (Sec. 55 (a) and (b), LGC) Taxes on stores or retailers
Service fees or charges
b. Procedure for approval and effectivity of tax Barangay clearance
ordinances Other fees and charges (Sec. 152,
LGC)
A public hearing must be conducted prior to the
enactment of a tax ordinance. (Sec. 187, LGC) But all LGUs may also impose reasonable service
fees, rates for operation of public utilities, andtoll
Within ten (10) days after the approval of the fees and charges. (See letter e below) (Sec. 153-
ordinance, certified true copies of all tax 155, LGC)
ordinances or revenue measures shall be
published in full for three (3) consecutive days in
a newspaper of local circulation. 5. Specific taxing power of local government unit
(LGUs)
In provinces, cities and municipalities where
there are no newspapers of local circulation, it

PAGE 229 OF 275

UP COLLEGE OF LAW TAXATION 2 TAXATION LAW

Power Province Municipality City Barangay

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

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

a. Taxing powers of provinces

Tax Imposed Rate/Amount Base Exemptions Others

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

Tax must be paid 60 days

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

PAGE 230 OF 275

UP COLLEGE OF LAW TAXATION 2 TAXATION LAW

Tax Imposed Rate/Amount Base Exemptions Others

Tax on Business of Not exceeding Gross annual Receipts from

Printing and Publication 50% of 1% receipts for the printing and/or
(Sec 136, LGC) preceding publishing of books
Imposed on the business calendar year and other reading
of persons engaged in materials prescribed
printing, and/or by the DECS as
publication of books, school texts or
cards, posters, leaflets, references
handbills, certificates,
receipts, pamphlets, and
others of similar nature

Newly started business Not exceeding Capital In the succeeding calendar

1/20 of 1% investment year, regardless of when
business started
operating, tax shall be
based on gross receipts for
preceding calendar year,
or any fraction thereof.

Franchise Tax (Sec 137,

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

Newly-started business Not more than Capital In the succeeding calendar

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

PAGE 231 OF 275

UP COLLEGE OF LAW TAXATION 2 TAXATION LAW

Tax Imposed Rate/Amount Base Exemptions Others

Professional Tax. Such amount Such reasonable Professionals To be paid to the province
Provinces may levy as the classification by exclusively employed where the profession is
annual professional tax Sangguniang the Sangguniang by the government practiced, or where a
on each person engaged Panlalawigan Panlalawigan principal office is
in the exercise of a may maintained.
profession requiring determine, in
government no case to A person who pays for
examination (Sec 139, exceed professional tax may
LGC) P300.00 practice his profession
anywhere in the country
without being subjected to
similar taxes.

Employers shall require

payment of professional
tax as a condition for
employment.

Payable annually, on or
before Jan 31.
Amusement Tax. Not more than Gross receipts Holding of operas, In case of theaters or
Collected from 10% (amended from admission concerts, dramas,cinemas, tax shall first be
proprietors, lessees, or by RA 9640, fees recitals, painting, and
deducted and withheld by
operators of theaters, 2009) art exhibitions, flower
their proprietors, lessees
cinemas, concert halls, shows, musicaland operators
circuses, boxing stadia, programs, literary
and other places of and oratorical Proceeds to be shared
amusement (Sec 140, presentations equally by the province
LGC) and municipality where
Exception to amusement places are
Note: The case of Alta exemption: Pop, rock, located.
Vista Golf and Country or similar concerts
Club v. City of Cebu (20
Jan. 2016) states that
golf courses are not
subject to amusement
tax because “people do
not enter a golf course to
see or view a show or
performance.”
Annual Fixed Tax For Amount not Every truck, van, Manufacturers, producers,
Every Delivery Truck or exceeding vehicle wholesalers, dealers and
Van of Manufacturers or P500 retailers referred to in
Producers, Wholesalers column 1 shall be exempt
of, Dealers, or Retailers from tax on peddlers
in, Certain Products.
Imposed on vehicles
used for the delivery of
distilled spirits,
fermented liquors, soft
drinks, cigars and
cigarettes, and other
products as may be
determined by the
sanggunian, to sales
outlets, or consumers in
the province, whether
PAGE 232 OF 275
UP COLLEGE OF LAW TAXATION 2 TAXATION LAW

Tax Imposed Rate/Amount Base Exemptions Others

directly or indirectly (Sec

141, LGC)

b. Taxing powers of cities

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

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

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

C. TAXING POWERS OF MUNICIPALITIES

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

more than 400k: 1% per annum 30k or less: in municipalities [Sec. 143
[d], Sec. 152, LGC]
Contractors and other independent In accordance with the schedule in
contractors Sec. 143 [e]
Banks and other financial institutions Not exceeding fifty percent 50% of 1%
on the gross receipts of the preceding
calendar year from interest,
commissions and discounts from
lending activities, income from
financial leasing, dividends, rentals
on property and profit from exchange
or sale of property, insurance
premium.
Peddlers engaged in the sale of any Not exceeding P50.00 per peddler
merchandise or article of commerce annually.

Any business which the sanggunian Catch-all provision.

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

PAGE 234 OF 275

UP COLLEGE OF LAW TAXATION 2
C.2 CEILING ON BUSINESS TAX
IMPOSSIBLE ON MUNICIPALITIES WITHIN
METRO MANILA
Such municipalities may not 50% more than
the maximum rates prescribed in Sec 143. [Sec.
144, LGC]
C.3. TAX ON RETIREMENT ON BUSINESS
Upon termination of a business subject to tax
under Sec.143 a sworn statement of its gross
sales or receipts for the current year shall be
submitted. If the tax paid is less than the tax
due, the difference shall be paid before the
business is considered officially retired. [Sec.
145, LGC]
C.4 RULES ON PAYMENT OF BUSINESS TAX
(1) Taxes in Sec. 143 shall be paid for every
separate or distinct establishment or
place where business subject to tax is
conducted.
(2) One line of business is not exempted by
being conducted with some other
businesses for which such tax has been
paid
(3) The tax on a business must be paid by the
person conducting it.
(4) If a person operates 2 or more businesses
mentioned in Sec 143 which are taxed;
computation shall be based on:
(a) combined total gross sales/receipts IF
subject to the same tax rate
(b) separate reports on gross
sales/receipts if subject to different
tax rates
Yamane vs. Lepanto Condo Corp. (Oct. 23,
1995): Condominium corporations are not
business entities, and are thus not subject to
local business tax. Even though the
corporation is empowered to levy assessments
or dues from the unit owners, these amounts
are not intended for the incurrence of profit by
the corporation, but to shoulder the multitude
of necessary expenses for maintenance of the
condominium.
Ericsson Telecoms vs. City of Pasig. (Nov.
2007):
Business tax must be based on gross receipts,
it being different from gross revenue. The right
to receive income, and not the actual receipt
PAGE 235 OF 275
TAXATION LAW
determines when to include the amount in
gross income.
C.5. FEES AND CHARGES FOR
REGULATION & LICENSING
General rule: As a condition to the conduct of
business or profession, the municipality may
impose reasonable fees and charges not yet
imposed by the province, commensurate with
the cost of regulation, inspection and licensing.
[Sec.147, LGC]
Exception: Professional tax in Sec. 139
Specific rules:
(1) Municipality has power to impose
reasonable rates for sealing and licensing
of weights and measures [Sec. 148, LGC]
(2) The Municipality has exclusive authority to
grant fishery privileges in municipal
waters. The sangguniang bayan may:
(a) Grant fishery privileges to erect fish
corrals, oysters, mussels or other
aquatic beds or bangus fry areas,
within a definite zone of the municipal
waters, as
(b) Grant marginal fishermen the
privilege to gather, take or catch
bangus fry, prawn fry or kawag-kawag
or fry of other species and fish from the
municipal waters by nets, traps or
other fishing gears free of rental, fee,
charge or imposition.
(c) Issue licenses for the operation of
fishing vessels of three [3] tons or less
(3) The Sanggunian may penalize the use of
explosives, noxious or poisonous
substances, electricity, muro-ami, and
other deleterious methods of fishing and
prescribe a criminal penalty therefor [Sec.
149, LGC]
C.6. SITUS OF TAX COLLECTED
According to Sec. 150 of the LGC,situs shall be
determined by the ff. rules:
RULE 1: In case of persons
maintaining/operating a branch or sales
outlet making the sale or transaction, the tax
shall be recorded in said branch or sales outlet
and paid to the municipality/city where the
branch or sales outlet is located.
UP COLLEGE OF LAW TAXATION 2
RULE 2: Where there is NO branch or sales
outlet in the city/municipality where the sale
is made, sale shall be recorded in the principal
office and the tax shall be paid to such
city/municipality.
RULE 3: In the case of manufacturers,
contractors, producers, and exporters having
factories, project offices, plants, and
plantations, proceeds shall be allocated as
follows:
(1) 30% of sales recorded in the principal
office shall be made taxable by the
city/municipality where the principal
office is located
(2) 70% shall be taxable by the
city/municipality where the factory,
project office, plant, or plantation is
located
Illustration of Rules 1 to 3:
A company has a principal office in
Mandaluyong, while its sales office and
factory are in Sta Rosa:
(1) sales made in Sta Rosa, will be recorded in
Sta Rosa
(2) sales made in Los Baños, Calamba or
Cabuyao [i.e., delivered to customers
located in those places], will be recorded
in Mandaluyong
(3) aside from sales made in Sta Rosa, Sta
Rosa also gets 70% of sales recorded in
Mandaluyong, pursuant to Rule 3
RULE 4: In case the plantation is located in a
place other than the place where the factory is
located, the 70% in Rule 3 will be divided as
follows:
60% to the city/municipality where the factory
is located
40% to the city/municipality where the
plantation is located
RULE 5: In case of 2 or more factories,
plantations, etc. in different localities, the
70% shall be prorated among the localities
where the factories, plantations, etc. are
located in proportion to their respective
volume of production.
Illustration:
A company has a principal office in Valenzuela
and has its factory in Bulacan. It also has
branches selling merchandise in Muntinlupa,
Bacolod, Cebu.
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TAXATION LAW
(1) sales made in Muntinlupa, Bacolod and
Cebu will go to the said cities
(2) sales in all other places which do not have
a sales branch shall be distributed as
follows: 30% to Valenzuela and 70% to
Bulacan
Excise Tax: Allied Thread Co., Inc. v. City Mayor
of Manila [1984] Tax is imposed on the
performance of an act or occupation,
enjoyment of a privilege. The power to levy
such tax depends on the place in which the act
is performed or the occupation is engaged in;
not upon the location of the office.
Sales Tax: Shell Co., Inc. v. Municipality of
Sipocot, Camarines Sur [1959]
It is the place of the consummation of the sale,
associated with the delivery of the things
which are the subject matter of the contract
that determines the situs of the contract for
purposes of taxation, and not merely the place
of the perfection of the contract.
D. TAXING POWERS OF BARANGAYS
The following shall exclusively accrue to the
barangays:
(1) Taxes on Stores or Retailers with Fixed
Business Establishments.
(a) Rate: not greater than one percent
(1%)
(b) Base:
(i) Cities: gross sales or receipts of
the preceding calendar year of
P50,000.00 or less
(ii) Municipalities: gross sales or
receipts of P30,000.00 or less
(2) Service Fees or Charges. For services
rendered in connection with the
regulations or the use of barangay-owned
properties or facilities such as palay, copra,
or tobacco dryers.
(3) Barangay Clearance. A city or municipality
cannot issue a permit for business without
a clearance from the barangay concerned.
The sangguniang barangay may impose a
reasonable fee on the clearance.
(4) Other Charges Allowed.
(a) charges on commercial breeding of
fighting cocks, cockfights and
cockpits;
(b) charges on places of recreation which
charge admission fees; and
UP COLLEGE OF LAW TAXATION 2 TAXATION LAW

(c) charges on billboards, signboards,

neon signs, and outdoor
advertisements. [Sec. 152, LGC]

E. COMMON REVENUE RAISING

POWERS
(1) Service fees and charges
LGUs may impose and collect such
reasonable fees and charges for services
rendered. [Sec. 153, LGC]
(2) Public utility charges
LGUs may fix the rates for the operation of
public utilities owned, operated and
maintained by them within their
jurisdiction. [Sec. 154, LGC]
(3) Toll fees or charges
(a) The sanggunian may prescribe the
terms and conditions and fix the rates
for the imposition of toll fees or
charges for the use of any public road,
pier, or wharf, waterway, bridge, ferry
or telecommunication system funded
and constructed by the local
government unit concerned.
(b) The sanggunian may also discontinue
the collection of the tolls when public
safety and welfare requires.
(c) No toll fees or charges shall be
collected from:
(i) Officers and enlisted men of the
AFP and members of the PNP on
mission
(ii) Post office personnel delivering
mail
(iii) Physically-handicapped
(iv) Disabled citizens who are sixty-
five (65) years or older. [Sec. 155,
LGC]

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UP COLLEGE OF LAW TAXATION 2 TAXATION LAW

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

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UP COLLEGE OF LAW TAXATION 2
Presentation of Community Tax Certificate is
necessary when an individual subject to
community tax:
(1) Acknowledges any document before a
notary public
(2) takes the oath of office upon election or
appointment to any position in the
government service
(3) receives any license, certificate, or permit
from any public authority
(4) pays any tax or fee
(5) receives any money from any public fund
(6) transacts other official business
(7) receives any salary or wage from any
person or commission
Presentation of certificate is not needed in the
registration of a voter. [Sec. 163, LGC]
The city or municipal treasurer shall deputize
the barangay treasurers to collect, provided
the latter be bonded.
If: actually and directly collected by the city or
municipal treasurer, community tax accrues
entirely to the general fund. If: collected
through the barangay treasurers, apportioned
equally. [Sec. 164, LGC]
6. Common limitations on the taxing powers of
LGUs
Unless otherwise provided, the following
cannot be levied by the local governments:
[IDEC-GAPEP-GRR-ECN]:
(1) Income tax, except when levied on banks
and other financial institutions;
(2) Documentary stamp tax;
(3) Estate tax, inheritance, gifts, legacies and
other acquisitions mortis causa, except as
otherwise provided;
(4) Customs duties, registration fees of vessel
and wharfage on wharves, tonnage dues,
and all other kinds of customs fees,
charges and dues except wharfage on
wharves constructed and maintained by
the LGU concerned;
(5) Taxes, fees or charges on Goods carried
into or out of, or passing through, the
territorial jurisdictions of local
government units in the guise of charges
for wharfage, tolls for bridges or otherwise,
or other taxes, fees, or otherwise
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TAXATION LAW
Sec.133(e) prohibits the imposition, in the
guise of wharfage, of fees, as well as all
other taxes or charges in any form
whatsoever, on goods or merchandise. It is
therefore irrelevant if the fees imposed are
actually for police surveillance on the
goods, because any other form of
imposition on goods passing through the
territorial jurisdiction of the municipality is
clearly prohibited. (See Palma
Development Corp. v. Municipality of
Managas [G.R. No. 152492. October 16,
2003])
(6) Taxes, fees or charges on Agricultural and
aquatic products when sold by marginal
farmers or fishermen;
(7) Taxes on business enterprises certified to
by the Board of Investments as Pioneer or
non-pioneer for a period of 6 and 4 years,
respectively from the date of registration;
(8) Excise taxes on articles enumerated under
the NIRC, as amended, and taxes, fees or
charges on petroleum products;
(9) Percentage or VAT on sales, barters or
exchanges or similar transactions on
goods or services except as otherwise
provided herein;
(10) Taxes on the Gross receipts of
transportation contractors and persons
engaged in the transportation of
passengers or freight by hire and common
carriers by air, land or water, except as
provided in the Code;
(11) Taxes on premiums paid by way or
Reinsurance or retrocession;
(12) Taxes, fees or charges for the Registration
of motor vehicles and for the issuance of
all kinds of licenses or permits for the
driving thereof, except tricycles;
(13) Taxes, fees, or other charges on Philippine
products actually Exported, except as
otherwise provided;
(14) Taxes, fees, or charges, on Countryside
and Barangay Business Enterprises and
cooperatives duly registered under the
Cooperative Code of the Philippines; and
(15) Taxes, fees or charges of any kind on the
National Government, its agencies and
instrumentalities, and local government
units. [Sec. 133, LGC]
7. Collection of business tax
UP COLLEGE OF LAW TAXATION 2
F.1. TAX PERIOD AND MANNER OF
PAYMENT
Based on calendar year, unless otherwise
provided.
May be paid annually or in quarterly
instalments. [Sec. 165, LGC]
F.2. ACCRUAL OF TAX
General rule: Accrues on the first day of
January of each year
Except: New taxes, fees or charges, or changes
in the rates thereof which shall accrue on the
first day of the quarter next following the
effectivity of the ordinance imposing such new
levies or rates. [Sec. 166, LGC]
F.3. TIME OF PAYMENT
Within the 20 days of January or of each
subsequent quarter. [i.e., Jan 20, Apr 20, July
20, and Oct 20]. It may be extended by the
sanggunian for justifiable reasons, without
surcharges or penalties. Extension cannot
exceed 6 months. [Sec. 167, LGC]
F.4. PENALTIES ON UNPAID TAXES, FEES
OR CHARGES
(1) Surcharge not exceeding 25% on taxes,
fees or charges NOT paid on time; and
(2) Interest not exceeding 2% per month of
the unpaid taxes, fees or charges including
surcharges, until the amount is fully paid
(3) In no case shall the total interest exceed
36 months. [Sec. 168, LGC]
F.5. AUTHORITY OF TREASURER IN
COLLECTION AND INSPECTION OF BOOKS
All local taxes, fees and charges shall be
collected by the local treasurer or their duly
authorized deputies [Sec. 170, LGC]
The local treasurer may, by himself or through
his deputies duly authorized in writing,
examine the books, accounts, and other
pertinent records of any person subject to
local taxes, fees and charges in order to
ascertain, assess and collect the correct
amount of the tax, fee or charge.
Examination must be done during business
hours, only once for every tax period and shall
be certified to by the examining official. [Sec.
171, LGC]
G. TAXPAYER’S REMEDIES
PAGE 240 OF 275
TAXATION LAW
G.1. PERIODS OF ASSESSMENT AND
COLLECTION OF LOCAL TAXES, FEES OR
CHARGES
Assessment: Within 5 years from the date they
become due
In case of Fraud or Intent to Evade Tax: Within
10 years from discovery of fraud or intent to
evade payment. [Sec. 194, LGC]
Collection: 5 years from the date of
assessment by administrative or judicial
action.
Instances When Running of Prescription
Periods is Suspended
(1) When the treasurer is legally prevented
from making the assessment or collection
(2) When taxpayer requests for
reinvestigation and executes a waiver in
writing before lapse of the period for
assessment or collection.
(3) When the taxpayer is out of the country or
otherwise cannot be located [Sec. 194 (d),
LGC]
G.2. PROTEST OF ASSESSMENT
Within sixty (60) days from the receipt of the
notice of assessment, the taxpayer may file a
written protest with the local treasurer
contesting the assessment; otherwise it shall
become final and executory. [Sec. 195, LGC]
G.3. CLAIM FOR REFUND OF TAX CREDIT
FOR ERRONEOUSLY OR ILLEGALLY
COLLECTED TAX, FEE OR CHARGE
Requires a written claim for refund or credit to
be filed with local treasurer before protest is
entertained.
Must be brought within 2 years from payment
of tax or from the date the taxpayer became
entitled to refund or credit [Sec. 196, LGC]
H. CIVIL REMEDIES BY THE LGU FOR
COLLECTION OF REVENUES
H.1. LOCAL GOVERNMENT’S LIEN FOR
DELINQUENT TAXES, FEES OR CHARGES
Non-payment of a tax, fee or charge creates a
lien superior to all liens or encumbrances in
favor of any other person, enforceable by
administrative or judicial action.
UP COLLEGE OF LAW TAXATION 2
The lien may only be extinguished upon full
payment of the delinquent local taxes, fees,
and charges including related surcharges and
interests. [Sec. 173, LGC]
H.2. CIVIL REMEDIES, IN GENERAL
(1) Administrative action
(2) Judicial action
Procedure for administrative action
Distraint of personal property
Personal properties subject to distraint: goods,
chattels or effects and other personal property
of whatever character, including stocks and
other securities, debts, credits, bank accounts,
and interest in and rights to personal property
Procedure: [Sec. 175, LGC]
(1) Seizure of personal property
(2) Accounting of distrained goods
(3) Publication of time and place of sale and
the articles distrained
(4) Release of distrained property upon
payment prior to sale
(5) Procedure of sale
(6) Disposition of proceeds
Levy of real property
Levy upon real property and interest in or rights
to real property
Procedure [Sec. 176, LGC]
(1) Preparation of a duly authenticated
certificate by the LGU Treasurer effecting
the levy on the real property
(2) Service of written notice of levy to the
assessor and Register of Deeds
(3) Annotation of the levy on the tax
declaration and the certificate of title
(4) Advertisement and Sale [Sec. 178, LGC]
Further distraint or levy
The remedies by distraint or levy may be
repeated if necessary until the full amount due,
including all expenses, is collected [Sec. 184,
LGC]
Exemption of personal property from distraint
or levy (ToB-CUPLA)
(1) Tools and implements necessarily used by
the taxpayer in his trade or employment
(2) One horse, cow, carabao, or other Beast of
burden, such as the delinquent taxpayer
PAGE 241 OF 275
TAXATION LAW
may select and necessarily used by him in
his ordinary occupation
(3) his necessary Clothing, and that of all his
family
(4) household furniture and Utensils
necessary for housekeeping and used for
that purpose by the delinquent taxpayer,
such as he may select, of a value not
exceeding P10,000
(5) Provisions, including crops, actually
provided for individual or family use
sufficient for 4 months
(6) the professional Libraries of doctors,
engineers, one fishing boat and net, not
exceeding the total value of P10,000 by
the lawful use of which a fisherman earns
his livelihood
(7) any material or Article forming part of a
house or improvement of any real property
Appeal before the Secretary of Justice;
Procedure
 Appeal to the Secretary of Justice
within 30 days from effectivity
 The Secretary of Justice has 60 days to
decide but an appeal does not
suspend the effectivity of the
ordinance
 Within 30 days from the Secretary of
Justice’s decision or after 60 days
inaction, an appeal may be filed with
the RTC. (See Sec. 187, RA 7160)
Penalty on local treasurer for failure to issue
and execute warrant of distraint or levy
Automatically dismissed from the service after
due notice and hearing [Sec. 177, LGC]
Procedure for judicial action
The local government may institute an
ordinary civil action with regular courts of
proper jurisdiction for the collection of
delinquent taxes, fees, charges or other
revenues.
The civil action shall be filed by the local
treasurer. [Sec. 183, LGC]
Valley Trading Co. vs. CFI of Isabela, (1989);
Angeles City v. Angeles City Electric
Corporation, (2010): LGC does not contain a
provision prohibiting courts from enjoining the
collection of local taxes. Such lapse may have
allowed preliminary injunction under Rule 58,
ROC where local taxes are involved.
UP COLLEGE OF LAW TAXATION 2
I. REAL PROPERTY TAXATION
I.1. FUNDAMENTAL PRINCIPLES (CAPUE)
(1) Current fair market value is the basis for
assessment
All real property, whether taxable or
exempt, shall be appraised at the
CURRENT AND FAIR MARKET VALUE
prevailing in the locality where the
property is situated. [Sec. 201, LGC]
(2) Actual use shall be the basis of
classification for assessment
(a) Real property shall be classified,
valued and assessed on the basis of its
actual use regardless of where located,
whoever owns it, and whoever uses it.
(b) Actual Use- refers to the purpose for
which the property is principally or
predominantly utilized by the person
in possession thereof [Sec. 199 (b),
LGC]
(c) MCIAA v. Marcos [G.R. No. 120082,
Sept. 11, 1996]: “Usage means direct,
immediate and actual application of
the property
(3) Private persons cannot be left to the
appraisal, assessment, levy and collection
of real property tax.
(4) uniform classification within each local
government unit shall be observed.
(5) equitable appraisal and assessment is
required. [Sec. 197, LGC]
I.2. NATURE OF REAL PROPERTY TAX
(1) It is a direct tax on the ownership or use of
real property
(2) It is an ad valorem tax. Value is the tax
base.
(3) It is proportionate because the tax is
calculated on the basis of a certain
percentage of the value assessed.
(4) It creates a single, indivisible obligation
(5) It attaches on the property [i.e., a lien] and
is enforceable against it.
(6) With respect to LGUs, it is levied thru a
delegated power
I.3. IMPOSITION OF REAL PROPERTY TAX
N.B. Real property under the Art. 415, Civil
Code; The following are immovable property:
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TAXATION LAW
(1) Land, buildings, roads and constructions of
all kinds adhered to the soil;
(2) Trees, plants, and growing fruits, while
they are attached to the land or form an
integral part of an immovable;
(3) Everything attached to an immovable in a
fixed manner, in such a way that it cannot be
separated therefrom without breaking the
material or deterioration of the object;
(4) Statues, reliefs, paintings or other objects
for use or ornamentation, placed in buildings
or on lands by the owner of the immovable in
such a manner that it reveals the intention to
attach them permanently to the tenements;
(5) Machinery, receptacles, instruments or
implements intended by the owner of the
tenement for an industry or works which may
be carried on in a building or on a piece of land,
and which tend directly to meet the needs of
the said industry or works;
(6) Animal houses, pigeon-houses, beehives,
fish ponds or breeding places of similar nature,
in case their owner has placed them or
preserves them with the intention to have
them permanently attached to the land, and
forming a permanent part of it; the animals in
these places are included;
(7) Fertilizer actually used on a piece of land;
(8) Mines, quarries, and slag dumps, while the
matter thereof forms part of the bed, and
waters either running or stagnant;
(9) Docks and structures which, though
floating, are intended by their nature and
object to remain at a fixed place on a river, lake,
or coast;
(10) Contracts for public works, and servitudes
and other real rights over immovable property.
(334a)
Coverage; For a Province, or a City or
Municipality within Metro Manila
(1) Land
(2) Building
(3) Machinery
(4) Other improvements not specifically
exempted [Sec. 232, LGC]
The rate shall be as follows:
Province: not exceeding one percent (1%) of
the assessed value of real property; and
City or municipality within Metro Manila: not
exceeding two percent (2%) of the assessed
value of real property. [Sec. 233, LGC]
UP COLLEGE OF LAW TAXATION 2 TAXATION LAW

(2) Charitable institutions, churches,

Special Levy on Idle Lands
A province, or city or municipality within Metro
Manila may levy an annual tax on idle lands at
the rate not exceeding five percent [5%] of the
assessed value of the property in addition to
the basic tax
Lands covered
(1) Agricultural Lands
More than one hectare in area suitable for
cultivation, dairying, inland fishery, and
other agricultural uses, one-half of which
remain uncultivated or unimproved
(2) Other than Agricultural
More than one thousand square meters in
area one half of which remain unutilized or
unimproved [Sec. 236 and 237, LGC]
Exempt Idle Lands
Lands exempt by reason of
 Force majeure,
 Civil disturbance,
 Natural calamity or
 Any cause or circumstance which
physically or legally prevents
improving, utilizing or cultivating the
same. [Sec. 238, LGC]
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,
or educational purposes.
(3) Machinery and equipment actually,
directly and exclusively used by local
Water utilities and GOCCs engaged in the
supply and distribution of water and/or
generation and transmission of electric
power.
(4) Real property owned by duly registered
cooperatives as provided for under
Republic Act No. 6938 [Cooperative Code
of the Philippines].
(5) Machinery and equipment used for
pollution control and Environmental
protection. [Sec. 234, LGC]
Provincial Assessor of Marinduque v. CA [G.R.
No. 170532, Apr. 30, 2009]:A claim for
exemption under Sec. 234 (e) should be
supported by evidence that the property
sought to be exempt is actually, directly and
exclusively used for pollution control and
environmental protection.

Special Levy for Public Works Proof of Exemption

A tax ordinance shall describe with reasonable (1) Documentary evidence such as affidavits,
accuracy the nature, extent and location of the by-laws, contract, articles of incorporation
public works to be undertaken, the estimated (2) Given to local assessor
cost, the metes and bounds by monuments (3) Within 30 days from date of declaration
and lines and the number of annual (4) Failure to file, will be listed as in
installments which should not be less than 5 Assessment Rolls as taxable
nor more than 10 years.
The sanggunian may fix different rates for GOCCs
different parts or sections thereof, depending Philippine Ports Authority vs. City of Iloilo [G.R.
on whether such land is more or less benefited No. 109791, July 14, 2003]: GOCCs are not
by the proposed work. [Sec. 241, LGC] covered by the exemption since the exemption
only refers to instrumentalities without
Special Education Fund (SEF) personalities distinct from the government.
A province, or city or municipality within Metro
Manila may levy and collect an annual tax of Mactan Airport v. MIAA cases
Provision
one percent (1%) on the assessed value of real SC Ruling
involved
property which shall be in addition to the basic Mactan Sec 133 (o), Airport
real property tax. Airport LGC. LGUs not Authority is a
Authority allowed to GOCC, not
Exempt from real property tax vs. levy… [o] exempt from
(1) Owned by the Republic of the Philippines Marcos taxes/fees/ RPT.
or any of its political subdivisions except (1996) charges of any Legislature in
when beneficial use is granted for a kind on the amending the
consideration or to a taxable person. national gov’t, law specifically

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Provision I.5. DECLARATION OF REAL PROPERTY

SC Ruling
involved Declaration by the Owner or Administrator
its agencies, deleted GOCCs Prepare a sworn statement declaring the true
instrumentalitie from the value of the property which shall be the
s and LGUs. enumeration in
current and fair market value of the property.
Sec 234 (a).
Sec 234 (a),
LGC. Properties It must contain a sufficient description of the
exempt from property to enable the assessor or his deputy
RPT: real to identify the same for assessment purposes
properties
owned by the The declaration must be filed with the
Republic or any assessor once every three (3) years during the
of its political period from January 1 to June 30. [Sec. 202,
subdivisions… LGC]
Manila Sec 133 (o), LGC MIAA falls
Airport under the term
Authority Sec 234 (a), LGC “instrumentality
Declaration by Any Person Acquiring Real
vs. CA ” outside the Property or Making Improvements
(2006) scope of LGS’s The sworn statement declaring the true value
local taxing of the property must be filed to the provincial,
powers under city or municipal assessor within sixty [60]
Sec 133[o]. days after the acquisition or upon completion
or occupancy of the improvement, whichever
Mactan The Mactan comesealier. [Sec. 203, LGC]
Airport Airport is a
Authority government Declaration by the Provincial or City or
vs. City of instrumentality;
Municipal Assessor
Lapu- only portions of
Lapu the land leased When the person required to file the sworn
(2015) to taxable declaration refuses or fails to make sich
persons like declaration, the provincial, city or municipal
private parties assessor shall declare the property in the
are subject to name of the defaulting owner.
real estate tax.
Notice of Transfer of Real Property
Charitable Institutions Any person who shall transfer real property
Lung Center of the Philippines vs. Quezon City ownership to another shall notify the
[G.R. No. 144104, June 29, 2004]: A charitable provincial, city or municipal assessor within
institution doesn't lose its character and its sixty [60] days from the date of such transfer.
exemption simply because it derives income
from paying patients so long as the money The notification shall include:
received is devoted to the charitable object it (1) Mode of transfer,
was intended to achieve, and no money inures (2) Description of the property alienated, and
to the benefit of persons managing the (3) Name and address of the transferee [Sec.
institution. 208, LGC]

Property leased to private entities is not
exempt from RPT, as it is not actually, directly
and exclusively used for charitable purposes.
Portions of the land occupied by the hospital
and portions used for its patients, whether
paying or non-paying, are exempt from real
property taxes.
I.4. APPRAISAL AND ASSESSMENT OF
REAL PROPERTY TAX
I.6. LISTING OF REAL PROPERTY IN THE
ASSESSMENT ROLLS
The local assessor must maintain an
assessment roll wherein all real property,
whether taxable or exempt, located within the
territorial jurisdiction of the LGU, is listed.
Real property in general—

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Shall be listed, valued and assessed in the (3) Commercial – Is land devoted principally
name of the owner or administrator, or anyone for the object of profit and is not classified
having legal interest in the property. as agricultural, industrial, mineral, timber
or residential land
For undivided real property— (4) Industrial – Is land devoted principally to
May be in the name of the estate or of the heirs industrial activity as capital investment
and devisees, or in the name of one or more and is not classified as agricultural,
co-owners commercial, timber, mineral or residential
land
Real property of a corporation, partnership or (5) Mineral – Are lands in which minerals
association— exist in sufficient quantity or grade to
Same manner as an individual justify the necessary expenditures to
extract and utilize such minerals
Real property owned by the Republic of the (6) Timberland
Philippines, its instrumentalities, political (7) Special – all lands, buildings and other
subdivision, the beneficial use has been improvements actually, directly and
granted to a taxable person— exclusively used for hospitals, cultural, or
scientific purposes, and those owned and
In the name of the possessor, grantee or of the used by local water districts, and GOCCs
public entity if such property has been rendering essential public services in the
acquired or held for resale or lease. [Sec. 205, supply and distribution of water and/or
LGC] generation and transmission of electric
power [Sec. 216, LGC]
I.7. APPRAISAL AND VALUATION OF REAL
PROPERTY Machinery
Land Brand New The FMV is the acquisition
The assessor of the province, city or cost
municipality or his deputy may summon the If the machinery is imported,
owners or persons having legal interest the acquisition cost includes
freight, insurance, bank and
therein and witnesses, administer oaths, and
other charges, brokerage,
take deposition concerning the property, its arrastre and handling, duties
ownership, amount nature, and value. [Sec. and taxes, plus cost of inland
213, LGC] transportation, handling, and
installation charges at the
Before any general revision of property present site. [Sec. 224, LGC]
assessment is made, there shall be prepared a All other FMV is determined by
schedule of FMV by the provincial, city or Cases dividing the remaining
municipal assessors; which shall be published economic life of the
in a newspaper of general circulation or in the machinery by its estimated
absence thereof, shall be posted in the economic life and multiplied
by the
provincial capital, city or municipal hall and in replacement/reproduction
two other conspicuous public places therein. cost. [Sec. 224, LGC]
[Sec. 212, LGC] Depreciation Rate—not exceeding five
CLASSES OF REAL PROPERTY Allowance percent (5%) of its original
(1) Residential – Is land principally devoted to cost or replacement cost, for
habitation each year of use
(2) Agricultural – Is land devoted principally The remaining value shall be
to the planting of trees, raising of crops, fixed at not less than twenty
livestock and poultry, dairying, salt percent (20%) of such
making, inland fishing and similar original, replacement or
reproduction cost for so long
aquaculture activities and other
as the machinery is useful
agricultural activities and is not classified and in operation. [Sec. 225,
as mineral, timber, residential, LGC]
commercial or industrial land

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I.8. ASSESSMENT OF REAL PROPERTY the punong barangay to the last known
i. Assessment levels address of the person to be served. [Sec. 223,
Assessment level – is the percentage applied LGC]
to the fair market value to determine the
taxable value of the property [Sec. 199(g), I.9. COLLECTION OF REAL PROPERTY TAX
LGC] Real property tax for any year
Assessment levels shall be fixed by Date of shall accrue on the first day
ordinances of the sanggunian at rates not Accrual (5.1) of January. [Sec. 246, LGC]
exceeding those prescribed in Sec. 218 On or before the 31st of
January or on any date
prescribed, the local
ii. General revisions of assessments and treasurer shall post the
property classification notice of the dates when the
The local assessor shall undertake a general Notice for tax may be paid without
revision of real property assessments every 3 Collection interest at a conspicuous and
years. [Sec. 219, LGC] (5.2) publicly accessible place at
the city or municipal hall.
iii. Date of effectivity of assessment or
reassessment The notice shall also be
General rule: All assessments or published in a newspaper of
reassessments made after the first day of general circulation in the
locality once a week for two
January of any year shall take effect on the first consecutive weeks. [Sec.
day of January of any year 249, LGC]
Within five years from the
Exceptions: reassessments due to date they become due
(1) partial or total destruction Prescriptive
(2) major change in actual use; Periods for Within ten years from
(3) great and sudden inflation or deflation of Collection discovery of fraud, in case
real property values; (5.3) there is fraud or intent to
(4) gross illegality of the assessment when evade
made; or Local treasurer is legally
prevented to collect tax.
(5) any other abnormal cause shall be made
The owner or property
within ninety (90) days from the date of Instances for requests for reinvestigation
any cause and shall take effect at the Suspension of and writes a waiver before
beginning of the quarter next following Prescriptive expiration of period to
the reassessment. [Sec. 221, LGC] Period collect.
The owner of property is out
iv. Assessment of property subject to back of the country or cannot be
taxes located [Sec. 270, LGC]
Property declared for the first time: assessed The local treasurer.
for taxes for the period during which it would Collecting He may deputize the
have been liable but in no case for more than Authority barangay treasurer to collect
all taxes upon filing of a
ten [10] years prior to the date of initial bond. [Sec. 247, LGC]
assessment [Sec. 222, LGC]
I.10. SPECIAL RULES ON PAYMENT
v. Notification of new or revised assessment
When real property is assessed for the first i. Payment of real property tax in installments
time or when an existing assessment is Payment of real property tax and the
increased or decreased, the local assessor additional tax for the Special Education Fund,
shall within thirty [30] days give written notice without interest, may be made in four [4]
of the new or revised assessment to the person equal instalments:
in whose name the property is being declared. 1st : March 31st
2nd : June 30th
Notice may be given personally or by 3rd : September 30th
registered mail or through the assistance of 4th : December 31st
PAGE 246 OF 275
UP COLLEGE OF LAW TAXATION 2 TAXATION LAW

the property, amount of the tax due and

This shall not apply to special levies which interest thereon.
shall be governed by ordinance of the Warrant must be mailed or served to owner
sanggunian concerned. or person having legal interest in the property
Written notice of levy must be mailed or served
Payments of real property taxes shall first be to the assessor and the Register of Deeds
applied to prior years delinquencies, interests where the property is located
and penalties, if any, and only after the The Register of Deeds must annotate the
delinquencies are settled may tax payments levy on the tax declaration and certificate of
be credited for the current period. [Sec. 250, title [Sec. 258, LGC]
LGC] Failure to issue or execute the warrant of
levy within one year from the time the tax
ii. Interests on unpaid real property tax becomes delinquent or within thirty days from
In case of failure to pay the basic real property the date of the issuance thereof shall be
tax or any other tax when due shall subject the dismissed from service [Sec. 259, LGC]
taxpayer to the payment of interest at the rate
of two percent per month on the unpaid Purchase by LGU for Want of Bidder
amount or a fraction thereof until the There is no bidder; or
delinquent tax shall have been fully paid. But
the total interest on the unpaid tax shall not When The highest bid is for an amount
exceed thirty-six months. [Sec. 255, LGC] Available insufficient to pay the real
property tax and the related
interest and costs of sale
iii. Condonation of real property tax The local treasurer conducting
By SANGGUNIAN: in case of general failure of the sale shall purchase the
crops or substantial decrease in the price of Duty of the property in behalf of the LGU to
agricultural or agri-based products or Local satisfy the claim and within two
calamity in any LGU [Sec. 276, LGC] Treasurer years thereafter shall make a
report of his proceedings.
By the PRESIDENT of the Philippines: when Within one year from the date of
public interest so requires [Sec. 277, LGC] Redemption forfeiture
Period
Remedies of LGUs for Collection of Real
Property Tax
ii. Judicial
i. Administrative The LGU may enforce the collection by civil
Local Government’s Lien— action in any court of competent jurisdiction.
The basic real property tax shall constitute a
lien on the property subject to tax, superior to Must be filed by local treasurer within 5 to 10
all liens, charges or encumbrances in favour of years. [Sec. 266 in relation to Sec. 270, LGC]
any person, irrespective of the owner or
possessor thereof, enforceable by J. TAXPAYER’S REMEDIES
administrative or judicial action and may only J.1. ADMINISTRATIVE
be extinguished upon payment of the tax and Protest
the related interests and expenses. [Sec. 257, Appeal to the Local Board of Assessment
LGC] Appeals (LBAA)
(1) Appeal must be filed within 60 days from
Levy the date of receipt of the written notice of
Upon the failure to pay the tax when due, the assessment
local treasurer shall issue a warrant levying (2) By filing a petition under oath in the form
the real property subject to tax. The warrant prescribed for the purpose
shall include a duly authenticated certificate (3) Copies of tax declarations and other
showing the name of the owner or person affidavits or documents must be
having legal interest therein, description of submitted [Sec. 226, LGC]

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The LBAA shall decide the appeal within 120
days from the date of receipt of such appeal
The LBAA shall have the power to summon
witnesses, administer oaths, conduct ocular
inspection, take depositions, and issue
subpoena duces tecum and/or subpoena
The LBAA must furnish the appellant a copy of
the decision of the board. [Sec. 229, LGC]
Fels Energy v. Province of Batangas [G.R. No.
168557, Feb. 16, 2007]: Under Section 226 of
R.A. No 7160, the last action of the local
assessor on a particular assessment shall be
the notice of assessment; it is this last action
which gives the owner of the property the right
to appeal to the LBAA. The procedure likewise
does not permit the property owner the
remedy of filing a motion for reconsideration
before the local assessor.
Victorias Milling v. CTA [G.R. No. L-24213, Mar.
13, 1968]: The failure to appeal within the
statutory period renders the assessment final
and unappealable.
Appeal to the Central Board of Assessment
Appeals (CBAA)
Appeal must be filed within 30 days from the
receipt of the decision of LBAA [Sec. 229, LGC]
Effect of payment of tax
Appeal on assessments of real property shall
not suspend the collection of the
corresponding realty taxes on the property
involved as assessed by the provincial or city
assessor without prejudice to the subsequent
readjustment depending upon the final
outcome of the appeal. [Sec. 231, LGC]
Payment of real property under protest
Protest must be filed with the local treasurer.
No protest shall be entertained unless the tax
is first paid. The protest must be in writing and
filed within 30 days from payment of the tax to
the local treasurer.
Meralco v. Nelia Barlis [G.R. No. 114231, May
18, 2001]: The trial court has no jurisdiction to
issue a writ of prohibition which seeks to set
aside the warrant of garnishment over
petitioner’s bank deposit in satisfaction of real
property taxes without paying first under
PAGE 248 OF 275
TAXATION LAW
protest the tax assessed and without
exhausting available administrative remedies.
The local treasurer shall decide the protest
within 60 days from receipt.
Appeal to the CTA En Banc
Appeal must be filed through a petition for
review within 30 days from the receipt of the
decision of CBAA [Sec. 11, R.A. 1125 as
amended]
Appeal to the SC
Appeal must be filed within 15 days from
receipt of decision of the CTA [Rule 45, Rules
of Court]
J.2. JUDICIAL
Question on the legality of a tax ordinance
Any question on the constitutionality or
legality of a tax ordinance may be raised on
appeal within 30 days from effectivity to the
Secretary of Justice who shall render a
decision within 60 days from the date of
receipt of the appeal.
The appeal shall not have the effect of
suspending the effectivity of the tax ordinance
and the accrual and payment of the tax.
Within 30 days after receipt of the decision or
the lapse of the sixty-day period without the
Secretary of Justice acting upon the appeal,
the aggrieved party may file appropriate
proceedings with a court of competent
jurisdiction. [Sec. 187, LGC]
Assailing the validity of a tax sale
No court shall entertain any action assailing
the validity of any sale at public auction until
the taxpayer shall have deposited with the
court the amount for which the real property
was sold, together with interest of two percent
per month from the date of sale to the time of
the institution of the action. [Sec. 267, LGC]
UP COLLEGE OF LAW TAXATION 2 TAXATION LAW

Flowchart V: Procedure for Assessment of Land Value for Real Property Tax
Purposes-Local Gov’t Code
For purposes of this flowchart owner means owner or administrator of real property or any person having legal interest thereto

Owner declares real
property once every 3
START
years (sec. 202) w/n
Jan 1 to June 30
Assessor prepares
Assessor declares
assessment rolls
real property if owner/
wherein real property
administrator fails to
shall be listed, valued
do so (sec. 204)
and assessed (sec. 205)

Submit documents
Owner may claim
supporting exemption w/ Is real property
for tax exemption Yes
in 30 days from tax exempt?
Required (sec. 206)
declaration (sec. 206)
Documents
submitted w/in
30 days? Property shall be
Property dropped from
Yes proven as tax Yes
assessment roll
No exempt? (sec. 206)
Property shall be
listed as taxable in
No
the assessment
roll (sec. 206) END

Within 30 days from

assessment, assessor
sends notice to owner
(sec. 223)
Owner may protest
assessment within 60
days from receipt of notice
to the Local Board of
Assessment Appeals
(LBAA) (Sec. 226)
No
If LBAA rejects protest, owner
LBAA must decide
may appeal to the Central
within 120 days
Board of Assessment Appeals
from receipt of
(CBAA) w/in 30 days from
appeal (sec. 229)
receipt of notice (Sec. 229)

If CBAA rejects protest,

Appeal to the owner may appeal to
END Supreme Court w/ the CTA en banc within
in 15 days 30 days from receipt of
decision

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

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

LT- Local Treasurer

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

LT posts notice of deadline for

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

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

No

Refund or tax credit must Taxpayer may appeal within within 60

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

If LBAA rejects protest/

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

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Flowchart VII: Procedure for Levy for Purposes of Satisfying Real
Property Taxes-Local Gov’t Code
START
Tax constitutes a lien on the
property superior to all liens
& may only be extinguished
upon payment of the tax and
charges. (sec. 257)
Before the date of sale,
the owner may stay the
proceedings by paying the
delinquent tax, interest &
the expenses of sale.
Sale is held:
1. at the main entrance
of the LGU building, OR
2. on the property to be
sold, OR at
3. any other place
specified in the notice
Is there a
bidder?
Yes
Bidder pays & 30 days
after the sale, the LT
shall report the sale to
the sanggunian
LT shall deliver to
purchaser certificate
of sale
Proceeds of sale in
excess of delinquent
tax, interest & conveyance to the
expenses of sale
remitted to the owner
(sec. 260)
TAXATION 2 TAXATION LAW
For purposes of this flowchart owner means owner or administrator of real property or any
person having legal interest thereto
Warrant of Levy issued
by the Local Treasurer Warrant is mailed
Time for payment
(LT), which has the force to or served upon
of real property
of legal execution in the the delinquent
taxes expires
LGU concerned. (sec. owner (sec. 258)
258)
30 days from service of warrant, local
treasurer shall advertise sale of the
property by:
1. posting notice at main entrance of written notice of the levy &
LGU hall/bldg and in a conspicuous the warrant is mailed/served
place in the barangay where prope is upon the assessor and the
located AND Registrar of Deeds of the
2. by publication once a week for 2 LGU (sec. 258)
weeks (sec. 260) (Note: In cases of
levy for unpaid local taxes publication
is once a week for 3 weeks)
LT shall purchase the property in behalf of
the LGU (sec. 263) (Note: in cases of levy
No for unpaid local taxes, LT may purchase if
there is no bidder or if the highest bid is
insufficient-sec. 181)
w/in 1 year from sale, owner may
Registrar of Deeds shall transfer the
redeem upon payment of the
title of the forfeited property to the LGU
1. delinquent tax,
w/o need of a court order (sec. 263)
2. interest due,
3. expenses of sale (from date of
delinquency to date of sale) and
4. add’l interest of 2% per month on W/n 1 year from forfeiture, the
the purchase price from date of sale owner, may redeem the property by
to date of redemption. (sec. 261) paying to the local treasurer the full
Delinquent owner retains amount of the tax and the related
possession and right to the fruits interest and the costs of sale
(sec. 261) otherwise the ownership shall be
vested on the local government unit
concerned. (sec. 263)
LT returns to the
Sanggunian concerned
purchaser/bidder the
may, by ordinance sell
price paid + interest
and dispose of the real
of 2% per month
property acquired under
(sec. 261)
the preceding section at
public auction. (sec. 264)
If property is not
redeemed, the local Levy may be repeated
treasurer shall until the full amount due,
execute a deed of including all expenses, is
collected. (sec. 265)
purchaser (sec. 262)
END
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VII. Tariff and Customs
Code of 1978, as
Amended
[Note: The Tariff and Customs Code (TCC) has
been repealed by RA 10863 or the Customs
Modernization and Tariff Act (CMTA). CMTA
came into effect on 30 May 2016]
A. TARIFF AND DUTIES, DEFINED
Tariff
Taxes or list of articles liable to duties
A list or schedule of articles on which a duty is
imposed upon the importation into the
country, with the rates at which they are
severally taxed. And derivatively, the system of
imposing duties or taxes on the importation of
foreign merchandise.
Custom duties – taxes on the importation or
exportation of commodities. Tariff or tax
assessed upon the merchandise imported
from or exported to a foreign country –
Export tariff – levied, assessed and collected
an export duty on the gross FOB value at the
time of shipment based on the prevailing rate
on traditional export products, such as certain
wood products, mineral products, plant and
vegetable products [Sec. 514, TCC]
Note: Export duties imposed upon all export
products under Sec. 514, TCC had been
abolished, except the export duty upon logs
[Sec. 1, EO 26 issued on 1 July 1986].
Import tariff – All articles, when imported from
any foreign country into the Philippines, shall
be subject to duty upon each importation,
even though previously exported from the
Philippines, except as otherwise specifically
provided for in this Code or in other laws [Sec.
101, TCC]
CMTA, Sec. 104: “All goods, when imported
into the Philippines, shall be subject to duty
upon importation, including goods previously
exported from the Philippines, except as
otherwise specifically provided under CMTA or
other laws.”
PAGE 252 OF 275
TAXATION LAW
B. GENERAL RULE: ALL IMPORTED
ARTICLES ARE SUBJECT TO DUTY [SEC.
101, TCC; SEC. 104, CMTA]
Importation by the government taxable
“except as otherwise specifically provided, all
importations by the government for its own
use or that of its subordinate branches on
instrumentalities, or corporations, agencies or
instrumentalities owned or controlled by the
government, shall be subject to the duties,
taxes, fees and other charges provided for in
this code: provided, however, that upon
certification of the head of the department or
political subdivision concerned, with the
approval of the auditor general, that the
imported article is actually being used by the
government or any of its political subdivision
concerned, the amount of duty, tax, fee or
charge shall be refunded to the government or
the political subdivision which paid it.” [Sec.
1205 TCC]
CMTA, Sec. 406: “Except those provided for in
Sec. 800 (conditionally tax and/or duty-
exempt importation), all importations by the
Government for its own use or that of its
subordinate branches or instrumentalities, or
corporations, agencies or instrumentalities
owned or controlled by the government, shall
be subject to the duties, taxes, fees and other
charges under the CMTA.”
Articles – goods, wares, merchandise and in
general anything that may be made subject of
importation or exportation [Sec. 3514, TCC]
U.S. Dollars, having ceased to be legal tender
in the Philippines, fall within the meaning of
the term merchandise [Bastida v.
Commissioner of Customs (1970)]
C. PURPOSE FOR IMPOSITION
For the protection of consumers and
manufacturers, as well as Philippine products
from undue competition posed by foreign-
made products.
D. FLEXIBLE TARIFF CLAUSE
Constitutional Basis: Sec. 28[2], Art. VI,
1987 Constitution. The Congress may, by
law, authorize the President to fix with
specified limits, and subject to such
limitations and restrictions, as it may
UP COLLEGE OF LAW TAXATION 2
impose, tariff rates, import and export
quotas, tonnage and wharfage duties, and
other duties or imposts within the
framework of the national development
program of the Government.
The flexible clause refers to the authority given
to the President, upon the recommendation of
NEDA, to adjust the tariff rates in the interest
of national economy, general welfare and/or
national security [Sec. 401, TCC].
CMTA, Sec. 1608: “In the interest of the
general welfare and national security,” the
President is empowered to adjust the tariff
rates, upon recommendation of NEDA.
The President is empowered to increase (by not
more than 5x) or reduce (by not more than
50%) the rates of import duty expressly fixed
by statute. This includes the authority to
modify the form of duty. [Sec. 401, TCC]
CMTA, Sec. 1608: The President is empowered
to:
(1) Increase, reduce or remove existing rates
[increase in the rate cannot exceed 100%
ad valorem], including authority to modify
the form of duty
(2) Establish import quotas or ban imports of
any commodity
(3) Impose an additional duty not exceeding
10% ad valorem
E. REQUIREMENTS OF IMPORTATION
E.1. BEGINNING AND ENDING OF
IMPORTATION
Importation begins when the carrying vessel
or aircraft enters the jurisdiction of the
Philippines with intention to unload therein
[Sec. 1202, TCC; the same under CMTA, Sec.
103]
Importation is deemed terminated upon
payment of duties, taxes and other charges
due upon the articles, or secured to be paid, at
a port of entry AND the legal permit for
withdrawal shall have been granted, or in case
said articles are free of duties, taxes and other
charges, until they have legally left the
jurisdiction of the customs. [Sec. 1202, TCC;
the same under CMTA, Sec. 103]
PAGE 253 OF 275
TAXATION LAW
Note: The payment of the duties, taxes, fees
and other charges must be in full. [Papa v.
Mago (1968)]
Imported articles shall be deemed "entered"
in the Philippines for consumption when the
specified entry form is properly filed and
accepted, together with any related
documents required by the TCC and/or
regulations to be filed with such form at the
time of entry, at the port or station by the
customs official designated to receive such
entry papers and any duties, taxes, fees
and/or other lawful charges required to be
paid at the time of making such entry have
been paid or secured to be paid with the
customs official designated to receive such
monies, provided that the article has
previously arrived within the limits of the port
of entry. [Sec. 206, TCC]
CMTA, Sec. 115: “Imported goods shall be
deemed “entered” in the Philippines for
consumption when the goods declaration is
electronically lodged, together with any
required supporting documents, with the
pertinent customs office.”
E.2. OBLIGATIONS OF IMPORTER
i. Cargo manifest
[Sec. 1005, TCC; the same under CMTA, Sec.
1204]
Every vessel from a foreign port must have on
board a complete manifest of all her cargo.
All the cargo intended to be landed at a port
in the Philippines must be described in
separate manifests for each port of call.
The manifest shall include:
(1) Port of departure
(2) Port of delivery
(3) Marks, numbers, quantity and description
of the packages
(4) Names of the consignees
General rule: It cannot be changed or altered
after entry of vessel.
Exception:
Amendment by the master, consignee or
agent attached to the original manifest
UP COLLEGE OF LAW TAXATION 2
CANNOT amend the manifest after the invoice
and/or entry covering the importation have
been received and recorded in the office of the
appraiser
EXCEPT: (a) Obvious clerical error or any other
discrepancy is committed in the preparation;
(b) Without fraudulent intent; (c) Discovery
would not have been made until after
examination of the importation is completed.
The cargo manifest and each copy thereof
shall be accompanied by a translation into the
official language of the Philippines, if originally
written in another language. [Sec. 1006, TCC;
different under CMTA, Sec. 1205—the
translation shall be in English]
Master shall deliver and mail the cargo
manifest to (endorsed by boarding officer):
(1) Auditor General
(2) Collector (Present original) [Sec. 1007,
TCC; different under CMTA, Sec. 1206—
the Bureau of Customs shall provide
electronic copies to the COA Chairperson;
the master shall present to the District
Collector the original properly endorsed
by the boarding officer]
ii. Import entry
- Now called “Goods Declaration” under the
CMTA
Imported articles must be entered in the
customhouse at the port of entry within fifteen
days from date of discharge of the last
package from the vessel either
(1) by the importer, being holder of the bill of
lading
(2) by any other holder of the bill of lading in
due course,
(3) by a customs broker acting under authority
from a holder of the bill, or
(4) by a person duly empowered to act as
agent or attorney-in-fact for such holder.
The Collector may grant an extension of not
more than fifteen days. [Sec. 1301, TCC; the
same under CMTA, Sec. 106 and 407, except
that for declarants, #2 is changed to—the
exporter, being the owner of the goods to be
shipped out. And, in case the consignee or the
person who has the right to dispose of the
goods is a juridical person, it may authorize a
PAGE 254 OF 275
TAXATION LAW
responsible officer of the company to sign the
goods declaration as declarant on its behalf.]
CMTA, Sec. 102(y): “Goods Declaration - a
statement made in the manner prescribed by
the Bureau and other appropriate agencies, by
which the persons concerned indicate the
procedure to be observed in the application for
the entry or admission of imported goods and
the particulars of which the customs
administration shall require.”
All imported articles, except importation
admitted free of duty, shall be subject to a
formal or informal entry. [Sec. 1302, TCC]
CMTA, Sec. 401: “Unless otherwise provided
for in this Act, all imported goods shall be
subject to the lodgement of a goods
declaration. A goods declaration may be for
consumption, for customs bonded
warehousing, for admission, for conditional
importation, or for customs transit.”
Kinds of Import Entry [Sec. 1302, TCC]
(1) Formal Entry
(2) Informal Entry
CMTA, Sec. 401—Kinds of Goods Declaration
(1) For Consumption
(2) For Customs Bonded Warehousing
(3) For admission
(4) For conditional importation
(5) For customs transit
Content and Form of Import Entry
Content [Sec. 1304, TCC]
(1) That the entry delivered to the Collector
contains a full account of the value or price
articles, including subject of the entry;
(2) That the invoice and entry contain a just
and faithful account of the value or price
of said articles including and specifying
the value of all containers or coverings,
and that nothing has been omitted,
therefrom or concealed whereby the
government of the Republic of the
Philippines be defrauded of any part of the
duties lawfully due on the articles;
(3) That, to the best of the declarant's
information and belief, all the invoice and
bills of lading to the articles are the only
ones in existence relating to the
importation in question and that they are
UP COLLEGE OF LAW TAXATION 2
in the state in which they were actually
received by him;
(4) That, to the best of the declarant's
information and belief, the entries,
invoices and bill of and the declaration
thereon under penalties of falsification of
perjury are in all respects genuine and true,
and were made by the person by whom the
same purpose to have been made. [The
same under CMTA, Sec. 412, except that
#1 is omitted]
Form
(1) signed by the importer, consignee or
holder of the bill, by or for whom the entry
is effected [Sec. 1305, TCC; CMTA, Sec.
107—signed by the declarant];
(2) in the required number of copies in such
form as prescribed by regulations [Sec.
1306, TCC]; and
(3) shall contain the names of the importing
vessel or aircraft, port of departure and
date of arrival, the number and mark of
packages, or the quantity, if in bulk, the
nature and correct commodity description
of the articles contained therein, and its
value as set forth in a proper invoice to be
presented in duplicate the entry [Sec. 1306,
TCC; the same under CMTA, Sec. 411,
except that the latter provides for the
inclusion of the names of the consignees
and port of destination]
Articles to be cleared on informal entry
[Sec. 1302, TCC]
(1) Articles of a commercial nature intended
for sale, barter or hire, the dutiable value
of which is P2000 or less; [Value changed
to P50,000 under CMTA, Sec. 402]
(2) Personal and household effects or articles,
regardless of value, imported in
passenger's baggage, mail, or otherwise,
for personal use.
The Collector may, upon instruction of the
Secretary of Finance, when he deems it
necessary for the protection of the revenue,
require a formal entry regardless of value.
Types of Formal Entry
[Sec. 1302, TCC]
A formal entry may be:
(1) For immediate consumption, or
PAGE 255 OF 275
TAXATION LAW
(2) Under irrevocable domestic letter of
credit, bank guarantee or bond for:
(a) Placing the article in customs bonded
warehouse;
(b) Constructive warehousing and
immediate transportation to other
ports of the Philippines upon proper
examination and appraisal; or
(c) Constructive warehousing and
immediate exportation.
CMTA, Sec. 402: “All goods declaration for
consumption shall be cleared through a
formal entry process.”
Note: All importations entered under formal
entry shall be covered by a letter of credit or
any other verifiable document evidencing
payment. [R.A. 9135 (2001); slightly modified
under CMTA, Sec. 402—“a letter of credit or
any verifiable commercial document
evidencing payment or in cases where there is
no sale for export, by any commercial
document indicating the commercial value of
the goods.”]
iii. Declaration of correct weight or value
[Sec. 1313, TCC]
Classification
When article is not specifically classified in the
Code, the interested party, importer or foreign
exporter may submit a sample with full
description of component materials in a
written request.
Value
Upon written application, Collector shall
furnish importer within 30 days the latest
information as to the value of the articles to be
imported.
Importer must present all pertinent papers
and documents, act in good faith and unable
to obtain information due to unusual
conditions
Information given is not an appraisal nor is it
binding upon the Collector’s right of appraisal.
The declaration, ascertainment or verification
of the correct weight of the cargo at the port of
loading is the duty or obligation of the master,
pilot, owner, officer or employee of the vessel.
If he omits or disregards this duty and a
UP COLLEGE OF LAW TAXATION 2
punishable discrepancy between the declared
weight and actual weight of the cargo exists,
the inevitable conclusion is that he is
negligent or careless. Similarly, if in the
exercise or performance of this duty, he is
negligent or careless resulting in the
commission of excessive discrepancy in the
weight of the ship's cargo penalized under the
law, carelessness or incompetency is,
nonetheless, imputable to him.
PROVISIONAL GOODS DECLARATION (PGD)
UNDER CMTA, SEC. 403: Where the declarant
does not have all the information or
supporting documents required to complete
the goods declaration, the lodging of a
provisional goods declaration may be
allowed: Provided, That it substantially
contains the necessary information required
by the Bureau and the declarant undertakes to
complete the information or submit the
supporting documents within 45 days from
the filing of the PGD, extentible for another 45
days for valid reasons.
If the Bureau accepts a PGD, the duty
treatment of the goods shall not be different
from that of goods with complete declaration.
Goods under a PGD may be released upon
posting of any required security equivalent to
the amount ascertained to be the applicable
duties and taxes.
iv. Liability for payment of duties
[Sec. 1204, TCC; the same under CMTA, Sec.
405]
General rule: the liability for duties, taxes, fees
and other charges attaching on importation
constitutes a personal debt due from the
importer to the government; it constitutes a
lien upon the articles imported which may be
enforced while such articles are in custody or
subject to the control of the government.
How to discharge: Discharged only by
payment in full of all duties, taxes, fees and
other charges legally accruing
Exception: Relieved by laws or regulations
v. Liquidation of duties
PAGE 256 OF 275
TAXATION LAW
When made: Upon approval by the Collector of
the returns of the appraiser and reports of the
weights, gauge or quantity [Sec. 1601, TCC]
How: the liquidation shall be made on the face
of the entry showing the particulars thereof,
initiated by the liquidating clerk, approved by
the chief liquidator, and recorded in the record
of liquidations. [Sec. 1601, TCC]
Additional Process: A daily record of all entries
liquidated shall be posted in the public
corridor of the customhouse, stating the name
of the vessel or aircraft, the port from which
she arrived, the date of her arrival, the name of
the importer, and the serial number and date
of the entry. A daily record must also be kept
by the Collector of all additional duties, taxes
and other charges found upon liquidation, and
notice shall promptly be sent to the interested
parties. [Sec. 1601, TCC]
Tentative and Final Liquidation
Tentative Liquidation
[Sec. 1602, TCC]
When liquidation shall be deemed to be
tentative: If to determine the exact amount
due under the law in whole or in part some
future action is required [only as to item/s
affected]
Effect: shall to that extent be subject to future
and final readjustment and settlement; entry
in such case shall be stamped "Tentative
liquidation"
Final Liquidation
[Sec. 1603, TCC as amended by RA 9135]
When liquidation is final and conclusive upon
all the parties: when articles have been
entered and passed free of duty or final
adjustment of duties made, after the
expiration of 3 years from the date of the final
payment of duties.
Exceptions:
(1) Fraud
(2) Protest
(3) Compliance audit pursuant to the
provisions of the Code
Note: Exceptions do not apply in case of
tentative liquidation
UP COLLEGE OF LAW
Fractions in the Liquidation — a fraction of a
peso less than fifty centavos shall be
disregarded, and a fraction of a peso
amounting to fifty centavos or more shall be
considered as one peso. In case of
overpayment or underpayment of duties,
taxes, surcharges, wharfage and/or other
charges paid on entries, where the amount
involved is less than five pesos, no refund or
collection shall be made. [Sec. 1604, TCC]
Other Notes:
Readjustment of Appraisal, Classification or
Return
[Sec. 1407, TCC]
Prescriptive Period for Appraisal, Classification
or Return
General rule: Appraisal, classification or return
as finally passed upon and approved or
modified by the Collector shall not be altered
or modified in any manner.
Exceptions:
(1) Within one year after payment of the
duties, upon statement of error in
conformity with seventeen hundred and
seven hereof, approved by the Collector
(2) Within fifteen days after such payment
upon request for reappraisal and/or
reclassification addressed to the
Commissioner by the Collector, if the
appraisal and/or classification is deemed
to be low
(3) Upon request for reappraisal and/or
reclassification, in the form of a timely
protest addressed to the Collector by the
interested party if the latter should be
dissatisfied with the appraisal or return
(4) Upon demand by the Commissioner of
Customs after the completion of
compliance audit pursuant to the
provisions of this Code." [R.A. 9135 (2001)]
vi. Keeping of records
All importers are required to keep at their
principal place of business, in the manner
prescribed by regulations to be issued by the
Commissioner of Customs and for a period of
3 years from the date of importation, all
records of their importations and/or books of
accounts, business and computer systems and
all customs commercial data including
payment records relevant to the verification of
the accuracy of the transactions value
PAGE 257 OF 275
TAXATION 2 TAXATION LAW
declared by the importer/customs brokers on
the import duty
All brokers are required to keep at their
principal place of business for a period of 3
years from date of importation copies
Custom officer authorized by BOC may enter
during office hours any premises or place
where the records are kept to conduct an audit
examination, inspection, verification or
investigation. The officer may make copies or
take extracts from any of such documents. A
certified copy may be evidence admissible in
all courts as if original.
Note: The same under CMTA, Secs. 1002-1003.
F. IMPORTATION IN VIOLATION OF TCC
F.1. SMUGGLING
In order to prevent smuggling and to secure
the collection of the legal duties, taxes and
other charges, the customs service shall
exercise surveillance over the coast, beginning
when a vessel or aircraft enters Philippine
territory and concluding when the article
imported therein has been legally passed
through the customhouse. [Sec. 2202]
Smuggling – any person who shall
fraudulently import or bring into the
Philippines, or assist in so doing, any article,
contrary to law, or shall receive, conceal, buy,
sell, or in any manner facilitate the
transportation, concealment, or sale of such
article after importation, knowing the same to
have been imported contrary to law; includes
the exportation of articles in a manner
contrary to law. [Sec. 3519, TCC]
Penalties for Unlawful Importation:
Person found guilty of smuggling shall be
punished by a fine of not less than six hundred
pesos nor more than five thousand pesos and
imprisonment for not less than six months nor
more than two years and, if the offender is an
alien, he shall be deported after serving the
sentence.
When the defendant is shown to have or to
have had possession of the article in question,
such possession shall be deemed sufficient
evidence to authorize conviction, unless the
UP COLLEGE OF LAW TAXATION 2
defendant shall explain the possession to the
satisfaction of the court. [Sec. 3601, TCC]
Note: The penalties for unlawful importation
are very different in the CMTA, under Sec.
1401; the penalties are dependent on the
appraised value of the goods unlawfully
imported.
F.2. OTHER FRAUDULENT PRACTICES
(1) Various Practices against Customs
Revenue: Any person who
(1) makes or attempts to make any entry
of imported or exported article by
means of any false or fraudulent
invoice, declaration, affidavit, letter,
paper, or
(2) by means of any false statement,
written or verbal, or by means of any
false or fraudulent practice
whatsoever, or
(3) shall be guilty of any willful act or
omission by means of whereof the
Government might be deprived of the
lawful duties, taxes and other charges,
or any portion thereof, accruing from
the article or any portion thereof,
embraced or referred to in such
invoice, declaration, affidavit, letter,
paper, or statement, or affected by
such act or omission [Sec. 3602, TCC]
(2) Failure to Report Fraud: Any master, pilot
in command or other officer, owner or
agent of any vessel or aircraft trading with
or within the Philippines and any
employee of the Bureau of Customs, who,
having cognizance of any fraud upon the
customs revenue, shall fail to report all
information relative thereto to the
Collector, as required by law [Sec. 3603,
TCC]
(1) Concealment or Destruction of Evidence of
Fraud: Any person who willfully conceals
or destroys, any invoice, book or paper
relating to any article liable to duty, after
an inspection thereof has been demanded
by the Collector of any Collection district,
or at any time conceals or destroys any
such invoice, book or paper for the
purpose of suppressing any evidence of
fraud therein contained [Sec. 3605, TCC]
(2) Affixing Seals: Any person who shall
willfully break or destroy any seal placed
by a customs official upon any car, or other
PAGE 258 OF 275
TAXATION LAW
conveyance by land, sea or air, or any
compartment thereof [Sec. 3606, TCC]
(3) Removal, Breakage, Alteration of Marks:
Any person who alters, defaces or
obliterates any distinctive mark placed by
a customs official on any package of
warehoused articles [Sec. 3607, TCC]
(4) Removing Goods from Customs Custody:
Any importer or owner of warehoused
articles, or person in his employ, who by
contrivance, fraudulently opens the
warehouse, or gains access to the articles,
except in the presence of the proper
official of the customs acting in the
execution of his duty [Sec. 3608, TCC]
(5) Failure to Keep Importation Records and
Give Full Access to Customs Officers: Any
person who shall fraudulently remove
warehoused articles from any public or
private warehouse or shall fraudulently
conceal such articles in any such
warehouse, or shall aid or abet any such
removal or concealment [Sec. 3609, TCC]
G. CLASSIFICATION OF GOODS
G.1. TAXABLE IMPORTATION
All articles, when imported from any foreign
country into the Philippines, shall be subject
to duty upon each importation, even though
previously exported from the Philippines,
except as otherwise specifically provided for in
this Code or in other laws. [Sec. 100, TCC]
G.2. PROHIBITED IMPORTATION
[Sec. 101, TCC] (POPP-LAW-DING)
(1) Dynamite, gunpowder, ammunitions and
other explosives, firearm and weapons of
war, and detached parts thereof, except
when authorized by law.
(2) Written or printed article in any form
containing:
(a) any matter advocating or inciting
treason, rebellion, insurrection or
sedition against the Government of
the Philippines
(b) forcible resistance to any law of the
Philippines
(c) containing any threat to take the life of
or inflict bodily harm upon any person
in the Philippines.
(3) Written or printed articles, photographs,
engravings, lithographs, objects,
paintings, drawings or other
UP COLLEGE OF LAW TAXATION 2
representation of an obscene or immoral
character.
(4) Articles, instruments, drugs and
substances designed, intended or
adapted for preventing human conception
or producing unlawful abortion, or any
printed matter which advertises or
describes or gives directly or indirectly
information where, how or by whom
human conception is prevented or
unlawful abortion produced.
(5) Roulette wheels, gambling outfits, loaded
dice, marked cards, machines, apparatus
or mechanical devices used in gambling,
or in the distribution of money, cigars,
cigarettes or other articles when such
distribution is dependent upon chance,
including jackpot and pinball machines or
similar contrivances.
(6) Lottery and sweepstakes tickets,
advertisements thereof and lists of
drawings therein.
Except those authorized by the Philippine
Government
(7) Any article manufactured in whole or in
part of gold silver or other precious metal,
or alloys thereof, the stamps brands or
marks of which do not indicate the actual
fineness or quality of said metals or alloys.
(8) Any adulterated or misbranded article of
food or any adulterated or misbranded
drug in violation of the provisions of the
"Food and Drugs Act."
(9) Marijuana, opium poppies, coca leaves, or
any other narcotics or synthetic drugs
which are or may hereafter be declared
habit forming by the President of the
Philippines, any compound,
manufactured salt, derivative, or
preparation thereof,
Except: when imported by the
Government of the Philippines or any
person duly authoriwhen imported by the
Government of the Philippines or any
person duly authorized by the Collector of
Internal Revenue for medicinal purposes
only
(10) Opium pipes and parts thereof, of
whatever material.
(11) All other articles the importation of which
is prohibited by law.
G.3. CONDITIONALLY-FREE IMPORTATION
[Sec. 105, TCC]
PAGE 259 OF 275
TAXATION LAW
The following articles shall be exempt from
the payment of import duties upon
compliance with the formalities prescribed in,
or with, the regulations which shall be
promulgated by the Commissioner of Customs
with the approval of the Secretary of Finance:
(1) Aquatic products (e.g., fishes, crustaceans,
mollusks, marine animals, seaweeds, fish
oil, roe), caught or gathered by fishing
vessels of Philippine registry: Provided,
That they are imported in such vessels or
in crafts attached thereto: And provided,
further, That they have not been landed in
any foreign territory or, if so landed, they
have been landed solely for transshipment
without having been advanced in
condition;
(2) Equipment for use in the salvage of
vessels or aircrafts, not available locally,
upon identification and the giving of a
bond in an amount equal to one and one-
half times the ascertained duties, taxes
and other charges thereon, conditioned
for the exportation thereof or payment of
the corresponding duties, taxes and other
charges within six [6] months from the
date of acceptance of the import entry:
Provided, That the Collector of Customs
may extend the time for exportation or
payment of duties, taxes and other
charges for a term not exceeding six [6]
months from the expiration of the original
period;
(3) Cost of repairs, excluding the value of the
article used, made in foreign countries
upon vessels or aircraft documented,
registered or licensed in the Philippines,
upon proof satisfactory to the Collector of
Customs [1] that adequate facilities for
such repairs are not afforded in the
Philippines, or [2] that such vessels or
aircrafts, while in the regular course of her
voyage or flight was compelled by stress of
weather or other casualty to put into a
foreign port to make such repairs in order
to secure the safety, seaworthiness or
airworthiness of the vessel or aircraft to
enable her to reach her port of destination;
(4) Articles brought into the Philippines for
repair, processing or reconditioning to be
re-exported upon completion of the repair,
processing or reconditioning: Provided,
That the Collector of Customs shall
require the giving of a bond in an amount
UP COLLEGE OF LAW TAXATION 2
equal to one and one-half times the
ascertained duties, taxes and other
charges thereon, conditioned for the
exportation thereof or payment of the
corresponding duties, taxes and other
charges within six [6] months from the
date of acceptance of the import entry;
(5) Medals, badges, cups and other small
articles bestowed as trophies or prizes, or
those received or accepted as honorary
distinction;
(6) Personal and household effects belonging
to residents of the Philippines returning
from abroad including jewelry, precious
stones and other articles of luxury which
were formally declared and listed before
departure and identified under oath
before the Collector of Customs when
exported from the Philippines by such
returning residents upon their departure
therefrom and during their stay abroad;
personal and household effects including
wearing apparel, articles of personal
adornment [except luxury items], toilet
articles, portable appliances and
instruments and similar personal effects,
excluding vehicles, watercrafts, aircrafts,
and animals purchased in foreign
countries by residents of the Philippines
which were necessary, appropriate and
normally used for the comfort and
convenience in their journey and during
their stay abroad upon proof satisfactory
to the Collector of Customs that same
have been in their use abroad for more
than six [6] months and accompanying
them on their return, or arriving within a
reasonable time which, barring
unforeseen circumstances, in no case
shall exceed ninety days before or after the
owners' return: Provided, That the
personal and household effects shall
neither be in commercial quantities nor
intended for barter, sale or hire and that
the total dutiable value of which shall not
exceed two thousand pesos [P2,000.00]:
Provided further, That the returning
residents have not previously received the
benefit under this section within one year
from and after the last exemption granted:
Provided furthermore, That a fifty [50] per
cent ad valorem duty across the board
shall be levied and collected on the
personal and household effects [except
PAGE 260 OF 275
TAXATION LAW
luxury items] in excess of two thousand
pesos: And provided, finally, That the
personal and household effects [except
luxury items] of a returning resident who
has not stayed abroad for six months shall
be subject to fifty per cent ad valorem duty
across the board, the total dutiable value
of which does not exceed two thousand
pesos; any excess shall be subject to the
corresponding duty provided in this Code;
(7) Wearing apparel, articles of personal
adornment, toilet articles, portable tools
and instruments, theatrical costumes and
similar effects accompanying travelers, or
tourists. or arriving within a reasonable
time before and after their arrival in the
Philippines, which are necessary and
appropriate for the wear and use of such
persons according to the nature of the
journey, their comfort and convenience:
Provided, That this exemption shall not
apply to articles intended for other
persons or for barter, sale or hire: Provided,
further, That the Collector of Customs may,
in his discretion, require either a written
commitment or a bond in an amount
equal to one and one-half times the
ascertained duties, taxes and other
charges conditioned for the exportation
thereof or payment of the corresponding
duties, taxes and other charges within
three [3] months from the date of
acceptance of the import entry: And
Provided finally, That the Collector of
Customs may extend the time for
exportation or payment of duties, taxes
and other charges for a term not
exceeding three months from the
expiration of the original period;
(8) Personal and household effects and
vehicles belonging to foreign consultants
and experts hired by, and/or rendering
service to, the government, and their staff
or personnel and families, accompanying
them or arriving within a reasonable time
before or after their arrival in the
Philippines, in quantities and of the kind
necessary and suitable to the profession,
rank or position of the person importing
them, for their own use and not for barter,
sale or hire provided that, the Collector of
Customs may in his discretion require
either a written commitment or a bond in
an amount equal to one and one-half
UP COLLEGE OF LAW TAXATION 2
times the ascertained duties, taxes and
other charges upon the articles classified
under this subsection; conditioned for the
exportation thereof or payment of the
corresponding duties, taxes and other
charges within six [6] months after the
expiration of their term or contract; And
Provided, finally, That the Collector of
Customs may extend the time for
exportation or payment of duties, taxes
and other charges for term not exceeding
six [6] months from the expiration of the
original period;
(9) Professional instruments and implements,
tools of trade, occupation or employment,
wearing apparel, domestic animals, and
personal and household effects belonging
to persons coming to settle in the
Philippines or Filipinos and/or their
families and descendants who are now
residents or citizens of other countries,
such parties hereinafter referred to as
Overseas Filipinos, in quantities and of the
class suitable to the profession, rank or
position of the persons importing them,
for their own use and not for barter or sale,
accompanying such persons, or arriving
within a reasonable time, in the discretion
of the Collector of Customs, before or after
the arrival of their owners, which shall not
be later than February 28, 1979 upon the
production of evidence satisfactory to the
Collector of Customs that such persons
are actually coming to settle in the
Philippines, that change of residence was
bona fide and that the privilege of free
entry was never granted to them before or
that such person qualifies under the
provisions of Letters of Instructions 105,
163 and 210, and that the articles are
brought from their former place of abode,
shall be exempt from the payment of
customs duties and taxes: Provided, That
vehicles, vessels, aircrafts, machineries
and other similar articles for use in
manufacture, shall not be classified
hereunder;
(10) Articles used exclusively for public
entertainment, and for display in public
expositions, or for exhibition or
competition for prizes, and devices for
projecting pictures and parts and
appurtenances thereof, upon
identification, examination, and appraisal
PAGE 261 OF 275
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and the giving of a bond in an amount
equal to one and one-half times the
ascertained duties, taxes and other
charges thereon, conditioned for
exportation thereof or payment of the
corresponding duties, taxes and other
charges within six [6] months from the
date of acceptance of the import entry;
Provided, That the Collector of Customs
may extend the time for exportation or
payment of duties, taxes and other
charges for a term not exceeding six [6]
months from the expiration of the original
period; and technical and scientific films
when imported by technical, cultural and
scientific institutions, and not to be
exhibited for profit: Provided, further, That
if any of the said films is exhibited for profit,
the proceeds therefrom shall be subject to
confiscation, in addition to the penalty
provided under Section Thirty-six hundred
and ten as amended, of this Code;
(11) Articles brought by foreign film producers
directly and exclusively used for making or
recording motion picture films on location
in the Philippines, upon their identification,
examination and appraisal and the giving
of a bond in an amount equal to one and
one-half times the ascertained duties,
taxes and other charges thereon,
conditioned for exportation thereof or
payment of the corresponding duties,
taxes and other charges within six [6]
months from the date of acceptance of the
import entry, unless extended by the
Collector of Customs for another six [6]
months; photographic and
cinematographic films, undeveloped,
exposed outside the Philippines by
resident Filipino citizens or by producing
companies of Philippine registry where the
principal actors and artists employed for
the production are Filipinos, upon affidavit
by the importer and identification that
such exposed films are the same films
previously exported from the Philippines.
As used in this paragraph, the terms
"actors" and "artists" include the persons
operating the photographic cameras or
other photographic and sound recording
apparatus by which the film is made;
(12) Importations for the official use of foreign
embassies, legations, and other agencies
of foreign governments: Provided, That
UP COLLEGE OF LAW TAXATION 2
those foreign countries accord like
privileges to corresponding agencies of
the Philippines;
(13) Articles imported for the personal or
family use of the members and attaches of
foreign embassies, legations, consular
officers and other representatives of
foreign governments: Provided, That such
privilege shall be accorded under special
agreements between the Philippines and
the countries which they represent: And
Provided, further, That the privilege may
be granted only upon specific instructions
of the Secretary of Finance in each
instance which will be issued only upon
request of the Department of Foreign
Affairs;
(14) Imported articles donated to, or for the
account of, any duly registered relief
organization, not operated for profit, for
free distribution among the needy, upon
certification by the Department of Social
Services and Development or the
Department of Education, Culture and
Sports, as the case may be;
(15) Containers, holders and other similar
receptacles of any material including kraft
paper bags for locally manufactured
cement for export, including corrugated
boxes for bananas, mangoes, pineapples
and other fresh fruits for export, except
other containers made of paper,
paperboard and textile fabrics, which are
of such character as to be readily
identifiable and/or reusable for shipment
or transportation of goods shall be
delivered to the importer thereof upon
identification, examination and appraisal
and the giving of a bond in an amount
equal to one and one-half times the
ascertained duties, taxes and other
charges within six months from the date of
acceptance of the import entry;
(16) Supplies which are necessary for the
reasonable requirements of the vessel or
aircraft in her voyage or flight outside the
Philippines, including articles transferred
from a bonded warehouse in any
collection district to any vessel or aircraft
engaged in foreign trade, for use or
consumption of the passengers or its crew
on board such vessel or aircrafts as sea or
air stores; or articles purchased abroad for
sale on board a vessel or aircraft as saloon
PAGE 262 OF 275
TAXATION LAW
stores or air store supplies: Provided, That
any surplus or excess of such vessel or
aircraft supplies arriving from foreign
ports or airports shall be dutiable;
(17) Articles and salvage from vessels
recovered after a period of two years from
the date of filing the marine protest or the
time when the vessel was wrecked or
abandoned, or parts of a foreign vessel or
her equipment, wrecked, abandoned in
Philippine waters or elsewhere: Provided,
That articles and salvage recovered within
the said period of two years shall be
dutiable;
(18) Coffins or urns containing human remains,
bones or ashes, used personal and
household effects [not merchandise] of
the deceased person, except vehicles, the
value of which does not exceed ten
thousand pesos, upon identification as
such;
(19) Samples of the kind, in such quantity and
of such dimension or construction as to
render them unsalable or of no
appreciable commercial value; models
not adapted for practical use; and
samples of medicines, properly marked
"sample-sale punishable by law," for the
purpose of introducing a new article in the
Philippine market and imported only once
in a quantity sufficient for such purpose by
a person duly registered and identified to
be engaged in that trade: Provided, That
importations under this subsection shall
be previously authorized by the Secretary
of Finance: Provided, however, That
importation of sample medicine shall be
previously authorized by the Secretary of
Health that such samples are new
medicines not available in the Philippines:
Provided, finally, That samples not
previously authorized and/or properly
marked in accordance with this section
shall be levied the corresponding tariff
duty.
(20) Commercial samples, except those
that are not readily and easily identifiable
[e.g., precious and semi-precious stones,
cut or uncut, and jewelry set with precious
stones], the value of any single
importation of which does not exceed ten
thousand pesos [P10,000.00] upon the
giving of a bond in an amount equal to
twice the ascertained duties, taxes and
UP COLLEGE OF LAW TAXATION 2
other charges thereon, conditioned for the
exportation of said samples within six [6]
months from the date of the acceptance of
the import entry or in default thereof, the
payment of the corresponding duties,
taxes and other charges. If the value of any
single consignment of such commercial
samples exceeds ten thousand pesos
[P10,000.00],the importer thereof may
select any portion of same not exceeding
in value of ten thousand pesos
[P10,000.00] for entry under the provision
of this subsection, and the excess of the
consignment may be entered in bond, or
for consumption, as the importer may
elect;
(21) Animals (except race horses), and plants
for scientific, experimental, propagation,
botanical, breeding, zoological and
national defense purposes: Provided, That
no live trees, shoots, plants, moss, and
bulbs, tubers and seeds for propagation
purposes may be imported under this
section, except by order of the
Government or other duly authorized
institutions: Provided, further, That the
free entry of animals for breeding
purposes shall be restricted to animals of
recognized breed, duly registered in the
book of record established for that breed,
certified as such by the Bureau of Animal
Industry: Provided, furthermore, That
certificate of such record, and pedigree of
such animal duly authenticated by the
proper custodian of such book of record,
shall be produced and submitted to the
Collector of Customs, together with
affidavit of the owner or importer, that
such animal is the animal described in
said certificate of record and pedigree:
And Provided, finally, That the animals
and plants are certified by the National
Economic and Development Authority as
necessary for economic development;
(22) Economic, technical, vocational,
scientific, philosophical, historical, and
cultural books and/or publications:
Provided, That those which may have
already been imported but pending
release by the Bureau of Customs at the
effectivity of this Decree may still enjoy the
privilege herein provided upon
certification by the Department of
Education, Culture and Sports that such
PAGE 263 OF 275
TAXATION LAW
imported books and/or publications are
for economic, technical, vocational,
scientific, philosophical, historical or
cultural purposes or that the same are
educational, scientific or cultural
materials covered by the International
Agreement on Importation of Educational
Scientific and Cultural Materials signed by
the President of the Philippines on August
2, 1952, or other agreements binding upon
the Philippines.
(23)Educational, scientific and cultural
materials covered by international
agreements or commitments binding
upon the Philippine Government so
certified by the Department of Education,
Culture and Sports.
(24) Bibles, missals, prayer books, Koran,
Ahadith and other religious books of
similar nature and extracts therefrom,
hymnal and hymns for religious uses;
(25) Philippine articles previously exported
from the Philippines and returned without
having been advanced in value or
improved in condition by any process of
manufacture or other means, and upon
which no drawback or bounty has been
allowed, including instruments and
implements, tools of trade, machinery and
equipment, used abroad by Filipino
citizens in the pursuit of their business,
occupation or profession; and foreign
articles previously imported when
returned after having been exported and
loaned for use temporarily abroad solely
for exhibition, testing and
experimentation, for scientific or
educational purposes; and foreign
containers previously imported which
have been used in packing exported
Philippine articles and returned empty if
imported by or for the account of the
person or institution who exported them
from the Philippines and not for sale,
barter or hire subject to identification:
Provided, That any Philippine article
falling under this subsection upon which
drawback or bounty has been allowed
shall, upon re-importation thereof, be
subject to a duty under this subsection
equal to the amount of such drawback or
bounty.
(26) Aircraft, equipment and machinery,
spare parts commissary and catering
UP COLLEGE OF LAW TAXATION 2
supplies, aviation gas, fuel and oil,
whether crude or refined, and such other
articles or supplies imported by and for
the use of scheduled airlines operating
under Congressional franchise: Provided,
That such articles or supplies are not
locally available in reasonable quantity,
quality and price and are necessary or
incidental for the proper operation of the
scheduled airline importing the same;
(27) Machineries, equipment, tools for
production, plants to convert mineral ores
into saleable form, spare parts, supplies,
materials, accessories, explosives,
chemicals, and transportation and
communication facilities imported by and
for the use of new mines and old mines
which resume operations, when certified
to as such by the Secretary of Agriculture
and Natural Resources upon the
recommendation of the Director of Mines,
for a period ending five [5] years from the
first date of actual commercial production
of saleable mineral products: Provided,
That such articles are not locally available
in reasonable quantity, quality and price
and are necessary or incidental in the
proper operation of the mine; and aircrafts
imported by agro-industrial companies to
be used by them in their agriculture and
industrial operations or activities, spare
parts and accessories thereof;
(28) Spare parts of vessels or aircraft of
foreign registry engaged in foreign trade
when brought into the Philippine
exclusively as replacements or for the
emergency repair thereof, upon proof
satisfactory to the Collector of Customs
that such spare parts shall be utilized to
secure the safety, seaworthiness or
airworthiness of the vessel or aircraft, to
enable it to continue its voyage or flight;
(29) Articles of easy identification exported
from the Philippines for repair and
subsequently reimported upon proof
satisfactory to the Collector of Customs
that such articles are not capable of being
repaired locally: Provided, That the cost of
the repairs made to any such article shall
pay a rate of duty of thirty per cent ad
valorem;
(30) Trailer chassis when imported by
shipping companies for their exclusive use
in handling containerized cargo, upon
PAGE 264 OF 275
TAXATION LAW
posting a bond in an amount equal to one
and one-half times the ascertained duties,
taxes and other charges due thereon to
cover a period of one year from the date of
acceptance of the entry, which period for
meritorious reasons may be extended by
the Commissioner of Customs from year to
year, subject to the following conditions:
(a) That they shall be properly identified
and registered with the Land
Transportation Commission;
(b) That they shall be subject to customs
supervision fee to be fixed by the
Collector of Customs and subject to
the approval of the Commissioner of
Customs;
(c) That they shall be deposited in the
Customs zone when not in use; and
(d) That upon the expiration of the period
prescribed above, duties and taxes
shall be paid, unless otherwise re-
exported
H. CLASSIFICATION OF DUTIES
H.1. ORDINARY/REGULAR DUTIES
Ordinary or regular duties refer to those that,
as a matter of course, are imposed on dutiable
articles [Sec. 104, TCC]
i. Ad valorem; Methods of valuation
The tax rates are based on
(1) The cost (FMV) or price of the imported
articles, in wholesale quantities in the
principal market of the exporting country
or the country of origin, including
expenses connected with the importation,
such as insurance, freight, packaging,
loading and unloading charges, but
excluding internal excise taxes to be
remitted or rebated; or
(2) In case such value is not ascertainable, the
reports of the Revenue or commercial
attaches; or
(3) If still not ascertainable, the domestic
wholesale market price in the ordinary
course of trade less import duty and not
more than 25% for expenses and profits.
[Sec. 201, TCC]
Basis for all Methods of Valuation
[Sec. 201, TCC and CAO 4-2004]
Methods for determining dutiable value –
(1) Transaction value – an ad valorem rate of
duty equivalent to the price actually paid
UP COLLEGE OF LAW TAXATION 2
or payable for the goods when sold for
export to the Philippines, as adjusted;
(2) Transaction value of identical goods – the
transaction value of identical goods sold
for export to the Philippines and exported
at or about the same time as the goods
being valued; “identical goods” shall
mean goods which are the same in all
respects, including physical
characteristics, quality and reputation,
discounting minor differences in
appearances;
(3) Transaction value of similar goods – the
transaction value of similar goods sold for
export to the Philippines and exported at
or about the same time as the goods being
valued; “similar goods” shall mean goods
which, although not alike in all respects,
have like characteristics and like
component materials which enable them
to perform the same functions and to be
commercially interchangeable;
(4) Deductive value – an amount based on the
unit price at which the imported gods or
identical or similar imported goods are
sold in the Philippines, in the same
condition as when imported, in the
greatest aggregate quantity, at or about
the time of importation of the goods being
valued, to persons not related to the
persons from whom they buy such goods,
as adjusted
(5) Computed value – the aggregate value of
the cost or value of materials and
fabrication or other processing employed
in producing the imported goods, amount
for profit and general expenses, freight,
insurance fees and other transportation
expenses for the importation of the goods,
among others; and
(6) Fallback value – an amount determined by
using other reasonable means and on the
basis of data available in the Philippines.
General rule: The foregoing methods are
sequentially applied
Exception: [CAO 4-2004] Methods 4 and 5
may be reversed at the request of the importer,
subject to the approval of the Commissioner.
Ground to refuse the request: if the
Commissioner deems that he will experience
PAGE 265 OF 275
TAXATION LAW
real difficulties in determining the dutiable
value using Method 5
Dutiable Value (DV) must not include:
(1) Charges for construction, erection,
assembly maintenance or technical
assistance undertaken after importation
(2) Cost of transport after importation
(3) Duties and taxes of Phil
(4) Other permissible deduction under WTO
Valuation Agreement
ALL the following conditions must be satisfied
so the Transaction Value (TV) shall be the DV
(CREPD):
(1) Sale for export to Phil
(2) No restrictions as to the disposition or use
of goods by buyer except:
(3) Those imposed by law or Phil authorities
(4) Limit the geographical area where goods
may be resold
(5) Do not substantially affect the value of the
goods
(6) Not be subject to some condition or
consideration for which value cannot be
determined
(7) No part of the proceeds of any subsequent
disposal shall accrue to the seller
(8) Buyer and seller are not related or if they
are, relationship did not affect the price
Deemed related if:
(1) They are officers or directors of one
another’s business;
(2) They are legally recognized partners in
business;
(3) There exists in an employer-employee
relationship between them;
(4) Any person directly or indirectly owns,
controls or holds 5% or more of the
outstanding voting stock or shares of
bother seller and buyer;
(5) One of them directly or indirectly controls
the other;
(6) Both of them are directly or indirectly
controlled by a 3rd person;
(7) Together they directly or indirectly control
a 3rd person; or
(8) Related by affinity or consanguinity up to
4th civil degree.
If related, use of TV acceptable if:
UP COLLEGE OF LAW TAXATION 2
(1) circumstances surrounding
transaction show that relationship did
not influence the price
(2) TV closely approximates:
(3) TV of unrelated buyers of identical or
similar goods
(4) Deductive value of identical or similar
goods determined according to
method #4
(5) Computed value of identical or similar
goods determined according to
method #5
Transaction Value of Identical Goods
The DV shall be the transaction value of
identical goods sold for export to the Phil and
exported at or about the same time as the
goods being valued. Identical goods must be
same commercial level and substantially
same quantity as the goods being valued.
Identical goods
(1) Same in all respects (physical
characteristics, quality and reputation)
(2) Produced in the same country as the
goods being valued
(3) Produced by producer of the goods being
valued
Excludes: imported goods for which
engineering, development, artwork,
design work, plans and sketches is
undertaken in the Phil and provided by the
buyer to the producer free of charge or at
a reduced rate
When no identical goods produced by the same
person: Identical goods produced by different
producer in the same country
If NO identical goods at same commercial level
and same quantity,
(1) TV of identical goods at a different
commercial level and different quantity
may be utilized
(2) TV shall be adjusted upward or downward
to account for the difference
Transaction value of similar goods
The DV shall be the transaction value of
similar goods sold for export to the Phil and
exported at or about the same time as the
goods being valued.
PAGE 266 OF 275
TAXATION LAW
Similar goods must be same commercial level
and substantially same quantity as the goods
being valued.
Similar goods
(1) like characteristics and like component
materials
(2) capable of performing same functions
(3) commercially interchangeable
(4) produced in same country
(5) produced by same producer
Excludes: imported goods for which
engineering, development, artwork,
design work, plans and sketches is
undertaken in the Phil and provided by the
buyer to the producer free of charge or at
a reduced rate
When no similar goods produced by the same
person: similar goods produced by different
producer in the same country
If NO similar goods at same commercial level
and same quantity,
(1) TV of similar goods at a different
commercial level and different
quantity may be utilized
(2) TV shall be adjusted upward or
downward to account for the
difference
Deductive value
DV is determined on the basis of sales in the
Phil of goods being valued of identical or
similar imported goods less certain expenses
resulting from importation and sale of goods.
Deductive Value is determined by making a
deduction from the established price per unit
for the aggregate of the ff. elements:
(a) Commissions or
(b) additions made in connection with profit
and general expenses and
(c) transport, insurance and associated costs
(d) customs duties and other national taxes
PRICE
Less: COMMISSIONS/ADDITIONS
Less: COSTS
Less: DUTIES and TAXES
DEDUCTIVE VALUE
The sales must meet the following conditions:
UP COLLEGE OF LAW TAXATION 2
(1) sold in the Phil in the same condition as
imported
(2) sales taken place at or about the same
time of importation of good being valued
If no sale took place at or about the time of
importation, use sales at the earliest date after
importation (of the similar or identical
good])but before expiration of 90 days
If no sale meet the above conditions, importer
may choose the use of sales of goods being
valued after further processing
“At or about the same time”
45 days prior to and 45 days following the
importation
Computed value
DV is determined on the basis of cost of
production + profit + general expenses
reflected in sales from exporting country to the
Phil of goods of same class or kind
DV is calculated by:
Determining aggregate of relevant costs,
charges and expenses or value of
(1) materials and
(2) production or processing costs
Costs* containers, packing, assists,
engineering, artwork, plans and sketches
undertaken in Phil and charged to producer
profits and general expenses
cost of transport, insurance and charges to the
port or place of importation
*Note: these additional costs are added only if
not included in the determination of the
aggregate of relevant costs, charges and
expenses or value of materials and production.
Fallback value
If DV cannot be determined using any of the
above methods, use other reasonable means
consistent with principles and general
provisions of General Agreements on Tariffs
and Trade [GATT]
ii. Specific
[Sec. 202, TCC]
Rates are based on units of weight number or
measurement
Kinds of weight:
PAGE 267 OF 275
TAXATION LAW
Gross Weight – weight of same, together with
the weight of all containers, packages, holders
and packings, of any kind, in which said
articles are contained, held or packed at the
time of importation
Legal Weight – weight at the time of their sale
to the public in usual retail quantities
Net Weight – only the actual weight at the
time of importation excluding the weight of
the immediate and all other containers
H.2. SPECIAL DUTIES
These are additional import duties imposed on
specific kinds of imported articles [See Table
of Special Duties]
I. REMEDIES
I.1. GOVERNMENT
i. Administrative/Extrajudicial
Search, seizure, forfeiture, arrest
Enforcement of Tax Lien
Tax Lien – attaches upon the articles imported
which may be enforced while such are in
custody or subject to the control of the
government [Sec. 1204]
Sec. 1508.
When an importer has an outstanding and
demandable account with the Bureau of
Customs,
Collector shall hold the delivery of the
article.
Upon notice, he may sell such importation
or a portion of it to satisfy the obligation.
Importer may settle his obligation anytime
before the sale.
Seizure and Forfeiture
[Sec. 2205]
Who may effect:
(1) Customs official;
(2) Fisheries Commissions;
(3) Philippine Coast Guard
Note: Person who is exercising such an
authority has the duty to make known his
official character, upon being questioned at
the time of the exercise. If his authority came
from a special authorization, he has the duty
to exhibit the written authority upon demand.
What is seized:
To make seizure of any vessel, aircraft, cargo,
animal or any movable property when the
UP COLLEGE OF LAW TAXATION 2
same is subject to forfeiture or liable for any
fine under the tariff and customs law
Where authority may be exercised:
At any place within the jurisdiction of the
Bureau of Customs
Other Rights/Authority of the Official effecting
the search and seizure
(1) Authority to require assistance of any
police officer if necessary [Sec. 2207]
(2) At any time, right to enter, pass through or
search any inclosure or warehouse, or
other building, not being a dwelling house
[Sec. 2208]
(3) Right to enter and search a dwelling
house, upon warrant issued by the Judge
of the Court, or any responsible officer as
may be authorized [Sec. 2209]
(4) Right to Search Vessels or Aircrafts and
Persons or Articles Conveyed [Sec. 2210]
(5) Right to Search Vehicles, Beasts and
Persons when he has reasonable cause to
suspect the presence therein of dutiable or
prohibited article introduced into the
Philippines contrary to law [Sec. 2211]
(6) Search of Persons Arriving From Foreign
Countries [Sec. 2212]
Administrative Proceedings [Secs 2301 –
2316]
Procedure for Seizure:
Collector shall issue a warrant for the
detention of the property
Cash bond
If the importer wishes to secure release of
article for legitimate use
(1) amount fixed by Collector
(2) appraised value of article and/or fine,
expenses, costs
Note: Article will not be released if:
(1) there is prima facie evidence of fraud in
the importation
(2) article is prohibited by law
Report to Commissioner and Chairman of
Commission of Audit
Written notice to owner or importer. He shall
he given opportunity to be heard
Notification to an unknown owner
PAGE 268 OF 275
TAXATION LAW
(1) posting for 15 days in the public corridor of
customhouse
(2) publication in newspaper
(3) other means Collector considers desirable
Collector shall make a list and particular
description and classification of the seized
property, appraisal based on local wholesale
values by
(1) at least 2 appraising officials
(2) absent such, 2 competent disinterested
citizens
If within 15 days from notification, no owner or
agent is found or appears before Collector,
then the property would be forfeited to
Government and sold at auction
Settlement
[Sec. 2307]
While case is pending, Collector may accept
settlement of any seizure case
(1) Upon approval of Commissioner
(2) Payment of fine (25% to 80% of the
landed cost of the article)
In case of forfeiture, should pay the domestic
market value of the seized article
When settlement not allowed
(1) Fraud in importation
(2) Importation prohibited by law
(3) Release would be contrary to law
Compromise
[Sec. 2316, TCC]
Commissioner may compromise any case
subject to approval by Secretary of Finance
ii. Judicial
Requisites for filing of criminal/civil case
[Sec, 2401, TCC]:
(1) Brought in the name of the government of
the Phil
(2) Conducted by Customs officers
(3) With approval from the Commissioner
Rules on appeal including jurisdiction
The party aggrieved by a ruling of the
Commissioner in any matter brought before
him upon protest or by 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.
UP COLLEGE OF LAW TAXATION 2
Unless an appeal is made to the Court of Tax
Appeals in the manner and within the period
prescribed by laws and regulations, the action
or ruling of the Commissioner shall be final
and conclusive. [Sec. 2402, TCC]
I.2. TAXPAYER
i. Protest
When made: at the time payment of the
amount claimed to be due is made within 15
days thereafter [Sec. 2308]
Form
(1) Must be in writing
(2) Must point out the particular decision or
ruling of the Collector of Customs to which
exception is taken or objection made
(3) Must state the grounds relied upon for
relief [Sec. 2310, TCC]
Scope
Limited to the subject matter of a single
adjustment (refers to the entire content of one
liquidation including duties, fees, surcharges
and fines) or other independent transaction
Other requirements:
(1) Payment of the amount due and the
corresponding docket fee shall be made
before protest [Sec. 2308]
(2) Upon demand of Collector, the importer
shall furnish samples of the articles which
are the subject of the protest
Effect of Failure to Protest
Failure renders the action of the Collector final
and conclusive except for manifest error
Review of Commissioner
[Sec. 2313]
A person aggrieved by the decision or
Collector in any matter presented upon
protest or by his action in any case of seizure
may, within days after notification on writing
by the Collector of his actions or decisions, file
a written notice to the Collector with a copy
furnished to the Commissioner of his intention
to appeal the action or decision of the
Collector to the Commissioner
Automatic Review
Happens in case a decision is made adverse to
the Government
PAGE 269 OF 275
TAXATION LAW
ii. Abandonment
When article deemed abandoned
(1) owner, importer or consignee expressly
signifies in writing to Collector his
intention to abandon
(2) after due notice, fails to file an entry within
30 days from date of discharge of last
package from vessel or aircraft
(3) after filing entry, fails to claim his
importation 15 days from date of posting
of the notice to claim such importation
[Sec. 1801, TCC]
Effect
[Sec. 1802, TCC]
(1) deemed to have renounced his interest
and property rights
(2) ipso facto deemed property of the
Government
If the abandoned articles are transferred to a
customs bonded warehouse, the operator
shall be liable for the payment of duties and
taxes in the case of loss of the stored
abandoned imported articles [R.V. Marzan v.
CA, GR No. 128064, March 4, 2004]
Liability of Official for Failure to Report
Abandonment
Any official or employee who:
(1) had knowledge of the existence of
abandoned article
(2) custody or charge of such article
fails to report within 24 hours from time article
deemed abandoned shall be punished
according to sec. 3604 (fine: P5000 –
P50,000; imprisonment: 1 yr – 10 yrs,
perpetual disqualification to hold public office,
vote and participate in election)
iii. Abatement and Refund
When available
(1) Abatement for Damage incurred during
Voyage [Sec. 1701]
(2) Abatement or Refund for the following:
(3) Missing Packages [Sec. 1702]
(4) Deficiency of Contents in Packages [Sec.
1703]
(5) Articles Lost or Destroyed after Arrival
[Sec. 1704]
(6) Dead or Injured animals [Sec. 1705]
Refund in case of excess payments due to:
UP COLLEGE OF LAW TAXATION 2 TAXATION LAW

(1) manifest clerical error made in invoice or

entry
(2) error in return of weight, measure and
gauge (certified, under penalties of
falsification or perjury, by examining
official)
(3) error in the distribution of charges on
invoices [which does not involve any
question of law and certified, under
penalties of falsification or perjury, by
examining official] [Sec. 1707]

Conditions for refund of excess payments

(1) errors discovered before payment or
discovered within 1 year after the final
liquidation
(2) written request and notice from importer
or statement of error certified by the
Collector

How claimed
(1) Claim made in writing
(2) Collector shall verify with the records in his
office
(3) Certify claim to Commissioner with his
recommendation and necessary papers
(4) Commissioner shall then cause the claim
to be paid if found correct

If the result of the refund would result to a

corresponding refund of the internal revenue
taxes on the same importation, Collector shall
certify to Commissioner who shall cause the
said excess to be paid, refunded or credited in
favor of the importer

PAGE 270 OF 275

UP COLLEGE OF LAW TAXATION 2 TAXATION LAW

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

Customs Code

START

Collector seizes goods

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

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

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

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

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

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

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

PAGE 271 OF 275

UP COLLEGE OF LAW TAXATION 2 TAXATION LAW

TABLE OF SPECIAL DUTIES: When Imposed

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

PAGE 272 OF 275

UP COLLEGE OF LAW TAXATION 2 TAXATION LAW

TABLE OF SPECIAL DUTIES: Imposing Authority and Amount

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

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

For b], compute

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

PAGE 273 OF 275

UP COLLEGE OF LAW TAXATION 2 TAXATION LAW

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

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

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

PAGE 274 OF 275

UP COLLEGE OF LAW TAXATION 2
VIII. Judicial Remedies
A. JURISDICTION OF THE COURT OF TAX
APPEALS
A.1. CIVIL TAX CASES
i. Exclusive Original Jurisdiction
Tax collection cases involving final and executory
assessments for taxes, fees, charges and
penalties, where the principal amount of taxes
and fees, exclusive of charges and penalties,
claimed is one million pesos or more.
ii. Exclusive Appellate Jurisdiction in civil cases
CTA Division
(1) Decisions and Inaction of CIR in cases
involving disputed assessments, refunds of
internal revenue taxes, fees or other charges,
penalties in relation thereto, or other matters
arising under the National Internal Revenue
or other laws administered by the Bureau of
Internal Revenue;
Inaction of the CIR shall be deemed a
denial in which the taxpayer may appeal.
Inaction does not necessarily constitute a
formal decision and the taxpayer may opt to
await the final decision of the CIR by
constitute a formal decision and the taxpayer
may opt to await the final decision of the CIR
beyond the 180 days and may appeal such
final decision.
For claim for refund, the taxpayer must
file a petition for review with the CTA prior to
the expiration of the two year prescriptive
period.
(2) Decisions, orders or resolutions of the RTC in
local tax cases and in tax collection cases
originally decided or resolved by them in their
original jurisdiction.
(3) Decisions of the Commissioner of Customs in
cases involving liability for customs duties,
fees or other money charges, seizure,
detention or release of property affected,
fines, forfeitures or other penalties in relation
thereto, or other matters arising under the
Customs Law or other laws administered by
the Bureau of Customs;
(4) Decisions of the Secretary of Finance on
customs cases elevated to him automatically
for review from decisions of the
Commissioner of Customs which are adverse
to the Government under Sec. 2315 of the
TCC;
PAGE 275 OF 275
TAXATION LAW
(5) Decisions of the Secretary of Trade and
Industry, in the case of non-agricultural
product, commodity or article, and the
Secretary of Agriculture in the case of
agricultural product, commodity or article,
involving dumping and countervailing duties
under Section 301 and 302, respectively, of
the Tariff and Customs Code, and safeguard
measures under Republic Act No. 8800,
where either party may appeal the decision to
impose or not to impose said duties. [Sec. 7,
RA No. 1125 as amended]
CTA en Banc
(1) Decisions or resolutions on motions for
reconsideration or new trial of the Court in
Divisions in the exercise of its exclusive
appellate jurisdiction over:
(2) Cases arising from administrative agencies –
Bureau of Internal Revenue, Bureau of
Customs, Department of Finance,
Department of Trade and Industry,
Department of Agriculture;
(3) Local tax cases decided by the Regional Trial
Courts in the exercise of their original
jurisdiction; and
(4) Tax collection cases decided by the Regional
Trial Courts in the exercise of their original
jurisdiction involving final and executory
assessments for taxes, fees, charges and
penalties, where the principal amount of
taxes and penalties claimed is less than one
million pesos;
(5) Decisions, resolutions or orders of the
Regional Trial Courts in local tax cases and in
tax collection cases decided or resolved by
them in the exercise of their appellate
jurisdiction;
(6) Decisions, resolutions or orders on motions
for reconsideration or new trial of the Court in
Division in the exercise of its exclusive
original jurisdiction over tax collection cases;
(7) Decisions of the Central Board of Assessment
Appeals (CBAA) in the exercise of its
appellate jurisdiction over cases involving the
assessment and taxation of real property
originally decided by the provincial or city
board of assessment appeals;
A.2. CRIMINAL CASES
[Sec. 7, RA 1125 as amended]
i. Exclusive Original Jurisdiction
UP COLLEGE OF LAW TAXATION 2
All criminal offenses arising from violations of the
National Internal Revenue Code or Tariff and
Customs Code and other laws administered by
the Bureau of Internal Revenue or the Bureau of
Customs. Principal amount of taxes and fees,
exclusive of charges and penalties, claimed is
more than or equal to one million pesos.
The filing of the criminal action being deemed to
necessarily carry with it the filing of the civil
action, and no right to reserve the filling of such
civil action separately from the criminal action
will be recognized.
ii. Exclusive appellate jurisdiction in criminal cases
CTA Division
(1) Over appeals from the judgments,
resolutions or orders of the Regional Trial
Courts in tax cases originally decided by them,
in their respected territorial jurisdiction.
(2) Over petitions for review of the judgments,
resolutions or orders of the Regional Trial
Courts in the exercise of their appellate
jurisdiction over tax cases originally decided
by the Metropolitan Trial Courts, Municipal
Trial Courts and Municipal Circuit Trial Courts
in their respective jurisdiction.
Does the CTA have jurisdiction over a special civil
action for certiorari assailing an interlocutory
order issued by the RTC in a local tax case? YES.
While there is no express grant of such power,
with respect to the CTA, Section 1, Article VIII of
the 1987 Constitution provides, nonetheless, that
judicial power shall be vested in one Supreme
Court and in such lower courts as may be
established by law and that judicial power
includes the duty of the courts of justice to settle
actual controversies involving rights which are
legally demandable and enforceable, and to
determine whether or not there has been a grave
abuse of discretion amounting to lack or excess
of jurisdiction on the part of any branch or
instrumentality of the Government.
On the strength of the above constitutional
provisions, it can be fairly interpreted that the
power of the CTA includes that of determining
whether or not there has been grave abuse of
discretion amounting to lack or excess of
jurisdiction on the part of the RTC in issuing an
interlocutory order in cases falling within the
PAGE 276 OF 275
TAXATION LAW
exclusive appellate jurisdiction of the tax court. It,
thus, follows that the CTA, by constitutional
mandate, is vested with jurisdiction to issue writs
of certiorari in these cases. [City of Manila v.
Grecia-Cuerdo, (2014)]
CTA En Banc
(1) Decisions, resolutions or orders on motions
for reconsideration or new trial of the Court in
Division in the exercise of its exclusive
original jurisdiction over cases involving
criminal offenses arising from violations of
the National Internal Revenue Code or the
Tariff and Customs Code and other laws
administered by the Bureau of Internal
Revenue or Bureau of Customs;
(2) Decisions, resolutions or orders on motions
for reconsideration or new trial of the Court in
Division in the exercise of its exclusive
appellate jurisdiction over criminal offenses
mentioned in the preceding subparagraph;
and
(3) Decisions, resolutions or orders of the
Regional trial Courts in the exercise of their
appellate jurisdiction over criminal offenses
mentioned in subparagraph [f].
B. JUDICIAL PROCEDURES
B.1. JUDICIAL ACTION FOR COLLECTION OF
TAXES
i. Internal revenue taxes
The remedies for the collection of internal
revenue taxes, fees or charges, and any
increment thereto resulting from delinquency
can be through the institution of a civil or criminal
action. [Sec. 205, NIRC]
Note: Please refer to Taxpayer’s Remedies (B.
Collection)
When this remedy is resorted to:
The tax assessment becomes final and executory
because of the failure to appeal.
Even pending decision of the administrative
protest [CIR v. Union Shipping, 1990]
ii. Local taxes
The LGU concerned may enforce the collection of
delinquent taxes, fees, charges or other revenues
by civil action in any court of competent
jurisdiction. The civil action shall be filed by the
local treasurer. [Sec. 183, LGC]
UP COLLEGE OF LAW TAXATION 2
MTC/RTC depending on jurisdictional threshold
amount.
Prescriptive period
Local taxes, fees, or charges may be collected
within 5 years from the date of assessment by
administrative or judicial action.
No judicial or administrative action for collection
can be instituted after lapse of the period for
assessment except when there is fraud or intent
to evade tax. [Sec. 194 LGC]
The running of the periods of prescription shall be
suspended for the time during which:
(1) The treasurer is legally prevented from
making the assessment of collection;
(2) The taxpayer requests for a reinvestigation
and executes a waiver in writing before
expiration of the period within which to
assess or collect; and
(3) The taxpayer is out of the country or
otherwise cannot be located. [Sec. 194, LGC]
B.2. CIVIL CASES
i. Who may appeal, mode of appeal, effect of
appeal
Appeal to CTA Division
(1) A party aggrieved or adversely affected by the
decision or ruling or inaction of
(a) The CIR;
(b) The Commissioner of Customs;
(c) The Secretary of Finance;
(d) The Secretary of Trade and Industry;
(e) The Secretary of Agriculture; or
(f) The RTC exercising original jurisdiction
(2) may appeal within 30 days from the receipt of
the copy of the decision or ruling, or the
expiration of the period fixed by law for the
Commissioner to decide, to the Court of Tax
Appeals Division.
Mode of Appeal: Rule 42
Aggrieved party may file a motion for
reconsideration or new trial within 15 days from
receipt of the copy of the decision.
Appeal to CTA en Banc
A party adversely affected by a decision or
resolution of a Division of the Court on a motion
for reconsideration or new trial may appeal within
15 days from receipt of the copy of the decision.
Mode of Appeal: Rule 43
PAGE 277 OF 275
TAXATION LAW
A party adversely affected by a decision or ruling
of the Central Board of Assessment Appeals and
the Regional Trial Court in the exercise of their
appellate jurisdiction may appeal within 30 days
from the receipt of the copy of the decision.
Suspension of collection of tax
General rule: No appeal taken to the Court shall
suspend the payment, levy, distraint, or sale of
any property of the taxpayer for the satisfaction
of his tax liability as provided under existing laws.
Exception: Where the collection of the amount of
the taxpayer’s liability, sought by means of a
demand for payment, by levy, distraint or sale of
any property of the taxpayer, or by whatever
means, as provided under existing laws, may
jeopardize the interest of the Government or the
taxpayer, an interested party may file a motion for
the suspension of the collection of the tax liability
(Sec. 11, RA 1125, as amended by RA 9282)
Injunction not available to restrain collection
No court shall have authority to grant an
injunction to restrain the collection of any
national internal revenue tax, fee or charge
imposed by the Code. [Sec. 217, NIRC]
Exception: Sec. 11, RA 1125, supra.
Note: The Local Government Code does not have
a provision prohibiting injunction in the collection
of tax.
Taking of evidence
The Court may receive evidence in the following
cases:
(1) In all cases falling within the original
jurisdiction of the Court in Division pursuant
to Section 3, Rule 4 of these Rules; and
(2) In appeals in both civil and criminal cases
where the Court grants a new trial pursuant
to Section 2, Rule 53 and Section 12, Rule 124
of the Rules of Court. [Sec. 2, Rule 12, A.M. No.
05-11-07]
Taking of evidence by:
Justice—
The Court may, motu proprio or upon proper
motion, direct that a case, or any issue therein, be
assigned to one of its members for the taking of
evidence, when the determination of a question
of fact arises at any stage of the proceedings, or
when the taking of an account is necessary, or
UP COLLEGE OF LAW TAXATION 2
when the determination of an issue of fact
requires the examination of a long account. The
hearing before such justice shall proceed in all
respects as though the same had been made
before the Court.
Upon the completion of such hearing, the justice
concerned shall promptly submit to the Court a
written report thereon, stating therein his
findings and conclusions. Thereafter, the Court
shall render its decision on the case, adopting,
modifying, or rejecting the report in whole or in
part, or, the Court may, in its discretion, recommit
it to the justice with instructions, or receive
further evidence. [Sec. 12, RA No. 1125, as
amended; also Sec. 3, Rule 12, A.M. No. 05-11-07]
Court Official –
In default or ex parte hearings, or in any case
where the parties agree in writing, the Court may
delegate the reception of evidence to the Clerk of
Court, the Division Clerks of Court, their
assistants who are members of the Philippine bar,
or any Court attorney. The reception of
documentary evidence by a Court official shall be
for the sole purpose of marking, comparison with
the original, and identification by witnesses of
such documentary evidence. The Court official
shall have no power to rule on objections to any
question or to the admission of exhibits, which
objections shall be resolved by the Court upon
submission of his report and the transcripts
within ten days from termination of the hearing.
[Sec. 4, Rule 12, A.M. No. 05-11-07]
Motion for reconsideration or new trial
[Rule 15, A.M. No. 05-11-07]
Who: Any aggrieved party may seek a
reconsideration or new trial of any decision,
resolution or order of the Court.
May be opposed by: The adverse party may file an
opposition to the motion for reconsideration or
new trial within ten days after his receipt of a copy
of the motion for reconsideration or new trial of a
decision, resolution or order of the Court.
When: He shall file a motion for reconsideration
or new trial within fifteen days from the date he
received notice of the decision, resolution or order
of the Court in question.
The Court shall resolve the motion for
reconsideration or new trial within three months
PAGE 278 OF 275
TAXATION LAW
from the time it is deemed submitted for
resolution.
How: The motion shall be in writing stating its
grounds, a written notice of which shall be served
by the movant on the adverse party.
A motion for new trial shall be proved in the
manner provided for proof of motions. A motion
for the cause mentioned in subparagraph [a] of
the preceding section shall be supported by
affidavits of merits which may be rebutted by
counter-affidavits. A motion for the cause
mentioned in subparagraph (b) of the preceding
section shall be supported by affidavits of the
witnesses by whom such evidence is expected to
be given, or by duly authenticated documents
which are proposed to be introduced in evidence.
A motion for reconsideration or new trial that
does not comply with the foregoing provisions
shall be deemed pro forma, which shall not toll
the reglementary period for appeal.
Effect: The filing of a motion for reconsideration
or new trial shall suspend the running of the
period within which an appeal may be perfected.
Grounds: A motion for new trial may be based on
one or more of the following causes materially
affecting the substantial rights of the movant:
(1) Fraud, accident, mistake or excusable
negligence which ordinary prudence could
not have guarded against and by reason of
which such aggrieved party has probably
been impaired in his rights; or
(2) Newly discovered evidence, which he could
not, with reasonable diligence, have
discovered and produced at the trial and,
which, if presented, would probably alter the
result.
A motion for new trial shall include all grounds
then available and those not included shall be
deemed waived.
Restrictions: No party shall be allowed to file a
second motion for reconsideration of a decision,
final resolution or order; or for new trial.
ii. Appeal to the CTA, en banc
No civil proceeding involving matter arising
under the National Internal Revenue Code, the
Tariff and Customs Code or the Local
UP COLLEGE OF LAW TAXATION 2 TAXATION LAW

Government Code shall be maintained, except as and Customs Code and other laws enforced by the
herein provided, until and unless an appeal has Bureau of Customs - The prosecution may be
been previously filed with the CTA and disposed conducted by their respective duly deputized
of in accordance with the provisions of this Act. legal officers.

A party adversely affected by a resolution of a Institution on civil action in criminal action

Division of the CTA on a motion for In cases within the jurisdiction of the Court, the
reconsideration or new trial, may file a petition for criminal action and the corresponding civil action
review with the CTA en banc. [Sec. 18, RA No. 1125 for the recovery of civil liability for taxes and
as amended] penalties shall be deemed jointly instituted in the
same proceeding. The filing of the criminal action
iii. Petition for review on certiorari to the Supreme shall necessarily carry with it the filing of the civil
Court action. No right to reserve the filing of such civil
[Rule 16, A.M. No. 05-11-07] action separately from the criminal action shall
A party adversely affected by a decision or ruling be allowed or recognized.
of the Court en banc may appeal by filing with the
Supreme Court a verified petition for review on ii. Appeal and period to appeal criminal cases
certiorari within fifteen days from receipt of a Period to Mode of
Deciding Body
copy of the decision or resolution, as provided in Appeal Appeal
Rule 45 of the Rules of Court. If such party has Regional Trial 15 days from Appeal
filed a motion for reconsideration or for new trial, Court in the receipt of pursuant to
exercise of its decision Sec. 3[a] and 6,
the period herein fixed shall run from the party’s
original Rule 122 of the
receipt of a copy of the resolution denying the jurisdiction Rules of Court
motion for reconsideration or for new trial. [to CTA
Division]
The motion for reconsideration or for new trial CTA Division 15 days from Petition for
filed before the Court shall be deemed [to CTA En receipt of review as
abandoned if, during its pendency, the movant Banc] decision provided in
shall appeal to the Supreme Court. Rule 43 of the
May be Rules of Court
B.3. CRIMINAL CASES extended for
i. Institution and prosecution of criminal actions good cause for The Court en
not more than banc shall act
Institution of criminal action
15 days on the appeal.
Instituted by the filing an information in the name Regional Trial 15 days from Petition for
of the People of the Philippines Courts in the receipt of review as
exercise of decision provided in
Those involving violations of the NIRC and other their appellate Rule 43 of the
laws enforced by the BIR: Must be approved by jurisdiction Rules of Court
the CIR [To CTA
division]
Those involving violations of the tariff and
Customs Code and other laws enforced by the
Bureau of Customs: Must be approved by the Solicitor General as counsel for the People and
Commissioner of Customs government officials sued in their official capacity
The Solicitor General shall represent the People
Institution shall interrupt the running of the of the Philippines and government officials sued
period of prescription in their official capacity in all cases brought to the
Court in the exercise of its appellate jurisdiction.
Prosecution of criminal action He may deputize the legal officers of the Bureau
Conducted and prosecuted under the direction of Internal Revenue in cases brought under the
and control of the public prosecutor National Internal Revenue Code or other laws
enforced by the Bureau of Internal Revenue, or
Those involving violations of the NIRC and other the legal officers of the Bureau of Customs in
laws enforced by the BIR or violations of the tariff cases brought under the Tariff and Customs Code
of the Philippines or other laws enforced by the
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Bureau of Customs, to appear in behalf of the
officials of said agencies sued in their official
capacity: Provided, however, such duly deputized
legal officers shall remain at all times under the
direct control and supervision of the Solicitor
General.
iii. Petition for review on certiorari to the Supreme
Court
A party adversely affected by a decision or ruling
of the CTA en banc may file with the Supreme
Court a verified petition for review on certiorari
pursuant to Rule 45 of the 1997 Rules of Civil
Procedure. [Sec. 19, R.A. No. 1125 as amended]
C. TAXPAYER’S SUIT IMPUGNING THE
VALIDITY OF TAX MEASURES OR ACTS OF
TAXING AUTHORITIES
C.1. TAXPAYER’S SUIT, DEFINED
Taxpayer’s suit – refers to a case where the act
complained of directly involves the illegal
disbursement of public funds derived from
taxation. [Kilosbayan v. Guingona, Jr. (1994)]
C.2. DISTINGUISHED FROM CITIZEN’S SUIT
The plaintiff in a taxpayer's suit is in a different
category from the plaintiff in a citizen's suit. In the
former, the plaintiff is affected by the expenditure
of public funds, while in the latter, he is but the
mere instrument of the public concern. [De
Castro v. Judicial and Bar Council (2010)]
C.3. REQUISITES FOR CHALLENGING THE
CONSTITUTIONALITY OF A TAX MEASURE OR
ACT OF TAXING AUTHORITY
i. Concept of locus standi as applied in taxation
The doctrine of locus standi is the right of
appearance in a court of justice. The doctrine
requires a litigant to have a material interest in
the outcome of a case. In private suits, locus
standi requires a litigant to be a "real party in
interest," which is defined as "the party who
stands to be benefited or injured by the judgment
in the suit or the party entitled to the avails of the
suit."
In public suits, this Court recognizes the difficulty
of applying the doctrine especially when plaintiff
asserts a public right on behalf of the general
public because of conflicting public policy issues.
On one end, there is the right of the ordinary
citizen to petition the courts to be freed from
unlawful government intrusion and illegal official
PAGE 280 OF 275
TAXATION LAW
action. At the other end, there is the public policy
precluding excessive judicial interference in
official acts, which may unnecessarily hinder the
delivery of basic public services.
The Court has adopted the "direct injury test" to
determine locus standi in public suits. In People
v. Vera, it was held that a person who impugns
the validity of a statute must have "a personal
and substantial interest in the case such that he
has sustained, or will sustain direct injury as a
result." The "direct injury test" in public suits is
similar to the "real party in interest" rule for
private suits under Section 2, Rule 3 of the 1997
Rules of Civil Procedure. [Planter’s Products, Inc.
v. Fertiphil Corporation, G.R. No. 166006, March
14, 2008]
As applied to taxation:
It is well-stated that the validity of a statute may
be contested only by one who will sustain a direct
injury in consequence of its enforcement. Yet,
there are many decisions nullifying, at the
instance of taxpayers, laws providing for the
disbursement of public funds, upon the theory
that "the expenditure of public funds by an officer
of the State for the purpose of administering an
unconstitutional act constitutes a misapplication
of such funds," which may be enjoined at the
request of a taxpayer. [Pascual v. Secretary of
Public Works (1960)]
A taxpayer is allowed to sue where there is a
claim that public funds are illegally disbursed, or
that the public money is being deflected to any
improper purpose, or that there is wastage of
public funds through the enforcement of an
invalid or unconstitutional law. A person suing as
a taxpayer, however, must show that the act
complained of directly involves the illegal
disbursement of public funds derived from
taxation. He must also prove that he has
sufficient interest in preventing the illegal
expenditure of money raised by taxation and that
he will sustain a direct injury because of the
enforcement of the questioned statute or
contract. In other words, for a taxpayer’s suit to
prosper, two requisites must be met:
(1) public funds derived from taxation are
disbursed by a political subdivision or
instrumentality and in doing so, a law is violated
or some irregularity is committed and
UP COLLEGE OF LAW TAXATION 2 TAXATION LAW

(2) the petitioner is directly affected by the
alleged act. [Mamba v. Lara, G.R. No. 165109,
Dec. 14, 2009]
ii. Doctrine of transcendental importance
Recognizing that a strict application of the "direct
injury" test may hamper public interest, this
Court relaxed the requirement in cases of
"transcendental importance" or with "far
reaching implications." Being a mere procedural
technicality, it has also been held that locus
standi may be waived in the public interest. [Ibid]
The decision of the Collector can be reviewed by
the Commissioner of Customs who can approve,
modify or reverse the decision or action of the
Collector. If the party is not satisfied with the
ruling of the Commissioner, he may file the
necessary appeal to the Court of Tax Appeals.
Afterwards, the decision of the Court of Tax
Appeals can be appealed to this Court.

Planters Products, Inc. v. Fertiphil Corp.: Even

assuming arguendo that there is no direct injury,
We find that the liberal policy consistently
adopted by this Court on locus standi must apply.
The issues raised by Fertiphil are of paramount
public importance. It involves not only the
constitutionality of a tax law but, more
importantly, the use of taxes for public purpose.
Former President Marcos issued LOI No. 1465
with the intention of rehabilitating an ailing
private company. This is clear from the text of the
LOI. PPI is expressly named in the LOI as the
direct beneficiary of the levy. Worse, the levy was
made dependent and conditional upon PPI
becoming financially viable. The LOI provided
that "the capital contribution shall be collected
until adequate capital is raised to make PPI
viable."

The constitutionality of the levy is already in

doubt on a plain reading of the statute. It is Our
constitutional duty to squarely resolve the issue
as the final arbiter of all justiciable controversies.
The doctrine of standing, being a mere
procedural technicality, should be waived, if at all,
to adequately thresh out an important
constitutional issue.

iii. Ripeness for judicial determination

“Ripeness for judicial determination” means that
litigation is inevitable or there is no adequate
relief available in any other form or proceeding.

CJH Development Corp. v. BIR (2008): However,

CJH is not left without recourse. The Tariff and
Customs Code provides for the administrative
and judicial remedies available to a taxpayer who
is minded to contest an assessment, subject of
course to certain reglementary periods. The TCC
provides that a protest can be raised provided
that payment first be made of the amount due.

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