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I.

General Principles

A. Definition and Concept of Taxation

As a process, it is a means by which the sovereign, through its law-making body,


raises revenue to defray the necessary expenses of the government. It is merely a way of
apportioning the costs of government among those who in some measures are privileged to
enjoy its benefits and must bear its burdens.
As a power, taxation refers to the inherent power of the state to demand enforced
contributions for public purpose or purposes.

Taxation is a symbiotic relationship, whereby in exchange for the protection that the
citizens get from the government, taxes are paid.1

B. Nature of Taxation

1. It is an inherent attribute of sovereignty


2. It is legislative in character

C. Characteristics of Taxation

1. The power of taxation is an incident of sovereignty as it is inherent in the State,


belonging as a matter of right to every independent government. It does need constitutional
conferment. Constitutional provisions do not give rise to the power to tax but merely
impose limitations on what would otherwise be an invincible power. No attribute of
sovereignty is more pervading, and at no point does the power of government affect more
constantly and intimately all the relations of life than through the exactions made under it.2

2. The power to tax is inherent in the State, and the State is free to select the object
of taxation, such power being exclusively vested in the legislature, except where the
Constitution provides otherwise.3

The Congress may by law authorize the President to fix within specified limits, and
subject to such limitations and restrictions as it may impose, tariff rates, import and export
quotas, tonnage and wharfage dues, and other duties or imposts within the framework of the
national development program of the Government.

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.4

1
Commissioner of Internal Revenue vs.Allegre, Inc., et al., L-28896, Feb. 17, 1988
2
Churchill and Tait v. Concepcion, 34 Phil 969
3
Art. VI, Sec, 28 (2); Art.X, Sec. 5; Art. VI, Sec. 28. par. 2.
4
Art. X, Sec. 5

1
3. It is subject to Constitutional and inherent limitations; hence, it is not an absolute
power that can be exercised by the legislature anyway it pleases.

D. Power of Taxation Compared With Other Powers

1. Police Power
2. Power of Eminent Domain

Taxation Police Power Eminent Domain


Purpose

Raising revenue Promote public welfare Taking of property for


thru regulations public use

Amount of exaction

No limit Limited to the cost of No exaction,


regulations, issuance of compensation paid by the
the license or surveillance government

Benefits received

No special or direct benefits No direct benefits but a Direct benefit results in


received but the enjoyment of the healthy economic standard the form of just
privileges of living in an organized of society or compensation
society damnumabsqueinjuria is
attained

Non-impairment of contracts

The impairment rule subsist Contracts may be Contracts may be


impaired impaired

Transfer of property rights

Taxes paid become part of public No transfer but only Property is taken by the
funds restraint on the exercise of govt upon payment of
property right exists just compensation

Scope

Affects all persons, property and Affects all persons, Affects only the particular
excise property, privileges, and property comprehended
even rights

2
Basis

Public necessity Public necessity and the Public necessity, private


right of the state and the property is taken for
public to self-protection public use
and self-preservation

Authority which exercises the power

Only by the government or Only by the government or May be granted to public


its political subdivisions its political subdivisions service, companies, or public
utilities

E. Purpose of Taxation

1. Revenue-raising

To provide funds or property with which the State promotes the general welfare and
protection of its citizens.

2.Non-revenue/special or regulatory

Promotion of General Welfare Taxation may be used as an implement of police power in


order to promote the general welfare of the people.5

Regulation As in the case of taxes levied on excises and privileges like


those imposed in tobacco or alcoholic products or
amusement places like night clubs, cabarets, cockpits, etc.6

Reduction of Social Inequality This is made possible through the progressive system of
taxation where the objective is to prevent the under-
concentration of wealth in the hands of few individuals.

Encourage Economic Growth In the realm of tax exemptions and tax reliefs, for
instance, the purpose is to grant incentives or exemptions

5
see Lutz vs.Araneta, 98 Phil 148 and Osmea vs.Orbos, G.R. No. 99886, Mar. 31, 1993
6
In the case of Caltex Phils. Inc. vs. COA (G.R. No. 92585, May 8, 1992), it was held that taxes may also be
imposed for a regulatory purpose as, for instance, in the rehabilitation and stabilization of a threatened
industry which is affected with public industry like the oil industry.

3
in order to encourage investments and thereby promote
the countrys economic growth.

e. Protectionism In some important sectors of the economy, as in the case


of foreign importations, taxes sometimes provide
protection to local industries like protective tariffs and
customs

F. Principles of Sound Tax System

1. Fiscal Adequacy

The sources of tax revenue should coincide with, and approximate the needs of
government expenditure. Neither an excess nor a deficiency of revenue vis--vis the needs of
government would be in keeping with the principle.

2. Administrative Feasibility

Tax laws should be capable of convenient, just and effective administration

3. Theoretical Justice

The tax burden should be in proportion to the taxpayers ability to pay7. The 1987
Constitution requires taxation to be equitable and uniform.

G. Theory and Basis of Taxation

1. Lifeblood Theory

Taxes are the lifeblood of the government, being such, their prompt and certain
availability is an imperious need.8 Without taxes, the government would be paralyzed for lack
of motive power to activate and operate it.

2. Necessity Theory

Taxes proceed upon the theory that the existence of the government is a necessity;
that it cannot continue without the means to pay its expenses; and that for those means, it
has the right to compel all citizens and properties within its limits to contribute.9

7
ability-to-pay principle
8
Collector of Internal Revenue vs. Goodrich International Rubber Co., Sept. 6, 1965
9
In a case, the Supreme Court held that:
Taxation is a power emanating from necessity. It is a necessary burden to preserve the States
sovereignty and a means to give the citizenry an army to resist aggression, a navy to defend its shores
from invasion, a corps of civil servants to serve, public improvements designed for the enjoyment of the
citizenry and those which come with the States territory and facilities, and protection which a

4
3. Benefits-Protection Theory10

The basis of taxation is the reciprocal duty of protection between the state and its
inhabitants. In return for the contributions, the taxpayer receives the general advantages and
protection which the government affords the taxpayer and his property.

4. Jurisdiction over subject and objects

Rules:

a) Tax laws cannot operate beyond a States territorial limits.


b) The government cannot tax a particular object of taxation which is not within its
territorial jurisdiction.

c) Property outside ones jurisdiction does not receive any protection of the State.
d) If a law is passed by Congress, it must always see to it that the object or subject of
taxation is within the territorial jurisdiction of the taxing authority.

H. Doctrines in Taxation

1. Prospectivity of tax laws

General Rule Exception

Taxes must only be imposed prospectively. The language of the statute clearly demands
or express that it shall have a retroactive
effect.

2. Imprescriptibility

General Rule Exception

Taxes are imprescriptible. When provided otherwise by the tax law


itself.11

government is supposed to provide (Phil. Guaranty Co., Inc. vs Commissioner of Internal Revenue, 13 SCRA
775)
10
Symbiotic Relationship
11
Example: NIRC provides for statutes of limitation in the assessment and collection of taxes therein
imposed.
The law on prescription, being a remedial measure, should be liberally construed to afford protection as a
corollary, the exceptions to the law on prescription be strictly construed. (CIR vs CA. G.R. No. 104171, Feb.
24, 1999)

5
3. Double taxation

a. Strict sense

Referred to as direct duplicate taxation, it means:

1. Taxing twice;
2. by the same taxing authority;
3. within the same jurisdiction or taxing district;
4. for the same purpose;
5. in the same year or taxing period;
6. some of the property in the territory
b. Broad sense

Referred to as indirect double taxation, it is taxation other than direct duplicate


taxation. It extends to all cases in which there is a burden of two or more impositions.

c. Constitutionality of double taxation

Unlike in the United States Constitution, our Constitution does not prohibit double
taxation.

However, while it is not forbidden, it is something not favored. Such taxation


should, whenever possible, be avoided and prevented.

In addition, where there is direct double taxation, there may be a violation of the
constitutional precepts of equal protection and uniformity in taxation.12

12
The argument against double taxation may not be invoked where one tax is imposed by the State and
the other is imposed by the city, it being widely recognized that there is nothing inherently obnoxious in
the requirement that license fees or taxes be exacted with respect to the same occupation, calling, or
activity by both the State and a political subdivision thereof. And where the statute or ordinance in
question, there is no infringement of the rule on equality (City of Baguio v. De Leon, 25 SCRA 938)

6
d. Modes of eliminating double taxation

Two (2) methods of relief:13

Exemption method The income or capital which is taxable at the state of source or
situs is exempted at the state of residence, although in some
instances it may be taken into account in determining the rate
of tax applicable to the taxpayers remaining income or capital

Credit method Although the income or capital which is taxed in the state of
source is still taxable in the state of residence, the tax paid in
the former is credited against the tax levied in the latter. The
basic difference between the two methods is that in the
exemption method, the focus is on the income or capital,
whereas the credit method focuses upon the tax.

13
A tax treaty resorts to several methods. First, it sets out the respective rights to tax of the state of
source or situs and of the state of residence with regard to certain classes of income or capital. In
some cases, an exclusive right to tax is conferred on one of the contracting states; however, for other
items of income or capital, both states are given the right to tax, although the amount of tax that may be
imposed by the state of source is limited. The second method for the elimination of double taxation
applies whenever the state of source is given a full or limited right to tax together with the
state of residence. In this case, the treaties make it incumbent upon the state of residence to allow
relief on order to avoid double taxation.

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4. Escape from taxation

a. Shifting of tax burden14

1) Ways of shifting the tax burden

a. 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.15

b. Backward shifting When the burden of the tax is transferred from the consumer
or purchaser through the factors of distribution to the factors
of production.16

c. Onward shifting When the tax is shifted two or more times either forward or
backward.17

2) Taxes that can be shifted

Only indirect taxes may be shifted;18 direct taxes19 cannot be shifted.

14
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.
Process by which such tax burden is transferred from statutory taxpayer to another without violating the
law.
What is transferred is not the payment of the tax, but the burden of the tax
15
Example:
Manufacturer or producer may shift tax assessed to wholesaler, who in turn shifts it to the retailer, who
also shifts it to the final purchaser or consumer
16
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, or finally to the manufacturer or producer
17
Example:
Thus, a transfer from the seller to the purchaser involves one shift; from the producer to the
wholesaler, then to retailer, we have two shifts; and if the tax is transferred again to the purchaser by the
retailer, we have three shifts in all.
18
e.g. VAT
19
e.g. Income tax

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3) Meaning of impact and incidence of taxation

Impact of taxation Incidence of taxation

The point on which a tax is originally The point on which the tax burden finally
imposed. In so far as the law is concerned, rests or settle down. It takes place when
the taxpayer is the person who must pay the shifting has been effected from the statutory
tax to the government. He is also termed as taxpayer to another.
the statutory taxpayer-the one on whom the
tax is formally assessed. He is the subject of
the tax.

b. Tax avoidance20

The exploitation of the taxpayer of legally permissible alternative tax rates or


methods of assessing taxable property or income in order to avoid or reduce tax liabilit

c. Tax evasion21

The use by the taxpayer of illegal or fraudulent means to defeat or lessen the
payment of tax.

20
also known as tax minimization; it is not punished by law
21
also known as tax dodging; it is punishable by law
Elements of tax evasion:
1. The end to be achieved, i.e. payment of less than that known by the taxpayer to be legally due, or
paying no tax when it is shown that tax is due
2. An accompanying state of mind which is 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
Indicia of fraud in tax evasion:
1. Failure to declare for taxation purposes true and actual income derived from business for two (2)
consecutive years; or
2. Substantial under declaration of income tax returns of the taxpayer for four (4) consecutive years
coupled with unintentional overstatement of deductions
Evidence to prove tax evasion:
Since fraud is a state of mind, it need not be proved by direct evidence but may be proved from the
circumstances of the case.
Failure of the taxpayer to declare for taxation purposes his true and actual income derived from his
business for two (2) consecutive years is an indication of his fraudulent intent to cheat the government of
its due taxes. (Republic vs. Gonzales, 13 SCRA 638)

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5. Exemption from taxation

a. Meaning of exemption from taxation

It is the grant of immunity to particular persons or corporations or to persons 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.22

b. Nature of tax exemption

1) It is a mere personal privilege of the grantee.

2) It is generally revocable by the government unless the exemption is founded on a


contract which is contract which is protected from impairment.

3) It implies a waiver on the part of the government of its right to collect what
otherwise would be due to it, and so is prejudicial thereto.

4) It is not necessarily discriminatory so long as the exemption has a reasonable


foundation or rational basis.

5) It is not transferable except if the law expressly provides so.

c. Kinds of tax exemption

1) Express23

When certain persons, property or transactions are, by express provision, exempted


from all certain taxes, either entirely or in part.

2) Implied24

When a tax is levied on certain classes of persons, properties, or transactions without


mentioning the other classes.25

22
Exemption is allowed only if there is a clear provision therefor.
It is not necessarily discriminatory as long as there is a reasonable foundation or rational basis.
Exemptions are not presumed, but when public property is involved, exemption is the rule and taxation
is the exemption.
23
or affirmative exemption
24
or exemption by omission
No tax exemption by implication
It must be expressed in clear and unmistakable language
25
Every tax statute makes exemptions because of omissions.

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3) Contractual

Agreed to by the taxing authority in contracts lawfully entered into by them under
enabling laws.

d. Rationale/grounds for exemption

Rationale for granting tax exemptions Grounds for granting tax exemptions

Its avowed purpose is some public benefit or 1) May be based on contract.26


interests which the lawmaking body considers
sufficient to offset the monetary loss entailed in 2) May be based on some ground of
the grant of the exemption. public policy.27
The theory behind the grant of tax exemptions
is that such act will benefit the body of the 3) May be based on grounds of
people. It is not based on the idea of lessening reciprocity or to lessen the rigors of
the burden of the individual owners of international double or multiple
property. taxation.28

e. Revocation of tax exemption

It is an act of liberality which could be taken back by the government unless there
are restrictions. Since taxation is the rule and taxation therefrom is the exception, the
exemption may be withdrawn by the taxing authority.29

26
In such a case, the public, which is represented by the government is supposed to receive a full
equivalent therefor, i.e. charter of a corporation.
27
i.e., to encourage new industries or to foster charitable institutions. Here, the government need not
receive any consideration in return for the tax exemption.
28
Equity is not a ground for tax exemption. Exemption is allowed only if there is a clear provision therefor.
29
Mactan Cebu International Airport Authority vs., Marcos, 261 SCRA 667.

11
6. Compensation and Set-off30

General Rule Exception

Taxes are not subject to set-off or legal Where both the claims of the government
compensation. The government and the and the taxpayer against each other have
taxpayer are not creditors and debtors or already become due and demandable as well
each other. Obligations in the nature of as fully liquated.32
debts are due to the government in its
corporate capacity, while taxes are due to the
government in its sovereign capacity.31

7. Compromise

A contract whereby the parties, by reciprocal concessions, avoid litigation or put an


end to one already commenced.33

8. Tax amnesty

a. Definition

A general pardon or intentional overlooking by the State of its authority to impose


penalties on persons otherwise guilty of evasion or violation of a revenue to collect what
otherwise would be due it and, in this sense, prejudicial thereto.34
30
Requisites of Compensation in taxation
1. The tax assessed and the claim against the government be fully liquidated.
2. The tax assessed and the claim against the government is due and demandable, and
3. The government had already appropriated funds for the payment of the claim (Domingo v. Garlitos, L-
18904, June 29, 1963)
31
Philex Mining Corp. vs. CIR, 294 SCRA 687; Republic vs.Mambulao Lumber Co., 6 SCRA 622
32
seeDomingo vs. Garlitos, supra
33
Art. 2028, New Civil Code
Requisites:
1. Taxpayer must have a tax liability.
2. There must be an offer by taxpayer or CIR, of an amount to be paid by taxpayer.
3. There must be acceptance of the offer in settlement of the original claim.
When taxes may be compromised:
1. A reasonable doubt as to the validity if the claim against the taxpayer exists;
2.The financial position of the taxpayer demonstrates a clear inability to pay the assessed tax.
3.Criminal violations, except:
a. Those already filed in court
b. Those involving fraud.
34
Tax amnesty, like tax exemption, is never favored nor presumed in law and if granted by statute must
be construed strictly against the taxpayer, who must show compliance with the law.
The government is not estopped from questioning the tax liability even if amnesty tax payments were
already received
Erroneous application and enforcement of the law by public officers do not block subsequent correct
application of the statute. The government is never estopped by mistakes or errors by its agents.

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b. Distinguished from tax exemption

Tax amnesty Tax exemption

Partakes of an absolute forgiveness or waiver The grant of immunity to particular persons


by the Government of its right to collect or corporations of a particular class from a
what otherwise would be due it and, in this tax of which persons and corporations
sense, prejudicial thereto, particularly to tax generally within the same state or taxing
evaders who wish to relent and are willing to district are obliged to pay.
reform are given a chance to do so and
therefore become a part of the society with a
clean slate.

Immunity from all criminal, civil and Immunity from civil liability only
administrative liabilities arising from non-
payment of taxes

Applies only to past tax periods, hence Prospective application


retroactive application

There is revenue loss since there was actually None, because there was no actual taxes due
taxes due but collection was waived by the as the person or transaction is protected by
government. tax exemption.

Never favored nor presumed in law, and is granted by statute. The terms of the amnesty or
exemption must be strictly construed against the taxpayer and liberally in favor of the
government.

13
9. Construction and Interpretation of:

a. Tax laws

General Rule Exception

Tax laws are liberally interpreted in favor of Liberal interpretation does not apply to tax
the taxpayer and strictly against the exemptions which should be construed
government. instrictissimijuris against the taxpayer.35

b. Tax exemption and exclusion

General Rule Exceptions

In the construction of tax statutes, 1. The law itself expressly provides for a
exemptions are not favored and are liberal construction thereof.
construed strictissimijuris against the
36
taxpayer. The fundamental theory is that all 2. In cases of exemptions granted to
taxable property should bear its share in the religious, charitable and educational
cost and expense of the government. institutions or to the government or its
agencies or to public property because the
Taxation is the rule and exemption. He who general rule is that they are exempted from
claims exemption must be able to justify his tax.
claim or right thereto by a grant express in
terms too plain to be mistaken and too
categorical to be misinterpreted. If not
expressly mentioned in the law, it must be at
least within its purview by clear legislative
intent.

35
Reason: Lifeblood doctrine
36
Strict interpretation does not apply to the government and its agencies
Petitioner cannot invoke the rule of strictissimijuris with respect to the interpretation of statutes
granting tax exemptions to the NPC. The rule on strict interpretation does not apply in the case of
exemptions in favor of a political subdivision or instrumentality of the government [Maceda v. Macaraig]

14
c. Tax rules and regulations

1) General rule only

They shall not be given retroactive application if the revocation, modification or


reversal will be prejudicial to the taxpayers.37

d. Penal provisions of tax laws

Tax laws are civil and not penal in nature, although there are penalties provided for
their violation.

The purpose of tax laws in imposing penalties for delinquencies is to compel the
timely payment of taxes or to punish evasion or neglect of duty in respect thereof.

e. Non-retroactive application to taxpayers

1) Exceptions

A statute may operate retroactively provided it is expressly declared or is clearly the


legislative intent. But a tax law should not be given retroactive application when it would be
harsh and oppressive.

I. Scope and Limitation of Taxation

1. Inherent Limitations

a. Public Purpose38

The tax must be used:


1) for the support of the state or
2) for some recognized objects of governments or
3) directly to promote the welfare of the community39

37
Sec. 246
38
Test in determining Public Purposes in tax:
a. Duty Test whether the thing to be threatened by the appropriation of public revenue is something
which is the duty of the State, as a government.
b. Promotion of General Welfare Test whether the law providing the tax directly promotes the
welfare of the community in equal measure.
The term public purpose is synonymous with governmental purpose; a purpose affecting the
inhabitants of the state or taxing district as a community and not merely as individuals.
A tax levied for a private purpose constitutes a taking of property without due process of law.
The purposes to be accomplished by taxation need not be exclusively public. Although private
individuals are directly benefited, the tax would still be valid provided such benefit is only incidental.

15
b. Inherently Legislative

1) General Rule

Taxation is purely legislative, Congress cannot delegate the power to others. This
limitation arises from the doctrine of separation of powers among the three branches of
government.

2) Exceptions

a) Delegation to local governments40

The power of local government units to impose taxes and fees is always subject to
the limitations which the Congress may provide, the former having no inherent power to
tax.41

The power to tax is primarily vested in the Congress, however, in our jurisdiction, it
may be exercised by local legislative bodies, no longer merely by virtue of a valid delegation
but pursuant to direct authority conferred by Section 5,42 Article X of the1987 Constitution,
subject to guidelines and limitations which Congress may provide which must be consistent
with the basic policy of local autonomy.43

b) Delegation to the President44

The power granted to Congress under this constitutional provision to authorize the
President to fix within specified limits and subject to such limitations and restrictions as it
may impose, tariff rates and other duties and imposts include tariffs rates even for revenue
purposes only. Customs duties which are assessed at the prescribed tariff rates are very much
like taxes which are frequently imposed for both revenue-raising and regulatory purposes.45

c) Delegation to administrative agencies

With respect to aspects of taxation not legislative in character.46

The test is not as to who receives the money, but the character of the purpose for which it is expended;
not the immediate result of the expenditure but rather the ultimate.
In the imposition of taxes, public purpose is presumed.
39
taxation as an implement of police power
40
Art. X. Sec. 5
41
Basco v. PAGCOR
42
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.
43
MCIAA v. Marcos, 261 SCRA 667
44
Art.VI, Sec. 28(2)
45
Garcia vs. Executive Secretary, et. al., G.R. No. 101273, July 3, 1992
46
Example: assessment and collection

16
c. Territorial

1) Situs of Taxation47

a) Meaning

Literally means the place of taxation.

The place or the authority that has the right to impose and collect taxes.48It is
premised upon the symbiotic relation between the taxpayer and the State.

b) Situs of Income Tax

1) From sources within the


Philippines
2) From sources without the
Philippines

Determined by the nationality, residence of the taxpayer and source of income.49

3) Income partly within and partly


without the Philippines

Allocated or apportioned to sources within or without the Philippines.50

Certain aspects of the taxing process that are not really legislative in nature are vested in
administrative agencies. In these cases, there really is no delegation, to wit:
a) power to value property
b) power to assess and collect taxes
c) power to perform details of computation, appraisement or adjustments.
For the delegation to be constitutionally valid, the law must be complete in itself and must set forth
sufficient standards.
47
It is an inherent mandate that taxation shall only be exercised on persons, properties, and excise
within the territory of the taxing power because:
1. Tax laws do not operate beyond a countrys territorial limit.
2. Property which is wholly and exclusively within the jurisdiction of another state receives none of
the protection for which a tax is supposed to be compensation.
However, the fundamental basis of the right to tax is the capacity of the government to provide
benefits and protection to the object of the tax. A person may be taxed, even if he is outside the taxing
state, where there is between him and the taxing state, a privity of relationship justifying the levy.
48
Commissioner vs. Marubeni, G.R. No. 137377, Dec.18, 2001
49
Sec. 42
Theories:
1. Domicillary theory - the location where the income earner resides is the situs of taxation
2. Nationality theory - the country where the income earner is a citizen is the situs of taxation
3. Source rule - the country which is the source of the income or where the activity that produced the
income took place is the situs of taxation.
50
For the purpose of computing the taxable income therefrom, where items of gross income are
separately allocated to sources within the Philippines, there shall be deducted:
(a) the expenses, losses and other deductions properly apportioned or allocated thereto, and

17
c) Situs of Property Taxes

(1) Taxes on Real Property

The place where the property is located.The applicable concept is lexsitusor


lexreisitae.51

(2) Taxes on Personal Property

Tangible personal property Intangible personal property

Where the property is physically located The place where the owner is located. The
although the owner resides in another applicable concept is
52 53
jurisdiction. mobiliasequunturpersonam.

d) Situs of Excise Tax

(1) Estate Tax


(2) Donors Tax

Determined by the nationality and residence of the taxpayer and the place where the
property is located.

(b) a ratable part of other expenses, losses or other deductions which cannot definitely be allocated to
some items or classes of gross income. The remainder, if any, shall be included in full as taxable income
from sources within the Philippines.
51
We can only impose property tax on the properties of a person whose residence is in the Philippines.
52
51 Am Jur. 467
53
movables follow the owner or domicile of the owner
Exceptions:
1. When the property has acquired a business situs in another jurisdiction;
2. When an express provision of the statute provide for another rule.

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e) Situs of Business Tax

The place where the act or business is performed or occupation is engaged in.54

(1) Sale of Real Property

The place or location of the real property.55

(2) Sale of Personal Property

The place of sale.

(3) VAT

Where the goods, property or services are destined, used or consumed.

d. International Comity56

The property of a foreign state or government may not be taxed by another.57

54
where the transaction is performed because it is that place that gives protection
The power to levy an excise upon the performance of an act or the engaging in an occupation does not
depend upon the domicile of the person subject to the exercise, nor upon the physical location of the
property or in connection with the act or occupation taxed, but depends upon the place on which the act
is performed or occupation engaged in.
Thus, the gauge of taxability does not depend on the location of the office, but attaches upon the place
where the respective transaction is perfected and consummated (Hopewell vs. Com. of Customs)
55
So, if the property sold is situated within the Phils., the income derived from such sale is considered as
income within.
56
Comity is the respect accorded to other sovereign nations.
57
The grounds for the above are:
1. sovereign equality among states
2. usage among states that when one enter into the territory of another, there is an implied
understanding that the power does not intend to degrade its dignity by placing itself under the
jurisdiction of the latter
3. foreign government may not be sued without its consent so that it is useless to assess the tax since it
cannot be collected
4. reciprocity among states

19
f. Exemption of Government Entities, Agencies, and
Instrumentalities

i. Agencies performing governmental functions - tax exempt58


ii. Agencies performing proprietary functions - subject to tax.

2. Constitutional Limitations

a. Provisions Directly Affecting Taxation

1) Prohibition against imprisonment for non-payment of poll


tax

No person shall be imprisoned for debt or non-payment of poll tax.59

2) Uniformity and equality of taxation

The rule of taxation shall be uniform and equitable. The Congress shall evolve a
progressive system of taxation.60

58
The exemption applies only to governmental entities through which the government immediately and
directly exercises its sovereign powers.
Tax exemption of property owned by the Republic of the Philippines refers to the property owned by
the government and its agencies which do not have separate and distinct personality (NDC vs. Cebu City)
Those created by special charter (incorporated agencies) are not covered by the exemption
59
Sec. 20, Art. III
The only penalty for delinquency in payment is the payment of surcharge in the form of interest at the
rate of 24% per annum which shall be added to the unpaid amount from due date until it is paid. (Sec.
161, LGC)
The prohibition is against imprisonment for non-payment of poll tax. Thus, a person is subject to
imprisonment for violation of the community tax law other than for non-payment of the tax and for non-
payment of other taxes as prescribed by law.
The non-imprisonment rule applies to non-payment of poll tax which is punishable only by a surcharge,
but not to other violations like falsification of community tax certificate or non-payment of other taxes.
60
Sec. 28(1), Art. VI
Uniformity (equality or equal protection of the laws) means all taxable articles or kinds or property of
the same class shall be taxed at the same rate. A tax is uniform when the same force and effect in every
place where the subject of it is found.
Equitable means fair, just, reasonable and proportionate to ones ability to pay.
Progressive system of Taxation places stress on direct rather than indirect taxes, or on the taxpayers
ability to pay
Inequality which results in singling out one particular class for taxation or exemption infringes no
constitutional limitation. (see Commissioner vs. Lingayen Gulf Electric, 164 SCRA 27)
The rule of uniformity does not call for perfect uniformity or perfect equality, because this is hardly
attainable.

20
3) Grant by Congress of authority to the President to impose
tariff rates

The Congress may, by law, authorize the President to fixtariff rates, import and
export quotas, tonnage and wharfage dues, and other duties or imposts within the
framework of the national development program of the government.61

4) Prohibition against taxation of religious, charitable entities,


and educational entities

Subject to the conditions prescribed by law, all grants, endowments, donations or


contributions used actually, directly and exclusively for educational purposes shall be exempt
from tax.62
5) Prohibition against taxation of non-stock, non-profit
institutions

All revenues and assets of non-stock, non-profit educational institutions used


actually, directly, and exclusively for educational purposes shall be exempt from taxes and
duties.63

6) Majority vote of Congress for grant of tax exemption

No law granting any tax exemption shall be passed without the concurrence of a
majority of all the members of the Congress.64

61
Art. 28 (2), Art. VI
62
Sec. 4(4), Art. XIV.
The exemption granted to non-stock, non-profit educational institution covers income, property, and
donors taxes, and custom duties.
To be exempt from tax or duty, the revenue, assets, property or donation must be used actually,
directly and exclusively for educational purpose.
In the case or religious and charitable entities and non-profit cemeteries, the exemption is limited to
property tax.
The said constitutional provision granting tax exemption to non-stock, non-profit educational institution
is self-executing.
Tax exemptions, however, of proprietary (for profit) educational institutions require prior legislative
implementation. Their tax exemption is not self-executing.
Lands, Buildings, and improvements actually, directly, and exclusively used for educational purposed
are exempt from property tax, whether the educational institution is proprietary or non-profit
63
Sec. 4 (3), Art. XIV
Proceeds of the sale of real property by the Roman Catholic church is exempt from income tax because
the transaction was an isolated one (Manila Polo Club vs. CTA)
Income derived from the hospital pharmacy, dormitory and canteen was exempt from income tax
because the operation of those entities was merely incidental to the primary purpose of the exempt
corporation (St. Paul Hospital of Iloilo vs. CIR)
Where the educational institution is private and non-profit (but a stock corporation), it is subject to
income tax but at the preferential rate of ten percent (10%)
64
Sec. 28(4), Art. VI
The provision requires the concurrence of a majority, not of attendees constituting a quorum, but of all
members of the Congress.

21
7) Prohibition on use of tax levied for special purpose

All money collected or 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.65

8) Presidents veto power on appropriation, revenue, tariff


bills

The President shall have the power to veto any particular item or items in an
Appropriation, Revenue or Tariff bill but the veto shall not affect the item or items to which
he does not object.66

9) Non-impairment of jurisdiction of the Supreme Court

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 Sec. 567 hereof.

65
Sec. 29(3), Art. VI
An example is the Oil Price Stabilization Fund created under P.D. 1956 to stabilize the prices of
imported crude oil. In a decide case, it was held that where under an executive order of the President, this
special fund is transferred from the general fund to a trust liability account, the constitutional mandate
is not violated. The OPSF, according to the court, remains as a special fund subject to COA audit
(OsmeavsOrbos, et al., G.R. No. 99886, Mar. 31, 1993)
66
Sec. 27(2), Art. VI
67
The Supreme Court shall have the following powers:
1. Exercise original jurisdiction over cases affecting ambassadors, other public ministers and consuls,
and over petitions for certiorari, prohibition, mandamus, quo warranto, and habeas corpus.
2. Review, revise, reverse, modify, or affirm on appeal or certiorari, as the law or the Rules of Court may
provide, final judgments and orders of lower courts in:
a. All cases in which the constitutionality or validity of any treaty, international or executive
agreement, law, presidential decree, proclamation, order, instruction, ordinance, or regulation is in
question.
b. All cases involving the legality of any tax, impost, assessment, or toll, or any penalty imposed in
relation thereto.
c. All cases in which the jurisdiction of any lower court is in issue.
d. All criminal cases in which the penalty imposed is reclusion perpetua or higher.
e. All cases in which only an error or question of law is involved.
3. Assign temporarily judges of lower courts to other stations as public interest may require. Such
temporary assignment shall not exceed six months without the consent of the judge concerned.
4. Order a change of venue or place of trial to avoid a miscarriage of justice.
5. Promulgate rules concerning the protection and enforcement of constitutional rights, pleading,
practice, and procedure in all courts, the admission to the practice of law, the integrated bar, and legal
assistance to the under-privileged. Such rules shall provide a simplified and inexpensive procedure for the
speedy disposition of cases, shall be uniform for all courts of the same grade, and shall not diminish,
increase, or modify substantive rights. Rules of procedure of special courts and quasi-judicial bodies shall
remain effective unless disapproved by the Supreme Court.
6. Appoint all officials and employees of the Judiciary in accordance with the Civil Service Law. (Art. VIII)

22
10) Grant of power to the local government units to create its
own sources of revenue

Each local government unit has the power to create its own revenue and to levy
taxes, fees and charges subject to such guidelines and limitations as the Congress may
provide.68

11) Flexible tariff clause

This clause provides the authority given to the President to adjust tariff rates under
Section 40169of the Tariff and Customs Code.70
12) Exemption from real property taxes

Charitable institutions, churches and parsonages or convents appurtenant thereto,


mosques, non-profit cemeteries, and all lands, building, and improvements actually, directly and
exclusively used for religious, charitable or educational purposes shall be exempt from
taxation.71

68
Sec 5, Art. X
Local government units have no power to further delegate said constitutional grant to raise revenue,
because what is delegated is not the enactment or the imposition of a tax, it is the administrative
implementation.
The power of local government units to impose taxes and fees is always subject to the limitations
which Congress may provide, the former having no inherent power to tax.
Municipal corporations are mere creatures of Congress which has the power to create and abolish
municipal corporations. Congress therefore has the power to control over local government units. If
Congress can grant to a municipal corporation the power to tax certain matters, it can also provide for
exemptions or even take back the power (Basco vs. PAGCOR)
69
In the interest of national economy, general welfare and/or national security, the President upon the
recommendation of the National Economic and Development Authority is empowered:
1) To increase, reduce or remove existing protective rates of import duty, provided that the increase
should not be higher than 100% ad valorem
2) To establish import quota or to ban imports of any commodity
3) To impose additional duty on all imports not exceeding 10% ad valorem.
70
Garcia v. Executive Secretary, G.R. No. 101273, July 3, 1992)
71
Sec. 28(3), Art. VI
Lest of the tax exemption: the use and not ownership of the property
To be tax-exempt, the property must be actually, directly and exclusively used for the purposes
mentioned.
The word exclusively means primarily.
The exemption is not limited to property actually indispensable but extends to facilities which are
incidental to and reasonably necessary for the accomplishment of said purposes.
The constitutional exemption applies only to property tax.
However, it would seem that under existing law, gifts made in favor or religious charitable and
educational organizations would nevertheless qualify for donors gift tax exemption. (Sec. 101(9)(3), NIRC)
The constitutional tax exemptions refer only to real property that are actually, directly and exclusively
used for religious, charitable or educational purposes, and that the only constitutionally recognized
exemption from taxation of revenues are those earned by non-profit, non-stock educational institutions
which are actually, directly and exclusively used for educational purposes. (Commissioner of Internal
Revenue v. Court of Appeals, et al., 298 SCRA 83)

23
13) No appropriation or use of public money for religious
purposes

No public money or property shall be appropriated, applied, paid or employed,


directly or indirectly for the use, benefit, support of any sect, church, denomination,
sectarian institution, or system of religion or of any priest, preacher, minister, or 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.72

b. Provisions Indirectly Affecting Taxation

1) Due process

No person shall be deprived of life, liberty or property without due process of law 73
x xx.

2) Equal protection

xxx nor shall any person be denied the equal protection of the laws.74

3) Religious freedom

No law shall be made respecting an establishment of religion or prohibiting the free


exercise thereof. The free exercise and enjoyment of religious profession and worship,
without discrimination or preference, shall be forever allowed.75

4) Non-impairment of obligations of contracts

No law impairing the obligation of contract shall be passed.76

72
Sec. 29(2), Art. VI
Public property may be leased to a religious group provided that the lease will be totally under the
same conditions as that to private persons (amount of rent).
Congress is without power to appropriate funds for a private purpose.
73
Sec. 1, Art. III
74
Ibid.
75
Sec. 5 Art. III
License fees/taxes would constitute a restraint on the freedom of worship as they are actually in the
nature of a condition or permit of the exercise of the right.
However, the Constitution or the Free Exercise of Religion clause does not prohibit imposing a generally
applicable sales and use tax on the sale of religious materials by a religious organization. (see Tolentinovs
Secretary of Finance, 235 SCRA 630)
76
Sec. 10, Art. III
A law which changes the terms of the contract by making new conditions, or changing those in the
contract, or dispenses with those expressed, impairs the obligation.
The non-impairment rule, however, does not apply to public utility franchise since a franchise is subject
to amendment, alteration or repeal by the Congress when the public interest so requires.

24
J. Stages of Taxation

1. Levy

Determination of the persons, property or excises to be taxed, the sum or sums to be


raised, the due date thereof and the time and manner of levying and collecting taxes.

2. Assessment and Collection

The manner of enforcement of the obligation on the part of those who are taxed.77

The two processes together constitute the taxation system.


3. Payment

The act of compliance by the taxpayer, including such options, schemes or remedies
as may be legallyavailable.

4. Refund

The recovery of any tax alleged to have been erroneously or illegally assessed or
collected, or of any penalty claimed to have been collected without authority, or of any sum
alleged to have been excessively, or in any manner wrongfully collected.

K. Definition, Nature, and Characteristics of Taxes

Definition Taxesare the enforced proportional contributions from


persons and property levied by the law-making body of the
State by virtue of its sovereignty for the support of
government and for public needs.

Nature They are not arbitrary exactions but contributions levied by


authority of law, and by some rule of proportion which is
intended to ensure uniformity of contribution and a just
apportionment of the burdens of government.

Characteristics 1. It is levied by the law-making body of the State.78


2. It is an enforced contribution.79
3. It is generally payable in money.80

77
This includes payment by the taxpayer and is referred to as tax administration
78
The power to tax is a legislative power which under the Constitution only Congress can exercise through
the enactment of laws. Accordingly, the obligation to pay taxes is a statutory liability.
79
A tax is not a voluntary payment or donation. It is not dependent on the will or contractual assent,
express or implied, of the person taxed. Taxes are not contracts but positive acts of the government.

25
4. It is proportionate in character.81

5. It is levied on persons or property.82

6. It is levied for public purpose or purposes.83

7. It is levied by the State which has jurisdiction over the


persons or property.84

L. Requisites of a valid tax

1) It should be for a public purpose


2) The rule of taxation should be uniform
3) Either the person or property taxed be within the jurisdiction of the taxing
authority
4) The assessment and collection be in consonance with the due process clause

5) The tax must not infringe on the inherent and constitutional limitations of the
power of taxation.85

M. Tax as distinguished from other forms of exactions

1. Tariff

May be used in three (3) senses:

a. A book of rates drawn usually in alphabetical order containing the names of


several kinds of merchandise with the corresponding duties to be paid for the same.
b. Duties payable on goods imported or exported.86
c. The system or principle of imposing duties on the importation/exportation of
goods.

80
Tax is a pecuniary burden an exaction to be discharged alone in the form of money which must be in
legal tender, unless qualified by law, such as R.A. 304 which allows backpay certificates as payment of
taxes.
81
It is ordinarily based on the taxpayers ability to pay.
82
A tax may also be imposed on acts, transactions, rights or privileges.
83
Taxation involves, and a tax constitutes, a burden to provide income for public purposes.
84
The persons, property or service to be taxed must be subject to the jurisdiction of the taxing state.
85
Taxes are the lifeblood of the government and should be collected without unnecessary hindrance. But
their collection should not be tainted with arbitrariness
86
P.D. No. 230

26
2. Toll

Sum of money for the use of something, generally applied to the consideration which
is paid for the use of a road, bridge of the like, of a public nature.

Tax Toll

Demand of sovereignty Demand of proprietorship

Paid for the support of the government Paid for the use of anothers property

Generally, no limit as to amount imposed Amount depends on the cost of construction


or maintenance of the public improvement
used

Imposed only by the government Imposed by the government or private


individuals or entities

3. License fee

A charge imposed under the police power for the purposes of regulation.87

Tax License/Permit Fee

Enforced contribution assessed by sovereign Legal compensation or reward of an officer


authority to defray public expenses for specific purposes

For revenue purposes For regulation purposes

87
Three kinds of licenses are recognized in the law:
1. Licenses for the regulation of useful occupations.
2. Licenses for the regulation or restriction of non-useful occupations or enterprises
3. Licenses for revenue only
Importance of the distinctions between tax and license fee:
1. Some limitations apply only to one and not to the other, and that exemption from taxes may not
include exemption from license fees.
2. The power to regulate as an exercise of police power does not include the power to impose fees for
revenue purposes. (see American Mail Line vs City of Butuan, L-12647, May 31, 1967 and related cases)
3. An extraction, however, maybe considered both a tax and a license fee.
4. But a tax may have only a regulatory purpose.
5. The general rule is that the imposition is a tax if its primary purpose is to generate revenue and
regulation is merely incidental; but if regulation is the primary purpose, the fact that incidentally revenue
is also obtained does not make the imposition of a tax. (see Progressive Development Corp. vs Quezon
City, 172 SCRA 629)

27
An exercise of the taxing power An exercise of the police power

Generally no limit in the amount of tax to be Amount is limited to the necessary expenses
paid of inspection and regulation

Imposed also on persons and property Imposed on the right to exercise privilege

4. Special assessment

An enforced proportional contribution from owners of lands especially or peculiarly


benefited by public improvements.88

Tax Special Assessment

Imposed on persons, property and excise Levied only on land

Personal liability of the person assessed Not a personal liability of the person
assessed, i.e. his liability is limited only to the
land involved

Based on necessity as well as on benefits Based wholly on benefits


received

General application89 Exceptional both as time and place

88
Since special assessments are not taxes within the constitutional or statutory provisions on tax
exemptions, it follows that the exemption under Sec. 28(3), Art. VI of the Constitution does not apply to
special assessments.
However, in view of the exempting proviso in Sec. 234 of the Local Government Code, properties which
are actually, directly and exclusively used for religious, charitable and educational purposes are not
exactly exempt from real property taxes but are exempt from the imposition of special assessments as
well. (see Aban)
The general rule is that an exemption from taxation does not include exemption from special
assessment.
89
seeApostolic Prefect vs Treas. Of Baguio, 71 Phil 547

28
5. Debt

Debt is based upon juridical tie, created by law, contracts, delicts or quasi-delicts
between parties for their private interest or resulting from their own acts or omissions.

Tax Debt

Based on law Based on contracts, express or implied

Generally, cannot be assigned Assignable

Generally payable in money May be paid in kind

Generally not subject to set-off or May be subject to set-off or compensation


compensation

Imprisonment is a sanction for non-payment No imprisonment for non-payment of debt


of tax except poll tax

Governed by special prescriptive periods Governed by the ordinary periods of


provided for in the Tax Code prescriptions

Does not draw interest except only when Draws interest when so stipulated, or in case
delinquent of default

29
N. Kinds of Taxes

1. As to object

Personal, capitation, or poll Property tax Privilege tax


tax

Tax of a fixed amount Tax imposed on property, A charge imposed upon the
imposed on persons residing real or personal, in performance of an act, the
within a specified territory, proportion to its value or in enjoyment of privilege, or
whether citizens or not, accordance with some other the engaging in an
without regard to their reasonable method of occupation.
property or the occupation apportionment.
or business in which they
may be engaged.90

2. As to burden or incidence

Direct Indirect

Demanded from the person who also Demanded from a person in the expectation
shoulders the burden of the tax. It is a tax and intention that he or she shall indemnify
which the taxpayer is directly or primarily himself or herself at the expense of another,
liable and which he or she cannot shift to falling finally upon the ultimate purchaser or
another. consumer. A tax which the taxpayer can shift
to another.

3. As to tax rates

Specific Ad valorem Mixed

The computation of the tax Tax upon the value of the Tax rates are partly
or the rates of the tax is article or thing subject to progressive and partly
already provided for by law. taxation; the intervention of regressive.
another party is needed for
the computation of the tax.

90
i.e. community tax.

30
4. As to purposes

General or fiscal Special, regulatory, or sumptuary

Imposed for the purpose of raising public Imposed primarily for the regulation of
funds for the service of the government. useful or non-useful occupation or
enterprises and secondarily only for the
purpose of raising public funds.

5. As to scope or authority to impose

National internal revenue taxes Local real property tax, municipal tax

Imposed by the National Government. Imposed by the municipal corporations or


local government units.

6. As to graduation

Progressive Regressive Proportionate

Rate or amount of tax Tax rate decreases as the Tax based on a fixed
increases as the amount of amount of income to be percentage of the amount of
the income or earning to be taxed increases. the property receipts or
taxed increases. other basis to be taxed.91

91
Example: real estate tax.

31
II. National Internal Revenue Code of 1997 as amended (NIRC)

A. Income Taxation

1. Income Tax Systems

a. Global Tax System

All income received by the taxpayer are grouped together, without any distinction as
to the type or nature of the income, and after deducting therefrom expenses and other
allowable deductions, are subjected to tax at a fixed rate.

b. Schedular Tax System

The various types or items of income92 are classified accordingly and are accorded
different tax treatments, in accordance with schedules characterized by graduated tax rates.
Since these types of income are treated separately, the allowable deductions shall likewise
vary for each type of income.

Schedular system Global system

There are different tax rates There is a single tax rate

There are different categories of taxable There is no need for classification as all
income taxpayers are subjected to a single tax rate.

Usually used in the income taxation of Usually applied to corporations.


individuals

c. Semi-schedular or semi-global tax system93

A system where the compensation, business orprofessional 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 allowabledeductions from business or
professional income, capital gain and passive income not subject to final tax, and other
income, in the case of corporations, as well as personal and additional exemptions, in the
case of individual taxpayers, the taxable income is subjected to one set of graduated tax rates;
method of taxation under the law.

92
compensation, business or professional income
93
approach used in the Philippines

32
2. Features of the Philippine Income Tax Law

Direct tax Progressive Comprehensive Semi-schedular or


semi-global tax
system94

One assessed upon The tax rates The Philippine


the property, person, increase as the tax Income tax law
business income, etc. base increases. In adopted the so-called
of those who pay certain cases, comprehensive tax
them. however, final taxes situs
are imposed on comprehensive in
passive income.95 the sense that it
practically applies all
possible rules of tax
situs.

3. Criteria in Imposing Philippine Income Tax

Citizenship Principle Residence Principle Source Principle

A citizen of the Philippines is A resident alien is liable to An alien is subject to


subject to Philippine income pay income tax on his Philippine income tax
tax income from sources within because he derives income
the Philippines but exempt from sources within the
(a) on his worldwide income, from tax on his income from Philippines. Thus, a
if he resides in the sources outside the nonresident alien is liable to
Philippines, or Philippines. pay Philippine income tax on
his income from sources
(b) only on his income from within the Philippines96
sources within the despite the fact that he has
Philippines, if he qualifies as not set foot in the
nonresident citizen. Philippines.

94
supra
95
The individual income tax system, in the main, is progressive in nature
96
such as dividend, interest, rent, or royalty

33
4. Types of Philippine Income Tax

Presumptive Income Tax Composite Tax Unitary Income Tax

A scale of income taxes is A tax consisting of aseries of Incomes arearranged


imposed in relation to a separate quasi-personal according to source. The
group of persons actual taxes,assessed on the separate items are added
expenditure and the particular source of income together and the rate applied
presumed income. with a superimposed to the resulting total income.
personal tax on the income
as a whole.

5. Taxable Period

Calendar Period Fiscal Period Short Period

A period of twelve (12) An accounting period of 12 A period of less than twelve


months commencing from months ending on the last (12) months.
January 1 and ending day of any month other than
December 31. December.97

97
ex. Feb. 1 to Jan. 31

34
6. Kinds of Taxpayers

a. Individual Taxpayers

1) Citizens

a) Resident citizens98

Citizens of the Philippines who are residing therein.

b) Non-resident citizens99

1. A citizen of the Philippines who establishes to the satisfaction of the


Commissioner of Internal Revenue (CIR) the fact of his physical presence abroad with a
definite intention to reside therein.

2. A citizen of the Phils. who leaves the country during the taxable year to reside
abroad, either as immigrant or for employment or on permanent basis.

3. A citizen of the Phils. who works and derives from abroad and whose
employment thereat requires him to be physically present abroad most of the time during the
taxable year.

4. A citizen who has been previously considered as non-resident citizen and who
arrives in the Phils. at any time during the taxable year to reside permanently in the
country.100

5. A citizen who shall have stayed outside the Phils. for 183 days or more by the end
of the year.101

98
Taxable for income derived from all sources based on taxable (i.e., net) income
99
Taxable for income derived within the Philippines based on taxable (i.e., net) income
100
He shall be considered a NRC for the taxable year in which he arrives in the Phils. with respect to his
income derived from sources abroad until the date of his arrival in the Phils.
101
Sec. 22 (E)
The continuity of residence abroad is not essential. If physical presence is established, such physical
presence for the calendar year is not interrupted by reasons of travels to the Phils. (Rev. Regs. No. 9-73,
November 26, 1973)
An overseas contract worker is taxable only on income from sources within the Philippines. (Sec.
23 (c).
A seaman who is a Filipino citizen and who receives compensation for services rendered abroad as
member of the complement of a vessel engaged exclusively in international trade is treated as an
overseas contract worker.
Length of stay is indicative of intention. A citizen of the Philippines who shall have stayed outside
the Philippines for 183 days or more by the end of the year is a non-resident citizen. His presence
abroad, however, need not be continuous. [RR1-79]

35
2) Aliens102

a) Resident aliens

Thosewhose residence are within the Philippines but who are not citizens thereof.103

b) Non-resident alien104

Those not residing in the Phils.and who are not citizens thereof.105

(1) Engaged in trade or business

An alien who stays in the Philippines for more than 180 days.106

102
What makes an alien a resident or non-resident alien is his intention with regard to the length and
nature of his stay. Thus:
a. One who comes to the Philippines for a definite purpose which in its very nature may
be promptly accomplished is not a resident citizen.
b. One who comes to the Philippines for a definite purpose which in its very nature would
require an extended stay, and to that end, makes his home temporarily in the Philippines, becomes a
resident, though it may be his intention at all times to return to his domicile abroad when the purpose
for which he came has been consummated or abandoned. (Sec. 5, RR 2)
Length of stay is indicative of intention.
An alien who shall have stayed in the Philippines for more than one (1) year by the end of the
taxable year is a resident alien
An alien who shall come to the Philippines and stay for an aggregate period of more than one hundred
eighty (180) days during a calendar year shall be considered a non-resident alien in business, or in the
practice of profession, in the Philippines. [Sec. 25(A)(1)] Thus, if an alien stays in the Philippines for 180
days or less during the calendar year, he shall be deemed a non-resident alien not doing business in the
Philippines, regardless of whether he owns
1. Stock in trade of the taxpayer, or other property of a kind which would properly be included in an
inventory of a taxpayer if on hand at the end of the taxable year (example: Raw Materials Inventory, Work
in Process Inventory, Office Supplies Inventory)
2. Property held by the taxpayer primarily for sale to customers in the ordinary course of his trade
or business (example: Merchandise Inventory)
3. Property used in the trade or business which is subject to the allowance for depreciation
(example: Office Equipment) actually engages in trade or business therein. (Mamalateo)
103
Sec. 22 [F], NIRC
A mere floating intention, indefinite as to time, to return to another country is not sufficient to constitute
him a transient.
For tax purposes, a resident alien is;
1. An alien who lives in the Phils. with no definite intention to stay as a resident.
2. One who comes in the Phils.for definite purposes which in its very nature would require an extended
stay and to that end, makes his home temporarily in the Phils.
3. An alien who stay within the Phils. for more than 12 months from the date of his arrival in the Phils.
104
A non-resident alien individual who came to the Phils.and stayed therein for an aggregate period of
more than 180 days during any calendar year shall be deemed a NRA doing business in the Phils.
105
Sec. 22 (G), id.
106
Sec. 25 [A], NIRC

36
(2) Not engaged in trade or business

An alien who stays in the Philippines for 180 days or less.107

(3) Special Class of Individual Employees

a) Minimum wage earner

A worker in the private sector paid the statutory minimum wage, or to an employee
in the public sector with compensation income of not more than the statutory minimum
wage in the non-agricultural sector where he/she is assigned.108

By virtue of the passage of R.A. 9504, minimum wage earners are exempted from the
payment of the net income tax.109

b) Corporations110

1) Domestic corporations

Created or organized in the Phils. or under its laws.111

2) Foreign corporations

Created, organized or existing under any laws other than those of the Phils.

(1) Resident

Engaged in trade or business112 within the Phils.

107
Sec. 25 [B], id.
It is the length of stay in the Philippines that determines whether or not he is engaged in trade or
business. The number of transaction he entered into is immaterial.
108
Sec. 22 (HH), id.as amended by R.A. 9504
109
They are not required to file an income tax return
Thus: xxx, That minimum wage earners 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.
110
The term shall include partnership, no matter how created or organized, joint stock companies, joint
accounts, or insurance companies, but does not include general professional partnerships and a joint
venture or consortium formed for the purpose of undertaking construction projects or engaging in
petroleum, coal, geothermal and other energy operations pursuant to operating or consortium
agreement under a service contract with the government. (Sec. 24(b), id)
111
liable for income from sources within and without the Philippines (Sec 22[C], id.)
112
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 insistent to
and in the progressive prosecution of commercial gain or for the purpose and the object of the business
organization (Comm. vs. British Overseas Airways Corporation BOAC case 149 SCRA 395)

37
(2) Non-resident

Not engaged in trade or business within the Phils.

c. Partnerships113

Partnership is a contract whereby two or more persons bind themselves to contribute


money, property, or industry to a common fund with the intention of dividing the profits
among themselves.114

d. General Professional Partnerships

Formed by persons for the role purpose of exercising their common profession, no
part of the income of which is derived from engaging in any trade & business.115

e. Estates and Trusts

Estate Trust

The mass of property, rights and obligations An arrangement created by will or co-
left behind by the decedent upon his death.116 agreement under which title to property is
passed to another for conservation or
investment with the income therefrom and
ultimately the corpus117 to be distributed in
accordance with the directions of the creator
as expressed in the governing instrument.118

113
An ordinary business partnership is considered as a corporation and is thus subject to tax as such.
Partners are considered stockholders and, therefore, profits distributed to them by the partnership are
considered as dividends.
114
Partnerships, no matter how created or organized, including joint ventures or consortiums, are taxable.
What are taxable unregistered partnerships?
The SC in Evangelista v. CIR 102, Phil 140, held that Sec. 24 covered unregistered partnerships and even
associations or joint accounts which have no legal personalities apart from their individual members.
Accordingly, a pool of individual real property owners dealing in real estate business was considered a
corporation for tax purposes [Afisco Insurance Corporation v. CA, 302 SCRA 1]
115
Sec. 22 (b)
e. g. Law firm
General professional partnerships are not taxable but partners are taxed on their share of partnership
profits actually or constructively paid during the year.
116
Estates may be classified as follows:
1. Estates not under judicial settlement - are subject to income tax generally as mere co-ownership.
- The tax liability on income of the co-ownership levied directly on the co-owners. Thus, the heirs
shall include in their respective returns their distributive shares of the net income of the estate.
2. Estates under judicial settlement - are subject to income tax in the same manner as individual.
- Income received during the settlement of the estate is taxable to the fiduciary (guardian, executor,
trustee, and administrator).
- The return should be filed by executor or administrator of the trust.
117
principal
118
Two (2) Kinds of Trust :

38
f. Co-ownerships119

It is created whenever the ownership of an undivided thing or right belongs to


different persons.

7. Income Taxation

a. Definition

A tax on all yearly profits arising from property, profession, trade or business, or a
tax on persons income, emoluments, profits and the like.120

b. Nature

It is generally regarded as an excise tax. It is not levied upon persons, property,


funds or profits but on the privilege of receiving said income or profit.

1. Irrevocable Trust - is considered as a separate taxpayer.


2. Revocable Trust - is one where at anytime the power to revest the title to any part of the corpus of the
trust is vested:
(a) in the grantor (creator of the trust) either alone or in conjunction with any person not having a
substantial adverse interest in the disposition of such part of the corpus or the income therefrom; or
(b) in any person not having a substantial adverse interest in the disposition of such part of the corpus or
the income therefrom.
The tax shall be imposed on taxable income of the grantor.
119
General rule: Co-ownership is exempt from income tax because the activities of the co-owners are
usually limited to the preservation of the properties owned in common and the collection of the income
therefrom.
Exceptions: (When co-ownership is subject to tax).
(1) When the income of the co-ownership is invested by the co-owners in other income-producing
properties or income-producing activities, and
(2) When there is no attempt to divide inherited property for more than ten (10) years and the said
property was not under any administration proceedings nor held in trust, an unregistered partnership is
deemed to exist.
Tax liability of co-owners:
The co-owners in exempt co-ownership shall be liable for income tax only in their separate and
individual capacity.
Filing of return:
The owners shall report and include in their respective personal income tax returns their shares of the
net income of the co-ownership.
Test to determine whether co-ownership is a taxable unregistered partnership:
Find out whether the heirs have made substantial improvements on the inherited property. If so, the
implication is that they will engage in business for profit (Evangelista Doctrine). If that happens, the co-
ownership will be taxed as an unregistered partnership.
120
Fisher v. Trinidad, GR L-19030, Oct. 20, 1922

39
c. General principles

1. A citizen of the Philippines residing therein is taxable on all income derived from
sources within and without the Philippines.

2. A non-resident citizen is taxable only on income derived from sources within the
Philippines.

3. An individual citizen of the Philippines, who is working and deriving income from
abroad as an overseas contract worker, is taxable only on income derived from sources
within the Philippines. Provided, that a seaman who is a citizen of the Philippines and who
receives compensation for services rendered abroad as a member of the complement of a
vessel engaged exclusively in international trade shall be treated as an overseas contract
worker.

4. An alien individual, whether or not a resident of the Philippines, is taxable only on


income derived from sources within the Philippines.

5. A domestic corporation is taxable on all income derived from sources within and
without the Philippines.

6. 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.

8. Income

a. Definition

It means cash or its equivalent coming to a person within a specified period, whether
as payment for services, interest or profit from investment. It covers gain derived from
capital, from labor, or from both combined, including gain from sale or conversion of capital
assets.121

b. Nature

All wealth which flows to the taxpayer other than a mere return of capital.

It is an amount of money coming to a person/corporation 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.122

121
It denotes the amount of money or property received by a person or corporation within a specified
time, whether as payment for services, interests, or profits from investments (Fisher vs. Trinidad, 43 Phil
973)
Income is not merely increase in value of property; but a gain, a profit in excess of capital as a result of
exchange transactions.
122
Conwi v. Court of Tax Appeals

40
Income includes earnings, lawfully or unlawfully acquired, without consensual
recognition, express or implied, of an obligation to repay and without restriction as their
disposition.

c. When income is taxable

1) Existence of income

There must be gain a value received in the form of cash or its equivalent as a result
of rendition of service or earnings in excess of capital invested.123

2) Realization of income

a) Tests of Realization

Unless income is deemed realized, then there is no taxable income.

Revenue is generally recognized whenboth conditions are met:

a. The earning process is complete or virtually complete; and


b. An exchange has taken place.124
b) Actual vis--vis Constructive receipt

Actual receipt Constructive receipt

Income may be actual receipt or physical When money consideration or its equivalent
receipt. is placed at the control of the person who
rendered the service without restriction
by the payor.125

123
A mere expectation of profits is not an income
A transaction whereby nothing of exchangeable value comes to or is received by the taxpayer does not
give rise to or create taxable income.
Items or amounts received which do not add to the taxpayers net worth or redound to his benefits
such as amounts merely deposited or entrusted to him are not considered as gains (CIR vs. Tours
Specialist, 183 SCRA 402).
Gain need not be necessarily in cash. It may be in form of payment, reduction or cancellation of Ts
indebtedness, or gain from exchange of property.
124
Manila Mandarin Hotels, Inc. v. CIR
125
Sec. 4.108-A, RR 16-2005
Examples of income constructively received:
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 payor to the account of the contractor
d. Interest coupons that have matured and are payable but have not been encashed
e. Undistributed share of a partner in the profits of a general partnership

41
3) Recognition of income

a. There is income, gain or profit


b. The income, gain or profit is received or realized during the taxable year
c. The income gain or profit is not exempt from income tax

4) Methods of accounting

a) Cash method vis--vis Accrual method

Cash method Accrual method

Recognition of income and expense Gains and profits are included in gross
dependent on inflow or outflow of cash.126 income when earned whether received or
not, and expenses are allowed as deductions
when incurred, although not yet paid. It is
the right to receive and not the actual receipt
that determines the inclusion of the amount
in gross income

b) Installment payment vis--visDeferred


payment vis-vis Percentage completion127

Installment payment Deferred payment Percentage completion

Appropriate when Initial payments exceed 25% Persons whose gross income
collections extend over of the gross selling price and is derived from long-term
relatively long periods of such transaction shall be contracts shall report such
time and there is a strong treated as cash sale which income upon the basis of
possibility that full collection makes the entire selling price percentage of completion.
will not be made. taxable in the month of sale.

126
meaning, you recognize the income when you actually receive the cash payment for the sale, and you
recognize the expense when you actually pay cash for the expense
127
in long term contracts

42
d. Tests in determining whether income is earned for tax
purposes

1) 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.128

2) 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.

The power to dispose of income is the equivalent of ownership of it. The exercise of
that power to procure the payment of income to another is the enjoyment and hence, the
realization of the income by him who exercises it. The dominant purpose of the revenue
laws is the taxation of income to those who earn or otherwise create the right to receive it
and enjoy the benefit of it when paid.

3) Economic benefit test, Doctrine of proprietary


interest

Income realized is taxable only to the extent that the taxpayer is economically
benefited.

Any economic benefit to the employee that increases his net worth is taxable.

4) Severance test

There is no taxable income until there is a separation from capital of something


which is of exchangeable value129 thereby supplying the realization or transmutation which
would result in the receipt of income. Thus, income is not taxable unless separated or
severed from the capital or labor that bore it.

128
There must be separation from capital of something of exchangeable value (e.g., sale of asset)
129
Eisner vs. Macomer, 252 US 189

43
9. Gross Income

a. Definition

All income derived during a taxable year by a taxpayer from whatever source,
whether legal or illegal,130 including the following items:

1. Gross income derived from the conduct of trade or business or the exercise of a
profession.
2. Rents
3. Interests
4. Prizes and winnings
5. Compensation for services in whatever form paid, including, but not limited
to fees, salaries, wages, commissions, and similar items
6. Annuities
7. Royalties
8. Dividends
9. Gains derived from dealings in property
10. Pensions
11. Partner's distributive share from the net income of the general professional
partnership.131

130
As such, income includes the following, among others:
1. Treasure found;
2. Punitive damages representing profit lost;
3. Amount received by mistake;
4. Cancellation of the taxpayer indebtedness;
5. Receipt of usurious interest;
6. Illegal gains;
7. Taxes paid and claimed as deduction subsequently refunded;
8. Bad debt recovery.
131
The above enumeration can be simplified into five (5) categories:
1. Compensation Income - income derived from rendering of services under an employer-employee
relationship.
2. Professional Income - fees derived from engaging in an endeavor requiring special training as
professional as a means of livelihood, which includes, but not limited to, the fees of CPAs, lawyers,
engineers and the like.
3. Business Income - gains or profits derived from rendering services, selling merchandise,
manufacturing products, farming and long-term contracts.
4. Passive Income - income in which the taxpayer merely waits for the amount to come in, which
includes, but not limited to interest income, royaltyincome, dividend income, prizes and

44
b. Concept of income from whatever source derived

Implies the inclusion of all income under the law, irrespective of the voluntary or
involuntary action of the taxpayer in producing the gains.132

All income not expressly excluded or exempted from the class of taxable income,
irrespective of the voluntary or involuntary action of the taxpayer in producing the
income.133

c. Gross Income vis--vis Net Income vis--vis Taxable


Income

Gross Income Net Income or Taxable Income


As to deductions

Allows no deductions Allows deductions

As to exemptions

Grants no exemptions Grants exemptions


As to tax base

Gross Income Net Income

Advantages/Disadvantages

Simplifies the income tax Confusing and complex


system process of filing income
tax return

Substantial reduction in corruption and tax Vulnerable to corruption on account of


evasion as the exercise of discretion, to allow margin of discretion in the grant of
or disallow deductions, is dispensed with. deductions

More administratively feasible Provides equitable releifs in the form of


deductions, exemptions and tax credit

Does away with wastage of manpower and Tax audit minimizes fraud
supplies

winnings.
5. Gains from Dealings in Property It includes all income derived from the disposition of property
whether real, personal or mixed.
132
It includes illegal gains arising from gambling, betting, lotteries, extortion and fraud.
133
Gutierrez v. CIR, CTA case

45
d. Classification of Income as to Source

1) Gross income and taxable income from sources


within the Philippines

1) Interests:

a) Interests derived from sources withinthe Phils.


b) Interests on bonds, notes or other interest-bearing obligations of
residents, corporate or otherwise.134

2) Dividends:

a) From a domestic corporation, and


b) From a foreign corporation 50% or more of the gross income of which
for the 3-year period ending with the close of the taxable year preceding the
declaration of such dividends, or for such part of such period as the corporation
within the Phils.135has been in existence, was derived from sources. It must be
only in an amount which bears the same ratio to such dividends as the gross
income of the corporation for such period derived from sources within the
Philippines bears to its gross income from all sources.
3) Compensation for labor or personal services performed in the Phils.136

4) Rentals and Royalties from property located in the Phils.or from any interest in
such property, including rentals or royalties for

a) The use of, or the right or privilege to use inthe Phils. any copyright,
patent, design or model, plan, secret formula or process, goodwill, trademark, trade
brand or other like property or night;
b) The use of, or the right to use in the Phils.any industrial, commercial or
scientific equipment;
c) The supply of scientific, technical, industrial or commercial knowledge or
information;
d) The supply of any assistance that is ancillary and subsidiary to, and is
furnished as a means of enabling the application or enjoyment of, any such property
or right as is mentioned in paragraph (a), any such equipment as is mentioned in
paragraph (b) or any such knowledge or information as is mentioned in paragraph
(c);

134
Sec. 42, (A)( 1)
135
Id. (A)(2)
136
Id. (A)(3)

46
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

5) Gains, profits, and income from the sale of real property located in the Phils. and

6) Gains, profits, and income from sale of personal property, treated as derived
entirely from the country where it is sold.137

2) Gross income and taxable income from sources


without the Philippines

1) Interest other than those derived from sources within the Phils.

2) Dividends other than those derived from sources within the Phils.

a. Dividends from foreign corporations in general; and

137
Exception to the rule: gain from the sale of shares of stock in a domestic corporation which is treated
as derived entirely from sources within the Phils. regardless of where the shares are sold.
Passage of title test: it is the prevailing view that in ascertaining the place of sale, the determination of
where and when the title to the goods passes from the seller to the buyer is decisive.
Enumeration in Section 42 not all-inclusive.
In the case of Commissioner vs. British Overseas Airways Corporation (BOAC) [149 SCRA 395], the
Supreme Court held:
xxx Section 37 (now Section 42) by its language, does not intend the enumeration to be exclusive. It
merely directs that the types of income listed therein be treated as income from sources within the Phils.
a cursory reading of the section will show that it does not state that it is an all-inclusive enumeration, and
that no other kind of income may be so considered xxx
The Supreme Court further held:
xxx The absence of flight operations to and from the Phils. is not determination of the source of
income on the situs of income taxation. Admittedly, BOAC was an off-line international airline at the time
pertinent to this case. The test of taxability is the source, and the source of an income is that activity xxx
which produced the income. Unquestionably the passage documentations in these cases were sold in the
Phils. and the revenue therefrom was derived from a business activity regularly pursued within the Phils.
xxx

47
b. Dividends derived from foreign corporations, 50% or more of the gross
income of which for the 3-year period preceding the declaration of
dividends.

3) Compensation for labor or personal services performed outside the Phils.

4) Rentals or royalties from property located outside the Phils. or from any interest
in such property including rentals or royalties for the use of or for the privilege of using
outside the Phils., patents, etc.

5) Gains, profits and income from the sale of real property located outside the Phils.

6) Gains, profits and income from the sale of personal property located outside the
Phils., and

7) Income derived from the purchase of personal property within and its sale outside
the Phils.138

3) Income partly within or partly without the


Philippines

1) Income from transportation such as foreign steamship companies whose vessel


touch the Phil. ports139 and other services rendered partly within and partly outside the Phils.
such as foreign corporations carrying on the business of transmission of telegraph and cable
messages between points outside the Phils.140

2) Income from the sale of personal property produced in whole or in part by the
taxpayer within and sold outside the Phils. orproduced by the taxpayer outside and sold
within the Phils.

138
Sec. 42
139
Sec. 163, Regulations
140
Sec. 164, id.

48
e. Sources of income subject to tax

1) Compensation Income141

All remuneration for services performed by an employee for his employer, including
the cash value of all remuneration paid in any medium other than cash.142

It includes all remuneration for services rendered by an employee for his employer
unless specifically excluded under the NIRC.143

2) Fringe Benefits144

a) Special treatment of fringe benefits

Applied to fringe benefits given or furnished to managerial or supervising


employees and not to the rank and file.145

b) Definition

Any good, service or other benefit furnished or granted in cash or in kind by an


employer to an individual employee, except rank and file employee.

141
Forms of Compensation
a. money
b. in kind
Compensation paid to an employee of a corporation in its stock is to be treated as if the corporation
sold the stock for its market value and paid to the employee in cash.
Living quarters furnished to the employee in addition to cash salary. The rental value should be
reported as income.
Meals given to employee, the value thereof substitutes income.
142
Sec. 78(A)
It includes:
1. Salaries and wages
2. Commissions
3. Tips
4. Allowances
5. Bonuses
6. Fringe Benefits of rank and file employees
It does not include remuneration paid:
For agricultural labor paid entirely in products of the farm where the labor is performed, or
For domestic service in a private home, or
For casual labor not in the course of the employer's trade or business, or
For services by a citizen or resident of the Philippines for a foreign govt or an intl organization.
143
Sec. 2.78.1, RR 2-98
144
Sec. 33
The fringe benefit covered refers to those enjoyed by managerial and supervisory employees
145
Pursuant to Revenue Regulations No. 3 98 (dated May 21, 1998) implementing section 33 of the Tax
Code.

49
c) Taxable and non-taxable fringe benefits

Taxable fringe benefits Non-taxable fringe benefits

1) Fringe benefits which are authorizedand


1) Housing Privileges
exempted from tax under speciallaws;
(a) Lease of residential property for the use
of the employee as his usual place of 2) Contributions of the employer for the
residence. benefit of the employee to
retirement,insurance and hospitalization
(b) Residential Property owned by employer benefitplans;
and assigned to employee as his usual place
of residence. 3) Benefits given to the rank and file
employees, whether granted under a
(c) Residential property purchased by collective bargaining agreement or not;
employer on installment basis for the use of
employer as his usual place of residence. 4)De minimis benefits;

5) When the fringe benefit is required by the


(d) Residential property purchased by ER nature of, or necessary to thetrade, business
and ownership is transferred to EE as his or profession of theemployer
usual place of residence.
6) When the fringe benefit is for the
(e) Residential property transferred to convenience of the employer. This isknown
employee at less than employers acquisition as Employers Convenience Rule.155
cost.146

2) Household Expenses refer to expenses


of the employee paid by the employer for
household personnel or other personal
expenses, which shall include:

(a) salaries of household helper


(b) personal driver of the employee
(c) payment for homeowner assoc., etc.
3) Interest on loan at less than market rate147

146
Non taxable Housing Fringe Benefits
(a) Housing privilege of military officials of AFP
(b) Housing unit, which is situated inside or adjacent to the premise of a business or factory. A housing
unit is considered adjacent if it is located within the maximum 50 meters from the perimeter of the
business premises.
(c) Housing benefit granted to employees on a temporary basis not exceeding three (3) months
147
If the employer lends money to his employee:

50
4) Expenses for Foreign Travel

General rule:
Expenses for foreign travel insured by the
employee and/or family members of the
employee borne by the employer shall be
treated as taxable fringe benefits of the
employee.

Except:
Where the expenses for foreign travel paid
by the employer for the employee are for the
purpose of attending business meeting or
convention. The exemption covers only the
following expenses:

a) Inland travel expenses except lodging cost


in hotel averaging US$ 300 or less per day;148
and

b) Cost of economy or business class airline


ticket.149

5) Membership fees, dues and other


expenses borne by the employer for his
employee, in social or athletic clubs or other
similar organizations.150

6) Life or Health Insurance -

General rule:

The cost of life or health insurance and other


non life insurance premiums or similar
amounts in excess of what the law allows

Free of interest or at a rate lower than 12% (or prevailing market rate) the interest foregone by the
employer or the difference of the interest assumed by the employer and the 12% rate shall be treated as
taxable fringe benefit.
Applicable to installment payment or loan with interest rate lower than 12% starting January 1, 1998.
155
Sec. 32, NIRC; Sec. 2.33 [C], RR 3-98
148
Travel expenses should be supported by documents proving the actual occurrences of the meetings or
conventions. Likewise, documents and evidence showing the business purpose of the employees travel
must be presented otherwise, the entire cost will be considered taxable fringe benefit.
149
However, if the ticket is a first class one, 30% of the cost of the ticket shall be subject to a fringe benefit
tax.
150
These are treated as taxable Fringe Benefits of the employee in full.

51
borne by the employer for his employees
shall be treated as taxable fringe benefits.

Except:

a) Contribution of the employer for the


benefits of the employee pursuant to existing
laws.151

b) The cost of premium borne by the


employer for the group insurance of his
employees.

7) Holidays and Vacation Expense

8) Motor Vehicle

a) Motor vehicle purchased by


employer in name of employee.

b) Cash for the purchased provided by the


employer, the ownership is placed in the
name of the employee

c) Purchase on Installment basis, the


ownership is placed in the name of the
employee

d) Portion of purchased price


shouldered by employer

e) Fleet of motor vehicle leased by the


employer

f) Fleet of Motor vehicles owned and


maintained by employer.152

151
such as R.A. 8287 (SSS) or R.A. 8291 (GSIS).
152
In case of letters a, b, c and d, regardless of whether the motor vehicle is used for the personal purpose
of the employee and partly for the benefit of his employer, the monetary value shall be the entire value of
the benefit.
Under letters e and f, the fleet of motor vehicles is for the use of the business and the employees. The
value of the benefit shall be the rental payments (e) or the acquisition cost (f) of all motor vehicles not
normally used for sales, freight, delivery service and non-personal use.
The use of yacht whether owned and maintained or leased by the employer shall be treated as taxable
fringe benefit the value of the benefit shall be measured based on the depreciation of the Yacht at an
estimated useful life of 20 yrs.
The use of aircraft (including helicopters) owned and maintained by the employer shall be treated as
business use and not subject to FBT.

52
9) Expense Account

a) Expenses incurred by the employee but


paid by his employer.

b) Expenses paid by the employee but


reimbursed by his employer.153

10) Educational Assistance

General Rule: The cost of the educational


assistance to the employee or his dependents
which are borne by the employer shall be
treated as Taxable Fringe Benefits.

Exception:

a) Education granted to employee154

b) Educational Assistance granted to


the dependents of the employee in
the nature of educational assistance
to the dependents of the employee
through a competitive scheme
under a scholarship program of the
company.

3) Professional Income

The fees received by a professional from the practice of his profession, provided that

153
Expense account not subject to FBT.
a) expenses duly receipted for in the name of the employer and
b) The expenditures do not partake the nature of personal expenses attributable to the employee.
Personal expenses of the employee (like groceries) paid for or reimbursed by the employer are
taxable fringe benefits, whether or not duly receipted for in the name of the EE.
Representation and Transportation Allowances (RATA) refers to fixed amounts which are regularly
received by the employees as part of their monthly compensation income. They are not treated as
Taxable Fringe Benefits but the same are treated as Taxable Compensation Income.
154
Requisites:
1. Educational grant whereby the study is directly connected with the trade, business or profession of the
ER.
2. And there is a written contract obligating the EE to remain under the employment for a certain period.

53
there is no employer-employee relationship between him and his clients.

4) Income from Business

The income derived from merchandising, mining, manufacturing and farming


operations.

5) Income from Dealings in Property

a) Types of Properties

(1) Ordinary assets

Properties held by the taxpayer in the pursuit of his profession, trade or business:

i. Stock in Trade;
ii. Property of a kind which would properly be included in the inventory if on
hand at the close of the taxable year;
iii. Property held by the taxpayer primarily for sale to customers in the ordinary
course of trade or business;
iv. Property used in trade or business which in subject to the allowance for
depreciation; and
v. Real property used in trade or business.156

(2) Capital assets

Properties not specifically included in the statutory definition157 constitutes capital


assets, the profits or losses on the sale or the exchange of which are treated as capital gains
or capital.158

The statutory definition of "capital assets" practically excludes from its scope, all
property held by the taxpayer if used in connection with his trade or business.

b) Types of Gains from dealings in property

156
Sec. 39, [A]
157
Include personal property (not used in trade or business) such as movables in ones residence, personal
vehicles, appliances and furniture for personal use, jewelries etc. as well as real property (not used in
trade or business) such as residential land, idle land not used in business operations and residential
house.
158
Sec. 39, [A]
This is an enumeration by exclusion, all others not enumerated are capital assets.

54
(1) Ordinary income vis--vis Capital
gain

Ordinary gain Capital gain

Any gain from the sale or exchange of Any gain from the sale or exchange of
property which is not a capital asset.159 property which is a capital asset.

(2) Actual gain vis--vis Presumed


gain

Actual gain Presumed gain

Excess of the cost from a sale of asset. Presumption of law that the seller realized
gains, which is taxed at 6% of the selling
price or fair market value, whichever is
higher.

(3) Long term capital gain vis--vis


Short term capital gain

Long term capital gain Short term capital gain

The profit realized from selling or The profit realized from selling or
exchanging a capital asset held for more than exchanging a capital asset held for less than a
a specified period, usu. one (1) year.160 specified period, usu. one (1) year.161

(4) Net capital gain, Net capital loss

Net Capital gain Net capital Loss

The excess of the gains from sales or The excess of the losses from sales or
exchange of capital assets over the losses exchanges of capital assets over the gains
from such sales or exchanges.162 from such sales or exchanges.163

(5) Computation of the amount of


gain or loss

159
Sec. 22, [Z]
160
Blacks Law Dictionary, 9th Ed.
161
ibid.
162
Sec. 39, [A, 2]
163
Sec. 39, [A, 3]

55
The gain from the sale or other disposition of property shall be the excess of the
amount realized therefrom over the basis or adjusted basis for determining gain, and the loss
shall be the excess of the basis or adjusted basis for determining loss over the amount
realized. The amount realized from the sale or other disposition of property shall be the sum
of money received plus the fair market value of the property received.164

(a) Cost or basis of the


property sold

Acquired by purchase The cost of the property

Acquired by inheritance The fair market price or value as of the date


of acquisition.

Acquired by gift The same as if it would be in the hands of


the donor or the last preceding owner by
whom it was not acquired by gift.

Acquired for less than an adequate The amount paid by the transferee for the
consideration property.165

(b) Cost or basis of the


property exchanged in
corporate readjustment

(1)Merger
(2)Consolidation

A merger or consolidation has income tax consequences to the corporation which is


a party to the merger or consolidation, to its stockholders, and to its security holders. To the
corporation, or to its stockholders, or to its security holders, loss is not recognized from the
merger or consolidation.166

Gain will be recognized only if, on the exchange under the merger or consolidation,
the taxpayer received cash or property. The gain to be recognized should not exceed the sum
of money and the fair market value of the property received.

164
Sec. 40 (A)
165
Id., (B)
166
Id., (C)

56
(3) Transfer to a
controlled
corporation167

When a taxpayer transfers property to a corporation, in consideration of stock


received for the transfer, as a result of which transfer, the taxpayer168 gains control of the
corporation, no loss is recognized on the transfer of property.169

(c) Recognition of gain or loss


in exchange of property

(1) General rule

Upon the sale or exchange or property, the entire amount of the gain or loss, as the
case may be, shall be recognized.170

(a) Where no
gain or loss
shall be
recognized

a) Exchange solely in kind171in legitimate mergers or consolidations.

1) A corporation which is a party to a merger or consolidation exchanges


property solely for stock in a corporation which is a party to the merger or
consolidation;

2) A corporation which is a party to a merger or consolidation receives in


exchange for property not only stock of another corporation but also money and/or
other property and distributes it in pursuance of the plan of merger or consolidation.

3) A shareholder exchanges stock in a corporation which is a party to the


merger or consolidation solely for the stock of another corporation, also a party to
the merger or consolidation.

167
tax-free exchanges
168
alone or together with others not exceeding four [or a total of five]
169
Id., (C)(2)(c), last par.
Suppose the transfer resulted in a gain to the transferor, will the gain be recognized? Gain will be
recognized only if on the transfer, the taxpayer received cash or property in addition to the shares
received. The gain to be recognized shall not exceed the sum of money and fair market value of the
property received.
If before the transfer to the corporation, the transferor already had control over the corporation, the
gain or loss on the transfer will be recognized
170
Id., (C) (1)
171
exchange of property solely for stocks

57
4) A security holder of a corporation which is a party to the merger or
consolidation exchanges his securities in such corporation solely for stockor
securities in another corporation, a party to the merger or consolidation.

b) Transfer or exchange of property for stock resulting in acquisition of corporate


control.172
(2) Exceptions

(a) Meaning of
merger,
consolidation,
control
securities

"Merger" or "consolidation means:

1. the ordinary merger or consolidation, or


2. the acquisition by one corporation of all or substantially all the properties
of another corporation solely for stock.173
"Control means ownership of stocks in a corporation possessing at least fifty-one
percent (51%) of the total voting power of all classes of stocks entitled to vote.174

(b) Transfer of
a controlled
corporation175

172
A person exchanges his property for stock or unit of participation in a corporation of which as a result
of such exchange said person, alone or together with others, not exceeding four persons, gains control of
said corporation
Control means ownership of stocks in a corporation possessing at least 51% of the total voting power
of all classes of stock entitled to vote.
The items enumerated above are also called tax-exempt exchanges.
173
Provided:
1. It must be undertaken for a bona fide business purpose and not solely for the purpose of escaping
the burden of taxation
2. In determining whether a bona fide business purpose exists, each and every step of the transaction
shall be considered and the whole transaction or series of transaction shall be treated as a single unit.
3. In determining whether the property transferred constitutes a substantial portion of the property of
the transferor, the term 'property' shall be taken to include the cash assets of the transferor.
174
Id., (C)(6)
175
supra

58
(6) Income tax treatment of capital
loss

(a) Capital loss limitation


rule176

Capital lossesare deductible only to the extent of capital gains.

(b) Net loss carry-over rule177

If any taxpayer178 sustains in any taxable year a net capital loss


1. Such net capital loss cannot be deducted from ordinary income due to the loss
limitation rule;
2. Such loss could be carried over to the next taxable yearas a deduction against net
capital gain in an amount not in excess of the taxable incomein the year the loss was
sustained; and
3. Such loss shall be treated as a loss from the sale or exchange of capital assets held
for not more than twelve (12) months.179
(7) Dealings in real property situated
in the Philippines180

6% final tax - on the gross selling price, or the current fair market value at the time
of the sale, whichever is higher.181

(8) Dealings in shares of stock of


Philippine corporations

(a) Shares listed and traded in


the stock exchange

Not subject to income tax but to percentage tax of of 1% of the gross selling
price.

176
applicable to both corporations and individuals
177
applicable only to individuals
178
other than a corporation
179
Sec. 39 [D]
180
The real property involved must be considered capital asset. A capital asset is property held by the
taxpayer whether or not connected in his trade or business except:
1. Stock in trade or other property of any kind which would be included in the inventory of the
taxpayer if on hand at the end of the taxable year.
2. Property primarily held for sale to customers in the ordinary course of trade or business.
3. Property used in trade or business subject to depreciation.
4. Real property used in trade or business.
181
Sec. 24 (D)

59
(b) Shares not listed and
traded in the stock
exchange

A final tax at the rates as follows:

Not over P100,000........ 5%


On any amount in excess of P100,000. 10%

(9) Sale of principal residence

Not liable for capital gains tax when:

a. Sold or disposed of by natural persons.


b. The proceeds of the sale are fully utilized in acquiring or constructing a new
principal residence within 18 calendar months from the date of sale or disposition.
c. The Commissioner is duly notified by the taxpayer within 30 days from the date of
sale or disposition through a prescribed return of his intention to avail of the tax exemption.
d. A deposit is made of the 6% capital gain tax otherwise due, in cash or managers
check, in an interest-bearing account with an Authorized Agent Bank (AAB), under an
Escrow Agreement between the taxpayer and the Bureau of Internal Revenue that the same
shall be released to the taxpayer when the proceeds of the sale shall have been utilized as
intended.

e. The tax exemption can only be availed of once every 10 years.182

6) Passive Investment Income

a) Interest Income

An earning derived from depositing or lending of money, goods or credits.183

b) Dividend Income184

182
Sec. 24 (D)(2)
Conditions for tax exemption of gain from the sale or exchange of principal residence:
1. Proceeds are fully utilized in acquiring or constructing a new principal residence within18 months
from the date of sale or disposition;
2. Historical cost or adjusted basis or the real property sold or disposed shall be carried over to the new
principal residence built or acquired;
3. Notice to the Commissioner of Internal Revenue shall be given within thirty (30) days from the date
of sale or disposition; and
4. If the proceeds of the sale were not fully utilized, the portion of the gain presumed to have been
realized from the sale or disposition shall be subject to capital gains tax
183
General rule: Interest received by a taxpayer, whether usurious or not, is subject to income tax.
Except: When interest income is exempted by law from income tax.

60
(1) Cash dividend

A dividend paid in cash and is taxable to the extent of the cash received.

(2) Stock dividend

A transfer of a portion of retained earnings to capital stock by action of


stockholders.It simply means the capitalization of retained earnings.185

(3) Property dividend

A dividend paid in property186 held by the corporation and to the extent of the FMV
of the property received at the time of the distribution.

(4) Liquidating dividend

A dividend distributed to the shareholders upon dissolution of the corporation.

c) Royalty Income

Compensation or payment for the use of property and ispaid to the owner of a right.

d) Rental Income

184
Dividends means any distributions made by a stock corporation to its stockholders (SHs)) out of its
earnings or profits and payable to its SHs in money or other property.
185
General rule: A mere issuance of stock dividends is not subject to income tax, because it merely
represents capital and it does not constitute income to its recipient. Before disposition thereof, stock
dividends are nothing but a representation of interest in the corporate entity.
Exceptions: When stock dividends are subject to tax;
a) These shares are later redeemed for a consideration by the corporation or otherwise conveyed by
the stockholder to the extent of such contribution. Under the NIRC, if a corporation, after the distribution
of a non-taxable stock dividend, proceeds to cancel or redeem its stock at such time and in such manner
as to make the distribution and cancellation or redemption essentially equivalent to the distribution of a
tax of a taxable dividend, the amount received in redemption or cancellation of the stock shall be treated
as a taxable dividend to the extent that it represents a distribution of earnings or profits. (Sec.73 (B),
NIRC). Depending on the circumstances, corporate earnings may be distributed under the guise of initial
capitalization by declaring the stock dividends previously issued and later redeem or cancel said dividends
by paying cash to the stockholder. This process amounts to distribution of taxable dividends which is just
delayed so as to escape the tax. (CIR vs. CA, 301 SCRA 152)
b) The recipient is other than the stockholder. (Bachrach vs. Seifert, 57 PHIL 483)
c) A change in the stockholders equity results by virtue of the stock dividend issuance.
186
such as stock investment, bonds or securities

61
(1) Lease of personal property
(2) Lease of real property

Earnings derived from leasing of real estate as well as personal property.187 It


includes all other obligations assumed to be paid by the lessee to the third party in behalf of
the lessor.

(3) Tax treatment of

(a) Leasehold improvements


by lessee

Outright Method Spread Out Method

The fair market value of the building or Allocate the depreciated value over the
improvement shall be reported as additional remaining term of the lease contract. Every
rent income. year, an aliquot part of the depreciated value
should be reported as additional rent in
addition to the regular rent income.

(b) VAT added to rental/paid


by the lessee

Any additional amount paid, directly or indirectly, by the lessee in consideration for
the lease is considered rental. Therefore, taxes paid by the lessee on leased property are part
of rental income of the landlord.

(c) Advance rental/long term


lease

Advanced rental is a SecurityDeposit which Advance rental is prepaid rental received


restricts the lessor as to its use without restriction as to its use

The amount shall be excluded in the The entire amount is taxable in the year it
determination of rental income. is received.

7) Annuities, Proceeds from life insurance or other


types of insurance

187
Taxes paid by the tenant (lessee) to or for a lessor for a business property are additional rent and
constitute income taxable to the lessor.

62
Annuities Amounts payable yearly or at other regular
intervals for a certain or uncertain period.
They also represent as installment payments
for life insurance sold by insurance
companies.188

Proceeds of life insurance Paid by reason of the death of the insured to


his estate or to any beneficiary,189 directly or
in trust.

Return of insurance premium190

8) Prizes and awards

Contest prizes and awards received are generally taxable. Such payment constitutes
gain derived from labor.191

9) Pensions, retirement benefit, or separation pay

188
If the part of annuity payments represent interest = taxable income.
If the annuity is a mere return of premium = not taxable.
189
Individual, partnership, or corporation, but not a transferee for a valuable consideration.
If the proceeds are retained by the insurer, the interest thereon is taxable;
190
If such amounts (when added to amounts already received before the taxable year under such
contracts) exceed the aggregate premiums or considerations paid (whether or not paid during the taxable
year), then the excess shall be included in the gross income. However, in the case of a transfer for a
valuable consideration, by assignment or otherwise, of a life insurance, endowment or annuity contract,
or any interest therein, only the actual value of such consideration and the amount of the premiums and
other sums subsequently paid by the transferee are exempt from taxation. No loss is realized on
surrender of a life insurance policy for its surrender value.
191
Exceptions:
1. Prizes and awards received in recognition of religious, charitable, scientific, educational, artistic,
literary or civic achievements are exclusions from gross income if:
a. The recipient was selected without any action on his part to enter a contest or proceedings; and
b. The recipient is not required to render substantial future services as a condition to receiving the
prize or award.
2. Prizes and awards granted to athletes in local and intl sports competitions and tournaments held
in the Philippines and abroad and sanctioned by their national associations shall be exempt from income
tax.

63
Pension refers to 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.

Retirement benefits received under RA 7641 and those received by officials and
employees of private firms in accordance with a reasonable private benefit plan maintained
by the employer.192

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.193

The social security benefits, retirement gratuities, pensions and other similar benefits
received by resident or nonresident citizens of the Philippines or aliens who come to reside
permanently in the Philippines from foreign government agencies and other institutions.

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

Benefits received from or enjoyed under the Social Security System.

Benefits received from the GSIS, including retirement gratuity received by


government officials and employees.

10) Income from any source whatever

All income not expressly excluded or exempted from the class of taxable income,
irrespective of the voluntary or involuntary action of the taxpayer in producing the
income.194

a) Forgiveness of indebtedness

192
Requisites:
1. The retiring employee has been in the service of the same employer for at least 10 years.
2. The retiring employee is not less than 50 years of age at the time of his retirement
3. The benefits shall be availed of by an employee only once.
4. That there be a reasonable private benefit plan as defined below.
193
i.e., the separation of the employee must be involuntary and not initiated by him
194
Gutierrez vs. Collector of Internal Revenue, CTA case no. 65, August 31, 1965.

64
Dependent upon the circumstances, may amount to:

1. income;195
2. a gift;196 or
3. a capital transaction.197

b) Recovery of accounts previously written


off

To be included as part of the taxpayers gross income in the year of such recovery to
the extent of the income tax benefit of said deduction.198There 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.199

c) Receipt of tax refunds or credit200

As a general rule, a refund of a tax related to the business or the practice of


profession is taxable income in the year of receipt to the extent of the income tax benefit of
said deduction.201

d) Income from any source whatever202


f. Source rules in determining income from within and
without203

195
If, for example, an individual performs services for a creditor who, in consideration thereof cancels the
debt, income to that amount is realized by the debtor as compensation for his service.
196
If, however, a creditor merely desires to benefit a debtor and without any consideration thereof cancels
the debt, the amount of the debt is a gift from the creditor to the debtor and need not be included in the
latters gross income.
197
If a corporation to which a stockholder is indebted forgives the debt, the transaction has the effect of
payment of dividends (Sec. 50, Rev. Reg. 2)
198
Tax Benefit Rule
199
Sec. 4, RR 5-99
200
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.
201
i.e., the tax benefit rule applies
However, the following tax refunds are not to be included in the computation of gross income:
1. Philippine income tax, except the fringe benefit tax
2. Income tax imposed by authority of any foreign country, if the taxpayer claimed a credit for such tax
in the year it was paid or incurred.
3. Estate and donors taxes
4. Taxes assessed against local benefits of a kind tending to increase the value of the property assessed
(Special assessments)
5.ValueAddedTax
6. Fines and penalties due to late payment of tax
7.Final taxes
8. Capital Gains Tax
202
supra

65
Income from sources within the Philippines:

1) Interests

Interests derived from sources within the Philippines, and interests on bonds,
notes or other interest-bearing obligation of residents, corporate or otherwise.

2) Dividends

The amount received as dividends:

(a) from a domestic corporation; and

(b) from a foreign corporation, unless less than fifty percent (50%) of the
gross income of such foreign corporation for the three-year period ending with the
close of its taxable year preceding the declaration of such dividends or for such part
of such period as the corporation has been in existence was derived from sources
within the Philippines as determined under the provisions of this Section; but only in
an amount which bears the same ration to such dividends as the gross income of the
corporation for such period derived from sources within the Philippines bears to its
gross income from all sources.

3) Services

Compensation for labor or personal services performed in the Philippines.

4) Rentals

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;

(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
203
Sec. 42

66
furnished as a means of enabling the application or enjoyment of, any such property
or right as is mentioned in paragraph (a), any such equipment as is mentioned in
paragraph (b) or any such knowledge or information as is mentioned in paragraph
(c);

(e) The supply of services by a non-resident person or his employee in


connection with the use of property or rights belonging to, or the installation or
operation of any brand, machinery or other apparatus purchased from such non-
resident person;

(f) 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:

(i) Motion picture films;


(ii) Films or video tapes for use in connection with television; and
(iii) Tapes for use in connection with radio broadcasting.
5) Royalties204

6) Sale of real property

Gains, profits and income from the sale of real property located in the
Philippines.
7) Sale of personal property
Gains, profits and income from the sale of personal property

Items of gross income treated as income from sources without the


Philippines:

(1) Interests other than those derived from sources within the Philippines

(2) Dividends other than those derived from sources within the Philippines

(3) Compensation for labor or personal services performed without the


Philippines;

(4) Rentals or royalties from property located without the Philippines or


from any interest in such property including rentals or royalties for the use of or for
the privilege of using without the Philippines, patents, copyrights, secret processes
and formulas, goodwill, trademarks, trade brands, franchises and other like

204
See 4) Rentals, supra

67
properties; and

(5) Gains, profits and income from the sale of real property located without
the Philippines.

8) Shares of stock of domestic corporation

Gain from the sale of shares of stock in a domestic corporation shall be treated as
derived entirely form sources within the Philippines regardless of where the said shares are
sold.

g. Situs of Income Taxation205

h. Exclusions from Gross Income206

Income received or earned but is not taxable as income because it is exempted by


law or by treaty. Receipts which are not in fact income are also excluded from Gross
Income.207
1) Rationale for the exclusions

They

a. Represent return of capital;


b. Are not income, gain or profit;
c. Are subject to another kind of internal revenue tax;
d. Are income, gain or profit that areexpressly exempt from income tax.208

2) Taxpayers who may avail of the exclusions

All kinds of taxpayers - individuals, estates, trusts and corporations, whether citizens,
aliens, whether residents or non-residents.

3) Exclusions distinguished from deductions and tax


credit

205
See Inherent Limitations, Territorial, supra
206
See Sec. 32 (B)
207
Exclusions are in the nature of tax exemptions, thus, the claimant must establish them convincingly.
208
under the Constitution, Tax treaty, Tax Code, or general or a special law.

68
Exclusions Deductions Tax credit

Income received or earned The items or amounts An amount subtracted from


but is not taxable because by authorized by law to be an individuals or entitys tax
law or treaty. Such tax free subtracted from the liability to arrive at the total
income is not to be included pertinent items of gross tax liability.211
in the income tax return income to arrive at taxable
unless information regarding income.210
it is specifically called for.209

4) Under the Constitution

a) Income derived by the government or its


political subdivisions from the exercise of
any essential governmental function

From:

1) any public utility; and


2) the exercise of any essential governmental function.212

5) Under the Tax Code

a) Proceeds of life insurance policies

Paid to the heirs or beneficiaries upon the death of the insured, whether in a single
sum or otherwise.213

b) Return of premium paid

Paid by the insured under life insurance, endowment, or annuity contracts, either
during the term or at the maturity of the term of the contract or upon surrender.214

209
Sec. 61, Rev. Regs. No. 2
210
Secs. 34 and 35, NIRC
211
M.E. Holding Corp. vs. Commissioner of Internal Revenue, CTA Case No. 5314, prom.August 17, 1998
citing Blacks Law Dictionary, 6th Ed.
212
Thus, income from sources other than those mentioned is subject to income tax.
213
Reason for exclusion: The contract of insurance is a contract of indemnity, hence, the proceeds thereof
are considered indemnity rather than a gain or profits.
Instances when proceeds from insurance are taxable:
a) Where proceeds are held by the insurer under an agreement to pay interest. The interest is included in
determination of gross income.
b) Where the transfer is for valuable consideration.
214
Reason for the exclusion: The return of premium is a mere return of capital. However, where the
included in the gross amount received exceed the aggregate premiums paid, the excess shall be income

69
c) Amounts received under life insurance,
endowment or annuity contracts

If the insured dies, and the beneficiary receivesthe life insurance proceeds, these are
not taxable income because they are excluded from gross income.

If the insured does not die and survives the designated period, the amount pertaining
to thepremiums he paid are excluded from gross income, but the excess shall be considered
part of his gross income.

d) Value of property acquired by gift, bequest,


devise or descent

The incomefrom such property, as wellas gift, bequest, devise, or descent of income
from property, in cases of transfers of divided interest, shall be included in gross income.

The estate of the testator or the decedent is subject to estate tax, while the heirs or
beneficiary/ies are not required to pay donees tax as the same was already abolished. The
value of the bequest and/or the devise received by the heirs or beneficiary/ies is not
included in the computation of their gross income since gifts, bequest and devises are
excluded from gross income.215

e) Amount received through accident or


health insurance

As compensation for personal injuries or sickness, plus the amounts of any damages
received, whether by suit or agreement, on the account of such injuries or sickness.216

f) Income exempt under tax treaty

Income of any kind, to the extent required by any treaty obligation binding upon the
Government of the Philippines.217

g) Retirement benefits, pensions, gratuities,


etc.

a) Retirements benefits received under RA 7641 and those received by officials and
employees of private firms in accordance with reasonable private benefit plan.218

215
Sec. 32[B], NIRC
216
Example of damages recovered from personal injuries: Moral damages for personal injuries.
If the award of damages is to compensate loss of property or an award of damages to compensate loss
of income / profits, such is subject to tax.
217
Sec. 32[B](5), id.

70
b) Any amount received by an official or employees or by his heirs from the
employer as a consequence of separation from service due to death, sickness or other
physical disability beyond the control of the said official or employer.
c) Terminal leave and other social security benefits.219
d) Benefits received under the US veterans Administration.
e) Benefits received from SSS
f) Benefits received from GSIS.

h) Winnings, prizes and awards, including


those in sports competition

1) Prizes and Awards - to be excluded, the following conditions must concur:

a. Prizes and award made primarily in recognition of religious, charitable,


scientific, educational, artistic, literary, or civic achievement.

b. The recipient was selected without any action on his part to enter the
contest or proceeding.
c. The recipient is not required to render substantial future services as a
condition in receiving the award.
2) Prizes and Awards in Sports Competition

All prizes and award granted to athletes in local and international sports
competitions and tournaments whether held in the Phils. or abroad and
sanctioned by sports associations.
6) Under a Tax Treaty

To the extent required by any treaty obligation binding upon the Philippine
government.

7) Under Special Laws


218
Requisites:
1. The retiring official or employees has been in service of the same employer for at least ten years.
2. Is not less than 50 yrs. of age at the time of his retirement and
3. Available to official or employee only once.
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
a. wherein contributions are made by such employer or employees, or both, for the purpose of
distributing to such employer the earnings and principal of the fund thus accumulated; and
b. wherein said plan provides that at no time shall any part of the principal or income of the fund be
used for, or be diverted to, any purpose other than for the exclusive benefit of said employee
219
The terminal leave pay of government employees whose employment is co-terminus is exempt since it
falls within the meaning of the phrase for any cause beyond the control of the said official or employees
(BIR Ruling 143-98)

71
a)Prizes received by winners in charity horse race sweepstakes from PCSO.
b) Back pay benefits

c) Income of cooperative marketing association


d) Salaries and stipends in dollars received by non - Filipino citizens on the technical
staff of International Rice Research Institutes (IRRI)
e) Supplemental allowances per diem, benefits received by officer or employees of
the Foreign Service.
f) Income from bonds and securities for sale in the international market.

i. Deductions from Gross Income220

220
These are items or amounts authorized by the law to be subtracted from the pertinent items of the
gross income to arrive at the taxable income.
Basic Principles Governing Tax Deductions:
He who claims it must point to the specific provision of the statute authorizing it, and he must be
able to prove that he is entitled to it.
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. However, if there is an express mention in the law or if the

72
1) General rules

a) Deductions must be paid or incurred in


connection with the taxpayers trade,
business or profession

It must be directly connected with trade or business or profession of the taxpayer.

b) Deductions must be supported by adequate


receipts or invoices221

The claimed deduction must be evidenced by official receipts or other adequate


records.222
2) Return of capital223

a) Sale of inventory of goods by


manufacturers and dealers of properties

b) Sale of stock in trade by a real estate dealer


and dealer in securities

c) Sale of services

3) Itemized deductions224

taxpayer falls within the purview of the exemption by clear legislative intent, the rule on strict
construction against the taxpayer-claimant will not apply.
Unlike gross income, there is no catch-all provision for deductions. Deductions must comply with the
substantiation requirement.
221
except standard deduction
222
The evidence must establish the following;
a) the amount of expenses being deducted
b) the direct relation of such to the development, management, operation, and/or conduct of the
trade, business or profession of the taxpayer.
223
cost of sales or services
224
The following can claim itemized deductions:
a. Corporations, whether domestic or (resident) foreign
b. General Professional Partnerships
c. Individuals engaged in trade, profession or business (citizen, resident alien, non-resident alien
doing business in the Philippines)
d. Estates and trusts engaged in trade or business
e. Proprietary educational institutions and hospitals (non-profit)

73
a) Expenses225

(1) Requisites for deductibility

1. It must be ordinary and necessary.


2. It must be paid or incurred during the taxable year.
3. It must be 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
a profession.
4. The amount must be reasonable.
5. It must be substantiated with sufficient evidence, such as official receipts or other
adequate records, showing:
i. the amount of the expense being deducted, and
ii. the direct connection or relation of the expense being deducted to the
development, management, operation and/or conduct of the trade,
business or profession of the taxpayer
6. It is not contrary to law, public policy or morals.
7. The tax required to be withheld on the amount paid or payable must have been
paid to the BIR by the taxpayer, who is constituted as a withholding agent of the
government.226

(a) Nature: Ordinary and


necessary227

Ordinary Necessary

f. Government-owned or controlled corporations


Only individuals, except non-resident aliens, can elect between itemized deductions and optional
standard deduction.
225
Sec. 34(A)
Only deductions allowable are ordinary and necessary trade, business or professional expenses
226
For instance, withholding tax on compensation income paid to employees, fringe benefit tax on
fringe benefits given to managerial and supervisory employees, etc. ( Sec. 2.58.5, RR 2-98 as amended by
Sec. 6, RR 14-2002)
227
The two conditions must concur. A court may decide on when an expense is, or is not, ordinary, but
as much as possible, it will refuse to substitute its judgment for that of the taxpayer on the necessity of an
expense.

74
When it connotes a payment, which is Where the expenditure is appropriate or
normal in relation to the business of the helpful in the development of taxpayers
taxpayer and the surrounding circumstances. business or that the same is proper for the
purpose of realizing a profit or minimizing a
loss.

(b) Paid and incurred during


taxable year

Paid Incurred

The payment is on cash receipt basis, The payment thereof is on accrual basis,
expenses are deductible in the year they are expenses are deductible in the year they are
incurred. incurred, whether paid or not.

(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 paid228

(3) Travel/Transportation expenses229

(4) Cost of materials

Materials and supplies are deductible only tothe amount actually consumed or used
in the operation during the taxable year.

(5) Rentals and/or other payments for


use or possession of property230

228
Sec. 34 (A)(1)(a)(i)
229
For travel expenses, here and abroad, while away from home, in the pursuit of trade, business or
profession.
Include meals and lodging, here and/or abroad.
While away from home means away from principal place of business
If the trip is undertaken for purposes other than business or exercise of profession, the transportation
expenses are personal expenses and the meals and lodging are living expenses and are not deductible.
Transportation expenses of an employee from his residence to his office and back are not deductible.
They are personal expenses. However, transportation expenses from his office to his customers place of
business and back are deductible. They are business expenses.

75
(6) Repairs and maintenance231

(7)Expenses under lease agreements232

(8) Expenses for professionals

(9) Entertainment expenses233

(10) Political campaign expenses

(11) Training expenses

b) Interest234

(1) Requisites for deductibility

a. There must be a valid and existing indebtedness


b. The indebtedness must be that of the taxpayer;
c. The interest must be legally due and stipulated in writing;
d. The interest expense must be paid or incurred during the taxable year;
e. The indebtedness must be connected with the taxpayer's trade, business or
exercise of profession;
f. The interest payment arrangement must not be between related taxpayers;235
g. The interest is not expressly disallowed by law to be deducted from the taxpayers
gross income;236 and
h. The amount of interest deducted from gross income does not exceed the limit set
forth in the law.237

230
Required as a condition for the continued use or possession, for purposes of the trade, business or
profession, of property to which the taxpayer has not taken or is not taking title or in which he has no
equity other than that of a lessee, user or possessor.
231
Extraordinary repairs - those in the nature of replacements, alteration, and expansion to the extent
that they arrest deterioration and prolong the life of the property.
Ordinary repairs - those made to keep the property ordinarily efficient working condition and do not
materially add to the value of the property
232
See 5) Rentals, etc., supra
233
Include representation expenses and/or depreciation or rental expense relating to entertainment
facilities. (1st par., Sec. 2, Rev. Regs. 110-2002)
234
The amount of interest paid or incurred within a taxable year on indebtedness in connection with the
taxpayer's profession, trade or business shall be allowed as deduction from gross income. (Sec. 34,
B (1))
235
infra
236
e.g., interest on indebtedness to finance petroleum operations

76
(2) Non-deductible interest expense

a. Interest on preferred stock, which in reality is dividend

b. Interest on unpaid salaries and bonuses

c. Interest calculated for cost keeping

d. Interest paid where parties provide no stipulation in writing to pay interest

e. If the indebtedness is incurred to finance petroleum exploration

f. Interest paid on indebtedness between related taxpayers238

g. Interest on indebtedness paid in advance through discount or otherwise and the


taxpayer reports income on cash basis.239

(3) Interest subject to special rules

(a) Interest paid in advance

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.

(b) Interest periodically


amortized240

(c) Interest expense incurred


to acquire property for use

237
In other words, the taxpayers otherwise allowable deduction for interest expense shall be reduced by
forty-two percent (42%) of the interest income subjected to final tax beginning November 1, 2005 under
R.A. 9337, and that effective January 1, 2009, the percentage shall be thirty-three percent (33%)
(Sec.34(B)(1)
238
1. Members of the same family, brothers and sisters, whether in full or half blood, spouse, ancestors
and lineal descendants
2. Stockholders and a corporation, when he holds more than 50% in value of its outstanding capital
stock, except in case of distribution in liquidation
3. Corporation and another corporation, with interlocking stockholders
4. Grantor and fiduciary in a trust
5. Fiduciary of a trust and fiduciary in another trust, if the same person is a grantor with respect to
each trust
6. Fiduciary of a trust and beneficiary of such trust
239
Interest is allowed as a deduction in the year the indebtedness is paid, not when the interest was paid
in advance.
240
See a), above

77
in
trade/business/profession

At the option of the taxpayer, may be allowed as a deduction or treated as a capital


expenditure.241

c) Taxes242

(1) Requisites for deductibility

1. It must be paid or incurred within the taxable year.


2. It must be paid or incurred in connection with the taxpayers trade,
profession or business.243
3. It must be imposed directly on the taxpayer.
4. It must not be specifically excluded by law from being deducted from the
taxpayers gross income.

(2) Non-deductible taxes

Taxes not allowed as deduction from gross income to arrive at taxable income:
a. Income tax provided under the NIRC
b. Income taxes imposed by authority of any foreign country244

241
Sec. 34 (B)(3)
242
The word taxes means taxes proper and no deduction should be allowed for amounts
representing interest, surcharge, or penalties incident to delinquency. (Sec. 80, RR-2)
243
Examples:
1. Import duties
2. Business taxes
3. Occupation taxes
4. Privilege and license taxes
5. Excise taxes
6. Documentary stamp taxes
7. Automobile registration fees
8. Real property taxes
Limitation: In the case of a nonresident alien individual engaged in trade or business (NRAETB)
and a resident foreign corporation (RFC), the deductions for taxes shall be allowed only if and to the
extent that they are connected with income from sources within the Philippines.

78
(3)Treatment/of
surcharges/interests/fines/for
delinquency245

(4) Treatment of special assessment246

Deductible as taxes where these are made for the purpose of:

1. Maintenance or repair of local benefits, if the payment of such assessment is


ordinary and necessary in the conduct of trade, business or profession

2. Constructing local benefits tending to increase the value of the property assessed,
the payments are in the nature of capital expenditures.247

(5) Tax credit248 vis--vis deduction


244
Income tax imposed by a foreign country are deductible only if:
a) the taxpayer is qualified to avail of tax credit;
b) He does not signify in its return his desire to avail of the same.
The right to deduct income taxes paid to a foreign government is given only as an alternative or
substitute to his right to claim a tax credit for such foreign income taxes.
Limitation on deduction:
a) non resident alien engaged in trade or business in the Phils.
b) resident foreign corporation --- the deductions for taxes shall be allowed only if and to the extent
that they are connected with income from sources within the Phils.
245
See (F)(3)(a)(2), under Tax Remedies under the NIRC, infra
246
An enforced proportional contribution from owners of lands, especially or peculiarly benefited by
public improvements.
247
The burden is on the taxpayer to show the allocation of the amounts assessed to the different
purposes.
248
Refers to the taxpayers right to deduct from the income tax due, the amount of tax he has paid to
foreign country.
Persons entitled to tax credit
1 .Resident Citizen of the Philippines
2. Domestic Corp. except General Professional Partnership
3. Members of the GPP
4. Beneficiaries of Estates and Trusts.

79
Tax Credit Tax deduction

Deducted from Phil. income tax Deducted from the gross income

All taxes are allowed to be deducted with the Only foreign income taxes may be claimed as
exception of the taxes expressly excluded credits

d) Losses

Losses actually sustained during the taxable year and not compensated for by
insurance or other forms of indemnity.249

(1) Requisites for deductibility250

a) The loss must be that of the taxpayer.251

b) There must be an actual loss suffered in a closed and completed transaction.252


c) The loss must be connected with the taxpayers trade, business or profession.

d) The loss must not be compensated for by insurance or otherwise.


e) The loss must be actually sustained and charge off during the taxable year.253
f) In the case of casualty loss, declaration of loss 254 must be filed within 45
days from the occurrence of the casualty loss.255

Persons not entitled to Tax credit


1. Non Resident Citizen
2. Aliens, whether residents or non residents
3. Foreign Corporation, whether residents or non - residents
249
Sec. 34 D [1]
250
Despite concurrence of requisites, when is loss nonetheless not deductible?
In computing net income, no deductions shall in any case be allowed in respect of losses from
sales or exchanges of property directly or indirectly [between related taxpayers (Sec. 36 (B)
251
The loss is personal to the taxpayer and is not transferable or usable by another. The loss of a
predecessor partnership is not deductible by a successor corporation. The loss of the parent company
may not be deducted by its subsidiary.
252
Closed transaction means that taxable year when the amount of loss was finally ascertained.
253
The deduction shall be in full or not at all.
However, if the loss is compensated by insurance or otherwise, the loss is postponed to a subsequent
year in which it appears that no compensation at all can be had, or there is a remaining net loss (or
there is no full compensation). Deduction will be denied if there is a measurable right to compensation for
the loss, with ultimate collection reasonably clear. So where there is reasonable ground for
reimbursement, the taxpayer must seek his redress and may not secure a loss deduction until he
establishes that no recovery may be had. In other words, the taxpayer must first exhaust his remedies
to recover or reduce his loss. (Plaridel Surety and Insurance Co. v. Collector, 21 SCRA 1187)

80
g) The loss must not be claimed as deduction for estate tax purposes in the estate tax
return.

(2) Other types of losses

(a) Capital losses

Losses from sale or exchange of capital assets. Deductible to the extent of capital
gains only.

(b) Securities becoming


worthless256

The loss resulting therefrom to the taxpayer257 is not considered as a bad debt but as
a capital loss.
(c) Losses on wash sales of
stocks or securities

Not deductible when:

1) A taxpayer who is not a dealer of stocks in trade has disposed shares and
2) Within the period of 60(sixty) days beginning 30 days before the date of such sale
and ending 30 days after such date, the taxpayer has acquired substantially identical stocks or
securities.258
(d) Wagering losses

Deductible only to the extent of the gains from such wagering transaction. If there
is no gain from the wagering transaction, the loss therefrom cannot be deducted from gross
income.259
(e) NOLCO260

It is the excess of allowable deductions over gross income of business for any taxable
year which had not been previously offset as deduction from gross income.

It shall be carried over as deduction from gross income for the next 3 consecutive
years following the year of such loss. Provided that:

254
Sworn Declaration of Loss
255
RR 12-77
256
Securities which are capital assets ascertained to be worthless and charged-off within the taxable year.
257
other than a bank or trust company incorporated under the laws of the Phil.
258
However, if losses from wash sales are claimed by a dealer in securities in the ordinary course of
business, such losses are deductible.
259
Wagering transactions - those in which the outcome is uncertain or those that involve games of
chance.
260
Net Operating Loss Carry over

81
1. The taxpayer was not exempt from income tax in the year of such net operating
loss; and

2. There has been no substantial change in the ownership of the business or


enterprise.

e) Bad debts

Debts due to the taxpayer when actually ascertained to be worthless261 and charged-
off within the taxable year.262

They refer to those debts resulting from the worthlessness or uncollectibility, in


whole or in part, of amounts due to the taxpayer by others, arising from money lent or from
uncollectible amounts of income from goods sold or services rendered.263

(1) Requisites for deductibility

1) There must be a valid and subsisting debt.264


2) The same must be connected with the taxpayers trade, business or practice of
profession.
3) The same must notbe sustained in a transaction entered into between related
parties.265
4) The same must be actually charged-off the books of accounts of the taxpayer as of
the end of the taxable year.266
5) The same must be actually ascertained to be worthless and uncollectible as of the
end of the taxable year.267

261
In general, a debt is not worthless simply because it is of doubtful value or difficult to collect.
Worthlessness is not determined by an inflexible formula or slide rule calculation but upon the exercise of
sound business judgment. The determination of worthlessness in a given case must depend upon the
particular facts and the circumstances of the case. A taxpayer may not postpone a bad debt deduction on
the basis of a mere hope of ultimate collection or because of a continuance of attempts to collect notes
which have long become overdue, and where there is no showing that the surrounding circumstances
differ from those relating to other notes which were charged off in a prior year. While a mere hope
probably will not justify postponement of the deduction, a reasonable possibility of recovery will permit
the account to be carried along notwithstanding that the probabilities are that the debt may not be
collected at all.
262
Sec.34 [E1]
263
Sec.2 [a], Rev. Regs. No.5-99
264
A valid and subsisting debt is one the collection of which may be enforced in a court of law. A debt
which had prescribed is no longer valid and subsisting.
265
infra
266
A partial writing-off of a bad debt is not allowed; it must be charged-off in full or not at all (Fernandez
Hermanos, Inc. vs. Commissioner, 29 SCRA 552; Philippine Refining Co. vs. Court of Appeals, 70 SCAD 544,
256 SCRA 667).

82
f) Depreciation

The gradual diminution in the useful value of tangible property used in trade or
business resulting from exhaustion, wear and tear, and normal obsolescence.

The term is also applied to amortization of value of intangible assets the use of
which in trade or business is definitely limited in duration.268

(1) Requisites for deductibility

a) The allowance for depreciation must be reasonable269


b) It must be for property arising out of its use or employment in the business or
trade, or out of its not being used temporarily during the year270
c) It must be charged-off during the taxable year;271
d) A statement on the allowance must be attached to the return.
e) The property must have a limited useful life.

(2) Methods of computing


depreciation allowance

(a) Straight-line method272

Spreads the total depreciation over the useful life of the asset and generally results in
an equal depreciation per unit of time regardless of the use to which the properties are put.

(b) Declining-balance method

Uses a rate to the declining book value of the asset. Depreciation is largest in amount
the first year and declines in the years thereafter.

(c)Sum-of-the-years-digit
method

267
In general, a debt is not worthless simply because it is of doubtful value or difficult to collect.
Worthlessness is determined upon the exercise of a sound business judgment. The determination of
worthlessness in a given case must depend upon the particular facts and circumstances of the case.
268
Basilan Estates, Inc. vs. Comm., 21 SCRA 17
269
Bacolod-Murcia Milling Co. Inc. vs. Comm., CTA Case No. 1402, Oct. 31, 1969
270
Connel Bros. Co. vs. Collector, CTA Cases No. 411 & 610, April 30, 1966).
271
The deduction must be made in the year in which the wear & tear occurs. Depreciation may not be
accumulated.
272
Fixed Percentage Method

83
Requires the application of a changing fraction to the cost basis of the property,
reduced by the estimated residual salvage value.

g) Charitable and other contributions273

(1) Requisites for deductibility

a) Must actually be paid or made to the Phil. Government or any of its agencies or
political subdivision or to any domestic corporations or associations.

b) Must be made within the taxable year;

c) Must not exceed 10% of the individuals taxable income and 5% of the
corporations taxable income before deducting the contribution; and

d) Must be evidenced by adequate records or receipts.274


(2) Amount that may be deducted

Subject to limit275 Deductible in full

a) Donations to the Philippine government a) Donations to the government of the


or any of its agencies or any political Philippines or to any of its agencies or
subdivision thereof exclusively for public political subdivisions, including fully-owned
purposes; government corporations exclusively to
finance, to provide for, or to be used in
b) Donations to accredited domestic undertaking priority activities in:
corporations or associations organized and
operated exclusively for: 1. Education;
2. Health;
1. Religions;
3. Youth and sports development;
2. Charitable;
4.Human settlements;
3. Scientific;

5. Science and culture; and


4. Youth and sports development;
6. Economic development.
5. Cultural; or
b) Donations to foreign institutions or
6. Educational purposes; or for the
international organizations in pursuance or
7. Rehabilitations of veterans; and compliance with agreements, treaties, or
commitments entered into by the

273
Kinds of contributions allowed as deduction:
1) Ordinary or contributions with limit or subject to limitation
2) Special or contributions deductible in full
274
Sec. 34 (H)
275
5%/10%

84
c) Donations to social welfare institutions or government of the and the foreign laws or
to non-government organizations in international organizations or in pursuance
accordance with rules and regulations of special laws, and
promulgated by the Secretary of
Finance,provided no part of the net income c) Donations to certain accredited non-
of which inures to the benefit of any private government organization.277
stockholders or individual.276

h) Contributions to pension trusts

(1) Requisites for deductibility

a) The employer must have established a pension or retirement plan to provide for
the payment of reasonable pensions to its employees;
b) The pension plan is reasonable and actuarially sound.278
c) It must be funded by the employer;

a) The amount contributed must no longer be subject to its control or disposition;


and
b) The payment has not therefore been allowed as a deduction.
4) Optional standard deduction

a) Individuals, except non-resident aliens

A maximum of forty percent (40%) of gross sales or gross receipts during the taxable
year.

The cost of sales or the cost of servicesis not allowed to be deducted for
purposes of determining the basis of the OSD inasmuch as the law279 is specific as to the
basis thereof which states that for individuals, the basis of the 40% OSD shall be the gross
sales or gross receipts and not gross income.280

b) Corporations, except non-resident foreign


corporations

Not exceeding forty percent (40%) of their gross income.

276
Sec. 34 (H)(1)
277
Ibid.,( 2)
278
Sec. 118, Regs.
279
R.A. 9504, Minimum Wage Earner Law
280
Rev. Reg. No. 16-2008

85
5) Personal and additional exemption281

a) Basic personal exemptions

Fifty thousand pesos (P50,000) each individual taxpayer.282

b) Additional exemptions for taxpayer with


dependents

Twenty-five thousand pesos (P25,000) - each dependent283 not exceeding four (4).284

c) Status-at-the-end-of-the-year rule

1. Taxpayer marries during taxable year - may claim the corresponding BPE in full
for such year.

2. Taxpayer should have additional dependent(s) during taxable year - may claim
corresponding AE in full for such year.

2. Taxpayer dies during taxable year - his estate may still claim BPE and AE for
himself and his dependent(s) as if he died at the close of such year.

4. If during the taxable year

a. spouse dies, or
b. 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.285
6) Items not deductible

a) General rules

These items are not related to the trade, business or profession of the taxpayer.

281
R. A. 9504
282
Sec. 4, id.
In the case of married individual where only one of the spouses is deriving gross income, only such
spouse shall be allowed the personal exemption.
283
A legitimate, illegitimate or legally adopted child chiefly dependent upon and living with the taxpayer if
such dependent is not more than twenty-one (21) years of age, unmarried and not gainfully employed or
if such dependent, regardless of age, is incapable of self-support because of mental or physical defect.
284
In the case of legally separated spouses, additional exemptions may be claimed only by the spouse
who has custody of the child or children:
The total amount of additional exemptions that may be claimed by both shall not exceed the maximum
additional exemptions herein allowed. (ibid)
285
Sec. 35 (C)

86
b) Personal, living or family expenses

These are personal expenses and not related to the conduct of trade or business.

c) Amount paid for new buildings or for


permanent improvements

These are capital expenditures added to the cost of the property and the periodic
depreciation is the amount that is considered as deductible expense.286

d) Amount expended in restoring property287

They are capital expenditures or those expenditures that result in obtaining benefits
of a permanent nature.288

e) Premiums paid on life insurance policy


covering life or any other officer or
employee financially interested

When the taxpayer is directly or indirectly a beneficiary under such policy.289

f) Interest expense, bad debts, and losses from


sales of property between related parties

Interest Expense Bad Debts Losses from sales of


property between related
parties

In general, the amount of In general, debts due to the (1) Between members of a
interest paid or incurred taxpayer actually ascertained family;293 or

286
Does not apply to intangible drilling and development cost incurred in petroleum operations.
287
major repairs
288
such as lands, buildings and machineries
289
Sec. 36 [A]

87
within a taxable year on to be worthless and charged (2) Except in the case of
indebtedness in connection off within the taxable year distributions in liquidation,
with the taxpayer's except those not connected between an individual and
profession, trade or with profession, trade or corporation more than fifty
290
business. business and those sustained percent (50%) in value of the
in a transaction entered into outstanding stock of which is
between parties.291 Recovery owned, directly or indirectly,
of bad debts previously by or for such individual; or
allowed as deduction in the
preceding years shall be (3) Except in the case of
included as part of the gross distributions in liquidation,
income in the year of between two corporations
recovery to the extent of the more than fifty percent
income tax benefit of said (50%) in value of the
deduction.292 outstanding stock of which is
owned, directly or indirectly,
by or for the same individual
if either one of such
corporations, with respect to
the taxable year of the
corporation preceding the
date of the sale of exchange
was under the law applicable
to such taxable year, a
personal holding company or
a foreign personal holding
company;

(4) Between the grantor and


a fiduciary of any trust; or

(5) Between the fiduciary of


and the fiduciary of a trust
and the fiduciary of another
trust if the same person is a
grantor with respect to each
trust; or

(6) Between a fiduciary of a


trust and beneficiary of such
trust.294

293
The family of an individual shall include only his brothers and sisters (whether by the whole or half-
blood), spouse, ancestors, and lineal descendants;
290
Sec. 34 (B)
291
supra
292
Id., (E)
294
Sec. 36 (B)

88
g) Losses from sales or exchange or property

In general, losses actually sustained during the taxable year and not compensated for
by insurance or other forms of indemnity:

1.If incurred in trade, profession or business;


2. Of property connected with the trade, business or profession, if the loss arises
from fires, storms, shipwreck, or other casualties, or from robbery, theft or embezzlement.295
h) Non-deductible interest296

i) Non deductible taxes297

j) Non-deductible losses

1. Losses from illegal transactions


2.Losses from sales or exchanges of property between related taxpayers298 but the
gains are taxable
k) Losses from wash sales of stock or
securities299

j. Exempt Corporations

1. General Professional Partnerships300

2. Joint Venture under a service contract with the government301

295
Sec. 34 (D)(1)
296
supra
297
Ibid.
298
ibid
299
Ibid.
300
Any other partnership is liable for corporate income tax.
Two (2) requisites to be exempt from corporate income tax:
1. It is formed by persons for the sole purpose of exercising their common profession; and
2. No part of the income of which is derived from engaging in any trade or business.

89
3. Government-owned or controlled corporations:

i. Government Service Insurance System (GSIS),


ii. the Social Security System (SSS),
iii. the Philippine Health Insurance Corporation (PHIC), and
iv. the Philippine Charity Sweepstakes Office (PCSO).

Other exempt corporations:

The following organizations shall not be taxed in respect to income received by them
as such:

(A) Labor, agricultural or horticultural organization not organized principally for


profit;

(B) Mutual savings bank not having a capital stock represented by shares, and
cooperative bank without capital stock organized and operated for mutual purposes and
without profit;

(C) A beneficiary society, order or association, operating for the exclusive benefit of
the members such as a fraternal organization operating under the lodge system, or mutual
aid association or a non-stock corporation organized by employees providing for the
payment of life, sickness, accident, or other benefits exclusively to the members of such
society, order, or association, or non-stock corporation or their dependents;

(D) Cemetery company owned and operated exclusively for the benefit of its
members;

(E) Non-stock corporation or association organized and operated exclusively for


religious, charitable, scientific, athletic, or cultural purposes, or for the rehabilitation of
veterans, no part of its net income or asset shall belong to or inures to the benefit of any
member, organizer, officer or any specific person;

(F) Business league chamber of commerce, or board of trade, not organized for
profit and no part of the net income of which inures to the benefit of any private stock-
holder, or individual;

301
A merger of two (2) or more corporations for the purpose of engaging in construction projects or
energy operations pursuant to a consortium agreement or a service contract with the government. The
corporations comprising the joint venture or consortium must be engaged in the same line of business.
It is only the joint venture or consortium itself which is exempt from corporate income tax, not the
income of each corporation from the joint venture consortium. Thus, each corporation comprising of the
joint venture or consortium is liable for corporate income tax (Batangas Land Transportation Co. vs.
Collector, 102 Phil. 822)

90
(G) Civic league or organization not organized for profit but operated exclusively for
the promotion of social welfare;

(H) A non-stock and nonprofit educational institution;

(I) Government educational institution;

(J) Farmers' or other mutual typhoon or fire insurance company, mutual ditch or
irrigation company, mutual or cooperative telephone company, or like organization of a
purely local character, the income of which consists solely of assessments, dues, and fees
collected from members for the sole purpose of meeting its expenses; and

(K) Farmers, fruit growers, or like association organized and operated as a sales agent
for the purpose of marketing the products of its members and turning back to them the
proceeds of sales, less the necessary selling expenses on the basis of the quantity of produce
finished by them;

Notwithstanding the provisions in the preceding paragraphs, the income of whatever


kind and character of the foregoing organizations from any of their properties, real or
personal, or from any of their activities conducted for profit regardless of the disposition
made of such income, shall be subject to tax imposed under this Code.302

10. Taxation of Resident Citizens, Non-resident Citizens, and Resident


Aliens

a. General rule that resident citizens are taxable on income


from all sources within and without the Philippines

A citizen of the Philippines residing therein is taxable on all income derived


from sources within and without the Philippines.

302
Sec. 30

91
b. Taxation on Compensation Income

1) Inclusions

a) Monetary compensation

(1) Regular salary/wage

Compensation income derived from an employer-employee relationship in


consideration of services rendered, except in the case of a minimum wage earner.303

(2) Separation pay/retirement benefit


not otherwise exempt

Separation pay received by an employee who voluntarily resigns is subject to income


tax. Retirements benefits may be subject to tax if it does not comply with the provision of
Sec. 32 (B)(6)(a).304

(3) Bonuses, 13th month pay, and


other benefits not exempt

Amount in excess of Thirty thousand pesos (P30,000.00).

(4) Directors fees305

b) Non-monetary compensation

(1) Fringe benefit not subject tax306

(1) Fringe benefits which are authorized and exempted from tax under special laws;

(2) Contributions of the employer for the benefit of the employee to retirement,
insurance and hospitalization benefit plans;

(3) Benefits given to the rank and file employees, whether granted under a collective
bargaining agreement or not; and

(4) De minimis benefits.307

(5) If the grant of fringe benefits to the employee is required by the nature of, or
necessary to the trade, business, or profession of the employer.

303
infra
304
See Reference
305
See (1) Regular salary/wage, supra
306
Sec. 33, consolidated with Sec. 2.33 (C), RR 03-98
307
infra

92
(6) If the grant of the fringe benefits is for the convenience of the employer.308

2) Exclusions

a) Fringe benefit subject to tax

Any good, service or other benefit furnished or granted in cash or in kind by an


employer to an individual employee309 such as, but not limited to, the following:

(1) Housing;
(2) Expense account;
(3) Vehicle of any kind;
(4) Household personnel, such as maid, driver and others;
(5) Interest on loan at less than market rate to the extent of the difference between
the market rate and actual rate granted;
(6) Membership fees, dues and other expenses borne by the employer for the
employee in social and athletic clubs or other similar organizations;
(7) Expenses for foreign travel;
(8) Holiday and vacation expenses;
(9) Educational assistance to the employee or his dependents; and
(10) Life or health insurance and other non-life insurance premiums or similar
amounts in excess of what the law allows.310

b) De minimis benefits

Limited to facilities or privileges furnished or offered by an employer to his


employees that are of relatively small value and are offered or furnished by the employer as a
means of promoting the health, goodwill, contentment, or efficiency of his employees.

They include:

308
Convenience of the employer rule
309
except rank and file employees
310
A: If the benefit is not tax-exempt and the recipient is:
1. A rank and file employee the value of such fringe benefit shall be considered as part of the
compensation income of such employee subject to tax payable by the employee.
2. Where the recipient is not a rank and file employee the value shall not be included in the
compensation income of such employee subject to tax. The fringe benefit tax is instead levied upon the
employer who is required to pay. (Sec. 33)

93
Monetized unused vacation leave credits of 1. Private employees:
employees
a. Vacation leave - exempt
up to 10 days

b. Sick leave always taxable

2. Government employees:

Vacation and sick leave are always tax


exempt regardless of the no. of
days.

Medical cash allowance to dependents of Not exceeding P750 per


employees semester or P125 per month

Rice subsidy P1,500 or one sack of 50-kg rice per month


amounting to not more than P1,500

Uniforms and clothing allowances actual Not exceeding P4,000 per annum
medical benefits

Actual medical benefits Not exceeding P10,000 per annum

Laundry allowance Not exceeding P300 per month

Employee achievement awards311 In the form of tangible personalproperty


other than cash or giftcertificate with an
annualmonetary value not exceedingP10,000

Gifts given during Christmas and major Not exceeding P5,000 per
anniversary celebrations employee per annum

Flowers, fruits and books or similar items Reasonable value depending


given to employees under certain on the employers capacity
circumstances

311
e.g. for length of service or safety achievement

94
Daily meal allowance for overtime work Not exceeding 25% of the basic minimum
wage.312

c) 13th month pay and other benefits and


payments specifically excluded from
taxable compensation income

Gross benefits received by officials and employees of public and private entities, the
total exclusion of which shall not exceed Thirty thousand pesos (P30,000) which shall cover:

(a) Benefits received by officials and employees of the national and local
government.313

(b) Benefits received by employees.314

(c) Benefits received by officials and employees not covered by (b)

(d) Other benefits315

3) Deductions

a) Personal exemptions and additional


exemptions

Basic personal exemption Additional exemption

Fifty thousand pesos (P50,000) for each Twenty-five thousand pesos (25,000) for
individual taxpayer.316 each dependent not exceeding four (4).317
b) Health and hospitalization insurance

312
RR 5-2008
313
under R.A. No. 6686;
314
under P.D. No. 851, as amended by Memorandum Order No. 28, dated August 13, 1986
315
such as productivity incentives and Christmas bonus
316
Sec. 35(A), as amended by R.A. 9504
In the case of married individual where only one of the spouses is deriving gross income, only such
spouse shall be allowed the personal exemption
317
Sec. 35 (B), id.
The additional exemption for dependents shall be claimed by only one of the spouses in the case of
married individuals.
In the case of legally separated spouses, additional exemptions may be claimed only by the spouse who
has custody of the child or children:
The total amount of additional exemptions that may be claimed by both shall not exceed the maximum
additional exemptions allowed.

95
The amount of premiums not to exceed Two thousand four hundred pesos (P2,400)
per family or Two hundred pesos (P200) a month paid during the taxable year taken by the
taxpayer for himself, including his family who has a gross income of not more than Two
hundred fifty thousand pesos (P250,000) for the taxable year.

In the case of married taxpayers, only the spouse claiming the additional exemption
for dependents shall be entitled to this deduction.318

c) Taxation of compensation income of a


minimum wage earner

(1) Definition of Statutory Minimum


Wage

The 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 (DOLE).319
(2) Definition of Minimum Wage
Earner320

(3) Income also subject to tax


exemption: holiday pay, overtime
pay, night shift differential, and
hazard pay321

c. Taxation of Business Income/Income from Practice of


Profession

Optional Standard Deduction (OSD) or Itemized deductions.

Optional Standard Deductions 10 % of the gross income. May be availed only by


individuals322 who are not purely compensation income earners. This is in lieu of the
itemized deductions.

d. Taxation of Passive Income

1) Passive income subject to final tax

a) Interest income

318
Sec. 34 (M)
319
Sec. 22, as amended by R.A. 9504
320
See II. (A) (6), Kinds of Taxpayers, supra
321
Sec. 24(A)(2) as amended by R.A. 9504
322
except non-resident aliens

96
Interest income derived by a resident individual323 from a depositary bank under the
expanded foreign service deposit system 7.5%.

Interest income from long term deposit or investment evidenced by certificates


prescribed by BSP:

a) Exempt, if investment is held for more than 5 years


b) If investment is pre-terminated, interest income on such investment shall be
subject to the following rates:
20% - If pre-terminated in less than 3 years
12% - If pre-terminated after 3 years to less than 4 years
5% - If pre-terminated after 4 years to less than 5 years

b) Royalties

Royalties, except on books, as well as other literary works and musical compositions
20%

Royalties on books literary works and musical compositions 10%

c) Dividends from domestic corporation

Cash and or property dividend actually or constructively received from a domestic


corporation or from a joint stock company, insurance or mutual fund companies and
regional operating headquarters of multinational companies. 10%

d) Prizes and other winnings

Prizes over P10,000 20%

Prizes less than P10,000 are included in the income tax of the individual subject to
the schedular rate of 5% up to P125,000 + 32% of excess of P500,000.

Other winnings, except PCSO and Lotto, derived from sources within the
Philippines 20%

2) Passive income not subject to final 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 - exempt from final tax.324

323
non-resident citizen not included
324
See Sec. 24 (B)(1)

97
e. Taxation of capital gains

1) Income from sale of shares of stock of a Philippine


corporation

a) Shares traded and listed in the stock


exchange

The gains are not subject to income tax. The tax applicable will be a business tax
known as percentage tax.

A tax at the rate of one-half of one percent (1/2 of 1%) of the gross selling price or
gross value in money of the shares of stock sold, bartered, exchanged or otherwise disposed
which shall be paid by the seller or transferor.325

b) Shares not listed and traded in the stock


exchange

A final tax as follows::

Not over P100,000..... 5%


Amount in excess of P100,000.. 10%326

2) Income from the sale of real property situated in


the Philippines

A final tax of six percent (6%) based on the gross selling price or current fair market
value, whichever is higher, upon capital gains presumed to have been realized from the sale,
exchange, or other disposition of real property classified as capital assets, including pacto de
retro sales and other forms of conditional sales, by individuals, including estates and trusts
xxx.327
3) Income from the sale, exchange, or other
disposition of other capital assets

A final tax of 6% on the gross selling price, or the current fair market value at the
time of the sale, whichever is higher.
11. Taxation of Non-resident Aliens Engaged in Trade or Business

a. General rules

325
Sec. 127 (A)
326
Sec. 27 (D)(2)
327
Sec. 24 (D)

98
A nonresident alien individual engaged in trade or business in the Philippines shall be
subject to an income tax in the same manner as an individual citizen and a resident alien
individual, on taxable income received from all sources within the Philippines.328

b. Cash and/or property dividends

10% final tax, on cash and or property dividend actually or constructively received
from a domestic corporation or from a joint stock company, insurance or mutual fund
companies and regional operating headquarters of multinational companies.329

c. Capital gains330

12. Individual Taxpayers Exempt from Income Tax

a. Senior citizens

A senior Citizen is:

1. any resident citizen of the Philippines

2. at least sixty (60) years old, including those who have retired from both
government offices and private enterprises, and

3. has an income of not more than sixty thousand pesos (P60,000.00) per annum
subject to the review of the National Economic Development Authority(NEDA) every three
(3) years.

b. Exemptions granted under international agreements

NRAETB331 may deduct personal exemption332 but only to the extent allowed by his
country to Filipinos not residing therein, and shall not exceed the aforementioned amounts.
NRANETB cannot claim any personal or additional exemption.

13. Taxation of Domestic Corporations333


328
A nonresident alien individual who shall come to the Philippines and stay therein for an aggregate
period of more than one hundred eighty (180) days during any calendar year shall be deemed a
'nonresident alien doing business in the Philippines (Sec. 25 (A)(1))
329
Id., (A)(2)
330
See e. Taxation of capital gains, supra
331
Non-resident alien engaged in trade or business
332
but not additional exemption
333
The term "corporation" shall include partnerships, no matter how created or organized, joint-stock
companies, joint accounts (cuentas en participacion), association, or insurance companies, but does not
include general professional partnerships and a joint venture or consortium formed for the purpose of
undertaking construction projects or engaging in petroleum, coal, geothermal and other energy

99
a. Tax payable

1) Regular tax

Thirty percent (30%)334 of taxable income.

2) Minimum corporate income tax (MCIT)

a) Imposition of MCIT335

Two percent(2%)on the gross income.

b) Carry forward of excess minimum tax

Any excess of the minimum corporate income tax (MCIT) over the normal income
tax shall be carried forward on an annual basis and credited against the normal income tax for
the three (3) immediately succeeding taxable years.

c) Relief from the MCIT under certain


conditions

The imposition of MCIT may be suspended, upon showing that the corporation
suffers losses due to any of the following causes:

a. Prolonged labor dispute336


b. Legitimate business reverses337
c. Force majeure338

d) Corporations exempt from the MCIT

1. Proprietary Educational Institution


2. Non-profit hospitals

operations pursuant to an operating consortium agreement under a service contract with the
Government. (Sec. 22(B))
334
beginning January 1, 2009 (R.A. 9337)
335
a. It is imposed beginning the fourth (4th) taxable year immediately following the taxable yr. in which
such corporation starts its business operation.
b. It is imposable only if such corporation has zero or negative taxable income or whenever the amount of
MCIT is greater than the Normal Corporate Income Tax (NCIT) due from such corporation.
336
e.g. strikes for more than 6 months
337
Ibid.
338
e.g. war

100
3. Depository banks under expended FCDU
4. International carriers
5. Offshore Banking Units
6. ROHQs of resident foreign corp.
e) Applicability of the MCIT where a
corporation is governed both under the
regular tax system and a special income
tax system

Only one may be imposed.

A minimum corporate income tax of 2% of the gross income xxx is imposed xxx
on a corporation339 xxx when the minimum income tax is greater than the (net income
tax)340

b. Allowable deductions

1) Itemized deductions

Business341 expenses which are ordinary and necessary in the conduct of business.342

2) Optional standard deduction343

May be taken by an individual, in lieu of itemized deductions.344

c. Taxation of Passive Income

1) Passive income subject to tax

339
domestic and resident foreign
340
Secs. 27 (E) and 28 (A)(2)
341
or professional
342
or in the exercise of profession
343
See also (9)(h)(4)(b), supra
344
Section 34(L)
Requisites:
a. Available only to citizens and resident aliens
b. The standard deduction is optional; i.e., unless the taxpayer signifies in his return his intention to
elect this deduction, he is considered as having availed of the itemized deductions.
c. Such election, when made by the qualified taxpayer, is irrevocable for the year in which made;
however, he can change to itemized deductions in succeeding years.

101
a) Interest from deposits and yield or any
other monetary benefit from deposit
substitutes and from trust funds and
similar arrangements and royalties345

Twenty percent (20%) final tax.

b) Capital gains from the sale of shares of


stock not traded in the stock exchange

On the net capital gain:

Not over P100,000


Final Tax of 5%

On any amount in excess of P100,000


plus 10% Final tax on the excess

c) Income derived under the expanded


foreign currency deposit system346

Ten percent (10%) final tax.

Exempt - any income of nonresidents, whether individuals or corporations, from


transactions with depository banks.

d) Intercorporate dividends

Not subject to tax.

e) Capital gains realized from the sale,


exchange, or disposition of lands and/or
buildings

Six percent (6%) final tax347-on the gross selling price, or the current fair market
value at the time of the sale, whichever is higher.

2) Passive income not subject to tax348

d. Taxation of Capital Gains

345
received by domestic corporations derived from sources within the Philippines
346
by a depository bank with local commercial banks, including branches of foreign banksauthorized by
the BSP to transact business with foreign currency deposit system units.
347
Tax treatment is the same as that of individuals
348
supra

102
1) Income from sale of shares of stock349

2) Income from the sale of real property situated in


the Philippines350

3) Income from the sale, exchange, or other


disposition of other capital assets351

e. Tax on proprietary educational institutions352 and hospitals

Ten percent (10%) on their taxable income.353

Thirty percent (30%) - if gross income from unrelated trade, business or other
activity354 exceeds fifty percent (50%) of the total gross income derived from all sources.355

f. Tax on government-owned or controlled corporations,


agencies or instrumentalities

Such rate of tax imposed upon corporations or associations engaged in similar


business, industry, or activity, except

1. The Government Service Insurance System (GSIS),


2. The Social Security System (SSS),
3. The Philippine Health Insurance Corporation (PHIC), and
4. The Philippine Charity Sweepstakes Office (PCSO).356

14. Taxation of Resident Foreign Corporations357

349
See 10 (e), Taxation of Capital Gains, supra
350
Ibid.
351
See (A)(10)(e)(3), Taxation of Capital Gains, supra
352
A "Proprietary educational institution" is any private school maintained and administered by private
individuals or groups with an issued permit to operate from the Department of Education, Culture and
Sports (DECS), or the Commission on Higher Education (CHED), or the Technical Education and Skills
Development Authority (TESDA), as the case may be, in accordance with existing laws and regulations.
353
except on certain passive incomes (Sec. 27 (D))
354
The term 'unrelated trade, business or other activity' means 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.
355
Sec. 27 (B)
356
Id., (C)
357
Income subject to Normal Tax [or] Minimum Corporate Income Tax (MCIT) [or] Gross Income Tax (GIT)
under the subheading of domestic corporations is equally applicable to resident foreign corporations,

103
a. General rule

Resident foreign corporationsare subject to 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
b. With respect to their income from sources within the
Philippines358

c. Minimum corporate income tax359

d. Tax on certain income

(1) Interest from deposits and yield or any other


monetary benefit from deposit substitutes, trust
funds and similar arrangements and royalties360

(2) Income derived under the expanded foreign


currency deposit system361

(3) Capital gain from sale of shares of stock not


traded in the stock exchange362

(4) Intercorporate dividends363

15. Taxation of Non-resident Foreign Corporations

a. General rule

both as to concepts and computations, except that RFCs are taxed only on income from sources within
the Philippines.
358
See Tax Payable under Taxation of Domestic Corporations, supra
359
ibid.
The MCIT is imposed on RFCs under the same conditions as domestic corporations (Sec. 28(A)(2))
360
See Taxation of Passive Income under Taxation of Domestic Corporations, supra
361
ibid.
362
ibid.
363
ibid.

104
Non-resident foreign corporations are subject to any or some of the following:

1. Capital Gains Tax


2. Final Tax on Passive Income
3. Final Tax on [Other] Gross Income from sources within the Philippines

b. Tax on certain income

(1) Interest on foreign loans

Twenty percent (20%) final withholding tax.364

(2) Intercorporate dividends

Fifteen percent (15%) - as long as the country in which the nonresident foreign
corporation is domiciled allows a tax credit for taxes deemed paid in the Philippines
equivalent to 15%.

Thirty percent (30%) withholding tax - if the country within which the NRFC is
domiciled does not allow a tax credit.365

(3) Capital gains from sale of shares of stock not


traded in the stock exchange366

16. Improperly Accumulated Earnings of Corporations

Every corporation formed or availed for the purpose of avoiding the income tax
with respect to its shareholders or the shareholders of any other corporation, by permitting
earnings and profits to accumulate instead of being divided or distributed.

17. Exemption from tax on corporations367

364
Sec. 28 (B)(5)(2)
365
Sec. 28 (B)(5)(b)
In other words, the dividends are subject to the third kind of tax: Final Tax on [Other] Gross Income
from sources within the Philippines.
366
See 10 (e)(1)(b), under Taxation of capital gains
367
See Other exempt corporations, supra

105
18. Taxation of Partnerships368

Rules:

1. Subject to the same rules on corporations,369 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
thereon, is the distributable net income of the partnership.

3. Ten percent (10%) final tax - the share of a partner in the partnerships
distributable net income of a year deemed to have been actually or constructively received
by the partners in the same taxable year taxed to them in their individual capacity, whether
actually distributed or not,370withheld by the partnership.371

19. Taxation of General Professional Partnerships372

Rules:

1. Not subject to income tax.

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

3. For purposes of computing the distributive share of the partners, the net
income of the GPP shall be computed in the same manner as a corporation.

4. Each partner shall report as gross income his distributive share, actually or
constructively received, in the net income of the partnership.

368
partnerships wherein all or part of their income is derived from the conduct of trade or business
369
capital gains tax, final tax on passive income, normal tax, minimum corporate income tax [MCIT] and
gross income tax [GIT]
370
Sec. 73(D)
371
Sec. 24(B)(2)
372
GPP is not a taxable entity The partnership is 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)

106
5. The share of a partner shall be subject to a creditable withholding income tax of
15%.373

20. Taxation on Estates and Trusts

a) Application

The tax imposed upon individuals shall apply to the income of estates or of any kind
of property held in trust, including:

1. Income accumulated in trust for the benefit of unborn or unascertained


person or persons with contingent interests, and income accumulated or held for future
distribution under the terms of the will or trust;

2. Income which is to be distributed currently by the fiduciary to the beneficiaries,


and income collected by a guardian of an infant which is to be held or distributed as the
court may direct;

3. Income received by estates of deceased persons during the period of


administration or settlement of the estate; and

4. Income which, in the discretion of the fiduciary, may be either distributed to the
beneficiaries or accumulated.

b) Exception

The tax shall not apply to employee's trust which forms part of a pension,
stock bonus or profit-sharing plan of an employer for the benefit of some or all of his
employees:

1. If contributions are made to the trust by such employer, or employees, or both


for the purpose of distributing to such employees the earnings and principal of the fund
accumulated by the trust in accordance with such plan, and

2. If under the trust instrument it is impossible, at any time prior to the satisfaction
of all liabilities with respect to employees under the trust, for any part of the corpus or
income to be used for, or diverted to, purposes other than for the exclusive benefit of his
employees.374

c) Determination of tax

1) Consolidation of income of two or more trusts

373
RR 2- 1998
374
Any amount actually distributed to any employee or distributee shall be taxable to him in the year in
which so distributed to the extent that it exceeds the amount contributed by such employee or
distributee.

107
Where the creator of the trust in each instance is the same person, and the
beneficiary in each instance is the same, the taxable income of all the trusts shall be
consolidated and the tax computed on such consolidated income, and such proportion of
said tax shall be assessed and collected from each trustee which the taxable income of the
trust administered by him bears to the consolidated income of the several trusts

2) Taxable income375

General rule:

Any amount actually distributed to any employee or distributee shall be taxable to


him in the year in which so distributed to the extent that it exceeds the amount contributed
by such employee or distributee.

3) Revocable trusts

Where at any time the power to revest in the grantor title to any part of the corpus
of the trust is vested:

a. in the grantor either alone or in conjunction with any person not having a
substantial adverse interest in the disposition of such part of the corpus or the income
therefrom, or

b. in any person not having a substantial adverse interest in the disposition of such
part of the corpus or the income therefrom, the income of such part of the trust shall be
included in computing the taxable income of the grantor.376
4) Income for benefit of grantor

375
The taxable income of the estate or trust shall be computed in the same manner and on the same basis
as in the case of an individual, except that:
(A) There shall be allowed as a deduction in computing the taxable income of the estate or trust
the amount of the income of the estate or trust for the taxable year which is to be distributed currently
by the fiduciary to the beneficiaries, and the amount of the income collected by a guardian of an infant
which is to be held or distributed as the court may direct, but the amount so allowed as a deduction
shall be included in computing the taxable income of the beneficiaries, whether distributed to them or
not. Any amount allowed as a deduction under this Subsection shall not be allowed as a deduction under
Subsection (B) of this Section in the same or any succeeding taxable year.
(B) In the case of income received by estates of deceased persons during the period of administration
or settlement of the estate, and in the case of income which, in the discretion of the fiduciary, may be
either distributed to the beneficiary or accumulated, there shall be allowed as an additional deduction the
amount of the income of the estate or trust for its taxable year, which is properly paid or credited during
such year to any legatee, heir or beneficiary but the amount so allowed as a deduction shall be included in
computing the taxable income of the legatee, heir or beneficiary.
(C) In the case of a trust administered in a foreign country, the deductions mentioned in Subsections
(A) and (B) of this Section shall not be allowed: Provided, That the amount of any income included in the
return of said trust shall not be included in computing the income of the beneficiaries. (Sec. 61)
376
Exception

108
Where any part of the income of a trust

a. is, or in the discretion of the grantor or of any person not having a


substantial adverse interest in the disposition of such part of the income may be held or
accumulated for future distribution to the grantor, or

b. may, or in the discretion of the grantor or of any person not having a


substantial adverse interest in the disposition of such part of the income, be distributed to
the grantor, or
c. is, or in the discretion of the grantor or of any person not having a
substantial adverse interest in the disposition of such part of the income may be applied to
the payment of premiums upon policies of insurance on the life of the grantor, such part of
the income of the trust shall be included in computing the taxable income of the grantor.377

5) Meaning of "in the discretion of the grantor"

Either alone or in conjunction with any person not having a substantial adverse
interest in the disposition of the part of the income in question.

21. Withholding tax378

a. Concept

The requirement that taxes imposed or prescribed by the NIRC are to be deducted
and withheld by the payor-corporations and/or persons from payments made to payees-
corporations and/or persons for the former to pay the same directly to the BIR. R. Hence,
the taxes are collected practically at the same time the transaction is made or when the
taxable transaction occurs. It is taxation at source.

b. Kinds

Withholding of final tax of certain income Withholding of creditable tax at source

377
ibid
378
also known as taxation at source

109
As to income subject of the system

1. Passive incomes 1. Compensation Income

2. Fringe benefits 2. Professional/talent fees

3. Rentals

4. Cinematographic filmrentals and other


payments

5.Income payments to certain contractors

As to whether or not income should be reported as part


of the gross income

The recipient may not report the said The employee is required to include the
income in his gross income because the tax income in his gross income
withheld constitutes final and full
settlement of the tax liability

As to the effect of the tax withheld

The tax withheld cannotbe claimed as tax The tax withheld can be claimed as a tax
credit credit or may be deducted from the tax due
or payable

As to filing of ITR

If the only source of income is subject to There is a necessity to file on


final tax, no need to file an ITR on the part the earner
of the earner

c. Withholding on wages

1) Requirement for withholding

110
No withholding of a tax where the total compensation income of an individual
does not exceed the statutory minimum wage, or five thousand pesos
(P5,000.00) per month, whichever is higher.379

2) Tax paid by recipient

If the employer fails to deduct and withhold the tax as required, and thereafter the
tax against which such tax may be credited is paid, the tax so required to be deducted and
withheld shall not be collected from the employer; but in no case relieve the employer from
liability for any penalty or addition to the tax otherwise applicable in respect of such failure
to deduct and withhold.380

3) Refunds or credits

(a) Employer When there has been an overpayment of tax,


refund or credit shall be made only to the
extent that the amount of such overpayment
was not deducted and withheld by the
employer.

(b) Employees The amount deducted and withheld


during any calendar year shall be allowed as a
credit to the recipient of such income against
the tax imposed under Section 24(A).381

Any excess of the taxes withheld over the tax due from the taxpayer shall be returned
or credited within three (3) months from the fifteenth (15th) day of April. Refunds or credits
made after such time shall earn interest at the rate of six percent (6%) per annum, starting
after the lapse of the three-month period to the date the refund of credit is made.382

4) Year-end adjustment

On or before the end of the calendar year but prior to the payment of the
compensation for the last payroll period, the employer shall determine the tax due from each
employee on taxable compensation income for the entire taxable year. The difference
between the tax due from the employee for the entire year and the sum of taxes withheld
from January to November shall either be withheld from his salary in December of the

379
Sec. 79 (A)
380
Id. (B)
381
See Reference
382
Id. (C)

111
current calendar year or refunded to the employee not later than January 25 of the
succeeding year.383

5) Liability for tax

The employer shall be liable for the withholding and remittance of the correct
amount of tax required to be deducted and withheld.384

d. Withholding of VAT

(a) 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, deduct and withhold a final VAT due at the rate of five percent (5%) of the
gross payment thereof.

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 sale
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 is less than seven
percent (7%) of gross payment, the difference must be closed to expense or account.

(b) The government or any of its political subdivisions, instrumentalities or agencies,


including government-owned or controlled corporations(GOCCs), as well as private
corporations, individuals, estates and trusts, whether large or non-large taxpayers, shall
withhold twelve percent (12%) VAT, starting February 1, 2006, with respect to the following
payments:

(1) Lease or use of properties or property rights owned by non-residents; and


(2) Other services rendered in the Philippines by non-residents.385

e. Filing of return and payment of taxes withheld

383
Id. (H)
384
See Sec. 80
385
RR 16-2005, as amended by RR 4-2007

112
1) Return and payment in case of government
employees

The return of the amount deducted and withheld upon any wage shall be made by
the officer or employee having control of the payment of such wage, or by any officer or
employee duly designated for the purpose.386

2) Statements and returns

(A) Requirements Every employer required to deduct and withhold a tax shall furnish
to each such employee in respect of his employment during the
calendar year, on or before January thirty-first (31st) of the
succeeding year, or if his employment is terminated before the close
of such calendar year, on the same day of which the last payment of
wages is made, a written statement confirming the wages paid by the
employer to such employee during the calendar year, and the
amount of tax deducted and withheld under this Chapter in respect
of such wages. The statement required to be furnished by this
Section in respect of any wage shall contain such other information,
and shall be furnished at such other time and in such form as the
Secretary of Finance, upon the recommendation of the
Commissioner, may, by rules and regulation, prescribe.

(B) Annual Every employer required to deduct and withhold the taxes in respect
Information Returns. of the wages of his employees shall, on or before January thirty-first
(31st) of the succeeding year, submit to the Commissioner an annual
information return containing a list of employees, the total amount
of compensation income of each employee, the total amount of
taxes withheld therefrom during the year, accompanied by copies of
the statement referred to in the preceding paragraph, and such other
information as may be deemed necessary.387

g. Final withholding tax at source388

386
Sec. 82
387
see Sec. 83
388
Sec. 57 (A), supra

113
g. Creditable withholding tax

1) Expanded withholding tax389

2) Withholding tax on compensation

Every employer must withhold from compensation paid, an amount computed in


accordance with the regulations.390

Exception:

Where such compensation income of an individual:

1. Does not exceed the statutory minimum wages; or


2. Five thousand pesos (P5,000) monthly391 - whichever is higher

h. Fringe benefit tax

Final tax of thirty-two percent (32%) - on the grossed-up monetary value of fringe
benefit furnished or granted to the employee392 by the employer, whether an individual or a
corporation, unless the fringe benefit is required:

1. by the nature of, or necessary to the trade, business or profession of the employer,
or
2. when the fringe benefit is for the convenience or advantage of the employer.393

B. Estate Tax

389
Id. (B), supra
390
Elements of Withholding on Compensation:
1. There must be an employer-employee relationship
2. There must be payment of compensation or wages
for services rendered
3. There must be a payroll period
391
P60,000 a year
392
except rank and file employees
393
Sec. 33 (A)

114
1. Basic principles

The estate tax accrues as of the death of the decedent and the accrual of the tax is
distinct from the obligation to pay the same. Upon the death of the decedent, succession
takes place and the right of the State to tax the privilege to transmit the estate vests instantly
upon death.394

Not a direct tax on the property transmitted or transferred although its amount is
based thereon.

2. Definition

A graduated tax imposed on the privilege of the decedent to transmit property at


death and is based on the entire net estate, regardless of the number heirs and relations to
the decedent.

3. Nature

A tax imposed on the privilege of transmitting property upon the death of the
owner. The liability for estate tax is generated by death and accrues at the time of death. It is
governed by the law in force at the time of death notwithstanding the postponement of the
actual possession or enjoyment of the estate by the beneficiary. Consequently, all properties
that are included in the taxable estate should be valued at the moment of death of a
decedent.

4. Purpose or object

a) Benefit-Received Theory

For the performance of services rendered by the government in the distribution of


the estate of the decedent and other benefits that accrue to the estate and the heirs, the state
collects the tax.

b) Redistribution of Wealth Theory

A contributing factor to the inequalities in wealth and income. The imposition of


death tax reduces the property received by the successor bringing about a more equitable
distribution of wealth in society.

c) Ability-to pay- theory

The receipt of inheritance places assets in the hands of the heirs and beneficiaries
thereby creating an ability to pay the tax and thus to contribute to governmental income; and

d) Privilege theory or State Partnership theory

394
Sec. 3, RR 2-2003

115
Inheritance is not a right but a privilege granted by the state and large estates have
been acquired only with the protection of the state. The State, as a passive and silent
partner in the accumulation of property has the right to collect the share which is properly
due to it

5. Time and transfer of properties

At the time of death.395

6. Classification of decedent

a) resident decedent
b) non resident alien decedent

7. Gross estate vis--vis Net estate

Gross estate Net estate

The total value of all property, whether real Determined by deducting from the value of
or personal, tangible or intangible belonging the gross estate the following items of
to the decedent at the time of his death, deductions:
situated within or outside the Philippines,
where such decedent was a resident or 1. Expenses, losses indebtedness, and taxes.
citizen of the Philippines.
2. Property previously taxed.
In the case of a nonresident alien decedent, it
shall include only property situated in the 3. Transfers for public use.
Philippines.
4. The Family Home

5. Standard Deductions

6. Medical Expenses

7. Amount received by heirs under R.A.


4917

8. Net share of the surviving spouse in the


conjugal partnership or community property.

8. Determination of gross estate and net estate

395
The tax should not be construed as a direct tax on the property of the decedent although the tax is
based thereon.

116
Decedent is a resident or nonresident citizen, Decedent is a non-resident alien
or a resident alien

All properties, real or personal, tangible or Only properties situated in the Philippines
intangible, wherever situated. provided that, intangible personal
property is subject to the rule of
reciprocity provided for under Section
104 of the NIRC.396

9. Composition of gross estate

Decedent is a resident or nonresident citizen, Decedent is a non-resident alien


or a resident alien

Value at the time of death Value at the time of death of all:


of all:
1. Tangible personal property situated in
1. Real property wherever situated the Philippines

2. Personal property, tangible or intangible, 2. Intangible personal property with situs


wherever situated in the Philippines unless exempted on
the basis of reciprocity
3. To the extent of the interest therein of the
decedent at the time of his death.

10. Items to be included in gross estate

396
Sec. 85

117
a. Decedent's interest It includes any interest having value or
capable of being valued, transferred by the
decedent at his death.

b. Transfer in contemplation of death A transfer motivated by the thought of


impending death although death may not be
imminent:

1. When the decedent has, at any time,


made a transfer in contemplation of or
intended to take effect in possession or
enjoyment at or after death;or

2. When decedent has, at any time, made a


transfer under which he has retained for
his life or for a period not ascertainable
without reference to his death or any
period which does not in fact end before
his death:

a. Possession, enjoyment or right to


income from the property; or

b. The right alone or in conjunction


with any other person to designate
the person who will possess or enjoy
the property or income there from.397

c. Revocable transfer A transfer by trust or otherwise, where the


enjoyment thereof was subject at the date of
his death to any change through the exercise
of a power to alter or amend or revoke or
terminate such transfer by:

a. Decedent alone;

b. By the decedent in conjunction with

397
Sec. 85[B]
The concept of transfer in contemplation of death has a technical meaning. This does not constitute any
transfers made by a dying person. It is not the mere transfer that constitutes a transfer in contemplation
of death but the retention of some type of control over the property transferred. In effect, there is no full
transfer of all interests in the property inter vivos.

118
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 decedents death
other than a bone fide sale for an adequate
and full consideration in money
or moneys worth.398

d.Property passing under general power The right to designate the person who will
appointment succeed to the property of the prior
decedent, in favor of anybody, including
himself, his estate, his creditors, or the
creditors of his estate. If the donation
contains a provision of reversion to the
donor, this is similar to a revocable
transfer.399

e.Proceeds of life insurance When the beneficiary is:

a. The estate of the decedent, his executor or


administrator regardless of whether the
designation is revocable or irrevocable; and

b. A third person, other than the decedents


estate, executor, or administrator provided
that the designation is revocable.400

f. Prior interests All transfers, trusts, estates, interests, rights,


powers and relinquishment of powers made,
created, arising existing, exercised or
relinquished before or after the effectivity of

398
Sec. 85(C)(1)
399
A power is not general (specific) if it can be exercised only in favor of one or more designated
person or classes of persons exclusive of the decedent, his estate, his creditors and creditors of his estate,
or if it expressly not exercisable in favor of the decedent, his estate, his creditors, or creditors of his
estate.
400
Not part of the gross estate when:
a. Proceeds receivable by a beneficiary designated as irrevocable provided that the beneficiary is not
the decedents estate, executor and administrator; and
b. Where the insurance was not taken by the decedent upon his own life and the beneficiary is not the
decedents estate, executor, or administrator. (Section 85(E)

119
the Tax Code.401

g. Transfers of insufficient consideration402 Only the excess of the fair market value of
the property at the time of the decedents
death over the consideration received shall
be included in the gross estate.

11.Deductions from estate

Decedent is a resident citizen, non-resident Decedent is a nonresident alien


citizen, or resident alien

Ordinary deductions: The deductions allowed to citizens or


residents of the Philippines are also extended
a. Funeral Expenses403 to a non-resident alien decedent with respect
to his estates situated in the Philippines at
b. Medical expenses404 the time of his death.

c. Judicial expenses of the testamentary or In case of deductions for expenses, losses,


intestate proceedings.405 indebtedness and taxes, the amount of the

401
Sec.85
402
b, c, d and g - properties not physically in the estate (these have already been transferred during
the lifetime of the decedent but are still subject to payment of estate tax) - are transfers inter vivos which
are considered part of gross estate.
403
The amount deductible is equal to 5% of the gross estate or the amount of the actual funeral expenses
whichever is lower, but in no case to exceed P200, 000.
Actual funeral expenses are those which were actually incurred in connection with the interment or
burial of the deceased and paid for from the estate of said deceased.
Funeral expenses include:
a) Costs of coffin, tombstone, mausoleum, and burial lot;
b) Funeral parlor fees;
c) Mourning clothing of the surviving spouse and the unmarried minor children;
d) Costs of obituary notices; and
e) Expenses during the wake
The following cannot be deducted under funeral expenses:
a) Cash advances of the surviving spouse and the heirs;
b) Expenses paid by the relatives and friends; and
c) Expenses after the burial.
404
Provided, that the following requisites are met:
a. Must be incurred by the decedent within one (1) year prior to his death
b. Must be duly substantiated by receipts; and
c. Must not exceed P500, 000.00.
405
Include administration expenses to those actually incurred in the administration of the estate
Examples:
a) fees of the executor or administrator;
b) attorneys fees;
c) accountants fees;

120
allowable deduction is limited only to the
406
d. Claims against the decedents estate proportion of such deductions with the value
of such part of his gross estate which at the
e. Claims against insolvent persons407
time of his death, is situated in the
f. Unpaid mortgages indebtedness408 Philippines, bears to the value of his entire
gross estate wherever situated.415
g. Casualty Losses409

h. Unpaid Taxes410

i. Vanishing deduction411

d) court fees;
e) salaries of employees; and
All other expense related to the administration of the estate.
Expenses not essential to the proper settlement of the estate but incurred for the individual benefit of
the heirs, legatees, or devisees are not allowed as deductions.
406
Debts or obligations of the decedent that is enforceable against the estate provided that the following
requisites are met:
a) They were contracted in good faith and for an adequate and full consideration in money or moneys
worth.
b) They must be existing against the estate.
c) They must be legally enforceable obligations of the decedent and ought to be enforced by the
claimants.
d) They must be reasonably certain in amount; and;
e) At the time the indebtedness was incurred, the debt instrument was duly notarized and if the loan
was contracted within three (3) years before the death of the decedent, the administrator or executor
shall submit a statement showing the disposition of the proceeds of the loan.
407
Requisites for deductibility:
a) The amount of said claims has been initially included as part of the gross estate; and
b) The incapacity of the debtors to pay their obligations is proven and not merely alleged.
408
Requisites for deductibility:
a. The fair market value of the property mortgaged without deducting the mortgage indebtedness has
been initially included as part of his gross estate; and
b. The mortgage indebtedness was contracted in good faith and for an adequate and full consideration
in money or moneys worth.
409
They include all losses incurred during the settlement of the estate arising from fires, storms,
shipwreck or other casualties or from robbery, theft or embezzlement.
Provided, that the following requisites are met:
a. Losses not compensated by an insurance or otherwise;
b. Losses not have been claimed as a deduction for income tax purposes; and
c. Losses incurred not later than the last day for payment of the estate tax (6 months from death).
410
Unpaid income tax on income due or received before death of the decedent, and real property taxes,
which have accrued prior to the death of the decedent (real property taxes accrued at the beginning of
the year but may be paid before or at the end of each quarter) are deductible.
Income taxes upon income received after the death of the decedent, or property taxes not accrued
before his death, or any estate tax cannot be deducted because they are chargeable to the income of the
estate.
411
Property previously taxed
An amount allowed to reduce the taxable estate of a decedent where the property:
a. received by him from prior decedent by gift, bequest, devise or inheritance, or

121
j. Transfer for public use412

k. Family home413

l. Standard deduction equivalent to P1,


000,000.00414

m. Amounts received by heirs under R.A.


No. 4917 from the decedents employer as a
consequence of the death of the decedent
employee provided that such amount is
included in the gross estate of the decedent.

n. Net share of the surviving spouse in the


conjugal partnership or community property.

o. Tax credit for estate tax paid to a foreign


country.

12. Exclusions from estate

b. transferred to him by gift, has been the object of previous transfer deduction.
It is so-called a vanishing deduction because the rate of deduction gradually diminishes and entirely
vanishes depending upon the time interval between the two (2) successive transfers.
Two (2) factors necessary in vanishing deduction, these are;
a. There are two (2) deceased persons and the first is the donor; and
b. The second decedent dies within five (5) years after the death of the prior decedent or in the case of
gifts the decedent donee dies within the same period after the date of the gift.
415
Sec. 86 (B)
412
Requisites:
a. The disposition must be testamentary in character.
b. To take effect after death.
c. In favor of the government of the Philippines, or any political subdivision thereof.
d. Exclusively for public purpose.
413
Refers to the dwelling house, including the land on which it is situated, where the husband and wife, or
an unmarried person who is the head of the family and members of their immediate family resides as
certified by the Barangay Captain of the locality.
For the purpose of availing of a family home deduction to the extent provided by law, a person may
constitute only one family home.
The amount deductible is equivalent to the current fair market value of the decedents family home if
said current fair market value exceeds P1, 000,000.00., the excess shall be subject to estate tax.
Requisites to be deductible:
a. 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 where the family is situated.
b. The total value of the family home must be included in the gross estate of the decedent.
c. The allowable deduction must be in an amount equivalent to the current fair market value of the family
home as declared or included in the gross estate not exceeding P1, 000,000.00.
414
does not include the P 200,000.00 exemption

122
The following properties are excluded from gross estate:416

a) Amount receivable by any beneficiary irrevocably designated in the policy of


insurance by the insured.
b) Proceeds of a group insurance policy taken out by a company for its employees.
c) Proceeds of insurance policies issued by the GSIS to government officials and
employees.
d) Benefits accruing under the Social Security Act.
e) Proceeds of life insurance payable to the heirs of deceased members of the
military personnel of the United States Army or Philippine Army under laws administered by
the United State veterans Administration.
f) Accident insurance proceeds.417
g) Separate property of the surviving spouse.

13. Tax credit for estate taxes paid in a foreign country

The estate tax imposed by the tax code shall be credited with the amount of any
estate tax paid to a foreign country.

14. Exemption of certain acquisitions and transmissions

a. The first P200, 000.00 value of the estate.418


b. The merger of the usufruct in the owner of the naked title.
c. The transmission from the first heir, legatee, or donee in favor of another
beneficiary in accordance with the desire of the predecessor.
d. All bequest, devises, legacies or transfers to social welfare, cultural and charitable
institutions, no part of the net income of which inured to the benefit of any individual and
provided that not more than 30% of the said bequest, etc. shall be used by such institution
for administration purposes.

416
In the determination of the gross estate, the nature of the property, whether common property of the
spouses, separate or exclusive property either of the deceased or of the surviving spouse, becomes of
vital importance. What regime of property relations shall govern the spouses?
Under the Civil Code, the husband and wife who got married before August 3, 1988 are governed by
the Conjugal Partnership of Gains, while those who got married on or after August 3, 1988 are governed
by the Absolute Community of Property, unless a different regime was agreed upon in the marriage
settlement.
417
Items a - fare proceeds of insurance not includible in the gross estate of the decedent
418
Sec. 84

123
e. Intangible personal property of non-resident aliens under the principle of
reciprocity.
f. Retirement benefits of employees of private firms from private pension plans
approved by the BIR.
g. Amount received for war damages.
h. Grants and donations to the Intramuros administration.
15. Filing of notice of death

Within two (2) months after the decedents death419 to the Commissioner of Internal
Revenue where the gross value of the estate exceeds twenty thousand pesos (P 20,000.00).420

16. Estate tax return

To be filed by the executor, administrator, or any of the legal heirs;


In cases of:

1. Transfers subject to tax

2. Where gross value of estate exceeds P200,000

3. Where estate consists of registered or registrable property, regardless of


Amount.421

419
or within like period after the executor or administrator qualifies as such
420
Sec. 89
421
Sec. 90 (A)

124
C. Donors Tax

1. Basic principles

It is levied, assessed, collected and paid upon the transfer of any person, resident or
non-resident, of the property by gift inter vivos. It applies 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.422

Donors tax shall be imposed 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.

A gift is merely subjected to donors tax.

2. Definition

A tax on the privilege of transmitting ones property or property rights to another or


others without adequate and full valuable consideration.

3. Nature

It is an excise tax on the privilege of the donor to give or on the transfer of property
by way of gift inter vivos. It is not a property tax.

4. Purpose or object

To:

a. Raise revenues

b. Tax the wealthy and to reduce certain other excise taxes

c. Discourage inter vivos transfers of property which could reduce mortis causatransfers
on which a higher tax423 can be collected

d. Prevent avoidance of income tax throughthe device of splitting income among


numerousdonees who are usually members of a family or into many trusts, with the donor
thereby escaping the effect of the progressive rates of income taxation

422
Sec. 98
423
estate tax

125
5. Requisites of valid donation

a. The donor must have capacity to donate424


b. There must be an intent to donate425
c. There must be delivery, either actual or constructive
d. Thedonee must accept the donation

6. Transfers which may be constituted as donation

a. Sale/exchange/transfer of property for insufficient


consideration426

If bona fide sale No value shall be included in the gross


estate.

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.

If inter vivos transfer is proven fictitious Total value of the property at the time of
death included in the gross estate.427

b. Condonation/remission of debt

If the creditor condones the indebtedness of the debtor the following rules apply:

1. On account of debtors services to thecreditor the same is in taxable income to the


debtor.

2. If no services were rendered but thecreditor simply condones the debt, it is taxable
gift and not a taxable income.

424
The donors capacity shall be determined as of the time of the making of the donation (Art. 737, NCC)
425
Donative intent is necessary only in cases of direct gift. If the gift is indirectly taking place by way of
sale, exchange or other transfer of property as contemplated in cases of transfers for less than adequate
and full consideration (Sec. 100, NIRC), not always essential to constitute a gift.
426
Transfers that are not bona fide sales of property for an adequate and full consideration in money or
moneys worth
427
Sec. 85 (G)

126
7. Transfer for less than adequate and full consideration

The amount by which the fair market value of the property exceeded the value of the
consideration shall be deemed a gift, and shall be included in computing the amount of gifts
made during the calendar year.428

8. Classification of donor

Taxable within and outside Philippines Taxable only within the Philippines

a. Resident citizen a. Non-resident aliens

b. Non-resident citizen b. Foreign corporation

c. Resident alien

d. Domestic corporation

9. Determination of gross gift

All property, real or personal, tangible orintangible, that was given by the donor to
the donee by way of gift, without the benefit of any deduction.429

10. Composition of gross gift

Resident citizen, non-resident citizen, and Non-resident alien


resident alien

a. Real property wherever situated; a. Real property situated within the


Philippines;
b. Personal property wherever situated,
tangible or intangible. b. Personal property:

i. Tangible property situated within the


Philippines

ii. Intangible personal property with situs in


the Philippines unless exempted on the
basis of reciprocity.430

428
Sec. 100
429
Sec. 104
430
Where the decedent or donor was a nonresident alien at the time of his death or donation, his real and
personal property so transferred but which are situated outside the Philippines shall not be included as
part of his "gross estate" or "gross gift (see Sec. 104)

127
11. Valuation of gifts made in property

Personal property Real property

The fair market valueof the property given at The fair market value at the time of donation
the time of the gift. or the value fixed bythe assessor, whichever
is higher.431

12. Tax credit for donors taxes paid in a foreign country

The tax imposed upon a donor who was a citizen or a resident at the time of
donation shall be credited with the amount of any donor's tax of any character and
description imposed by the authority of a foreign country.432

13. Exemptions of gifts from donors tax

1. Donation for political campaign purposes433

2. Certain gifts made by residents434

3. Certain gifts made by non-residents435

431
Sec. 102.
432
Sec. 101(C)
433
Sec. 99[C]
434
(1) Dowries or gifts made on account of marriage and before its celebration or within one (1) year
thereafter by parents to each of their legitimate, recognized natural, or adopted children to the extent of
the first Ten thousand pesos (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; and
(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. Not more than thirty percent (30%) of said gifts shall be used by such donee
for administration purposes(Sec.101[A])
For the purpose of the exemption, a 'non-profit educational and/or charitable corporation, institution,
accredited nongovernment organization, trust or philanthropic organization and/or research institution or
organization' is a school, college or university and/or charitable corporation, accredited nongovernment
organization, trust or philanthropic organization and/or research institution or organization, incorporated
as a non-stock entity, paying no dividends, governed by trustees who receive no compensation, and
devoting all its income, whether students' fees or gifts, donation, subsidies or other forms of
philanthropy, to the accomplishment and promotion of the purposes enumerated in its Articles of
Incorporation.
435
(1) 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.
(2) Gifts in favor of an educational and/or charitable, religious, cultural or social welfare corporation,
institution, foundation, trust or philanthropic organization or research institution or organization. Not
more than thirty percent (30%) of said gifts shall be used by such donee for administration purposes
(Sec.101[B])

128
4. Donation of intangibles subject to reciprocity436

5. Donation for athletes prizes and awards437

6. Donation under the Adopt-a-School Program438

7. Exemption under other special laws.439

14. Person liable

Any person, resident or nonresident, of the property transferred by gift.

Any person making a donation unless thedonation is specifically exempted under


NIRC or other special laws, is required for every donation to accomplish under oath a
donors tax return in duplicate.

15. Tax basis

The total net gifts made during the calendar year.440

436
Sec. 104
437
1. The donation must be prizes and awards given to athletes in local and international tournaments
and competitions;
2. held in the Philippines or abroad; and
3. sanctioned by their respective sports association. (Sec. 1, R.A. 7549)
438
Any aid, help, contribution or donation provided by an adopting private entity to a government school,
whether elementary, secondary or tertiary are exempt from donors taxes. The assistance may be in the
form of, but not limited to infrastructure, teaching, and skills development, learning, support, computer
and science laboratories and food and nutrition (R.A. 8525)
439
1. Donation to International Rice Research Institute (IRRI)
2. Donation to Ramon Magsaysay Award Foundation
3. Donation to Philippines Inventors Convention (PIC)
4. Donation to Integrated Bar of the Philippines (IBP)
5. Donation to the Development Academy of the Philippines
6. Donation to social welfare, cultural or charitable institution, no part of the net income of which
inures to the benefit of any individual, if not more than 30% of the donation shall be used by the done for
administration purposes
7. Donation to Aquaculture Department of the Southeast Asian Fisheries Development Center of the
Philippines
8. Donation to the National Museum
9. Donation to the National Library
10. Donation to the National Social Action Council
11. Donation to the Philippine American Cultural Foundation
12. Donation to Task Force on Human Settlement on the donation of equipment, materials, and services
440
Sec. 99 (A)

129
D. Value-Added Tax (VAT)

1. Concept

VAT is a percentage tax imposed at every stage of the distribution process on the
sale, barter, or exchange, or lease of goods or properties, and on the performance of service
in the course of trade or business, or on the importation of goods, whether for business
or non-business purposes.

It is a business tax levied on certain transactions involving a wide range of


goods, properties, and services, such tax being payable by the seller, lessor, or transferor. The
tax is so- called because it is imposed on the value not previously subjected to VAT.441

It is also an excise tax, or a tax on the privilege of engaging in the business of selling
goods or services, or in the importation of goods.

The taxpayer442 determines his tax liability by computing the tax on the gross selling
price or gross receipt443 and subtracting or crediting the earlier VAT on the purchase or
importation of goods or on the sale of service444 against the tax due on his own sale.

2. Characteristics

It is an indirect tax, the amount of which may be shifted to or passed on the buyer,
transferee, or lessee of the goods, properties or services.445

It is equitable: The law is equipped with a threshold margin (P1.5M). Also, basic
marine and agricultural products in their original state are still not subject to tax.
Congress also provided for mitigating measures to cushion the impact of the imposition of
the tax on those previously exempt. Excise taxes on petroleum products and natural gas
were reduced. Percentage tax on domestic carriers was removed. Power producers are
now exempt from paying franchise tax.

VAT, by its very nature, is regressive. But the Constitution does not really
prohibit the imposition of indirect taxeswhich is essentially regressive. What it simply
provides is that Congress shall evolve a progressive system of taxation.446

441
De Leon, The National Internal Revenue Code Annotated, 2000 edition
442
seller
443
output tax
444
input tax
445
Sec. 105
This rule shall likewise apply to existing contracts of sale or lease of goods, properties or services at the
time of the effectivity of R.A. No. 9337 (RR 16-2005)
446
In Tolentino v. Sec. of Finance, the Court said that 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.
The Constitution mandate to evolve a progressive system of taxation simply means that direct taxes
are to be preferred as much as possible, and indirect taxes should be minimized. Resort to indirect taxes
should be minimized but not avoided entirely. Also, the regressive effects are corrected by the zero rating

130
Other Characteristics:

a. It is consumption-based
b. It is imposed on the value-added in each stage of distribution
c. It is a credit-invoice method value-added tax
d. It is not a cascading tax.

3. Impact of tax447

The seller448upon whom the tax has been imposed.

4. Incidence of tax449

It is on the final consumer, the place at which the tax comes to rest. The tax is
shifted to the buyer of the goods, properties, or services.

5. Tax credit method450

The input tax shifted by the seller to the buyer is credited against the buyers output
taxes when he in turn sells the taxable goods, properties or services.

This method relies on invoices, an entity can credit against or subtract from the VAT
charged on its sales or outputs the VAT paid on its purchases, inputs and imports.451

If at the end of a taxable period, the output taxes charged by a seller are equal to the
input taxes passed on by the suppliers, no payment is required. It is when the output taxes
exceed the input taxes that the excess has to be paid. If however, the input taxes exceed the
output taxes, the excess shall be carried over to the succeeding quarter or quarters. Should
the input taxes result from zero-rated or effectively zero-rated transactions or from
acquisition of capital goods, any excess over the output taxes shall instead be refunded to the
taxpayer or credited against other internal revenue taxes.452

of certain transactions and through the exemptions. The transactions which are subject to VAT are those
which involve goods and services which are used or availed of mainly by higher income groups (Real
properties held primarily for sale to customers, right or privilege to use patent, copyright.)
447
The point on which a tax is originally imposed. In so far as the law is concerned, the taxpayer is the
person who must pay the tax to the government. He is also termed as the statutory taxpayer-the one on
whom the tax is formally assessed. He is the subject of the tax
448
manufacturer
449
That point on which the tax burden finally rests or settle down. It takes place when shifting has been
effected from the statutory taxpayer to another
450
also called invoice method
451
Commissioner of Internal Revenue v. Seagate Technology Philippines, G. R. No. 153866, February 11,
2005 citing various cases and authorities; AbakadaGuro Party List (etc.) v. Ermita, etc., et al., G. R. No.
168056, September 1, 2005 and companion cases)
452
Commissioner of Internal Revenue v. Seagate Technology (Philippines), G. R. No. 153866, February 11,
2005 citing various cases and authorities

131
6. Destination principle453

Under this doctrine, goods and services are taxed only in the country where they are
consumed. No VAT shall be imposed to form part of the cost of goods destined outside the
territorial border of the taxing authority. Thus, exports are zero-rated, while
imports are taxed.

Actual shipment of the goods from the Philippinesto a foreign country is a


precondition of an export sale following the destination principle being adhered to by our
VAT system.

VAT is imposed in the country in which the products or services are actually
consumed or used. Exports exempt, imports taxable.454

7. Persons liable455

A. Any person who, in the regular course of trade or business456

1) sells, barters, exchanges goods or properties,


2) leasesgoods or properties,
3) renders services; and
4) any person who imports goods.457

Consequently, any sale, barter or exchange of goods or services not in the course of
trade or business is not subject to VAT.458

453
or the Cross Border Doctrine
454
Situs: country of Consumption.
Exception to the destination principle:
A zero percent VAT rate for services that are performed in the Philippines, "paid for in acceptable
foreign currency and accounted for in accordance with the rules and regulations of the BSP."
Hence, actual or constructive export of goods and services from the Philippines to a foreign country
must be zero-rated for VAT; while, those destined for use or consumption within the Philippines shall be
imposed the twelve percent (12%) VAT.
455
whether or not in the regular course of business (Sec. 105)
Present law requires a threshold amount of P1,500,000.00 gross sale or gross receipt to become liable for
value-added tax.
456
The phrase in the course of trade or business means the regular conduct or 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 non-stock, nonprofit organization (irrespective of the disposition of its
net income and whether or not it sells exclusively to members or their guests), or government entity (Sec.
105)
457
The importer, whether an individual or corporation and whether or not made in the course of his
trade or business, shall be liable to pay VAT. (RR 16-2005)
458
Commissioner v. Magsaysay Lines Inc., G.R. No. 146984, July 28, 2006

132
8. VAT on sale of goods or properties

a. Requisites of taxability of sale of goods or properties:

1. There is an actual or deemed sale, barter or exchange of goods or personal


properties for valuable consideration;

2. The sale is in the course of trade orbusiness or exercise of profession in the


Philippines;

3. The goods or properties are located in thePhilippines and are for use or
consumption therein; and

4. The sale is not exempt from VAT underSection 109 of NIRC, special law,
international agreement binding upon the government of the Philippines.459

9. Zero-rated sales of goods or properties, and effectively zero-rated


sales of goods or properties

The gross selling price of goods or properties is multiplied by 0% VAT rate. Zero-
rated sale of goods or properties by a VAT-registered person is a taxable transaction for
VAT purposes but the sale does not result in any output tax.

However, the input tax on the purchases of goods, properties or services related to
such zero-rated sale shall be available as tax credit or refund.

Zero-rated sales of goods by a VAT-registered person:

a. Export Sales460

b. Foreign Currency Denominated Sale461


c. Sale to persons or entities which is VAT exempt under special laws or
international agreements to which the Philippines is a signatory462
d. Transactions subject to zero-rated (0%)463
10. Transactions deemed sale464

459
Absence of any of the above requisites exempts the transaction from VAT. However, percentage taxes
may apply (Section 116, NIRC).
460
as provided in Section 106(A)(2)(a), See Reference
461
id. (A)(2)(b)
462
id. (A)(2)(c)
463
as provided in Section 108(B)
464
Sec. 106 (B)
The transactions are deemed sale because in reality there is no sale, but still the law provides that
the following transactions are considered as sale and are thus subject to VAT.

133
a. Transfer, use or consumption not in the course of business
of goods/properties originally intended for sale or use in
the course of business.

e.g. when a VAT-registered person withdraws goods from his business for his
personal use.

b. Distribution or transfer to shareholders, investors or


creditors

1. Shareholders or investors as share in the profits of the VAT-registered persons;


or
2. Creditors in payment of debt.465

c. Consignment of goods if actual sale not made within 60


days from date of consignment

Consigned goods returned by the consignee within the 60-day period are not deemed
sold.466

d. Retirement from or cessation of business with respect to


inventories on hand

As of the date of such retirement or cessation, whether or not the business is


continued by the new owner or successor.Examples are change of ownership of the
business467 and dissolution of a partnership and creation of a new partnership which takes
over the business.468

11.Change or cessation of status as VAT-registered person

VAT shall apply to goods disposed of or existing as of a certain date if under the
circumstances, the status of a person as a VAT-registered person changes or is terminated.

465
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)
466
RR 16-2005
467
e.g. when a sole proprietorship incorporates, or the proprietor sells his entire business
468
RR 16-2005

134
a. Subject to VAT

Subject to output tax - 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

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 years469

b. Not subject to VAT

1) Change of control of a corporation

By the acquisition of the controlling interest of such corporation by another


stockholder or group of stockholders.

The goods or properties used in the business or those comprising the stock-intrade
of the corporation will not be considered sold, bartered or exchanged despite the change in
the ownership interest. However, exchange of property by corporation acquiring control for
the shares of stocks of the target corporation is subject to VAT.

2) Change in the trade or corporate name

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 by the surviving or new corp.

12. VAT on importation of goods

VAT shall be assessed and collected upon goods brought into the Philippines,
whether or not goods are for use in business.

469
from the time of registration by a person who voluntarily registered despite being exempt under Sec.
109 (2)

135
a. Transfer of goods by tax exempt persons

The subsequent purchasers, transferees or recipients of such imported goods shall be


considered as importers who shall be liable for the tax on importation.

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.470

13. VAT on sale of service and use or lease of properties

a. Requisites for taxability

1. There is a sale or exchange of service or lease or use of property enumerated in


the law or other similar services;

2. The service is performed or to beperformed in the Philippines;

3. The service is in the course of trade of taxpayers trade or business or profession;

4. The service is for a valuable considerationactually or constructively received; and

5. The service is not exempt under the TaxCode, special law or international
agreement.471

14. Zero-rated sale of services472

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 to 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.

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.

4) Services rendered to persons engaged in international shipping or international air


transport operations, including leases of property for use thereof;473 Provided, however, that

470
Sec. 107 (B)
471
Absence of any of the requisites renders the transaction exempt from VAT but may be subject to other
percentage tax under Title V of the Tax Code.
472
Ibid. (B)

136
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. 108.474

5) Services performed by subcontractors and/or contractors in processing,


converting, of 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 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.475 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.

15. VAT exempt transactions

a. VAT exempt transactions, in general

It involves goods or services which, by their nature, are specifically listed in and
expressly exempted from VAT under the Tax Code, without regard to the tax status of the
party to the transaction.

b. Exempt transactions, enumerated

1. Sale/ import of agricultural, marine food products in original state;476 of livestock


and poultry.477

473
Ibid..
474
supra
475
Ibid.
476
Original state including 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)

137
Polished and/or husked rice, corn grits, raw cane sugar and molasses, ordinary salt,
and copra shall be considered in their original state.

2. Sale/ import of fertilizers; seeds, seedlings and fingerlings; fish, prawn, livestock
and poultry feeds.

3. Import of personal and household effects of Phil resident returning from abroad
and nonresident citizens coming to resettle in the Philippines

4. Import 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.

5. Services subject to percentage tax.

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.478
8. Educational services rendered by private educational institutions, duly
accredited by DEPED, CHED, TESDA, and those rendered by government educational
institutions.

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 P.D. No. 529.479

12. Sales by agricultural cooperatives duly registered with the Cooperative


Development Authority to their members as well as sale of their produce. Exemption
includes importation of direct farm inputs, machineries and equipment, including spare parts

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.
477
Livestock or poultry does not include fighting cocks, race horses, zoo animals and other animals
generally considered as pets
478
Ibid
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]
479
Petroleum Exploration Concessionaires under the Petroleum Act of 1949

138
thereof, to be used directly and exclusively in the production and/or processing of their
produce.

13. Gross receipts from lending activities by credit or multi-purpose cooperatives


duly registered with the Cooperative Development Authority.

14. Sales by non-agricultural, non- electric and non-credit cooperatives duly


registered with the Cooperative Development Authority are exempt 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 the ff. sales are exempt:

a. Sale of real properties NOT primarily held for sale to customers or held
for lease in the ordinary course of trade or business.

b. Sale of real properties utilized for low-cost housing480

c.Sale of real properties utilized for socialized housing.481


d. Sale of residential lot valued at P1.5M and below, or house & lot and
other residential dwellings valued at P2.5M and below, where the instrument of
sale/transfer/disposition was executed on or after July 1, 2005.482

17. Lease of residential units with a monthly rental per unit not exceeding P10K,
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 P10K but the

480
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 B.P. Blg. 220, P.D. No. 957 or any other similar law, wherein the unit selling price is within the
selling price ceiling per unit of P750,000.00 under R.A. No. 7279, and other laws, such as R.A. No. 7835
and R.A. No. 8763.
481
"Socialized housing" refers to housing programs and projects covering houses and lots or home lots
only undertaken by the Government or the private sector for the underprivileged and homeless citizens
which shall include sites and services development, long-term financing, liberated terms on interest
payments, and such other benefits in accordance with the provisions of RA No. 7279 and RA No. 7835
and RA No. 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
482
To be adjusted every 3 years from Jan 31, 2009
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 P1.5M. 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)

139
aggregate of such rentals of the lessor during the year do not exceed One Million Five
Hundred Pesos (P1.5M) shall likewise be exempt from VAT, however, the same shall
be subjected to three percent (3%) percentage tax.

In cases where a lessor has several residential units483 for lease, some are
leased out for a monthly rental per unit of not exceeding P10K while others are leased out
for more than P10K per unit, his tax liability will be as follows:

a. The gross receipts from rentals not exceeding P10K per month per unit
shall be exempt from VAT regardless of the aggregate annual gross receipts.

b. The gross receipts from rentals exceeding P10K per month per unit shall
be subject to VAT if the aggregate annual gross receipts from said units only484
exceeds P1.5M. Otherwise, the gross receipts will be subject to the 3% tax.

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. Sale, importation or lease of passenger or cargo vessels and aircraft, including
engine, equipment and spare parts thereof for domestic or international transport
operations.

20. Importation of fuel, goods, and supplies by persons engaged in international


shipping or air transport operations.

21. Services of banks, non-bank financial intermediaries performing quasi-banking


functions and other non-bank financial intermediaries; and

22. 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 P1,500,0000.485

16. Input tax and output tax, defined

Input tax Output tax

The VAT due from or paid by a VAT- The VAT due on the sale or lease of taxable
registered person in the course of his trade goods or properties or services by any

483
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]
484
not including the gross receipts from units leased for not more than P10K
485
Sec. 109

140
or business on importation of goods or person registered or required to register
local purchase of goods or services, including under Section 236489 of the Code.
lease or use of property, from a VAT-
registered person. It includes the transitional
input tax determined in accordance with
Section 111486 of this Code.

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. Input tax must be
evidenced by a VAT invoice or official
receipt issued by a VAT- registered person in
accordance with Secs. 113 and 237487 of the
Tax Code.488

17. Sources of input tax

a. Purchase or importation of goods490

b. Purchase of real properties for which a VAT has actually


been paid

c. Purchase of services in which VAT has actually been paid

d. Transactions deemed sale491

e. Transitional input tax492

It is an input tax credit allowed to person who becomes liable to value-added tax or
any person who elects to be a VAT-registered person. The allowed input tax shall be
whichever is higher between:

486
Ibid.
487
Ibid.
488
RR 16-2005
489
See Reference
490
(i) For sale; or
(ii) For conversion into or intended to form part of a finished product for sale including packaging
materials; or
(iii) For use as supplies in the course of business; or
(iv) For use as materials supplied in the sale of service; or
(v) For use in trade or business for which deduction for depreciation or amortization is allowed under
this Code, except automobiles, aircraft and yachts. (Sec. 110 (A)(1)
491
supra
492
See input tax, supra

141
1. 2% of the value of the taxpayers beginning inventory of goods, materials
and supplies;or

2. The actual value-added tax paid on such goods.493

f. Presumptive input tax

It is an input tax credit allowed to persons or firms engaged in the:

1. processing of:

a. sardines
b. mackerel
c. milk
2. manufacturing of:

a. refined sugar
b. cooking oil
c. packed noodle based instant meals

The allowed input tax shall be equivalent to fourpercent (4%) of the gross value in
money of their purchases of primary agricultural products which are used as inputs to their
production.494

g. Transitional input tax credits allowed under the transitory


and other provisions of the regulations495

A person who becomes liable to value-added tax or any person who elects to be a
VAT-registered person shall be allowed input tax on his beginning inventory of goods,
materials and supplies equivalent to two percent (2%) of the value of such inventory or the
actual value-added tax paid on such goods, materials and supplies, whichever is higher,
which shall be creditable against the output tax.496

18.Persons who can avail of input tax credit

493
Sec.111 (A)
494
The term "processing" shall mean pasteurization, canning and activities which through physical or
chemical process alter the exterior texture or form or inner substance of a product in such manner as to
prepare it for special use to which it could not have been put in its original form or condition (Id. (B))
495
See e) Transitional input tax, supra
496
Sec. 111 (A)

142
(a) Purchaser - upon consummation of sale and on importation of goods or
properties;497 and

(b) Importer - upon payment of the value-added tax prior to the release of the
goods from the custody of the Bureau of Customs.

However, in the case of purchase of services, lease or use of properties, the


input tax shall be creditable to the purchaser, lessee or licensee upon payment of the
compensation, rental, royalty or fee.498

19.Determination of output/input tax; VAT payable; Excess input


tax credits

a. Determination of output tax

Sellers of goods or properties:

Gross selling price (X) VAT rate

Sellers of service:

Gross receipts (X) VAT rate

b. Determination of input tax creditable

The sum of the excess input tax carried over from the preceding month or quarter
and the input tax creditable to a VAT-registered person during the taxable month or quarter
shall be reduced by the amount of claim for refund or tax credit for value-added tax and
other adjustments, such as purchase returns or allowances and input tax attributable to
exempt sale.

The claim for tax credit shall include not only those filed with the Bureau of Internal
Revenue but also those filed with other government agencies.499

c. Allocation of input tax on mixed transactions

497
In the case of purchase of services, lease or use of properties, the input tax shall be creditable to the
purchaser, lessee or licensee upon payment of the compensation, rental, royalty or fee.
498
Sec. 110 (A)(2)
499
such as the Board of Investments or the Bureau of Customs (Sec. 110 (C))

143
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 government-owned or controlled corporations
(GOCCs) shall not be credited against output taxes arising from sales to non-Government
entities; and

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.500

d. Determination of the output tax and VAT payable and


computation of VAT payable or excess tax credits

Output tax
Less: Input tax
VAT payable/ excess tax credits

20. Substantiation of input tax credits501

Transactions Required Support

Input taxes on domestic purchases of goods VAT invoice


or properties made in the course of trade or
business

Input tax on purchases of real property

a. Cash/deferred basis Public instrument502 together with the VAT


invoice for the entire selling price and
non-VAT Official Receipt for the initial and
succeeding payments.

b. Installment basis Public instrument and VAT Official Receipt

500
Input tax attributable to VAT-exempt sales shall not be allowed as credit against the output tax but
should be treated as part of cost of goods sold.
For persons engaged in both zero-rated sales and nonzero rated sales, the aggregate input taxes shall
be allocated ratably between the zero-rated and non-zero rated sales.
501
RR 16-2005
502
i.e., deed of absolute sale, deed of conditional sale, contract/agreement to sell, etc.

144
for every payment

Input tax on domestic purchases of service VAT Official Receipt

Input tax on importation of goods Import entry or other equivalent document


showing actual payment of VAT on the
imported goods

Transitional input tax Inventory of goods as


shown in a detailed list to
be submitted to the BIR

Input tax on deemed sale transaction Required invoices

Input tax from payments made to non- Monthly Remittance Return of Value Added
residents503 Tax Withheld504 filed by the resident payor in
behalf of the non-resident evidencing
remittance of VAT due which was withheld
by the payor.

Advance VAT on sugar Payment order showing payment of the


advance VAT

21.Refund or tax credit of excess input tax

503
such as for services, rentals, or royalties
504
BIR Form 1600

145
a. Who may claim for refund/apply for issuance of tax credit
certificate (TCC)

Any VAT-registered person, whose sales are zero-rated or effectively zero-rated may
apply for the issuance of a tax credit certificate or 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.505

b. Period to file claim/apply for issuance of TCC

Within two (2) years after the close of the taxable quarter when the sales were made.

c. Manner of giving refund

Upon warrants drawn by the Commissioner or by his duly authorized representative


without the necessity of being countersigned by the Chairman, Commission on audit, subject
to post audit by the Commission on Audit.506

d. Destination principle or Cross-border doctrine507

Destination principle Cross border doctrine

Goods and services are taxed only in the Mandates that no VAT shall be imposed to
country where these are consumed form part of the cost of the goods destined
for consumption outside the territorial
border of the taxing authority.

22.Invoicing requirements

a. Invoicing requirements in general

For every sale, a VAT-registered person shall issue an invoice or receipt.

Aside from the information required under Section 237,508 the following information
shall be indicated in the invoice or receipt:

(1) A statement that the seller is a VAT-registered person, followed by his taxpayer's
identification number (TIN); and

(2) The total amount which the purchaser pays or is obligated to pay to the seller
with the indication that such amount includes the value-added tax.

505
Sec. 112 (A)
506
Id. (E)
507
See also (D)(7), supra
508
See Reference

146
b. Invoicing and recording deemed sale transactions

Transaction Invoicing Requirement

Transfer, use or consumption not in Memorandum entry in the subsidiary sales


the course of business of goods or journal to record withdrawal of goods for
properties originally intended for sale personal use
or for use in the course of business

Distribution or transfer to
shareholders/investors or creditors
Invoice, at the time of the transaction,
which should include all the info prescribed
Consignment of goods if actual sale is in Sec. 113 (B)509
not made within 60 days

Retirement from or cessation of An inventory shall be prepared and


business with respect to all goods in submitted to the RDO who has jurisdiction
hand over the taxpayers principal place of
business not later than 30 days after
retirement or cessation from the 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.

c. Consequences of issuing erroneous VAT invoice or VAT


official receipt

509
Ibid.

147
1. In case of non-VAT registered person who issues a VAT invoice/receipt shall be
held liable to:

a. payment of percentage tax if applicable;

b. payment of VAT without input tax;

c. 50% surcharge on tax due; and

d. the purchaser shall be allowed to recognize an input tax credit provided that the
invoice/official receipt contains the required information.

2. In case of VAT-registered who issues a VAT invoice/official receipt for a VAT


exempt sale without the words VAT Exempt Sale shall be held liable to pay 12% VAT.510

23.Filing of return and payment

Every person liable to pay the VAT shall file a quarterly return of the amount of his
gross sales or receipts within 25 days following the close of each taxable quarter prescribed
for each taxpayer.

Required to file VAT return:

1. Every person or entity who in the course of trade or business, sells or leases
goods, properties, and services subject to VAT, if the aggregate amount of actual gross
sales or receipts exceed P1.5 million for any twelve month period

2. A person required to register as VAT taxpayer but failed to register

3. Any person who imports goods

4. Professional practitioners.511

VAT-registered shall pay the VAT on a monthly basis. The monthly return shall be
filed not later than the 20th day following the end of each month.

24. Withholding of final VAT on sales to government

The Government or any of its political subdivisions, instrumentalities or agencies,

510
Sec. 113 (D)
511
Services of Professional Practitioners are subject to:
VAT if the gross professional fees exceed P1.5 million for a 12-month period; or
3% percentage tax if the gross professional fees does not exceed P1.5 million for a 12-month period
(RR 16-2005)

148
including government owned or controlled corporations (GOCCs) shall, before making
payment on account of its purchase of goods and/or services taxed at 12% shall deduct and
withhold a final VAT of 5% of the gross payment.512

E. Compliance Requirements (Internal Revenue Taxes)

1. Administrative requirements

512
Sec. 114(C)
The five percent (5%) final VAT withholding rate shall represent the net VAT payable to 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 sale to government exceed seven percent (7%) of gross
payments, the excess may form part of the sellers expense or cost
If actual input VAT attributable to sale to government is less than 7% of gross payment, the difference
must be closed to expense or cost.

149
a. Registration requirements

1) Annual registration fee

Five hundred pesos (P500) - upon registration and every year thereafter on or before
the last day of January for every separate or distinct establishment or place of business.513

2) Registration of each type of internal revenue tax

Every person who is required to register with the Bureau of Internal Revenue shall
register each type of internal revenue tax for which he is obligated, shall file a return and
shall pay such taxes, and shall update such registration of any changes.514

3) Transfer of registration

In case a registered person decides to transfer his place of business or his head office
or branches, it shall be his duty to update his registration status by filing an application for
registration information update in the form prescribed therefor.515

4) Other updates

Any person registered shall, whenever applicable, update his registration information
with the Revenue District Office where he is registered, specifying therein any change in type
and other taxpayer details.516

5) Cancellation of registration

The registration of any person who ceases to be liable to a tax type shall be cancelled
upon filing with the Revenue District Office where he is registered an application for
registration information update in a form prescribed therefor.517

513
Cooperatives, individuals earning purely compensation income, whether locally or abroad, and
overseas workers are not liable to the registration fee herein imposed.
The registration fee shall be paid to an authorized agent bank located within the revenue district, or to
the Revenue Collection Officer, or duly authorized Treasurer of the city of municipality where each place
of business or branch is registered.
Sec. 236 (B)
514
in accordance with Subsection (E), Id., (C)
515
Id., (D)
516
Id., (E)
517
Id., (F)
Other instances where a VAT registered person may apply for cancellation of
Registration:
1. A change of ownership, in case of a single proprietorship
2. Dissolution of a partnership or corporation
3. Merger or consolidation with respect to the dissolved corporation
4. A person who has registered prior to commencement of a planned business, but failed to actually start
his business

150
6) Power of the Commissioner to suspend the
business operations of any person who fails to
register

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 Commissioner in the closure order.518

b. Persons required to register for VAT

1) Optional registration for VAT of exempt person

Any person who is not required to register for VAT519may elect to register for VAT
by registering with the RDO that has jurisdiction over the head office of that person, and
paying the annual registration fee.520

2) Cancellation of VAT registration

Requirements:

1. The VAT-registered person makes written application and demonstrates to the


Commissioners satisfaction that his gross sales or receipts for the following 12 months,
other than those that are exempt,521 will not exceed P1.5 million.

2. He has ceased to carry on his trade or business and does not expect to
recommence any trade or business within the next 12 months.522

3) Changes in or cessation of status of a VAT-


registered person523

c. Supplying taxpayer identification number (TIN)

A taxpayer must have only one TIN. Any person who secures more than one TIN
shall be criminally liable.524

d. Issuance of receipts or sales or commercial invoices

518
Sec. 115
519
under Subsection G
520
Sec. 236 (H)
521
under Sec. 109 1A to U
522
Sec. 236 (F2)
523
supra
524
Sec. 236

151
All persons subject to an internal revenue tax shall, for each sale or transfer of
merchandise or for services rendered valued at 25 pesos or more, issue duly registered
receipts or sales or commercial invoices, prepared at least in duplicate, showing the date of
transaction, quantity, unit cost and description of merchandise or nature of service.525

1) Printing of receipts or sales or commercial invoices

Receipts must be serially numbered and shall show the name, style, TIN and the
business address of the person.526

2) Invoicing requirements for VAT

a) 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); and

2. The total amount which the purchaser pays or is obligated to pay to the seller with
the indication that such amount includes the value-added tax.

a. The amount of the tax shall be shown as a separate item in the invoice or
receipt;

b. If the sale is exempt from value-added tax, the term "VAT-exempt sale"
shall be written or printed prominently on the invoice or receipt;

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 shownon the invoice or receipt. The seller may issue separate
invoices or receipts for thetaxable, exempt, and zero rated components of the sale.

3. The date of transaction, quantity, unitcost and description of the goods or


properties or nature of the service; and

4. In the case of sales in the amount of onethousand 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.527

525
Sec. 237
526
Sec. 238
527
Sec. 113 (B)

152
b) Consequences of issuing erroneous VAT
invoice or official receipts528

e. Exhibition of certificate of payment at place of business

The certificate or receipts showing paymentof taxes issued to a person engaged in a


business subject to an annual registration fee shall be kept conspicuously exhibited inplain
view in or at the place where the business is conducted. Peddlers are required to show the
certificate upon demand.529

f. Continuation of business of deceased person

The person interested in the estate should submit to the BIR inventories of goods
and stocks had at the time of such death, transfer or change of name.No additional payment
shall be required for the residue of the term of which the tax was paid.530

g. Removal of business to other location

Any business for which the annual registration fee has been paid may be removed
and continued in any other place without the payment of additional tax during the term for
which the payment was made.531

2. Tax returns

528
supra
529
Sec. 241
530
Sec. 242
531
Sec. 243

153
A tax return is a report made by the taxpayer to the BIR on all gross income received
during the taxable year, the allowable deduction including exemptions, the net taxable
income, the income tax rate, the income tax due, the income tax withheld, if any, and the
income tax still to be paid or refundable.

a. Income Tax Returns

1) Individual Tax Returns

a) Filing of individual tax returns

(1) Who are required to file

Resident citizens receiving income from a. Individuals deriving compensation income


sources within or outside the Philippines from 2 or more employers, concurrently or
successively at anytimeduring the taxable
year;

b. Employees deriving compensation income


regardless of the amount, whether from a
single or several employers during the
calendar year, the income tax of which has
not been withheld correctly resulting to
collectible or refundable return;

c.Employees whose monthly gross


compensation income does not exceed 5,000
or the statutory minimum wage, whichever is
higher, and opted for non-withholding of tax
on said income;

d. Individuals deriving non-business, non-


professional relatedincome in addition to
compensation income not otherwise subject
to a final tax;

e. Individuals receiving purely compensation


income from a single employer, although
theincome of which has been correctly
withheld, but whose spouse is not entitled to
substituted filing.

Non-resident citizens receiving income


from sources within the Philippines.

154
Citizens working abroad receiving income
from sources within the Philippines.

Aliens, whether resident or not, receiving


income from sources within the Philippines.

(a) Return of husband and


wife

Married individuals, whether citizens, resident or nonresident aliens, who do not


derive income purely from compensation, shall file a return for the taxable year to include
the income of both spouses.

Where it is impracticable for the spouses to file one return, each spouse may file a
separate return of income but the returns so filed shall be consolidated by the Bureau for
purposes of verification for the taxable year.532

(b) Return of parent to include


income of children

The income of unmarried minors derived from property received from a living
parent shall be included in the return of the parent, except

(1) when the donor's tax has been paid on such property, or
(2) when the transfer of such property is exempt from donor's tax.533

(c) Return of persons under


disability

May be made by his duly authorized agent or representative or by the guardian or


other person charged with the care of his person or property, the principal and his
representative or guardian assuming the responsibility of making the return and incurring
penalties provided for erroneous, false or fraudulent returns.534

(2) Who are not required to file

532
Id., (D)
533
Id., (E)
534
Id., (F)

155
(a) An individual whose gross income does not exceed his total personal and
additional exemptions for dependents.535

(b) An individual with respect to pure compensation income536derived from sources


within the Philippines, the income tax on which has been correctly withheld.537

(c) An individual whose sole income has been subjected to final withholding tax;538
and
(d) A minimum wage earner or an individual who is exempt from income tax.539

b) Where to file

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.

If there be no legal residence or place of business in the Philippines, with the Office
of the Commissioner.540

c) When to file

On or before the fifteenth (15th) day of April of each year covering income for the
preceding taxable year.

However, individuals who are self-employed or in practice of a profession are


required to file and pay estimated income tax every quarter as follows:

1. First Quarter - April 15


2. Second Quarter - August 15
3. Third Quarter - November 15

535
under Sec. 35, supra
A citizen of the Philippines and any alien individual engaged in business or practice of profession within
the Philippine shall file an income tax return, regardless of the amount of gross income.
536
Compensation for services in whatever form paid, including, but not limited to fees, salaries, wages,
commissions, and similar items.
537
under the provisions of Sec. 79, supra
An individual deriving compensation concurrently from two or more employers at any time during the
taxable year shall file an income tax return.
An individual whose compensation income derived from sources within the Philippines exceeds Sixty
thousand pesos (P60,000) shall also file an income tax return;
538
pursuant to Sec. 57(A), supra
539
Id., (A)(2)
Individuals not required to file an income tax return may nevertheless be required to file an information
return. Under R.A. 9504, minimum wage earners are granted full tax exemption from paying income tax.
540
Id., (B)

156
4. Final Quarter - April 15 of the followingyear541

2) Corporate Returns

a) Requirement for filing returns

Every corporation subject to tax under the NIRC shall file a corporate tax return,
except foreign corporations not engaged in trade or business in the Philippines.542

(1) Declaration of quarterly corporate


income tax

Every corporation shall file in duplicate a quarterly summary declaration of its gross
income and deductions on a cumulative basis for the preceding quarter or quarters upon
which the income tax shall be levied, collected and paid. The tax so computed shall be
decreased by the amount of tax previously paid or assessed during the preceding quarters
and shall be paid not later than sixty (60) days from the close of each of the first three (3)
quarters of the taxable year, whether calendar or fiscal year.543

(a) Place of filing

With the authorized agent banks or Revenue District Officer or Collection Agent or
duly authorized Treasurer of the city or municipality having jurisdiction over the location of
the principal office of the corporation filing the return or place where its main books of
accounts and other data from which the return is prepared are kept.544

(b) Time of fling

Within sixty (60) days following the close of each of the first three (3) quarters of the
taxable year.

(2) Final adjustment return

It is a return that covers the total taxable income of a corporation for the preceding
calendar or fiscal year. The quarterly tax payments are in the nature of advances or portions
of the annual income tax due. They have to be adjusted at the end of the calendar or fiscal
year through the Final Adjustmentreturn.

541
Individuals subject to tax on capital gains;
(a) Sale or exchange of shares of stock not traded thru a local stock exchange - within thirty (30) days
after each transaction and a final consolidated return on or before April 15 of each year covering all stock
transactions of the preceding taxable year; and
(b) Sale or disposition of real property - within thirty (30) days following each sale or other disposition.
(Sec. 52)
542
Ibid.
543
Sec. 75
544
Sec. 77 (A)

157
(a) Place of filing545

(b) Time of filing

On or before the fifteenth (15th) day of April, or on or before the fifteenth (15th)
day of the fourth (4th) month following the close of the fiscal year, as the case may be.546

(3) Taxable year of corporations

A corporation may employ either calendar year or fiscal year as a basis for filing its
annual income tax return.

The corporation shall not change the accounting period employed without prior
approval from the Commissioner.547

(4)Extension of time to file return

The Commissioner may, in meritorious cases, grant a reasonable extension of time


for filing returns of income.548

b) Return of corporation contemplating


dissolution or reorganization

Within thirty (30) days after the adoption by the corporation of a resolution or plan
for its dissolution, or for the liquidation of the whole or any part of its capital stock,
including a corporation which has been notified of possible involuntary dissolution by the
Securities and Exchange Commission, or for its reorganization.549

c) Return on capital gains realized from sale of


shares of stock not traded in the local stock
exchange

Within thirty (30) days after each transactions and a final consolidated return of all
transactions during the taxable year on or before the fifteenth (15th) day of the fourth (4th)
month following the close of the taxable year.

3) Returns of receivers, trustees in bankruptcy or


assignees

In the same manner and form as the corporation whose properties and businesses
they operate is required to make returns, and any tax due on the income as returned by
receivers, trustees or assignees shall be assessed and collected in the same manner as if

545
See Sec. 77 (A), supra
546
Id., (B)
547
in accordance with the provisions of Sec. 47 (See Reference)( Sec. 52 (B))
548
or final and adjustment returns in case of corporations, subject to the provisions of Section 56 (Sec. 53)
549
Sec. 52 (C)

158
assessed directly against the organizations of whose businesses or properties they have
custody or control.550

4) Returns of general partnerships

In duplicate, setting forth the items of gross income and of deductions allowed, and
the names, Taxpayer Identification Numbers (TIN), addresses and shares of each of the
partners.551

5) Fiduciary returns

In duplicate, a return of the income of the person, trust or estate for whom or which
the fiduciary act, which apply to individuals in case such person, estate or trust has a gross
income of Twenty thousand pesos (P20,000) or over during the taxable year.552

b. Estate Tax Returns

1) Notice of death to be filed

a. In all cases of transfers subject to tax; or

b. Even if exempt from tax, if gross value of estate exceeds Twenty thousand pesos
(P20,000).553

2) Estate tax returns

a) Requirements

An estate tax return is required:

1. In all cases of transfers subject to tax;

2. Even though exempt, where gross value of estate exceeds P200,000;

3. When the gross estate consists of registered or registrable property,


regardless of amount.554

550
Sec. 54
551
Sec. 55
552
Sec. 65
553
Sec. 89
554
Sec. 90 (A)

159
b) Time of filing and extension of time

Within six (6) months after the decedent's death.

The Commissioner shall have authority to grant, in meritorious cases, a reasonable


extension not exceeding thirty (30) days for filing the return.555

c) Place of filing

Resident Decedent Non-Resident Decedent

1. Authorized Agent Bank (AAB) or 1. Office of the CIR

2. Revenue District Officer (RDO), 2. Revenue District Officer or


Collection Officer, or
3. Philippine Embassy or Consulate in the
3. Duly authorized Treasurer of the city or country where decedent is residing at the
municipality in which the decedent was time of his/her death
domiciled at the time of his death, or
4. Any other place where the CIR permits
4. Any other place where the CIR permits the estate tax return to be filed.
the estate tax return to be filed.556

3) Discharge of executor or administrator from


personal liability

The executor or administrator must:

a. File a written application to the Commissioner for the determination of the


amount of the estate tax and further stating his desire to be absolved or to be discharged
from the liability.

b. The Commissioner must notify the executor or administrator

Return was filed No return filed

Within one (1) year after the return is filed Within one (1) year after the making of such
application.557

3. The executor or administrator, upon payment of the amount of which he


isnotified, shall be discharged frompersonal liability for any deficiency in thetax thereafter
found to be due and shallbe entitled to a receipt or writing showing such discharge.558
555
id., (B)(C)
556
Id., (D)
557
But not after the expiration of the period prescribed for the assessment of the tax in Section 203.
558
Sec.92

160
a) Definition of deficiency

(a) The amount by which the estate tax imposed exceeds the amount shown as the
tax by the executor, administrator or any of the heirs upon his return; or

(b) If no amount is shown as the tax by the executor, administrator or any of the
heirs upon his return, or if no return is made by the executor, administrator, or any heir,
then the amount by which the tax exceeds the amounts previously assessed 559 as a
deficiency.560

c. Donors Tax Returns

1) Requirements

Notice of donation is not required.

Except:

1. Donation to NGO worth at least P50, 000,provided, not more than 30% of which
will be used for administration purposes.

2. Donation to any candidate, political party, or coalition of parties

2) Time and place of filing

Within thirty (30) days after the date the gift is made.

The return must be filed with:

1. AAB, RDO, RCO, or duly authorized treasurer of the City or municipality where
the donor was domiciled at the time of the transfer;

2. If there is no legal residence in the Philippines, with the office of the


Commissioner;

3. For gifts made by non-residents, with the Phil embassy or Consulate in the
country where he is domiciled at the time of the transfer or directly with the office of the
Commissioner.561

559
Ibid.
560
Sec. 93
Deficiency occurs when one files a return and pay the tax but the tax paid is less than the amount of tax
due, or if a return is filed but the taxpayer did not pay the tax, or when one did not file the return nor paid
the tax.
561
Sec.103 (B)

161
d. VAT Returns

1) In general

A quarterly return of the amount of a taxpayers gross sales or receipts filed within
twenty-five (25) days following the close of each taxable quarter. VAT-registered persons
shall pay the value-added tax on a monthly basis.

Any person, whose registration has been cancelled shall file a return and pay the tax
due thereon within twenty-five (25) days from the date of cancellation of registration. Only
one consolidated return shall be filed by the taxpayer for his principal place of business or
head office and all branches.562

2) Where to file the return

With an authorized agent bank, Revenue Collection Officer or duly authorized city
or municipal Treasurer in the Philippines located within the revenue district where the
taxpayer is registered or required to register.563

e. Withholding Tax Returns

1) Quarterly returns and payments of taxes withheld

Taxes deducted and withheld shall be covered by a return and paid to an authorized
Treasurer of the city or municipality where the withholding agent has his legal residence or
principal place of business, or where the withholding agent is a corporation, where the
principal office is located.

The taxes deducted and withheld shall be held as a special fund in trust for the
government until paid to the collecting officers.564

2) 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.

In the case of final withholding taxes, the return shall be filed on or before January
31 of the succeeding year, and for creditable withholding taxes, not later than March 1 of the
year following the year for which the annual report is being submitted.565

562
Sec. 114 (A)
563
Id., (B)
564
The return for final withholding tax shall be filed and the payment made within twenty-five (25) days
from the close of each calendar quarter, while the return for creditable withholding taxes shall be filed
and the payment made not later than the last day of the month following the close of the quarter during
which withholding was made (Sec. 58)
565
Sec. 144 (C)

162
3. Tax payments

a. Income Taxes

1) Payment, in general; time of


payment

Pay-as-you-file system.

The total amount of income tax imposed shall be paid by the person subject thereto
at the time the return is filed.

In the case of tramp vessels, the shipping agents and/or the husbanding agents, and
in their absence, the captains thereof are required to file the return and pay the tax due
thereon before their departure. Upon failure of the said agents or captains to file the return
and pay the tax, the Bureau of Customs is authorized to hold the vessel and prevent its
departure until proof of payment of the tax is presented or a sufficient bond is filed to
answer for the tax due.566

2) Installment payment

When the tax due is in excess of Two thousand pesos (P2,000), the taxpayer567 may
elect to pay the tax in two (2) equal installments, the first installment to be paid at the time
the return is filed and the second installment, on or before July 15 following the close of the
calendar year.

If any installment is not paid on or before the date fixed for its payment, the whole
amount of the tax unpaid becomes due and payable, together with the delinquency
penalties.568

3) Payment of capital gains tax

On the date the return is filed by the person liable thereto.569

566
Sec. 56 (A)(1)
567
other than a corporation
568
Sec. 56 (A)(2)
569
Sec.56 [A] [3]
If the seller submits proof of his intention to avail himself of the benefit of exemption of capital gains
under existing special laws, no such payment shall be required.
In case of failure to qualify for exemption, the tax due on the gains realized from the original
transaction shall immediately become due and payable, and subject to the penalties prescribed under the
rules and the NIRC.
If the seller, having paid the tax, submits such proof of intent within 6 months from the registration of
the document transferring the real property, he shall be entitled to a refund of such tax upon verification
of his compliance with the requirements for such exemption.
In case the taxpayer elects and is qualified to report the gain by installments (under Sec. 249), the tax due
from each installment shall be paid within 30 days from receipt of such payments.

163
b. Estate Taxes

1) Time of payment

At the time the return is filed and before delivery to any heir or beneficiary, of his
distributive share of the estate.570

a) Extension of time

An extension for the payment of the estate tax may be granted by the Commissioner
on meritorious cases.571

Judicial settlement of estate Extra judicial settlement of estate

Not exceeding five (5) years Not exceeding two (2) years.572

2) Liability for payment

a) Discharge of executor or
administrator from
personal liability573

b) Definition of deficiency574

570
Sec. (91) (A)
Philippines implement the Pay as you file system.
571
There can be no extension of the period of payment if there is negligence, intentional disregard of
rules and regulations or fraud.
The amount shall be paid on or before expiration of the extension and running of the statute of
limitations for assessment shall be suspended for the period of any
of such extension.
The CIR may require a bond not exceeding double the amount of the tax and with such sureties as the
CIR deems necessary when the extension of payment is granted.
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.
572
Sec.91 [B]
573
supra
574
Ibid.

164
3) Payment before delivery by
executor or administrator

No judge shall authorize the executor or judicial administrator to deliver a


distributive share to any party interested in the estate unless a certification from the
Commissioner that the estate tax has been paid is shown.575

a) Payment of tax antecedent


to the transfer of shares,
bonds or rights

A certification from the Commissioner that the taxes due thereon have been paid
must be shown before any transfer to any new owner in the books of any corporation,
sociedadanonima, partnership, business, or industry organized or established in the Philippines
of any share, obligation, bond or right by way of gift inter vivos or mortis causa, legacy or
inheritance.576

4) Duties of certain officers and


debtors

Registers of Deeds shall not register in the Registry of Property any document
transferring real property or real rights therein or any chattel mortgage, by way of gifts inter
vivos or mortis causa, legacy or inheritance, unless a certification from the Commissioner that
the tax actually due thereon had been paid is shown, and they shall immediately notify the
Commissioner, Regional Director, Revenue District Officer, or Revenue Collection Officer
or Treasurer of the city or municipality where their offices are located, of the non-payment
of the tax discovered by them.

Any lawyer, notary public, or any government officer who, by reason of his official
duties, intervenes in the preparation or acknowledgment of documents regarding partition or
disposal of donation inter vivos or mortis causa, legacy or inheritance, shall have the duty of
furnishing the Commissioner, Regional Director, Revenue District Officer or Revenue
Collection Officer of the place where he may have his principal office, with copies of such
documents and any information whatsoever which may facilitate the collection of the
aforementioned tax.

Neither shall a debtor of the deceased pay his debts to the heirs, legatee, executor or
administrator of his creditor, unless the certification of the Commissioner that the tax fixed
in this Chapter had been paid is shown; but he may pay the executor or judicial administrator
without said certification if the credit is included in the inventory of the estate of the
deceased.577

575
Sec. 94
576
Sec. 97
577
Sec. 95

165
5) Restitution of tax upon satisfaction
of outstanding obligations

If after the payment of the estate tax, new obligations of the decedent shall appear,
and the persons interested shall have satisfied them by order of the court, they shall have a
right to the restitution of the proportional part of the tax paid.578

c. Donors Taxes

1) Time and place of payment

Donors tax is paid at the time the return is filedsince the Philippine Tax system
observes the Pay as you file system.

Donors tax is paid with the

1. Authorized agent bank, Revenue district officer, Revenue Collection Officer, or


duly authorized treasurer of the City or municipality where the donor was domiciled at the
time of the transfer;

2. If there is no legal residence in the Philippines, with the office of the


Commissioner;

3. For gifts made by non-residents, with the Phil embassy or Consulate in the
country where he is domiciled at the time of the transfer or directly with the office of the
Commissioner.579

d. VAT

1) Payment of VAT580

2) Where to pay the VAT

With an authorized agent bank, Revenue Collection Officer or duly authorized city
or municipal Treasurer in the Philippines located within the revenue district where the
taxpayer is registered or required to register.581

578
Sec. 96
579
Sec. 103 (B)
580
supra
581
Sec. 114 (B)

166
F. Tax Remedies under the NIRC

1. Taxpayers Remedies

a. Assessment

1) Concept of assessment

The notice that the amount therein stated is due as a tax, with a demand for payment
within a stated period of time.582

The official action of the administrative officer in determining the tax due from a
taxpayer.583

a) Requisites for valid assessment

The assessment must:

1. Be in writing and signed by the BIR;


2. Contain the law and the facts on which the assessment is made; and
3. Contain a demand for payment within the prescribed period.584

582
A notice of assessment contains not only a computation of tax liabilities but also a demand for the
payment within a prescribed period. It also signals the time when penalties and interests begin to accrue.
583
The following are not considered assessments:
1. A letter containing a computation of supposed liabilities, giving the taxpayer an opportunity to
show the incorrectness of the findings, or urging the taxpayer to produce his books or records for
verification, or to present his side.
2. A letter-notice that did not provide, even in a general way, reasons why deficiency taxes were being
collected
3. An affidavit by a revenue officer stating the tax liabilities of a taxpayer and attached to a criminal
complaint for tax evasion.
4. A pre-assessment notice signed by a revenue official.
5. A deficiency assessment outside the scope of the letter of authority (a nullity).
The following may be considered assessments:
1. A letter from the Commissioner demanding the amount of a rubber check previously paid by a
taxpayer, if it declares the tax to be payable and demands the settlement thereof.
2. A preliminary collection letter, if it was the initial notice received by the taxpayer regarding his
internal revenue tax liabilities,
a. and if it can be proven that the taxpayer did not receive any assessment notice,
b. and no follow up letter was sent nor was a preliminary conference arranged.
An assessment is relevant:
1. as an essential step towards the initiation of administrative proceeding or judicial action to collect
taxes,
2. to enforce taxpayer liabilities and matters relating to it (imposition of surcharges and interest),
3. to apply the statute of limitations,
4. to the establishment of tax liens,
5. in estimating the revenues that may be collected by the government in the coming year.
584
Sec. 228

167
b) Constructive methods of income
determination

1. Percentage method The computed amount of revenues based on


the percentage computation is compared to
the amount of revenues reflected on the
return. The percentages used may be
obtained from the taxpayer, industry
publication, prior years audit results, or third
parties. The comparison will provide an
indication on the possibility of revenue being
understated.

2. Net worth method A method of reconstructing income which is


based on the theory that if the taxpayers net
worth has increased in a given year in an
amount larger than his reported income, he
has understated his income for that year.
The net worth on a fixed starting date is
compared with the net worth on a fixed
ending date. Any increase in net worth is
presumed to be income not declared for tax
purposes.585

The bank records of the taxpayer are


3. Bank deposit method
analyzed and the BIR estimates income on
the basis of the total bank deposits after
eliminating non-income items. This method
stands on the premise that deposits represent
taxable income unless otherwise explained as
being non-taxable items. This method may
be used only where the BIR has been legally
allowed access to the taxpayers bank
records.

Assumes that the excess of a taxpayers


4. Cash expenditure method
expenditures during the tax period over his
reported income for that period is taxable to
the extent not disproved otherwise

585
The difficulty of establishing the opening net worth of a tax payer has led to the Cohan Rule which is
the use of estimates or approximations of the amount of cash and other asserts where the taxpayer lacks
adequate records.

168
The determination or verification of gross
5. Unit and value method
receipts may be computed by applying price
and profit figures to the known ascertainable
quality of business of the taxpayer.

6. Third party information or access to The BIR may require third parties, public or
records method private to supply information to the BIR,
and thus, obtain on a regular basis from any
person other than the person whose internal
revenue tax liability is subject to audit or
investigation, or from any office or officer of
the national and local governments,
government agencies and instrumentalities
including the BangkoSentralngPilipinas and
government-owned or controlled
corporations, any information such as, but
not limited to, costs and volume of
production, receipts or sales and gross
incomes of taxpayers, and the names ,
addresses, and financial statements of
corporations, mutual fund companies,
insurance companies, regional operating
headquarters or multinational companies,
joint accounts, associations, joint ventures or
consortia and registered partnerships, and
their members.586

A letter sent by the Bureau of Internal


7. Surveillance and assessment method
Revenue to a taxpayer asking him to explain
within a period of fifteen (15) days from
receipt why he should not be the subject of
an assessment notice. It is part of the due
process rights of a taxpayer.587

586
Sec. 5 (B), NIRC of 1997
587
As a general rule, the BIR could not issue an assessment notice without first issuing a pre-assessment
notice because it is part of the due process rights of a taxpayer to be given notice in the form of a pre-
assessment notice, and for him to explain why he should not be the subject of an assessment notice.

169
c) Inventory method588 for income
determination589

d) Jeopardy assessment

A delinquency tax assessment made without the benefit of a complete or partial


investigation by a belief that the assessment and collection of a deficiency tax will be
jeopardized by delay caused by the taxpayers failure to:

a. Comply with audit and investigation requirements to present his books of


accounts and/or pertinent records, or

b. Substantiate all or any of the deductions, exemptions or credits claimed in his


return.

An assessment made demanding immediate payment of the tax due without the usual
formalities in instances when the Commissioner believes that if the tax will be collected
under normal procedures, the collection of such tax is at risk which might result in loss to
the government.590

e) Tax delinquency and tax deficiency

588
also called Net Worth Method
589
See table
590
This is issued when the revenue officer finds himself without enough time to conduct an appropriate or
thorough examination in view of the impending expiration of the prescriptive period for assessment. To
prevent the issuance of a jeopardy assessment, the taxpayer may berequired to execute a waiver of the
statuteof limitations.
Instances when jeopardy assessment may be issued:
When it shall come to the knowledge of the Commissioner that a taxpayer is:
1. retiring from business subject to tax; or
2. intending
a. to leave the Philippines or remove his property therefrom; or
b. to hide or conceal his property;
3. performing any act tending
a. to obstruct the proceedings for the collection of the tax for the past or current quarter or year; or
b. to render the same totally or partly ineffective unless such proceedings are begun immediately (Sec. 6
(D), R.A. 8424)
Jeopardy assessment is an indication of the doubtful validity of the assessment, hence it may be subject
to a compromise. [Sec. 3.1 (a), Rev. Regs. No. 6-2000]

170
Delinquency Tax Deficiency Tax

A taxpayer is considered delinquent in the a. The amount by which the tax imposedby
payment of taxes when: law as determined by the CIR or his
authorized representative exceeds the
a. Self-assessed tax per return filed by the amount shown as tax by the taxpayer upon
taxpayer on the prescribed date was not paid his return;592 or
at all591 or only partially paid; or
b. If no amount is shown as tax by
b. Deficiency tax assessed by the thetaxpayer upon his return is made by the
BIRbecomes final and executory. taxpayer, then the amount by which the
tax593 exceeds the amounts previously
assessed or collected without
assessment as deficiency.

Collection

Can immediately be collected


administratively through the issuance of a
warrant ofdistraint and levy,and/or judicial
action

Civil Action

The filing of a civilaction for thecollection of The filling of a civil action at the ordinary
the delinquent tax in theordinary court is court for collection during the pendency of
aproper remedy protest may be the subject of a motion to
dismiss. In addition to a motion to dismiss,
the taxpayer must file a petition for review
with the CTA to toll the running of the
prescriptive period

Penalties

A delinquent tax is subject toadministrative A deficiency tax is generally not subject to


penalties such as 25% surcharge, interest, the 25% surcharge, although subject to
and compromise penalty interest and compromise penalty

591
The taxpayer did not file a return
592
The taxpayer filed a return but the same was deficient. Deficiency is the difference between the tax
due and the tax paid.
593
as determined by the CIR or his authorized representative

171
2) Power of the Commissioner to make assessments
and prescribe additional requirements for tax
administration and enforcement

a) Power of the Commissioner to obtain


information, and to summon/examine,
and take testimony of persons

The Commissioner is authorized:

(A) To examine any book, paper, record, or other data which may be relevant or
material to such inquiry;

(B) To obtain on a regular basis from any person other than the person whose
internal revenue tax liability is subject to audit or investigation, or from any office or officer
of the national and local governments, government agencies and instrumentalities, including
the BangkoSentralngPilipinas and government-owned or -controlled corporations, any
information such as, but not limited to, costs and volume of production, receipts or sales
and gross incomes of taxpayers, and the names, addresses, and financial statements of
corporations, mutual fund companies, insurance companies, regional operating headquarters
of multinational companies, joint accounts, associations, joint ventures of consortia and
registered partnerships, and their members;

(C) To summon the person liable for tax or required to file a return, or any officer or
employee of such person, or any person having possession, custody, or care of the books of
accounts and other accounting records containing entries relating to the business of the
person liable for tax, or any other person, to appear before the Commissioner or his duly
authorized representative at a time and place specified in the summons and to produce such
books, papers, records, or other data, and to give testimony;

(D) To take such testimony of the person concerned, under oath, as may be relevant
or material to such inquiry; and

(E) To cause revenue officers and employees to make a canvass from time to time of
any revenue district or region and inquire after and concerning all persons therein who may
be liable to pay any internal revenue tax, and all persons owning or having the care,
management or possession of any object with respect to which a tax is imposed.

The Commissioner has no authority to inquire into bank deposits other than as
provided for in Section 6(F)594 of this Code.595

3) When assessment is made

594
see Reference
595
Sec. 5

172
When it is released, mailed or sent by the collector of internal revenue to the
taxpayer within the three-year or ten-year period, as the case may be.596

a) Prescriptive period for assessment

(1) False, fraudulent, and non-filing of


returns

Ten (10) years from the discovery of the falsity, fraud or omission to file the
597
return.

b) Suspension of running of statute of


limitations

1) Periods suspended:

(a) periods for assessment


(b) beginning of distraint or levy
(c) proceeding in court for collection
2) Grounds for suspension of prescriptive periods:

a) Commissioner is prohibited from making the assessment or beginning


distraint or levy or a proceeding in court and for 60 days thereafter

b) Taxpayer requests for Reinvestigation which is granted598

c) Taxpayer cannot be located in the address given in the return filed, except
if the taxpayer informs the Commissioner of a change in address the prescriptive
period will not be suspended

d) When the warrant is duly served upon the taxpayer and no property could
be located599

e) When the taxpayer is out of the Phils.600

f) When there is an Answer filed by the BIR to the petition for review in the
CTA601 where the court justified this bysaying that in the answer filed by the BIR,it
prayed for the collection of taxes.

596
CIR v. Pascor, G.R. 128315, June 29, 1999
597
Sec. 222
598
A request for reconsideration alone does not suspend the period to assess/collect.
599
proper only for suspension of the period to collect
600
Sec. 223
601
Hermanos v. CIR, GR. No.L-24972. Sept.30, 1969

173
4) General provisions on additions to the tax

a) Civil penalties
b) Interest602

Additions to the tax consist of the:

(1) civil penalty, otherwise known as surcharge, which may either be 25% or 50 % of
the tax depending upon the nature of the violation;

(2) interesteither for a deficiency tax or delinquency as to payment603

(3) other civil penalties or administrative fines such as for failure to file certain
information returns and violations committed by withholding agents.604

5) Assessment process605

602
This is an increment on any unpaid amount of tax, assessed at the rate of twenty percent (20%) per
annum, or such higher rate as may be prescribed y rules and regulations, from the date prescribed for
payment until the amount is fully paid. (Sec. 249 [A], 1997 NIRC)
603
Interest is classified into:
1.Deficiency interest
Any deficiency in the tax due shall be subject to the interest of 20% per annum, or such higher rate as
may be prescribed by rules and regulations, which shall be assessed and collected from the date
prescribed for its payment until the full payment thereof (Sec. 249 [B], 1997 NIRC)
2.Delinquency interest
This kind of interest is imposed 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 notice and
demand of the Commissioner.
604
General Considerations on the Addition to tax
a. Additions to the tax or deficiency tax apply to all taxes, fees, and charges imposed in the Tax Code.
b. The amount so added to the tax shall be collected at the same time, in the same manner, and as part
of the tax.
c. If the withholding agent is the government or any of its agencies, political subdivisions or
instrumentalities, or a government owned or controlled corporation, the employee thereof responsible
for the withholding and remittance of the tax shall be personally liable for the additions to the tax
prescribed (Sec. 247[b], 1997 NIRC) such as the 25% surcharge and the 20% interest per annum on the
delinquency (Secs. 248 and 249 [C], 1997 NIRC)

174
a) Tax audit

The process of examining, going over, or scrutinizing the books and records of the
taxpayer to ascertain the correctness of the tax declared and paid by the taxpayer.

It can only be performed upon a Letter of Authority issued by the Commissioner or


Regional Director.

b) Notice of informal conference

A written notice informing a taxpayer that the findings of the audit conducted on his
books of accounts and accounting records indicate that additional taxes or deficiency
assessments have to be paid.

If, after the culmination of an audit, a Revenue Officer recommends the imposition
of deficiency tax assessments, this recommendation is communicated by the Bureau to the
taxpayer concerned during an informal conference called for this purpose, the taxpayer shall
have 15 days from receipt of the notice of informal conference to explain his side.

c) Issuance of preliminary assessment notice


(PAN)

Communication issued by the Regional Assessment Division or any other concerned


BIR office, informing a taxpayer who has been audited of the findings of the Revenue
Officer, following the review of these findings. The assessment shall be in writing, and
should inform the taxpayer of the law and the facts on which the assessment is made;
otherwise, the assessment is void.

d) Exceptions to Issuance of PAN

(a) The finding for any deficiency tax is the result of mathematical error in the
computation of the tax as appearing on the face of the return; or

(b) A discrepancy has been determined between the tax withheld and the amount
actually remitted by the withholding agent; or

(c) 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

(d) The excise tax due on excisable articles has not been paid; or

605
Assessments prima facie correct. Tax assessments by tax examiners are presumed correct and made
in good faith. The taxpayer has the duty to prove otherwise. (Sy Po v. CTA, GRN L- 81446 August 18, 1988.)

175
(e) The 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 non-exempt persons.606

e) Reply607 to PAN

Within 15 days, the taxpayer has to file a written reply contesting the proposed
assessment if he disagrees with the findings of the PAN.

Failure of the taxpayer to file a reply would now enable the RO to issue a FAN.608
However no liability for additional or deficiency tax arises from such failure.

f) Issuance of formal letter of demand and


assessment notice/final assessment
notice609

Notice of Assessment is a formal letter of demand where a declaration of deficiency


taxes is 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.610

g) Disputed assessment

When the taxpayer, indicates its protest against the delinquent assessment of the RO
and requests for reconsideration, through a letter. After the request is filed and received by
the BIR, the assessment becomes a disputed assessment.611

606
Sec. 3.1.3, RR 12-99
607
For purposes of contesting a PAN, the regulations used the word reply to distinguish it from the written
objections to a FAN wherein the generic word protest or specific term request for reconsideration or
request for reinvestigation is used.
608
If fails to respond, he shall be considered in default. A formal letter of demand or assessment notice
shall be issued by the Assessment Division of the Revenue Regional Office or the Commissioner or his
authorized representative.
609
General rule: Taxes are self-assessing and do not require the issuance of an assessment notice in
order to establish the tax liability of a taxpayer.
Exceptions:
1. Tax period of a taxpayer is terminated (Sec. 6 (d), NIRC)
2. Deficiency tax liability arising from a tax audit conducted by a BIR (sec 56b, NIRC)
3. Tax lien (Sec. 219, NIRC)
4. Dissolving Corporation (Sec. 52 (c), NIRC)
610
This is commonly known as the Final Assessment Notice. An assessment contains not only a
computation of underdeclaration of taxable sales, receipts or income, or a substantial overstatement of
deductions.
611
CIR v. Isabela Cultural Corp., GR 135210, July 11, 2001

176
j) Administrative decision on a disputed
assessment

The taxpayer may elevate the protest to the CIR within 30 days from receipt of the
decision for a request for reconsideration and that his case is referred to the Bureaus
Appellate Division. Otherwise, it becomes final and appeal to the CTA may be taken.612

6) Protesting assessment

It is the act by the taxpayer of questioning the validity of the imposition of the
corresponding delinquency increments for internal revenue taxes as shown in the notice of
assessment and letter of demand.

a) Protest613 of assessment by taxpayer

(1) Protested assessment

The taxpayer files an administrative protest against the assessment. Such protest may
either be a request for reconsideration or for reinvestigation.

Prescriptive period provided by law to make collection by distraint or levy or by a


proceeding in court is interrupted once a taxpayer protests the assessment and requests for
its cancellation.

(2) When to file a protest

Within thirty (30) days from receipt of assessment.

(3) Forms of protest

Request for reconsideration Request for reinvestigation

A claim for re-evaluation of the assessment A claim for re-evaluation of the assessment
based on existing records without need of based on newly-discovered or additional
additional evidence. It may involve a evidence. It may also involve a question of
question of fact or law or both. It does not fact or law or both. It tolls the statute of
toll the statute of limitations. limitations.

612
But where the taxpayer adversely affected has not received the decision or ruling, he could not appeal
the same to the CTA within 30 days from notice. Hence, it could not become final and executory (Republic
vs. De la Rama, 18 SCRA 861)
Motion for reconsideration suspends the running of the 30 - day period of perfecting an appeal. Must
advance new grounds not previously alleged to toll the reglementary period; otherwise, it would be
merely pro-forma(Roman Catholic Archbishop vs. Coll., L-16683, Jan. 31, 1962)
613
A vital document which is a formal declaration of resistance of the taxpayer. It is a repository of all
arguments. It can be used in court in case of administrative remedies have been exhausted. It is also the
formal act of the taxpayer questioning the official actuations of the CIR. This is equivalent to a pleading.

177
b) Submission of documents within 60 days
from filing of protest

All relevant documents should be filed, otherwise assessment becomes final and
cannot be appealed.614

c) Effect of failure to protest

It makes the FAN final and executory, and the taxpayer loses his right to contest the
assessment, at the administrative and judicial levels.615

7) Rendition of decision by Commissioner

a) Denial of protest

Direct Denial Indirect Denial

The decision of the Commissioner or his a. Commissioner did not rule on the
duly rep. shall taxpayers MR of the assessment it was
only when respondent received summons on
a. state the facts, applicable law, rules and the civil action for the collection of
regulations or jurisprudence on which his deficiency income tax that the period to
protest is based, otherwise the protest shall appeal commenced to run.617
be considered void and without force and
effect, in which case the same shall not be b. Referral by the Commissioner of request
considered a decision a disputed assessment for reinvestigation to the Solicitor General618
and
c. Reiterating the demand for immediate
b. that the same is his final decision.616 payment of the deficiency tax due to
taxpayers continued refusal to execute
waiver619

d. Preliminary collection letter may serve as


assessment notice620

614
Sec. 228
Submission of documents within the 60 days period is optional to the taxpayer. The relevant
supporting documents mentioned in the law refers to such documents which the taxpayer feels would be
necessary to support his protest and not what the Commissioner feels should be submitted, otherwise the
taxpayer would always be at the mercy of the BIR which may require production of such documents which
taxpayer could not produce. (Standard Chartered Bank v. CTA, Case No. 5696, Aug. 16, 2001)
615
Thus, the filing of the protest within 30 days from the receipt of the assessment would be mandatory
for the taxpayer to use the other administrative and judicial remedies.
616
Sec. 3.1.5, RR 12-99
617
CIR vs. Union Shipping Corp.
618
Republic vs. Lim TianTeng Sons
619
CIR vs. Ayala Securities Corp
620
United Intl Pictures vs. CIR

178
(1) Commissioners actions equivalent
to denial of protest

(a) Filing of criminal action


against taxpayer
(b)Issuing a warrant of
distraint and levy

These actions of the CIR serve as bases for appeal to the CTA.

(2) Inaction by Commissioner

The protest is not acted upon by the Commissioner within 180 days from
submission of documents.

8) Remedies of taxpayer to action by Commissioner

a) In case of denial of protest

Appeal the decision to the Court of Tax Appeals (CTA) within 30 days from receipt
of decision denying the protest.621

b) In case of inaction by Commissioner within


180 days from submission of documents

The taxpayer has two alternative options:

1. File a petition for review with the CTAwithin 30 days after the expiration of the
180-day period; or

2. Wait for the final decision of the CIR onthe disputed assessment and appeal the
final decision to the CTA within 30 days from the receipt of the decision.

c) Effect of failure to appeal

1. The decision or assessment becomes final and executory.

2. In an action for the collection of the taxby the government, the taxpayer is barred
from re-opening the question already decided.

3. The assessment is considered correctwhich may be enforced by summary or


judicial remedies.

621
If the taxpayer elevates his protest to the CIR within 30 days from date of receipt of the final decision
of the CIRs duly authorized representative, such decision will not be final and executory.

179
4. In a proceeding for collection of tax byjudicial action, the taxpayers defensesare
similar to those of the defendant in a case for the enforcement of a judgment by judicial
action.

5. The assessment which has become final and executory cannot be superseded by a
new assessment.

b. Collection

1) Requisites

Collection is only allowed when there is already a final assessment made for the
determination of the tax due.

Assessments are deemed final when:

1. The taxpayer failed to file a protest 30 days from receipt of the assessment

2. After the 180 day period and the CIR hasnot yet acted on the protest the taxpayer
fails to appeal it

3. After 30 days from the receipt of thedecision of the CIR the taxpayer fails to
appeal.

2) Prescriptive periods

Assessment was made False or fraudulent return or failure to file


a return,

By distraint or levy or by a proceeding in Aproceeding in court for the collection of


court- within three (3) years following the such tax may be filed without assessment - at
assessment released, mailed, or sent.622 any time within ten (10) years after the
discovery of the falsity, fraud or omission.623

622
BPI v. CIR, G.R. 139736, Oct. 17, 2005
623
Sec.222 [a]

180
3) Distraint of personal property including
garnishment

a) Summary remedy of distraint of personal


property

(1) Procedure for distraint and


garnishment

a. The officer serving the warrant shall make an account of the goods distrained. A
copy signed by him shall be left with the owner or to the person in possession of the goods
to which list shall be added a statement of the sum demanded and note of the time and place
of sale.

b. Stocks and securities warrant of distraint shall be served upon the taxpayer and
upon the president, manager, treasurer or other responsible officer of cooperation, company
or association, which issued the said stocks.

c. Debts and Credits serving the warrant of distraint upon the taxpayer and the
person owing such debts. Such warrant is sufficient authority to the person owning the
debts or having possession or under his control any credits. The warrant of distraint is
sufficient authority to such person to pay the Commissioner;

d. Bank Accounts serving the warrant upon the taxpayer and upon the president,
manager, treasurer and other responsible officer of the bank. Upon receipt of the warrant,
the bank shall turn over to the Commissioner the amount sufficient to satisfy the claim.624

(2) Sale of property distrained and


disposition of proceeds

a. Notice of the sale must specify the time and place of sale and the articles
distrained;

b. The Notice must be exhibited in not less than 2 public places; one of such places
shall be at the Office of the Mayor;

c. The time of sale shall not be less than 20 days after notice to the owner or
possessor of the property and the publication or posting of such notice.

d. The sale shall be at public auction to the highest bidder for cash or with the
approval of the Commissioner, through duly licensed commodity or stock exchanges.

e. In case of stocks or securities, the officer making the sale shall execute a bill of
sale which shall deliver to the buyer and a copy thereof furnished the corporation, company,
or association which issued the stocks or other securities.

624
Sec. 208

181
f. Residue over and above what is required to pay the entire claim, including
expenses, shall be returned to the owner of the property sold.625

(a) Release of distrained


property upon payment
prior to sale

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.626

(3)Purchase by the government at sale


upondistraint

a. When the amount for the bid property under distraint is not equal to the amount
of the tax;
b. When the amount for the bid is very much less than the actual market value of the
articles for sale;
The property purchased may be resold by the Commissioner or his deputy.627

(4) 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 Commissioner and shall himself preserve a copy of such
report as an official record.628

(5) Constructive distraint to protect


the interest of the government

The Commissioner may place under constructive distraint the property of a


delinquent taxpayer or any taxpayer who, in his opinion, is retiring from any business subject
to tax, or is intending to leave the Philippines or to remove his property therefrom or to hide
or conceal his property or to perform any act tending to obstruct the proceedings for
collecting the tax due or which may be due from him.

The constructive distraint of personal property shall be affected 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 Commissioner.

625
Sec. 209
626
Sec. 210
627
Sec. 212
628
Sec. 211

182
In case the taxpayer or the person having the possession and control of the property
sought to be placed under constructive distraint refuses or fails to sign the receipt herein
referred to, 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, after which the said property shall be
deemed to have been placed under constructive distraint.629

4) Summary remedy of levy on real property

a) Advertisement and sale

1. Twenty days after levy, the officer conducting the proceedings shall proceed to
advertise the property or a usable portion thereof as may be necessary to satisfy the claim
and cost of the sale and such advertisement shall be for a period of at least 30 days.
2. The notice of sale shall:
a. Be posted at the main entrance of the municipal building; and
b. public and conspicuous place in the barrio or district; and
c. be published once a week for three consecutive weeks in a newspaper of
general circulation.

3. Right of Pre-emption At any time before the day fixed for the sale, the taxpayer
may discontinue all proceedings by paying the taxes, penalties, and interest.
4. 5 days after the sale, a return by the distraining or levying officer of the
proceedings shall be entered upon the records of the Revenue Collection Officer (RCO), the
RDO and Revenue Regional Director.
5. A certificate of sale shall be delivered to the purchaser.
6. Excess of the proceeds of the sale shall be delivered to the taxpayer.630
b) Redemption of property sold

Within one (1) year from the date of sale, the delinquent taxpayer, or any one for
him, shall have the right of paying to the Revenue District Officer the amount of the public
taxes, penalties, and interest thereon from the date of delinquency to the date of sale,
together with interest on said purchase price at the rate of fifteen percent (15%) per annum
from the date of purchase to the date of redemption, and such payment shall entitle the
person paying to the delivery of the certificate issued to the purchaser and a certificate from
the said Revenue District Officer that he has thus redeemed the property, and the Revenue
District Officer shall forthwith pay over to the purchaser the amount by which such
property has thus been redeemed, and said property thereafter shall be free from the lien of
such taxes and penalties.

629
Sec. 206
630
Sec. 213

183
The owner shall not, however, be deprived of the possession of the said property
and shall be entitled to the rents and other income thereof until the expiration of the time
allowed for its redemption.631

c) Final deed of purchaser

In case the taxpayer shall not redeem the property, the Revenue District Officer
shall, as grantor, execute a deed conveying to the purchaser so much of the property as has
been sold, free from all liens of any kind whatsoever, and the deed shall succinctly recite all
the proceedings upon which the validity of the sale depends.632

5) Forfeiture to government for want of bidder

a) Remedy of enforcement of forfeitures

(1) Action to contest forfeiture of


chattel

In case of the seizure of personal property under claim of forfeiture, the owner
desiring to contest the validity of the forfeiture may, at any time before sale or destruction of
the property, bring an action against the person seizing the property or having possession
thereof to recover the same, and upon giving proper bond, may enjoin the sale; or after the
sale and within six (6) months, he may bring an action to recover the net proceeds realized at
the sale.633

b) Resale of real estate taken for taxes

The Commissioner shall have charge of any real estate obtained by the Government
of the Philippines in payment or satisfaction of taxes, penalties or costs or in compromise or
adjustment of any claim therefore, and said Commissioner may, upon the giving of not less
than twenty (20) days notice, sell and dispose of the same of public auction or dispose of
the same at private sale.

In either case, the proceeds of the sale shall be deposited with the National Treasury,
and an accounting of the same shall be rendered to the Chairman of the Commission on
Audit.634

631
Sec. 214
632
Sec. 202
633
Sec. 231
634
Sec. 216

184
c) When property to be sold or destroyed

Upon forfeiture, distilled spirits, liquors, cigars, cigarettes, other manufactured


products of tobacco, and all apparatus used in or about the illicit production of such articles
may be destroyed by order of the Commissioner, when the sale of the same for consumption
or use would be injurious to public health or prejudicial to the enforcement of the law.635

Forfeited property shall not be destroyed until at least twenty (20) days after
seizure.636

d) 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 Commissioner or his authorized deputies as the taxes
themselves are required to be paid and shall be accounted for and dealt with the same way.637

6) 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.638

7) Tax lien639

A legal claim or charge on property, either real or personal, established by law as a


security in default of the payment of taxes.

635
All other articles subject to excise tax, which have been manufactured or removed in violation of the
Code, as well as dies for the printing or making of internal revenue stamps and labels which are in
imitation of or purport to be lawful stamps, or labels may, upon forfeiture, be sold or destroyed in the
discretion of the Commissioner (Sec. 225)
636
ibid.
637
Sec. 226
638
Sec. 217
Otherwise, a clever taxpayer who is also able to conceal most of the valuable part of his property
would escape payment of his tax liability by sacrificing an insignificant portion of his holdings.
639
Nature:
A lien in favor of the government of the Philippines when a person liable to pay a tax neglects or fails to
do so upon demand.
Duration:
Exists from time assessment is made by the CIR until paid, with interests, penalties and costs.
Extent:
Upon all property and rights to property belonging to the taxpayer.
Effectivity against third persons:
Only when notice of such lien is filed by the CIR in the Register of Deeds concerned.

185
8) Compromise640

a) Authority of the Commissioner to


compromise and abate taxes641

Compromise the payment of any internal Abate or cancel a tax liability


revenue tax

When: When:

1. There is reasonable doubt as to the validity 1. The tax or any portion thereof appears to
of the claim against the taxpayer; or be unjustly or excessively assessed; or

2. The financial position of the taxpayer 2. The administration and collection costs
demonstrates a clear inability to pay the involved do not justify the collection of the
assessed tax.642 amount due.

9) Civil and criminal actions

a) Suit to recover tax based on false or


fraudulent returns

If tax is collected under an assessment that the list, statement or return is


false/fraudulently made, it cannot be recovered by any suit unless it is proved that the said
list, statement or return was not false nor fraudulent & did not contain any understatement
or undervaluation.643

640
Contract whereby the parties, by making reciprocal concessions, avoid litigation or put an end to one
already commenced.
641
The power to compromise or abate shall not be delegated by the Commissioner except in the following
cases:
1. Assessments issued by the Regional Offices involving basic tax of P 500,000 or less;
2. Minor criminal violations
All criminal violations may be compromised except: (a) those already filed in court, or (b) those
involving fraud (Sec. 204 (A)(B))
All criminal violations may be compromised except: (a) those already filed in court, or (b) those
involving fraud (Sec. 204 (A)(B))
642
Minimum Compromise Amounts:
1. Financial incapacity 10% of the basic tax assessed;
2. Other cases 40% of the basic tax assessed
When approval of Evaluation Board necessary:
1. The basic tax involved exceeds one million pesos;
2. Where the settlement offered is less than the prescribed minimum rate.
643
Not applicable to statements or returns made or to be made in good faith regarding annual
depreciation of oil or gas wells & mines.

186
c. Refund644

1) Grounds and requisites for refund

Grounds Requisites

a. Tax is erroneously or illegally collected.


a. There must be a written claim with the
CIR, as it would enable the CIR to correct
b. Sum collected is excessive or in any the errors of his subordinate and to notify
manner wrongfully collected. the government;

c. Penalty is collected without authority. b. Must be a categorical claim for refund or


credit;

c. Must be filed within 2 years after the


payment of the tax or penalty otherwise no
refund or credit could be taken. No suit or
proceeding shall be instituted after the
expiration of the 2 year period regardless of
any supervening cause that may arise after
payment; and

d. Present proof of payment of the tax.

2) Requirements for refund as laid down by cases

a) Necessity of written claim for refund

This requirement is mandatory.645

Except:

Where on the face of the return upon which payment is made, such payment appears
clearly to have been erroneous.646

644
A suit or proceedings for tax refund may be maintained whether or not such tax, penalty or sum has
been paid under protest or duress (Sec. 229)
Similarly, payment under protest is not necessary in refund for local taxes. (Sec. 196 LGC),
however, under protest is necessary to claim for
a. real property taxes (Sec. 252, LGC)
b. custom duties (Sec. 2308, TCC)
645
Reasons:
a. to afford the commissioner an opportunity to correct the action of subordinate officer and
b. to notify the government that the taxes sought to be refunded are under question and that,
therefore, such notice should then be borne in mind in estimating the revenue available for
expenditure(Bermejo vs. CIR, 87 Phil 96)
646
Sec. 229

187
b) Claim containing a categorical demand for
reimbursement

c) Filing of administrative claim for refund


and the suit/proceeding before the CTA
within 2 years from date of payment
regardless of any supervening cause647

The requirement is a condition precedent and non-compliance therewith bars


recovery.648

It refers not only to the administrative claim that the taxpayer should file within
2years from date of payments with the BIR, but also the judicial claim or the action for
refund the taxpayer should commence with the CTA.649

3) Legal basis of tax refunds

Legal principle of quasi-contracts or solutioindebiti.650


The Government is within the scope of the principle of solutioindebiti.651
4) Statutory basis for tax refund under the Tax Code

a) Scope of claims for refund

The Commissioner may credit or refund taxes:

a) Erroneously or illegally assessed or collected internal revenue taxes


b) Penalties imposed without authority
c) Any sum alleged to have been excessive or in any manner wrongfully
collected.652

b) Necessity of proof for claim or refund

Refund claim partakes of the nature of an exemption which cannot be allowed unless
granted in the most explicit and categorical language.653

Failure to discharge burden of giving proof is fatal to claim.

647
Secs.204 (c) & 229
648
Phil. Acetylene Co. Inc, vs. Commissioner, CTA Case No. 1321, Nov. 7, 1962
649
seeGibbs vs.. Collector of Internal Revenue, 107 Phil 232
650
see Art. 2142 & 2154, CC
651
CIR vs. Firemans Fund Insurance Co
652
Secs. 204 and 209
653
CIR vs. Johnson and Sons

188
It must be shown that payment was an independent single act of voluntary
payment of a tax believed to be due, collectible and accepted by the government, and
which therefore, become part of the state moneys subject to expenditure and perhaps
already spent or appropriated.654

c) Burden of proof for claim of refund

Written claim for refund or tax credit filed by the taxpayer with the Commissioner.

d) Nature of erroneously paid tax/illegally


assessed collected

Taxpayer pays under the mistake of fact, as for instance in a case where he is not
aware of the existing exemption in his favor at the time payments were made.

A tax is illegally collected if payments are made under duress.

e) Tax refund vis--vis tax credit655

Tax refund Tax credit

Requires a physical return of the sum Generally refers to an amount that is


erroneously paid by the taxpayer. subtracted directly from ones total tax
liability, an allowance against the tax itself, or
a deduction from what is owned.
The taxpayer to whom the tax is refunded
would have the option, among others, to Reduces the tax due, including whenever
invest for profit the returned sum, an option applicable the income tax that is
not proximately available if the taxpayer determined after applying the corresponding
chooses instead to receive a tax credit.656 tax rates to taxable income.657

f) Essential requisites for claim of refund

1. The claim is filed with the Commissioner of Internal Revenue within the two-year
period from the date of the payment of the tax.
2. It is shown on the return of the recipient that the income payment received was
declared as part of the gross income; and

654
CIR vs. Li Yao, L-11875,Dec. 28, 1963
655
It may be that there is no essential difference between a tax refund and a tax credit since both are
moves of recovering taxes erroneously or illegally paid to the government. (Commissioner of Customs v.
Philippine Phosphate Fertilizer Corporation, G. R. No. 144440, September 1, 2004)
656
Commissioner of Customs v. Philippine Phosphate Fertilizer Corporation, ibid.
657
Commissioner of Internal Revenue v. Central Luzon Drug Corporation, G. R. No. 159647, April 15,2005

189
3. The fact of withholding is established by a copy of a statement duly issued by the
payee showing the amount paid and the amount of tax withheld therefrom.658
5) Who may claim/apply for tax refund/tax credit

a) Taxpayer/withholding agents of non-


resident foreign corporation

A withholding agent is subject to and liable for deficiency assessments, surcharges


and penalties should the amount of the tax withheld be finally found to be less than the
amount that should have been withheld under the law.

A person liable for tax has been held to be a person subject to tax and properly
considered a taxpayer. xxx By any reasonable standard, such a person should be regarded
as a party in interest, or as a person having sufficient legal interest, to bring a suit for refund
of taxes.659

6) Prescriptive period for recovery of tax erroneously


or illegally collected

Two (2) years from the date of payment of the tax or penalty.

7) Other consideration affecting tax refunds

a) Taxpayer may file an action for refund in the CTA even before the Commissioner
decides his pending claim in the BIR.660

b) Suspension of the 2-year prescriptive period may be had when:

i. there is a pending litigation between the two parties (government and


taxpayer) as to the proper tax to be paid and of the proper interpretation of the
taxpayers charter in relation to the disputed tax; and

ii. the commissioner in that litigated case agreed to abide by the decision of
the Supreme Court as to the collection of taxes relative thereto.661

c) Even if the 2-year period has lapsed, the same is not jurisdictional and may be
suspended for reasons of equity and other special circumstances.662

d) 2-year prescriptive period for filing of tax refund or credit claim computed from
date of payment of tax of penalty except in the following:

658
Banco Filipino Savings and Mortgage Bank v. Court of Appeals, et al., G. R. No. 155682, March 27, 2007
659
CIR vs. Procter and Gamble PMC, 204 SCRA 377
660
Commissioner of Internal Revenue vs. Palanca, Jr., L-16626, Oct. 29, 1966
661
Panay Electric Co., Inc. vs. Collector of Internal Revenue, 103 Phil. 819
662
CIR vs. Phil. American Life Ins. Co., G.R. No. 105208, May 29, 1995

190
i. Corporations:

2-year prescriptive period for overpaid quarterly income tax is


counted not from the date the corporation files its quarterly income tax
return, but from the date the final adjusted return is filed after the taxable
year.663

ii. Taxes payable in installment:

2-year period is counted form the payment of the last installment.664

iii. Withholding Taxes

Prescriptive period counted not from the date the tax is withheld and
remitted to the BIR, but from the end of the taxable year.665

iv. VAT Registered Person whose sales are zero-rated or effectively zero-
rated

2-year period computed from the end of the taxable quarter when the
sales transactions were made.666

e) Interest on Tax Refund:

The Government cannot be required to pay interest on taxes refunded to the


taxpayer unless:
i. The Commissioner acted with patent arbitrariness667
ii. In case of Income Tax withheld on the wages of employees.668

663
Commissioner of Internal Revenue vs. TMX Sales, Inc., G.R. No.83736, Jan. 15, 1992
664
CIR vs. Palanca, Jr., supra
665
Gibbs vs. Commissioner of Internal Revenue, supra
666
Sec. 112 (A)
667
Arbitrariness presupposes inexcusable or obstinate disregard of legal provisions (CIR vs.Victorias
Milling Corp., Inc. L-19607, Nov. 29,1966)
668
Any excess of the taxes withheld over the tax due from the taxpayer shall be returned or credited
within 3 months from the fifteenth (15th) day of April. Refund or credit after such time earn interest at
the rate of 6% per annum, starting after the lapse of the 3-month period to the date the refund or credit
is made (Sec 79 (c) (2))

191
2. Government Remedies

a. Administrative remedies

1) Tax lien669

2) Levy and sale of real property

Levy - is the seizure of real property and interest in or rights to such properties for
the satisfaction of taxes due from the delinquent taxpayer.

The requisites are the same as that of distraint.670

3) Forfeiture of real property to the government for


want of bidder671

Implies a divestiture of property without compensation, in consequence of a default


or offense.

Includes the idea of not only losing but also having the property transferred to
another without the consent of the owner and wrongdoer.

4) Further distraint and levy672

5) Suspension of business operation673

6) Non-availability of injunction to restrain collection


of tax

No court shall have the authority to grant an injunction to restrain the collection of
any national internal revenue tax, fee or charge imposed by the Code.674

669
supra
670
Ibid.
671
Effect: Transfer the title to the specific thing from the owner to the government.
When available:
a. No bidder for the real property exposed for sale.
b. If highest bid is for an amount insufficient to pay the taxes, penalties and costs.
- Within two days thereafter, a return of the proceeding is duly made.
How enforced:
a. In case of personal property by seizure and sale or destruction of the specific forfeited property.
b. In case of real property by a judgment of condemnation and sale in a legal action or proceeding, civil
or criminal, as the case may require.
672
supra
673
Ibid.
674
Sec. 218

192
Exception:
Injunction may be issued by the CTA in aid of its appellate jurisdiction.675

b. Judicial remedies676

Civil Action677 Criminal Action678

1. By filing a civil case679 to collect internal Generally resorted to by the BIR when the
revenue taxes in regular courts680 summary remedies for the collection of taxes
have proven ineffective and futile.682
2. By filing an answer to the petition for
review filed by the taxpayer with the CTA681 Instituted not to demand payment but to
penalize taxpayer for the violation of the
NIRC.

675
Under Sec. 11 of R.A. 1125, (as amended by RA 9282) - when in the opinion of the Court the collection
may jeopardize the interest of the Government and/or the taxpayer, the Court, at any stage of the
proceeding, may suspend the said collection and require the taxpayer either to deposit the amount
claimed or to file a surety bond for not more than double the amount with the Court.
676
Civil and Criminal Actions:
1. Brought in the name of the Government of the Philippines.
2. Conducted by Legal Officer of BIR
3. Must be with the approval of the CIR, in case of action, for recovery of taxes, or enforcement of a
fine, penalty or forfeiture.
677
For tax remedy purposes, these are actions instituted by the government to collect internal
revenue taxes in the regular courts after assessment by CIR has become final and executory.
It includes, however, the filing by the government of claims against the deceased taxpayer with the
probate court.
678
The criminal charge is filed directly with the Department of Justice with the approval of the CIR.
The information should be filed:
1. CTA - on criminal offenses arising from violations of the NIRC or Tariff and Customs Code and other laws
administered by the BIR and the BOC where the principal amount of taxes and fees, exclusive of charges
and penalties claimed is P1 million and above.
2. RTC, MTC, MeTC - on criminal offenses arising from violations of the NIRC orTariff and Customs Code
and other laws administered by the BIR and the BOC where the principal amount of taxes and fees,
exclusive of charges and penalties claimed is less than P1 million. (Sec. 7, R.A. 9282)
679
within 5 years from the date of the assessment
680
RTC or MTCs, depending on the amount involved
When assessment made has become final and executory for failure or taxpayer to:
a. Dispute same by filing protest with CIR
b. Appeal adverse decision of CIR to CTA
Jurisdiction:
If case involves collection of assessed principal taxes amounting to 1M or more- CTA
If lower than 1M- RTC and other lower courts
681
If Commissioner files the case- Republic of the Phils.is the party plaintiff; when it is the taxpayer who
files a petition for review in CTA, the respondent is the Commissioner.
682
A direct mode of collection of taxes, the judgment of which shall not only impose the penalty but also
order payment of taxes.
An assessment of a tax deficiency is not necessary to a criminal prosecution for tax evasion, provided
there is a prima facie showing of willful attempt to evade.

193
3. Statutory Offenses and Penalties

a. Civil penalties

They are imposed in addition to the tax required to be paid.

1) Surcharge

A civil penalty imposed by law as an addition to the main tax required to be paid. It
is not a criminal penalty but a civil administrative sanction provided primarily as safeguard
for the protection of the State revenue and to reimburse the government for the expenses of
investigation and the loss resulting from the taxpayers fraud.683

A surcharge added to the main tax is subject to interest.

2) Interest

a) In General

Assessed and collected on any unpaid amount of tax at the rate of twenty percent
(20%) per annum from the date prescribed for payment until the amount is fully paid.684

b) Deficiency interest

The interest due on any amount of tax due or installment thereof which is not paid
on or before the date prescribed for its payment computed at the rate of 20% per annum,685
from the date prescribed for its payment until it is fully paid.

c) Delinquency interest

The interest of 20% per annum required to be paid in case of failure to pay:

(1) The amount of the tax due on any return to be filed, or


(2) The amount of the tax due for which no return is required, or
(3) A deficiency tax, or any surcharge or interest thereon on the due date appearing
in the notice and demand of the Commissioner.686

683
A surcharge added to the main tax is subject to interest.
684
Sec. 249 (A)
685
or such higher rate as may be prescribed by the rules and regulations
686
Id., (C)

194
d) Interest on extended payment

If any person required to pay the tax is qualified and elects to pay the tax on
installment but fails to pay the tax or any installment hereof, or any part of such amount or
installment on or before the date prescribed for its payment, or where the Commissioner has
authorized an extension of time within which to pay a tax or a deficiency tax or any part
thereof, there shall be assessed and collected interest at the rate prescribed on the tax or
deficiency tax or any part thereof unpaid from the date of notice and demand until it is
paid.687

4. Compromise and Abatement of taxes688

a. Compromise

Involves a mere reduction of the tax.

b. Abatement

A cancelation of the entire liability.

687
Id., (D)
688
supra

195
G. Organization and Function of the Bureau of Internal Revenue

1. Rule-making authority of the Secretary of Finance

a. Authority of Secretary of finance to promulgate rules and


regulations

Upon recommendation of the Commissioner, for the effective enforcement of the


provisions of the Code.689

b. Specific provisions to be contained in rules and regulations

(1) 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;

(2) 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;

(3) 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;

(4) The conditions to be observed by revenue officers respecting the institutions and
conduct of legal actions and proceedings;

(5) 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;

(6) The conditions under which denatured alcohol may be removed and dealt in, the
character and quantity of the denaturing material to be used, the manner in which the
process of denaturing shall be effected, so as to render the alcohol suitably denatured and
unfit for oral intake, the bonds to be given, the books and records to be kept, the entries to
be made therein, the reports to be made to the Commissioner, and the signs to be displayed
in the business ort by the person for whom such denaturing is done or by whom, such
alcohol is dealt in;
(7) The manner in which revenue shall be collected and paid, the instrument,
document or object to which revenue stamps shall be affixed, the mode of cancellation 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;

689
Sec. 244

196
(8) 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 Commissioner may consider suitable for
the enforcement of the said Title III;

(9) 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;

(10) The manner in which internal revenue taxes690shall 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.

c. Non-retroactivity of rulings

If the revocation, modification or reversal will be prejudicial to the taxpayers, except:

(a) Where the taxpayer deliberately misstates or omits material facts from his return
or any document required of him by the Bureau of Internal Revenue;

(b) Where the facts subsequently gathered by the Bureau of Internal Revenue are
materially different from the facts on which the ruling is based; or

(c) Where the taxpayer acted in bad faith.691

2. Power of the Commissioner to suspend the business operation of


a taxpayer692

690
such as income tax, including withholding tax, estate and donor's taxes, value-added tax, other
percentage taxes, excise taxes and documentary stamp taxes
691
Sec. 246
692
supra

197
III. Local Government Code of 1991, as amended

A. Local Government Taxation693

1. Fundamental principles694

a. Taxation shall be uniform695 in each LGU


b. Taxes, fees, charges and other impositions shall be:
1. Equitable and based on the taxpayers ability to pay.
2. For public purpose.696
3. Not unjust, excessive, oppressive or confiscatory.
4. Not contrary to law, public policy, national economic policy, or in restraint
of trade.
c. The collection of local taxes, fees,charges and other impositions shall in no case be
Let to any private person;

d. The revenue collected pursuant to the provisions of the LGC shall Inure solely
to the benefit of, and be subject to the disposition by, the local government unit levying the
tax, fee, charge or other imposition unless otherwise specifically provided herein; and

e. Each LGU shall, as far as practicable, evolve a progressive system of taxation.697

693
The power to tax which may be exercised by local legislative bodies is no longer merely by nature of a
valid delegation as before but pursuant to direct authority conferred by Sec. 5, Art. X of the Constitution
(MactanCebyIntnl Airport vs. Marcos, G.R. No. 120082, Sept 11, 1996)
Where there is neither a grant nor a prohibition by statute, the tax power must be deemed to exist
although Congress may provide statutory limitations and guidelines. The basic rationale for the current
rule is to safeguard the viability and self-sufficiency of local government units by directly granting them
general and broad tax power (MERALCO vs. Prov. of Laguna, G.R. No 131359, May 5, 1999
694
also known as the requisites of municipal taxation
695
Uniformity of Taxation Equality and uniformity of local taxation is that all taxable articles of the same
class shall be taxed at the same rate within the same territorial jurisdiction of the taxing authority.
696
Public Purpose Proceeds obtained are to be used to support the existence of the
LGU.
697
Just Taxation Municipal corporations are allowed a wide range in determining tax rates of imposable
taxes and license fees.

198
2. Nature and source of taxing power

a. Grant of local taxing power under the Local Government


Code

Each local government unit shall exercise its power to create its own sources of
revenue and to levy taxes, fees, and charges subject to the provisions herein, consistent with
the basic policy of local autonomy. Such taxes, fees, and charges shall accrue exclusively to
the local government units.698

b. Authority to prescribe penalties for tax violations

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).699

c. Authority to grant local tax exemptions

Local government units may, through ordinances duly approved, grant tax
exemptions, incentives or reliefs under such terms and conditions as they may deem
necessary.700

d. Withdrawal of exemptions

Tax exemptions or incentives granted to, or presently enjoyed by all persons,


whether natural or juridical, including government-owned or -controlled corporations,
except local water districts, cooperatives duly registered under R.A. No. 6938, non-stock and
non-profit hospitals and educational institutions, are hereby withdrawn upon the effectivity
of this Code.701

e. Authority to adjust local tax rates

LGUs are given authority to adjust the tax rates, but the adjustment should be made
not oftener than once every 5 years but in no case shall the adjustment exceed 10% of the
rates fixed under the LGC.702

698
Sec. 129
699
Sec. 516
700
Sec. 192
The power to grant tax exemptions, tax incentives and tax reliefs shall not apply to regulatory feeswhich
are levied under the police power of the LGU.
701
Sec. 193
702
Sec 191

199
f. Residual taxing power of local governments

LGUs may exercise the power to levy taxes, fees or charges on any base or subject
not otherwise specifically enumerated herein or taxed under the

1. Local Government Code;


2. National Internal Revenue Code; or
3. Other applicable laws.703

g. Authority to issue local tax ordinances

The power to impose a tax, fee, or charge or to generate revenue shall be exercised
by the sanggunian of the local government unit concerned through an appropriate
ordinance.704

3. Local taxing authority

a. Power to create revenues exercised thru LGUs

Local governments are authorized to impose and collect the following charges:

1. Reasonable fees and charges for services rendered.705


2. Public Utility Charges if:
a. Owned, operated and maintained
b. Within their jurisdiction706

3. Tools, Fees or Charges for:

a. Use of public road, pier or wharf, waterway bridge, ferry or


telecommunication system
b. Funded and constructed by the local government707

703
Sec. 186
704
Sec. 132
705
Sec. 153
706
Sec. 154
707
Sec. 155

200
b. Procedure for approval and effectivity of tax ordinances

1. The procedure applicable to local government ordinances in general should be


observed.708

Thefollowing procedural details must be complied with:

a. Necessity of quorum

b. Submission for approval by the local chief executive

c. The matter of veto and overriding the same

d. Publication and effectivity709

2. Public hearings are required before any local tax ordinance is enacted.710

3. Within 10 days after their approval,publication in full for 3 consecutive days in a


newspaper of general circulation. In the absence of such newspaper in the province, city or
municipality, then the ordinance may be posted in at least two conspicuous and publicly
accessible places.711

4. Scope of taxing power

a. Each local government unit shall exercise its power to create its own sources of
revenue and to levy taxes, fees, and charges, consistent with the basic policy of local
autonomy. Such taxes, fees, and charges shall exclusively accrue to it.712

b. All local government units are granted general powers to levy taxes, fees or
charges on any base or subject not otherwise specifically enumerated herein or taxed under
the provisions of the NIRC, as amended, or other applicable laws. The levy must not be
unjust, excessive, oppressive, confiscatory or contrary to a declared national economic
policy.713

c. No such taxes, fees or charges shall be imposed without a public hearing having
been held prior to the enactment of the ordinance.714

d. Copies of the provincial, city, and municipal tax ordinances or revenue measures
shall be published in full for three consecutive days in a newspaper of local circulation or
posted in at least two conspicuous and publicly accessible places.715

708
Sec. 187
709
Secs. 54, 55, and 59
710
Sec. 187
711
Sec. 188 & 189
712
Sec. 129
713
Sec. 186
714
Sec. 187

201
5. Specific taxing power of local government unit (LGUs)

a. Taxing powers of provinces

1) Tax on transfer of real property716 ownership

Transaction taxed Sale, barter, or any other mode of transferring ownership


of, or title to, real property

Rate At not more than 50% of 1% total consideration.717

Exception from tax The sale, transfer or other disposition of real property
pursuant to R.A. 6657.718

2) Tax on business of printing and publication

Transaction taxed Business of printing and publication of books, cards,


posters, leaflets, handbills, certificates, receipts, pamphlets,
and other similar nature

Tax Rate Not exceeding 50% of 1% of the gross annual receipts for
the preceding calendar year, in the case of newly started
business, not to exceed 1/20 of 1% of the capital
investment

Exception The receipts from the printing and/ or publishing of books


or other reading materials prescribed by the DECS as
school text or references are not subject to the tax imposed

715
Sec. 188
716
Real Property refers only to lands, buildings, and machineries intended by the owner of the land or
building for an industry or works which may by carried on in a building or on a piece of land and which
tend directly to meet the needs of the industry or works.
717
Tax base
1. total consideration or
2. fair market value, whichever is higher
718
Comprehensive Agrarian Reform Law

202
3) Franchise tax719

Franchise Generally refers to a privilege conferred by the


government on an individual or corporation, which
does not belong to the citizens by common right

Tax Rate Not exceeding 50% of 1%, if newly started business,


1/20 of 1 %

Tax base Gross annual receipts of preceding calendar year


based on:

a) Incoming receipts, or
b) Realized within territorial jurisdiction.

4) Tax on sand, gravel and other quarry services720

Tax Rate Not more than 10% of fair market value

Issuance of Permit To permit to extract the sand, gravel and other


quarry resources shall be issued exclusively by the
provincial governor pursuant to the ordinance of
the sangguniangpanlalawigan

719
Purpose of Franchise Tax to be in addition to the franchise tax imposed by the national government
on business which are holders of franchise except when otherwise prohibited by law. 719
720
Distribution of the Proceeds The proceeds of the tax shall be distributed as follows
a. Province 30%
b. Component city or municipality where the sand, etc are extracted 30%
c. Barangay where the sand, etc. are extracted 40%

203
5) Professional tax721

Tax rate In such as Sanggunian may determine and in no case


to exceed P300

When paid On or before Jan. 20

Where Paid on the place where you practice your


profession.722

6) Amusement tax723

Tax Rate Not more than 30% of the gross receipt from
admission fees

Exemption Operas, concerts, dramas, recitals, painting and art


exhibitions, flower shows, musical programs,
literary and oratorical presentation

Exceptions to exemption Pop, rock, or similar concert.

7) Tax on delivery truck/van

Transaction taxed Use of truck, van vehicle in the delivery or


distribution of distilled spirits, fermented liquors,
softdrinks, cigar and cigarettes and other products,
determined by the Sanggunian to sales outlets or

721
Profession a calling w/c requires the passing of an appropriate government board or bar
examination, such as the practice of law, medicine, public accounting, engineering, etc.
Nature of Tax professional tax applies only to natural or physical persons and not to juridical
entities. Said tax is fixed on the privilege of exercising or engaging in a profession. The tax is not based on
the amount of earnings of the taxpayer.
722
government employees are exempted from paying PT
723
Amusement pleasurable diversion and entertainment
Amusement Place includes theaters, cinemas, concert halls, circuses and other places of amusement
where one seeks admission to entertain himself by seeing or viewing the show or performance (Sec 131
(c))

204
consumers.

Tax rate Not exceeding P500 for every truck, van or any
vehicle used

Exemption Exempt from tax on peddlers.

b. Taxing powers of cities

Cities are authorized specifically to impose taxes, fees and charges that provinces and
municipalities may levy.

Rate: May be above the maximum established for


provinces and municipalities but not exceeding
50% of such maximum rates except the rates of
professional and amusement taxes

c. Taxing powers of municipalities

Municipality may levy taxes, fees and charges not otherwise levied by provinces and
cities

1) Tax on various types of businesses

Rate

Manufacturers, assemblers, repackers of At graduated annual fixed tax based on


liquors, distilled spirits and wines gross sales or receipts for the preceding
calendar year in an amount not to exceed
P6.5 M or more, a rate not exceeding 37
of 1% is imposed

Wholesalers, distributors or dealers in any Graduated annual fixed rate based on


article of Commerce gross sales or receipts not exceeding
P2M or more, the rate not exceeding
50% of 1%

Exporters, manufacturers, millers, producers Not exceeding of the rates prescribed


of essential commodities in (a) and (b)724

724
supra

205
Contractors and other independent Graduated annual fixed rate when the
contractors gross receipts exceeds P2M the rate is
not exceeding 50% of 1%

Banks and other financial institutions Not exceeding 50% of 1% on the gross
receipts of preceding calendar year

Peddlers Not exceeding 50% per peddler annually

Any business not otherwise specified As the Sanggunian may deem proper.
When subject to excise, VAT or
percentage tax, it shall not exceed 2% of
gross receipts of the preceding calendar
year.725

2) Ceiling on business tax impossible on


municipalities within Metro Manila

The municipalities within the Metropolitan Manila Area may levy taxes at rates which
shall not exceed by fifty percent (50%) the maximum rates prescribed in the preceding
Section.726

3) Tax on retirement on business

A business subject to tax shall, upon termination thereof, submit a sworn statement
of its gross sales or receipts for the current year. If the tax paid during the year be less than
the tax due on said gross sales or receipts of the current year, the difference shall be paid
before the business is considered officially retired.

If the tax paid during the year be less than the tax due on said gross sales of receipts
of the current year, the difference shall be paid before the business is considered officially
retired.727

4) Rules on payment of business tax

a. It shall be payable for every separate or distinct establishment or place where the
business subject to the tax is conducted and one line of business does not become exempt
by being conducted with some other business for which such tax has been paid.

725
Sec. 143
726
Sec. 144
727
Sec. 145

206
b. The tax on a business must be paid by the person conducting the same.

c. In cases where a person conducts or operates 2 or more of the businesses:

1. subject to the same rate of tax - the tax shall be computed on the
combined total gross sales or receipts of the said 2 or more related businesses.

2. subject to different rates of tax - the gross sales or receipts of each


business shall be separately reported for the purpose of computing the tax due from
each business.

5) Fees and charges for regulation & licensing

The municipality may impose and collect suchreasonable fees and charges on
business and occupation except professional taxes reserved for provinces.728

a. Fees for Sealing and Licensing of Weights and Measures729

b. Fishery Rentals, Fees and Charges,including the authority to grant fishery


privileges within municipal waters, as well as issue licenses for the operation of fishing
vessels of three tons or less.

c. The sanggunian may penalize the use ofexplosives, noxious or poisonous


substances, electricity, muro ami, and other deleterious methods of fishing and prescribe a
criminal penalty therefore.730

728
Sec. 147
729
Sec. 148
730
Sec. 149

207
6) Situs of tax collected

Situation Recognition of sale Payment of tax


The tax shall be payable to
With branch or sales office All sales made in the locality the city or municipality
or warehouse where the branch or office where the same is located.
or warehouse is located

Where there is no branch or The municipality where the The tax shall accrue to the
sales sale or transaction is made. city or municipality where
office or warehouse said principal office is
. The sale shall be recorded in located
the principal office along
with the sales made by said
principal office

Branch office a fixed place in a locality which conducts operations of the business as an
extension of the principal office.

Principal office head or main office of the business appearing in pertinent documents
submitted to the SEC and specifically mentioned in the Articles of Incorporation.

Where there is a factory, Of all sales recorded in the


project office, plant or principal office:
plantation in pursuit of
business 1. 30% taxable to the city or
municipality where the
principal office is located.
If plantation is at a place
other thanwhere the factory All sales shall be recorded in 2. 70% taxable to the city or
is located the principal office municipality where the
factory, plant, etc. is located.

The 70% (above) shall be


divided as follows:
If manufacturer,
contractor, etc. has two or 1. 60% to the city or
more factories, project municipality where the
offices, plants or plantations factory is.
located in different
localities. 2. 40% to the city or
municipality where the
plantation is located.

208
d. Taxing powers of barangays

Taxes on stores / retailers with fixed Rate: Not exceeding 1% on such gross sales
business establishment with gross sales or or receipts
receipts of the preceding calendar year of
P50,000 or less in the cities & municipalities

Service Fees/ Charges It may collect reasonable fees or charges for


services rendered in connection with the
regulation or the use of barangay owned
property or service facilities

Barangay Clearance No city municipality may issue any license/


permit for any business / activity is located.
For such clearance, the sangguniangbrgy.
may impose reasonable fee.

Other fees & charges The brgy. may levy reasonable fees &
charges

a) On commercials breeding of fighting


cocks & cockpits;

b) On places of recreation w/c charge


admission fees; and

c) On billboards, signs boards, neon signs


and outdoor advertisement

209
e. Common revenue raising powers

1) Service fees and charges

LGUs may impose and collect such reasonable fees and charges for services
rendered.731

2) Public utility charges

LGUs may fix the rates for the operation of public utilities owned, operated and
maintained by them within their jurisdiction.732

3) Toll fees or charges

The sanggunianconcerned 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.733

f. Community tax

The community tax, which replaced the residence tax, is essentially a poll or
capitalization tax. It is of fixed amount imposed upon certain inhabitants of the country
without regard to the property/ occupation in which they may be engaged.

Who are authorized to levy Cities or municipalities may levy a


community tax, as well as the rates & accrual
of the proceeds thereof.734

Persons liable to tax 1. Individuals

Rate: P5.00 an annual additional tax of P1.00


for every P1,000 income regardless of
whether from business, exercise of
profession or from property w/c in no case
shall exceed P5,000.

2. Corporations -

Rate: Annual community tax of P500 and an


annual additional tax w/c in no case shall

731
Sec. 153
732
Sec. 154
733
Sec. 155
734
Sec 156

210
exceed P10,000

Exemptions from the Community Tax 1. Diplomatic and consular representatives


and

2. Transient visitors when their stay in the


Phil. Does not exceed 3 mos.

Estates of deceased persons, being neither corporations nor individuals, are not
subject to the tax, but the heirs must declare their proportionate shares of their income.

Community Tax Certificate shall be issued to every person or corporation upon


payment of the community tax. It may also be issued to any corporation/person not subject
to the community tax.735

735
Sec 162

211
6. Common limitations on the taxing powers of LGUs736

Unless otherwise provided herein, the exercise of the taxing power of provinces,
cities, municipalities, and barangays shall not extend to the levy of the following:

1. Income tax737
2. Documentary Stamp Tax

3. Tax on estates, inheritance, gifts, legacies and other acquisitions mortis causa738

4. Excise taxes on articles enumerated under the NIRC,739 as amended, and taxes,
fees or charges on petroleum products.

5. Percentage or VAT on sales, barters or exchanges or similar transactions on goods


or services exchanges or similar transactions on goods or services except as otherwise
provided herein740

6. Taxes on the gross receipts of transportation of contractors and persons engaged


in the transportation of passengers or freight by hire and common carriers by air, land or
water except as provided by the code.741
7. Taxes, fees and charges imposed under the Tariff and Customs Code and other
Special Laws

8. Customs duties, registration fees of vessels and wharfage on wharves, tonnage


dues and all other kinds of customs fees, charges and dues, except wharfage on wharves
constructed and maintained by LGU concerned.

9. Taxes, fees and charges and other Impositions which contravene Existing
Government Policies or which are violative of the Fundamental Principles of Taxation.

736
Sec 133
737
Exception: banks and other financial institutions
738
Exception: tax on transfer of real property ownership
739
Taxable Articles embodied in the NIRC are:
1. Alcoholic products
2. Tobacco products
3. Petroleum products
4. Miscellaneous articles
5. Mineral products
Local governments can tax the selling of these finished products or the raw materials.
740
Percentage of taxes imposed when there is set of ration between the amount of tax and the volume
of sales.
741
Transportation contractors including persons who transport passengers for hire and other domestic
carriers by land, air or water for transport of passengers, except owners of bancas and owners of animal
drawn two-wheeled vehicle are subject to 3% percentage tax on their gross quarterly receipt (Sec 117,
NIRC)
Sec. 117 of NIRC specifies that the gross receipt of common carriers derived from their incoming and
outgoing freight shall not be subjected to local taxes imposed under LGC.

212
10.Taxes, fees, and charges and other impositions upon goods carried into or out of,
or passing through, the territorial jurisdiction of LGU in the guise of charges for wharfage,
tolls for bridges or otherwise, or other taxes, fees or charges in any form whatever upon
such goods or merchandise.

11. Taxes, fees, or charges on agricultural and aquatic products when sold by
marginal farmers or fishermen.

12. Taxes on business enterprises certified to by the Board of Investment as pioneer


or non-pioneer who enjoy tax holidays742 for a period of 6 and 4 years, respectively from the
date of registration

13. Taxes on premiums paid by way of reinsurance or retrocession.

14. Taxes, fees or other charges on Philippine products actually exported, excepted
otherwise provided herein in the LGC.

15. Taxes, fees or charges on Countryside and Baranggay Business Enterprises and
Cooperative duly registered under RA No. 6810 and RA 6938 otherwise known as the
Cooperative Code of the Phil. Respectively.

16. Taxes, fees or charges of any kind on the National Government, its agencies and
instrumentalities and LGU.

17. Taxes, fees, and charges imposed under special laws.

18. Taxes, fees or charges for registration of motor vehicles.743

742
exemption from income tax only
743
Exception: Tricycles

213
7. Collection of business tax

a. Tax period and manner of payment

The calendar year,744which may be paid in quarterly installments.745

b. Accrual of tax

On the 1st day of January of each year.746

New taxes, fees or charges or changes accrue on the 1st day of the quarter next
following the effectively of the ordinance imposing such new rates.747

c. Time of payment

Within the first 20 days of January or of each subsequent quarter.748

Not exceeding 6 months in case of extension of payment.749

d. Penalties on unpaid taxes, fees or charges

A surcharge not exceeding 27% of the amount of taxes, fees or charges and an
interest at the rate not exceeding 2% per month until such amount is fully paid.

In no case the total interest on the unpaid amount or portion thereof exceed 36
months750
e. Authority of treasurer in collection and inspection of books

All local taxes, fees, and charges shall be collected by the provincial, city, municipal,
or barangay treasurer, or their duly authorized deputies. The provincial, city or municipal
treasurer may designate the barangay treasurer as his deputy to collect local taxes, fees, or
charges. In case a bond is required for the purpose, the provincial, city or municipal
government shall pay the premiums thereon in addition to the premiums of bond that may
be required under this Code.751

The provincial, city, municipal or barangay treasurer may, by himself or through any
of his deputies duly authorized in writing, examine the books, accounts, and other pertinent
records of any person, partnership, corporation, or association subject to local taxes, fees

744
unless otherwise provided
745
Sec. 165
746
unless otherwise provided
747
Sec 166
748
unless otherwise provided
749
Sec 167
750
Sec 168
751
Sec. 170

214
and charges in order to ascertain, assess, and collect the correct amount of the tax, fee, or
charge. Such examination shall be made during regular business hours, only once for every
tax period, and shall be certified to by the examining official. Such certificate shall be made
of record in the books of accounts of the taxpayer examined. In case the examination herein
authorized is made by a duly authorized deputy of the local treasurer, the written authority of
the deputy concerned shall specifically state the name, address, and business of the taxpayer
whose books, accounts, and pertinent records are to be examined, the date and place of such
examination, and the procedure to be followed in conducting the same. For this purpose, the
records of the revenue district office of the Bureau of Internal Revenue shall be made
available to the local treasurer, his deputy or duly authorized representative.752

8. Taxpayers remedies

a. Periods of assessment and collection of local taxes, fees or


charges753

Assessment Collection

- within five years from the date they - within 5 years from the date of assessment
become due. by administrative or judicial action

- within 10 years, in case of fraud of intent to


evade payment

b. Protest of assessment

a. Assessment made by the local Treasurer

b. Taxpayer has 60 days from receipt to file written protest with Treasurer, otherwise
it shall become final and executory

c. Treasurer has 10 days within which to decide.754

752
Sec. 171
753
Suspension of the running of the prescriptive Period -
a. Treasurer legally prevented from the making the assessment or collection
b. Taxpayer requests for reinvestigation and executes waiver in writing
c. Taxpayer out of the country
d. Taxpayer cannot be located
754
Treasurer cancels assessment
Treasurer denies protest
- Taxpayer appeals within 30 days after receipt of denial
Treasurer does not act within 60 days
- Taxpayer has 30 days from the lapse of 60 days to appeal

215
c. Claim for refund of tax credit for erroneously or illegally
collected tax, fee or charge

A written claim for refund or credit is filed with the local Treasurer within 2 years
from the date of payment of such tax, fee, or charge, or from the date the taxpayer is entitled
to a refund or credit

9. Civil remedies by the LGU for collection of revenues

a. Local governments lien for delinquent taxes, fees or


charges

1. Superior to all items, charges or encumbrances in favor of any person, enforceable


by the administrative of judicial action
2. Covers not only property or rights subject to the lien but also upon property used
in business.
b. Civil remedies, in general

1) Administrative action

1. Distraint of goods, chattels or effects and other personal property of whatever


character
2. Levy upon real property and interest in or rights to real property
2) Judicial action

Either of these remedies or all may be pursued concurrently or simultaneously at the


discretion of local government unit concerned.755

c. Procedure for administrative action

1) Distraint of personal property

(a) Seizure Upon failure of the person owing any local tax, fee, or
charge to pay the same at the time required, the local
treasurer or his deputy may, upon written notice, seize or
confiscate any personal property belonging to that person or
any personal property subject to the lien in sufficient
quantity to satisfy the tax, fee, or charge in question,
together with any increment thereto incident to delinquency
and the expenses of seizure. In such case, the local treasurer
or his deputy shall issue a duly authenticated certificate

755
Sec 174

216
based upon the records of his office showing the fact of
delinquency and the amounts of the tax, fee, or charge and
penalty due. Such certificate shall serve as sufficient warrant
for the distraint of personal property aforementioned,
subject to the taxpayer's right to claim exemption under the
provisions of existing laws. Distrained personal property
shall be sold at public auction in the manner hereon
provided for.

(b) Accounting of distrained The officer executing the distraint shall make or cause to be
goods. made an account of the goods, chattels or effects distrained,
a copy of which signed by himself shall be left either with
the owner or person from whose possession the goods,
chattels or effects are taken, or at the dwelling or place or
business of that person and with someone of suitable age
and discretion, to which list shall be added a statement of
the sum demanded and a note of the time and place of sale.

(c) Publication The officer shall forthwith cause a notification to be


exhibited in not less than three (3) public and conspicuous
places in the territory of the local government unit where
the distraint is made, specifying the time and place of sale,
and the articles distrained. The time of sale shall not be less
than twenty (20) days after the notice to the owner or
possessor of the property as above specified and the
publication or posting of the notice. One place for the
posting of the notice shall be at the office of the chief
executive of the local government unit in which the property
is distrained.

(d) Release of distrained If at any time prior to the consummation of the sale, all the
property upon payment prior proper charges are paid to the officer conducting the sale,
to sale the goods or effects distrained shall be restored to the
owner.

(e) Procedure of sale At the time and place fixed in the notice, the officer
conducting the sale shall sell the goods or effects so
distrained at public auction to the highest bidder for cash.
Within five (5) days after the sale, the local treasurer shall

217
make a report of the proceedings in writing to the local chief
executive concerned.756

(f) Disposition of proceeds The proceeds of the sale shall be applied to satisfy the tax,
including the surcharges, interest, and other penalties
incident to delinquency, and the expenses of the distraint
and sale. The balance over and above what is required to pay
the entire claim shall be returned to the owner of the
property sold. The expenses chargeable upon the seizure
and sale shall embrace only the actual expenses of seizure
and preservation of the property pending the sale, and no
charge shall be imposed for the services of the local officer
or his deputy. Where the proceeds of the sale are insufficient
to satisfy the claim, other property may, in like manner, be
distrained until the full amount due, including all expenses,
is collected.757

2) Levy of real property, procedure

After the expiration of the time required to pay the delinquent tax, fee, or charge,
real property may be levied on before, simultaneously, or after the distraint of personal
property belonging to the delinquent taxpayer. To this end, the provincial, city or municipal
treasurer, as the case may be, shall prepare a duly authenticated certificate showing the name
of the taxpayer and the amount of the tax, fee, or charge, and penalty due from him. Said
certificate shall operate with the force of a legal execution throughout the Philippines.

Levy shall be effected by writing upon said certificate the description of the property
upon which levy is made. At the same time, written notice of the levy shall be mailed to or
served upon the assessor and the Register of Deeds of the province or city where the
property is located who shall annotate the levy on the tax declaration and certificate of title
of the property, respectively, and the delinquent taxpayer or, if he be absent from the
Philippines, to his agent or the manager of the business in respect to which the liability
arose, or if there be none, to the occupant of the property in question.

In case the levy on real property is not issued before or simultaneously with the
warrant of distraint on personal property, and the personal property of the taxpayer is not
sufficient to satisfy his delinquency, the provincial, city or municipal treasurer, as the case
may be, shall within thirty (30) days after execution of the distraint, proceed with the levy on
the taxpayer's real property.

756
Should the property distrained be not disposed of within one hundred and twenty (120) days from the
date of distraint, the same shall be considered as sold to the local government unit concerned for the
amount of the assessment made thereon by the Committee on Appraisal and to the extent of the same
amount, the tax delinquencies shall be cancelled.
757
Sec. 165

218
A report on any levy shall, within ten (10) days after receipt of the warrant, be
submitted by the levying officer to the sanggunian concerned.758

3) Further distraint or levy

The remedies by distraint and levy may be repeated if necessary until the full amount
due, including all expenses, is collected.759

4) Exemption of personal property from distraint or


levy

(a) Tools and implements necessarily used by the delinquent taxpayer in his trade or
employment;

(b) One (1) horse, cow, carabao, or other beast of burden, such as the delinquent
taxpayer may select, and necessarily used by him in his ordinary occupation;

(c) His necessary clothing, and that of all his family;

(d) 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 Ten
thousand pesos (P10,000.00);

(e) Provisions, including crops, actually provided for individual or family use
sufficient for four (4) months;

(f) The professional libraries of doctors, engineers, lawyers and judges;

(g) One fishing boat and net, not exceeding the total value of Ten thousand pesos
(P10,000.00), by the lawful use of which a fisherman earns his livelihood; and

(h) Any material or article forming part of a house or improvement of any real
property.760

5) Penalty on local treasurer for failure to issue and


execute warrant of distraint or levy

Any local treasurer who fails to issue or execute the warrant of distraint or levy after
the expiration of the time prescribed, or who is found guilty of abusing the exercise thereof
by competent authority shall be automatically dismissed from the service after due notice
and hearing.761

758
Sec. 166
759
Sec. 184
760
Sec. 185
761
Sec. 177

219
d. Procedure for judicial action

1) In any court of competent jurisdiction


2) Filed by local Treasurer
3) Within 5 years from the date taxes, fees or charges become due

220
B. Real Property Taxation

1. Fundamental principles

a) Real property shall be appraised at its current and fair market value.
b) Real property shall be classified for assessment purposes on the basis of its actual
use.

c) Real property shall be assessed on the basis of a uniform standard within each
local government unit.
d) The appraisal, assessment, and collection of real property tax shall not be let to
any private person; and
e. ) The appraisal and assessment of real property shall be equitable762

2. Nature of real property tax

Property taxes are assessed on all property, or all property of a certain class located
within a certain territory on a specified date in proportion to its value or in accordance with
some other reasonable method of apportionment.763

In the Philippines, a real property tax is an annual ad valorem tax imposed by LGUs
on real property within their jurisdiction, determined on the basis of a fixed proportion of
the value of the property.

3. Imposition of real property tax

a. Power to levy real property tax

A province or city or a municipality within the Metropolitan Manila Area may levy an
annual ad valorem tax on real property such as land, building, machinery, and other
improvement not hereinafter specifically exempted.764

762
Sec. 198
763
The function of a property tax is to raise revenue. Such tax does not impose any condition nor does it
place any restriction upon the use of the property taxed.
764
Sec. 232

221
b. Exemption from real property tax765

1. Real property owned by the Republic of the Philippines or any of its political
subdivisions except when the beneficial use thereof has been granted to a taxable person;
2. Charitable institutions, churches, parsonages, or convents appurtenant thereto,
mosques, non profit or religious cemeteries, and all lands, buildings, and improvements
actually, directly andexclusively used for religious, charitable, or educational purposes.

3. All pieces of machinery and equipment that are actually, directly, and exclusively
used by local water districts, and government owned or controlled corporations engaged in
the supply and distribution of water and/or generation and transmission of electric power.

4. All real property owned by duly registered cooperatives,766 and

5. Machinery and equipment used for pollution control and environmental


protection.

4. Appraisal and assessment of real property tax

a. Rule on appraisal of real property at fair market value

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.767

b. Declaration of real property

It shall be the responsibility of the owner, administrator or their representatives to


declare, under oath, the true value of real property, taxable or exempt, within 60 days after
the acquisition. The sworn declaration shall be filed once every 3 years before June 30 th of
the year commencing 1992. The failure or refusal to make that declaration within the
prescribed period would authorize the provincial or city assessor to declare the property in
the name of the defaulting owner, if known, or against an unknown owner as the case may
be, and to assess the property for taxation.768

765
Real properties of review schools are subject to tax (why? Considered an ordinary corporation)
Non-stock, nonprofit private schools are exempt.
Proprietary schools (stock and profit) duly accredited by DECS or CHED are exempt, if property is
actually, directly and exclusively used for educational purposes.
The term exclusively under the Constitution does not mean solely butonly primarily (Roman
Catholic Church v. Hastings, 5 Phil 701, Province of Abra v. Hernando, 107 SCRA 104 & other cases).
766
as provided for under R.A. 6938
767
Sec. 201
768
Secs. 201-204

222
c. Listing of real property in assessment rolls

(a) In every province and city, including the municipalities within the Metropolitan
Manila Area, there shall be prepared and maintained by the provincial, city or municipal
assessor an assessment roll wherein shall be listed all real property, whether taxable or
exempt, located within the territorial jurisdiction of the local government unit concerned.
Real property shall be listed, valued and assessed in the name of the owner or administrator,
or anyone having legal interest in the property.

(b) The undivided real property of a deceased person may be listed, valued and
assessed in the name of the estate or of the heirs and devisees without designating them
individually; and undivided real property other than that owned by a deceased may be listed,
valued and assessed in the name of one or more co-owners. Such heir, devisee, or co-owner
shall be liable severally and proportionately for all obligations and the payment of the real
property tax with respect to the undivided property.

(c) The real property of a corporation, partnership, or association shall be listed,


valued and assessed in the same manner as that of an individual.

(d) Real property owned by the Republic of the Philippines, its instrumentalities and
political subdivisions, the beneficial use of which has been granted, for consideration or
otherwise, to a taxable person, shall be listed, valued and assessed in the name of the
possessor, grantee or of the public entity if such property has been acquired or held for
resale or lease.769

d. Preparation of schedules of fair market value

Before any general revision of property assessment is made, there shall be prepared a
schedule of fair market values by the provincial, city and municipal assessor of the
municipalities within the Metropolitan Manila Area for the different classes of real property
situated in their respective local government units for enactment by ordinance of the
sanggunian concerned. The schedule of fair market values shall be published in a newspaper
of general circulation in the province, city or municipality concerned or in the absence
thereof, shall be posted in the provincial capitol, city or municipal hall and in two other
conspicuous public places therein.770

1) Authority of assessor to take evidence

For the purpose of obtaining information on which to base the market value of any
real property, the assessor of the province, city or municipality or his deputy may summon
the owners of the properties to be affected or persons having legal interest therein and
witnesses, administer oaths, and take deposition concerning the property, its ownership,
amount, nature, and value.771

769
Sec. 205
770
Sec. 212
771
Sec. 213

223
2) Amendment of schedule of fair market value

The provincial, city or municipal assessor may recommend to the sanggunian


concerned amendments to correct errors in valuation in the schedule of fair market values.
The sanggunian concerned shall, by ordinance, act upon the recommendation within ninety
(90) days from receipt thereof.772

e. Classes of real property

For purposes of assessment, real property shall be classified as residential,


agricultural, commercial, industrial, mineral, timberland or special.

The city or municipality within the Metropolitan Manila Area, through their
respective sanggunian, shall have the power to classify lands as residential, agricultural,
commercial, industrial, mineral, timberland, or special in accordance with their zoning
ordinances.773

f. Actual use of property as basis of assessment

Regardless of where located, whoever owns it, and whoever uses it.774

g. Assessment of real property

1) Assessment levels

The assessment levels to be applied to the fair market value of real property to
determine its assessed value shall be fixed by ordinances of the sangguniangpanlalawigan,
sangguniangpanlungsod or sangguniangbayan of a municipality within the Metropolitan Manila
Area, at the rates not exceeding the following:

(a) On Lands:

CLASS ASSESSMENT LEVELS

Residential 20%
Agricultural 40%
Commercial 50%
Industrial 50%
Mineral 50%
Timberland 20%

772
Sec. 214
773
Sec. 215
774
Sec. 217

224
(b) On Buildings and Other Structures:

(1) Residential
Fair market Value

Over Not Over Assessment Levels

P175,000.00 0%
P175,000.00 300,000.00 10%
300,000.00 500,000.00 20%
500,000.00 750,000.00 25%
750,000.00 1,000,000.00 30%
1,000,000.00 2,000,000.00 35%
2,000,000.00 5,000,000.00 40%
5,000,000.00 10,000,000.00 50%
10,000,000.00 60%

(2) Agricultural

Fair Market Value


Over Not Over Assessment Levels

P300,000.00 25%
P300,000.00 500,000.00 30%
500,000.00 750,000.00 35%
750,000.00 1,000,000.00 40%
1,000,000.00 2,000,000.00 45%
2,000,000.00 50%

(3) Commercial / Industrial

Fair Market Value


Over Not Over Assessment Levels

P300,000.00 30%
P300,000.00 500,000.00 35%
500,000.00 750,000.00 40%
750,000.00 1,000,000.00 50%
1,000,000.00 2,000,000.00 60%
2,000,000.00 5,000,000.00 70%
5,000,000.00 10,000,000.00 75%
10,000,000.00 80%

225
(4) Timberland

Fair Market Value


Over Not Over Assessment Levels

P300,000.00 45%
P300,000.00 500,000.00 50%
500,000.00 750,000.00 55%
750,000.00 1,000,000.00 60%
5,000,000.00 2,000,000.00 65%
2,000,000.00 70%

(c) On Machineries

Class Assessment Levels

Agricultural 40%
Residential 50%
Commercial 80%
Industrial 80%

(d) On Special Classes: The assessment levels for all


lands buildings, machineries and other
improvements;

Actual Use Assessment Level

Cultural 15%
Scientific 15%
Hospital 15%
Local water districts 10%
Government-owned or controlled corporations
engaged in the supply and distribution of water
and/or generation and transmission of electric power
10%775

2) General revisions of assessments and property


classification

Within two (2) years after the effectivity of this Code and every three (3) years
thereafter, the provincial, city or municipal assessor shall undertake a general revision of real
property assessments.776

775
Sec. 218
776
Sec. 219

226
3) Date of effectivity of assessment or reassessment

Made after the first (1st) day of January of any year - shall take effect on the first (1st)
day of January of the succeeding year.777

4) Assessment of property subject to back taxes

Real property declared for the first time shall be assessed for taxes for the period
during which it would have been liable but in no case of more than ten (10) years prior to
the date of initial assessment. Such taxes shall be computed on the basis of the applicable
schedule of values in force during the corresponding period.778

5) Notification of new or revised assessment

When real property is assessed for the first time or when an existing assessment is
increased or decreased, the provincial, city or municipal assessor shall within thirty (30) days
give written notice of such new or revised assessment to the person in whose name the
property is declared. The notice may be delivered personally or by registered mail or through
the assistance of the punong barangay to the last known address of the person to be served.

h. Appraisal and assessment of machinery

(a) The fair market value of a brand-new machinery shall be the acquisition cost.779

(b) If the machinery is imported, the acquisition cost includes freight, insurance,
bank and other charges, brokerage, arrastre and handling, duties and taxes, plus charges at
the present site.780

777
The reassessment of real property due to its partial or total destruction, or to a major change in its
actual use, or to any great and sudden inflation or deflation of real property values, or to the gross
illegality of the assessment when made or to any other abnormal cause, shall be made within ninety (90)
days from the date any such cause or causes occurred, and shall take effect at the beginning of the
quarter next following the reassessment.
778
Sec. 222
779
In all other cases, the fair market value shall be determined by dividing the remaining economic life of
the machinery by its estimated economic life and multiplied by the replacement or reproduction cost.
780
The cost in foreign currency of imported machinery shall be converted to peso cost on the basis of
foreign currency exchange rates as fixed by the Central Bank.

227
5. Collection of real property tax

a. Date of accrual of real property tax

On the first day of January.781

b. Collection of tax

1) Collecting authority

The responsibility of the city or municipal treasurer concerned.

The city or municipal treasurer may deputize the barangay treasurer to collect all
taxes on real property located in the barangay: Provided, the barangay treasurer is properly
bonded for the purpose and the premium on the bond shall be paid by the city or municipal
government concerned.782

2) Duty of assessor to furnish local treasurer with


assessment rolls

The provincial, city or municipal assessor shall prepare and submit to the treasurer of
the local government unit, on or before the thirty-first (31st) day of December each year, an
assessment roll containing a list of all persons whose real properties have been newly
assessed or reassessed and the values of such properties.783

3) Notice of time for collection of tax

On or before the thirty-first (31st) day of January each year or any other date to be
prescribed by the sanggunianconcerned/

Said notice shall likewise be published in a newspaper of general circulation in the


locality once a week for two (2) consecutive weeks.

c. Periods within which to collect real property tax

Within five (5) years from the date they become due.784

Within ten (10) years from discovery - in case there is fraud or intent to evade
payment of the tax.785

781
From that date it shall constitute a lien on the property which shall be superior to any other lien,
mortgage, or encumbrance of any kind whatsoever, and shall be extinguished only upon the payment of
the delinquent tax (Sec. 246)
782
Sec. 247
783
Sec. 248
784
No action for the collection of the tax, whether administrative or judicial, shall be instituted after the
expiration of such period.
785
Sec. 270

228
d. Special rules on payment

1) Payment of real property tax in installments

The owner of the real property or the person having legal interest therein may pay
the basic real property tax and the additional tax for Special Education Fund (SEF) due
thereon without interest in four (4) equal installments; the first installment to be due and
payable on or before March Thirty-first (31st); the second installment, on or before June
Thirty (30); the third installment, on or before September Thirty (30); and the last
installment on or before December Thirty-first (31st), except the special levy the payment of
which shall be governed by ordinance of the sanggunianconcerned.

Payments of real property taxes shall first be applied to prior years delinquencies,
interests, and penalties, if any, and only after said delinquencies are settled may tax payments
be credited for the current period.786

2) Interests on unpaid real property tax

Two percent (2%) per month, until the delinquent tax shall have been fully paid.

In no case shall the total interest on the unpaid tax or portion thereof exceed thirty-
six (36) months.787

3) Condonation of real property tax

In case of a general failure of crops or substantial decrease in the price of agricultural


or agri-based products, or calamity in any province, city or municipality, the
sanggunianconcerned, by ordinance passed prior to the first (1st) day of January of any year
and upon recommendation of the Local Disaster Coordinating Council, may condone or
reduce, wholly or partially, the taxes and interest thereon for the succeeding year or years in
the city or municipality affected by the calamity.788

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.789

The period of prescription within which to collect shall be suspended for the time during which:
1. The local treasurer is legally prevented from collecting the tax;
2. The owner of the property or the person having legal interest therein requests for reinvestigation
and executes a waiver in writing before the expiration of the period within which to collect; and
3. The owner of the property or the person having legal interest therein is out of the country or
otherwise cannot be located
786
Sec. 250
787
Sec. 255
788
Sec. 276
789
Sec. 277

229
e. Remedies of LGUs for collection of real property tax

1) Issuance of notice of delinquency for real property


tax payment

To be posted at the main hall and in a publicly accessible and conspicuous place in
each barangay of the local government unit concerned. The notice of delinquency shall also
be published once a week for two (2) consecutive weeks, in a newspaper of general
circulation in the province, city, or municipality.790

2) Local governments lien

The basic real property tax and any other tax levied constitutes a lien on the property
subject to tax, superior to all liens, charges or encumbrances in favor of any person,
irrespective of the owner or possessor thereof, enforceable by administrative or judicial
action, and may only be extinguished upon payment of the tax and the related interests and
expenses.791

3) Remedies in general

The local government unit concerned may avail of the remedies by administrative
action thru levy on real property or by judicial action.792

4) Resale of real estate taken for taxes, fees or charges

The sanggunian concerned may, by ordinance duly approved, and upon notice of not
less than twenty (20) days, sell and dispose of the real property acquired at public auction.
The proceeds of the sale shall accrue to the general fund of the local government unit
concerned.793

790
Such notice shall specify the date upon which the tax became delinquent and shall state that personal
property may be distrained to effect payment. It shall likewise state that any time before the distraint of
personal property, payment of the tax with surcharges, interests and penalties may be made, and unless
the tax, surcharges and penalties are paid before the expiration of the year for which the tax is due except
when the notice of assessment or special levy is contested administratively or judicially, the delinquent
real property will be sold at public auction, and the title to the property will be vested in the purchaser,
subject, however, to the right of the delinquent owner of the property or any person having legal interest
therein to redeem the property within one (1) year from the date of sale(Sec. 254)
791
Sec. 257
792
Sec. 256
793
Sec. 264

230
5) Further levy until full payment of amount due

Levy may be repeated if necessary until the full amount due, including all expenses, is
collected.794

6. Refund or credit of real property tax

a. Payment under protest

(a) No protest shall be entertained unless the taxpayer first pays the tax. There shall
be annotated on the tax receipts the words "paid under protest". The protest in writing must
be filed within thirty (30) days from payment of the tax to the provincial, city treasurer or
municipal treasurer, in the case of a municipality within Metropolitan Manila Area, who shall
decide the protest within sixty (60) days from receipt.

(b) The tax or a portion thereof paid under protest, shall be held in trust by the
treasurer concerned.

(c) In the event that the protest is finally decided in favor of the taxpayer, the
amount or portion of the tax protested shall be refunded to the protestant, or applied as tax
credit against his existing or future tax liability.

(d) In the event that the protest is denied or upon the lapse of the sixty (60) day
period prescribed in subparagraph (a), the taxpayer may appeal.795

b. Repayment of excessive collections

When an assessment of basic real property tax or any other tax levied is found to be
illegal or erroneous and the tax is accordingly reduced or adjusted, the taxpayer may file a
written claim for refund or credit for taxes and interests with the provincial or city treasurer
within two (2) years from the date the taxpayer is entitled to such reduction or adjustment.

The provincial or city treasurer shall decide the claim for tax refund or credit within
sixty (60) days from receipt thereof. In case the claim for tax refund or credit is denied, the
taxpayer may appeal.796

794
Sec. 265
795
Sec. 252
796
Sec. 253

231
7. Taxpayers remedies

a. Contesting an assessment of value of real property

1) Appeal to the Local Board of Assessment


Appeals (LBAA)

Within sixty (60) days from the date of receipt of the written notice of assessment,
any owner or person having legal interest in the property who is not satisfied with the action
of the provincial, city or municipal assessor in the assessment of his property may appeal to
the Board of Assessment Appeals of the provincial or city by filing a petition under oath in
the form prescribed for the purpose, together with copies of the tax declarations and such
affidavits or documents submitted in support of the appeal.797

2) Appeal to the Central Board of Assessment


Appeals (CBAA)

Within thirty (30) days after receipt of the decision of said Board, the owner of the
property or the person having legal interest therein or the assessor who is not satisfied with
the decision of the Board, may appeal to the Central Board of Assessment Appeals. The
decision of the Central Board shall be final and executory.798

3) Effect of payment of tax

Appeal on assessments of real property shall, in no case, suspend the collection of


the corresponding realty taxes on the property involved as assessed by the provincial or city
assessor, without prejudice to subsequent adjustment depending upon the final outcome of
the appeal.799

b. Payment of real property under protest

1) File protest with local treasurer800

2) Appeal to the Local Board of Assessment


Appeals801

3) Appeal to the Central Board of Assessment


Appeals802

797
Sec. 226
798
Sec. 229 (c), last par.
799
Sec. 231
800
See B. (6)(a), under Refund or credit of real property tax, supra
801
See (a)(1), supra
802
See (a)(2), supra

232
4) Appeal to the CTA

By filing a petition for review803 with the CTA within thirty (30) days from the receipt
of the decision or ruling or in the case of inaction, from the expiration of the period fixed by
law to act thereon.804

5) Appeal to the SC

By filing with the said Court of Appeals a notice of appeal and with the Supreme
Court a petition for review, within thirty (30) days from the date he receives notice of the
ruling, order or decision. If, within the aforesaid period, he fails to perfect his appeal, the
said ruling, order or decision shall become final and conclusive against him.

If no decision is rendered by the Court within thirty days from the date a case is
submitted for decision, the party adversely affected by said ruling, order or decision may file
with said Court a notice of his intention to appeal to the Supreme Court, and if, within thirty
(30) days from the filing of said notice of intention to appeal, no decision has as yet been
rendered by the Court, the aggrieved party may file directly with the Supreme Court an
appeal from said ruling, order or decision, notwithstanding the foregoing provisions of this
section.

If any ruling, order or decision of the Court of Tax Appeals be adverse to the
Government, the Collector of Internal Revenue, the Commissioner of Customs, or the
provincial or city Board of Assessment Appeals concerned may likewise file an appeal
therefrom to the Supreme Court in the manner and within the same period as above
prescribed for private parties.805

803
under a procedure analogous to that provided for under Rule 42 of the 1997 Rules of Civil Procedure
804
Sec. 11, RA No. 1125
805
Any proceeding directly affecting any ruling, order or decision of the Court of Tax Appeals shall have
preference over all other civil proceedings except habeas corpus, workmen's compensation and election
cases.

233
IV. Tariff and Customs Code of 1978, as amended (TCC)

A. Tariff and duties, defined

Custom duties Tariff

Duties which are one charged upon A book of rates, a table or catalogue drawn
commodities on their being imported into or usually in alphabetical order containing the
exported out of a country. names of several kinds of merchandise with
the duties to be paid for the same as settled
or agreed upon between several states that
holds commerce together.

B. General rule: All imported articles are subject to duty. Importation by the
government taxable.

All articles when imported from a foreign country including those previously
exported from the Philippines are subject to duty unless otherwise specifically provided for
in the Tariff and Customs Code or other laws.806

C. Purpose for imposition

For the protection of consumers and manufacturers, as well as Phil. products from
undue competition posed by foreign-made products.

D. Flexible tariff clause

A provision in the Tariff and Customs Code,807 which implements the


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

806
Sec. 100
807
Sec. 401

234
E. Requirements of importation

1. Beginning and ending of importation

Importation begins when the carrying vessel or aircraft enters the jurisdiction of the
Philippines with the intention to unload808 therein.

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 gave 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.809

2. Obligations of importer

a. Cargo manifest

A cargo manifest shall in no case be changed or altered, except after entry of the
vessel, by means of an amendment by the master, consignee, or agent thereof, under oath,
and attached to the original manifest.810

b. Import entry

It is a declaration to the BOC showing particulars of the imported article that will
enable the customs authorities to determine the correct duties. An importer is required to
file an import entry. It must be accomplished from disembarking of last cargo from vessel.

c. Declaration of correct weight or value

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.811 If he omits or disregards this duty and a punishable discrepancy between the
declared weight and actual weight of the cargo exists, the inevitable conclusion is that he is
negligent or careless.812 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.

808
Even if not yet unloaded, and there is unmanifested cargo, forfeiture may take place because
importation has already begun.
809
Sec. 1202
810
Sec. 1228, 3rd par., Rev. Adm. Code
811
Sec. 2523
812
See Delgado Shipping Agencies, Inc. vs. Commissioner of Customs, C.T.A. Case No. 2685, Feb. 15, 1977;
Macondray& Co., Inc. vs. Commissioner of Customs, C.T.A. Case No. 274 1, Feb. 3, 1977; Macondray& Co.,
Inc, vs. Commissioner of Customs, C.T.A. Case No. 2656, January 21, 1977 and cases cited therein.

235
d. Liability for payment of duties

The liability for duties, taxes, fees and other charges attaching on importation
constitutes a personal debt due from the importer to the government which can be
discharged only by payment in full of all duties, taxes, fees and other charges legally accruing.
It also 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.813

e. Liquidation of duties

If the Collector shall approve the returns of the appraiser and the report of the
weights, gauge or quantity, 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.

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.814

If to determine the exact amount due under the law, some future action is required,
the liquidation shall be deemed to be tentative as to the item or items affected and shall to
that extent be subject to future and final readjustment and settlement. The entry in such case
shall be stamped "Tentative liquidation".815

When articles have been entered and passed free of duty or final adjustment of duties
made, with subsequent delivery, such entry and passage free of duty or settlement of duties
will, after the expiration of one year, from the date of the final payment of duties, in the
absence of fraud or protest, be final and conclusive upon all parties, unless the liquidation of
the import entry was merely tentative.816

In determining the total amount of duties, taxes, surcharges, wharfage and/or other
charges to be paid on entries, 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.817

f. Keeping of records

813
Sec. 1204
814
Sec. 1601
815
Sec. 1602
816
Sec. 1603
817
Sec. 1604

236
F. Importation in violation of TCC

1. Smuggling

a. An act of any person who shall:

1. Fraudulently import any article contrary to law, or


2. Assist in so doing, or
3. Receive, conceal, buy, sell, facilitate, transport, conceal or sell such
article knowing its illegal importation.818
4. Export contrary to law.819

b. The Philippines is divided into various ports of entry entry other than port of
entry, will be smuggling.

2. Other fraudulent practices

Any person who 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 by
means of any false statement, written or verbal, or by means of any false or fraudulent
practice whatsoever, or 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 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, shall, for each
offense, be punished by a fine of not less than six hundred pesos nor more than five
thousand pesos and by imprisonment for not less than six months nor more than two (2)
years. If the offender is an alien, he shall be deported after serving the sentence.820

G. Classification of goods

1. Taxable importation

All articles imported from any foreign country into the Philippines, upon each
importation, even though previously exported from the Philippines, except as otherwise
specifically provided.821

818
Sec. 3601
819
Sec. 3514
820
Sec. 3602
821
Sec. 101

237
2. Prohibited importation

a. Dynamite, gunpowder, ammunitions and other explosives, firearm and weapons of


war, and detached parts thereof, except when authorized by law.1awphil

b. Written or printed article in any form containing any matter advocating or inciting
treason, rebellion, insurrection or sedition against the Government of the Philippines, of
forcible resistance to any law of the Philippines, or containing any threat to take the life of or
inflict bodily harm upon any person in the Philippines.

c. Written or printed articles, photographs, engravings, lithographs, objects,


paintings, drawings or other representation of an obscene or immoral character.

d. 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.

e. 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.

f. Lottery and sweepstakes tickets except those authorized by the Philippine


Government, advertisements thereof and lists of drawings therein.

g. 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.

h. Any adulterated or misbranded article of food or any adulterated or misbranded


drug in violation of the provisions of the "Food and Drugs Act."

i. Marihuana, 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 authorized by the Collector of
Internal Revenue, for medicinal purposes only.

j. Opium pipes and parts thereof, of whatever material.

k. All other articles the importation of which is prohibited by law.822

822
Sec. 102

238
H. Classification of duties

1. Ordinary/Regular duties

Imposed on imported articles that enter the country of the Philippines in avoidance
with the schedules and classifications provided under the Tariff and Customs Code.

a. Ad valorem; Methods of valuation

1) Transaction value

The price actually paid or payable for the goods when sold for export to the
Philippines, adjusted by adding:

a. The following to the extent that they are incurred by the buyer but are not
included in the price actually paid or payable for the imported goods:

1. Commissions and brokerage fees;823

2. Cost of containers;

3. The cost of packing, whether for labour or materials;

4. The value, apportioned as appropriate, of the following goods and


services: materials, components, parts and similar items incorporated in the imported
goods; tools; dies; moulds and similar items used in the production of imported
goods; materials consumed in the production of the imported goods; and
engineering, development, artwork, design work and plans and sketches undertaken
elsewhere than in the Philippines and necessary for the production of imported
goods, where such goods and services are supplied directly or indirectly by the buyer
free of charge or at a reduced cost for use in connection with the production and
sale for export of the imported goods;

5. The amount of royalties and license fees related to the goods being valued
that the buyer must pay, either directly or indirectly, as a condition of sale of the
goods to the buyer;

b. The value of any part of the proceeds of any subsequent resale, disposal or use of
the imported goods that accrues directly or indirectly to the seller;

c. The cost of transport of the imported goods from the port of exportation to the
port of entry in the Philippines;

d. Loading, unloading and handling charges associated with the transport of the
imported goods from the country of exportation to the port of entry in the Philippines; and

823
except buying commissions

239
e. The cost of insurance.824

2) Transaction value of identical goods

Where the dutiable value cannot be determined under method one, the dutiable
value shall be 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. Minor differences in appearances shall not
preclude goods otherwise conforming to the definition from being regarded as identical.825

3) Transaction value of similar goods

Where the dutiable value cannot be determined under the preceding method, the
dutiable value shall be 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. The quality of the goods, their reputation
and the existence of a trademark shall be among the factors to be considered in determining
whether goods are similar.826xxx

4) Deductive value

Based on the unit price at which the imported goods 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 the importation of the goods being valued, to
persons not related to the persons from whom they buy such goods, subject to deductions
for the following:

(1) Either the commissions usually paid or agreed to be paid or the additions usually
made for profit and general expenses in connection with sales in such country of imported
goods of the same class or kind;

(2) The usual costs of transport and insurance and associated costs incurred within
the Philippines; and

(3) Where appropriate, the costs and charges referred to in subsection (A) (3), (4) and
(5); and

824
Sec. 1 (A), R.A. 9135, amending Sec. 201 of TCC
825
Sec. 1 (B), Id.
826
Sec. 1 (C), id.

240
(4) The customs duties and other national taxes payable in the Philippines by reason
of the importation or sale of the goods.827xxx

5) Computed value

The sum of:

(1) The cost or the value of materials and fabrication or other processing employed
in producing the imported goods;

(2) The amount for profit and general expenses equal to that usually reflected in the
sale of goods of the same class or kind as the goods being valued which are made by
producers in the country of exportation for export to the Philippines;

(3) The freight, insurance fees and other transportation expenses for the importation
of the goods;

(4) Any assist, if its value is not included under paragraph (1) hereof; and

(5) The cost of containers and packing, if their values are not included under
paragraph (1) hereof.828xxx

6) Fallback value

If the dutiable value cannot be determined under the preceding methods described
above, it shall be determined by using other reasonable means and on the basis of data
available in the Philippines.

If the importer so requests, the importer shall be informed in writing of the dutiable
value determined under Method Six and the method used to determine such value.

No dutiable value shall be determined under Method Six on the basis of:

(1) The selling price in the Philippines of goods produced in the Philippines;
(2) A system that provides for the acceptance for customs purposes of the higher of
two alternative values;
(3) The price of goods in the domestic market of the country of exportation;
(4) The cost of production, other than computed values, that have been determined
for identical or similar goods in accordance with Method Five hereof;
(5) The price of goods for export to a country other than the Philippines;
(6) Minimum customs values; or

827
Sec. 1 (D), id.
828
Sec. 1 (E), id.

241
(7) Arbitrary or fictitious values.829
b. Specific

Duty based on the dutiable weight of goods number or measurement.

2. Special duties

Imposed in addition to regular or ordinary duties principally in order to protect local


industries against unfair competition from foreign manufacturers or procedures; consumer
against possible deceptions; and national interest.

a. Dumping duties

Imposed by the Secretary of Finance, upon the recommendation of the Tariff


Commission when:

a. The price of the imported article is deliberately or continually fixed at less


than the fair market value or cost of production; and

b. Importation would cause or likely cause and injury to local industries engaged
in the manufacture or production of the same or similar articles or prevent
their establishment.

Amount of special duty: extent of the underpricing.

b. Countervailing duties

Special duty imposed on imported articles which are granted any kind or form of
subsidy by the government in the country or origin or exportation, the importation of which
has caused or threatens to cause material injury to a domestic industry or has materially
relaided the growth or, prevents the establishment of a domestic industry.830

c. Marking duties

Special duty of five percent (5%) ad valorem imposed or articles properly marked,
collected by the commissioner, except when such article is exported or destroyed under the
customs supervision and prior to final liquidation of the corresponding entry.831

829
Sec. 1 (F), id.
830
R.A. 8751
Requisites:
1. The levy of an excise tax or inland tax or local goods of the same or similar class as the article
imported or the grant of subsidy to the foreign exporter by his government; and
2. The importation is likely to insure materially established local industries or prevent their
establishments.
Amount of special duty: Equal to the bounty or subsidy or subvention.
831
Purpose: To prevent possible deception of the consumers.

242
d. Retaliatory/Discriminatory duties

Imposed on imported goods whenever it is found as a fact that the country of origin
discriminates against the commerce of the Philippines in such a manner as to place the
commerce of the Philippines at a disadvantage compared with the commerce of any foreign
country.

e. Safeguard

Safeguard measures are emergency measures, including tariffs, to protect domestic


industries and producers from increased imports which inflict or could inflict serious injury
on them.832

The CTA is vested with jurisdiction to review decisions of the Secretary of Trade
and Industry imposing safeguard measures.833

The DTI Secretary cannot impose the safeguard measures if the Tariff Commission
does not favorably recommend its imposition.

I. Drawbacks

A drawback is a refund or tax credit granted on duties that had been paid on
products that are subsequently exported, such as on all fuel imported into the Philippines
used for propulsion of vessels engaged in trade with foreign countries, or in the coastwise
trade, or articles used as raw materials for items subsequently exported.

A drawback is a device resorted to for enabling a commodity affected by taxes to be


exported and sold in foreign markets upon the same terms as if it had not been taxed at all.
It refers to duties or taxes paid back or remitted by the government on the exportation of
that on which they were levied under the Tariff and Customs Code. It refers to refund of
duties on imported fuel used for provision of vessels.

832
Safeguard measures that may be imposed. Additional tariffs, import quotas or banning of imports.
833
as provided under Rep. Act No. 8800, the Safeguard Measures Act (SMA) (Southern Cross Cement
Corporation v. The Philippine Cement Manufacturers Corp., et al., G. R. No. 158540, July 8, 2004)

243
J. Remedies

1. Government

a. Administrative/Extrajudicial

1) Search, seizure, forfeiture, arrest

For the enforcement of the customs and tariff laws, the following persons are
authorized to effect searches, seizures and arrests conformably with the provisions of said
laws:

a. Officials of the Bureau of Customs, collectors, assistant collectors, deputy


collectors, surveyors, security and secret-service agents, inspectors, port patrol officers and
guards of the Bureau of Customs.

b. Officers of the Philippine Navy when authorized by the Commissioner.

c. Any person especially authorized in writing by the Commissioner.

d. Officers generally empowered by law to effect arrests and execute processes of


courts, when acting under direction of the Collector.

e. Any person especially authorized by a Collector, subject to restrictions.

Persons exercising the powers hereinabove conferred shall, in the exercise thereof,
have the same authority, be entitled to the proper protection, and shall be governed by the
same law as other officers exercising police authority in general.834

Persons acting under authority conferred pursuant to subsection (e) may exercise
their authority within the limits of the collection district only and in or upon the particular
vessel or aircraft, or in the particular place, or in respect to the particular article specified in
the appointment. All such appointments shall be in writing, and the original shall be filed in
the customhouse of the district where made.

All other persons exercising the powers hereinabove conferred may exercise the
same at any place within the jurisdiction of the Bureau of Customs.835

It shall be within the power of a customs official or person authorized as aforesaid,


and it shall be his duty, to make seizure of any vessel, aircraft, cargo, articles, animal or other
movable property when the same is subject to forfeiture or liable for any fine imposed under
customs and tariff laws, and also to arrest any person subject to arrest for violation of any
customs and tariff laws.836

834
Sec. 2203
835
Sec. 2204
836
Sec. 2205.

244
It shall be the duty of any person exercising authority as aforesaid, upon being
questioned at the time of the exercise thereof, to make known his official character as an
officer or official of the Government, and if his authority is derived from special
authorization in writing to exhibit the same for inspection, if demanded.837

Any person exercising police authority under the customs and tariff laws may
demand assistance of any police officer when such assistance shall be necessary to effect any
search, seizure or arrest which may be lawfully made or attempted by him. It shall be the
duty of any police officer upon whom such requisition is made to give such lawful assistance
in the matter as may be required.838

For the more effective discharge of his official duties, any person exercising the
powers herein conferred, may at anytime enter, pass through, or search any land or enclosure
or any warehouse, store or other building, not being a dwelling house.839

A warehouse, store or other building or enclosure used for the keeping of storage of
articles does not become a dwelling house within the meaning hereof merely by reason of
the fact that a person employed as watchman lives in the place, nor will the fact that his
family stays there with him alter the case.

A dwelling house may be entered and searched only upon warrant issued by a judge
or justice of the peace, upon sworn application showing probable case and particularly
describing the place to be searched and person or thing to be seized.840

It shall be lawful for any official or person exercising police authority under these
provisions to go aboard any vessel or aircraft within the limits of any collection district, and
to inspect, search and examine said vessel or aircraft and any trunk, package, box or
envelope on board, and to search any person on board the said vessel or aircraft and to this
end to hail and stop such vessel or aircraft if under way, to use all necessary force to compel
compliance; and if it shall appear that any breach or violation of the customs and tariff laws
of the Philippines has been committed, whereby or in consequence of which such vessels or
aircrafts, or the article, or any part thereof, on board of or imported by such vessel or
aircraft, is liable to forfeiture, to make seizure of the same or any part thereof.

The power of search shall extend to the removal of any false bottom, partition,
bulkhead or other obstruction, so far as may be necessary to enable the officer to discover
whether any dutiable or forfeitable articles may be concealed therein.

No proceeding herein shall give rise to any claim for the damage thereby caused to
article or vessel or aircraft.841

837
Sec. 2206
838
Sec. 2207.
839
Sec. 2208.
840
Sec. 2209
841
Sec. 2210

245
It shall also be lawful for a person exercising authority as aforesaid to open and
examine any box, trunk, envelope or other container, wherever found where he has
reasonable cause to suspect the presence therein of dutiable or prohibited article or articles
introduced into the Philippines contrary to law, and likewise to stop, search and examine any
vehicle, beast or person reasonably suspected of holding or conveying such article as
aforesaid.842

All persons coming into the Philippines from foreign countries shall be liable to
detention and search by the customs authorities under such regulations as may be prescribed
relative thereto.

Female inspectors may be employed for the examination and search of persons of
their own sex.843

Upon making any seizure, the Collector shall issue a warrant for the detention of the
property; and if the owner or importer desires to secure the release of the property for
legitimate use, the Collector may surrender it upon the filing of a sufficient bond, in an
amount to be fixed by him, conditioned for the payment of the appraised value of the article
and/or any fine, expenses and costs which may be adjudged in the case. The articles the
importation of which is prohibited by law shall not be released under bond.844

When a seizure is made for any cause, the Collector of the district wherein the
seizure is effected shall immediately make report thereof to the Commissioner and to the
Auditor General.845

The Collector shall give the owner or importer of the property or his agent a written
notice of the seizure and shall give him an opportunity to be heard in reference to the
delinquency which was the occasion of such seizure.

For the purpose of giving such notice and of all other proceedings in the matter of
such seizure, the importer, consignee or person holding the bill of lading shall be deemed to
be the "owner" of the article included in the bill.

For the same purpose, "agent" shall be deemed to include not only any agent in fact
of the owner of the seized property but also any person having responsible possession of the
property at the (missing) of the seizure, if the owner or his agent in fact is unknown or
cannot be reached.846

Notice to an unknown owner shall be effected by posting a notice for fifteen days in
the public corridor of the customhouse of the district in which the seizure was made, and, in

842
Sec. 2211
843
Sec. 2212
844
Sec. 2301
845
Sec. 2302
846
Sec. 2303

246
the discretion of the Commissioner, by publication in a newspaper or by such other means
as he shall consider desirable.847

The Collector shall also cause a list and particular description of the property seized
to be prepared and an appraisement or classification of the same at its wholesale value in the
local market in the usual wholesale quantities to be made by at least two appraising officials,
if there are such officials at or near the place of seizure; in the absence of such officials, then
by two competent and disinterested citizens of the Philippines, to be selected by him for that
purpose, residing at or near the place of seizure, which list and appraisement shall be
properly attested to by such Collector and the persons making the appraisal.848

If, within fifteen days after the notification prescribed in section twenty-three
hundred and four849 of this Code, no owner or agent can be found or appears before the
Collector, the latter shall declare the property forfeited to the government to be sold at
auction in accordance with law.850

If, in any seizure case, the owner or agent shall, while the case is yet before the
Collector of the district of seizure, pay to such Collector the fine imposed by him or, in case
of forfeiture, shall pay the appraised value of the property, or, if after appeal of the case, he
shall pay to the Commissioner the amount of the fine as finally determined by him, or, in
case of forfeiture, shall pay the appraised value of the property, such property shall be
forthwith surrendered, and all liability which may or might attach to the property by virtue of
the offense which was the occasion of the seizure and all liability which might have been
incurred under any bond given by the owner or agent in respect to such property shall
thereupon be deemed to be discharged.

Redemption of forfeited property shall not be allowed in any case where the
importation is absolutely prohibited or where the surrender of the property to the person
offering to redeem the same would be contrary to law.851

b. Judicial

1) 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.

Unless an appeal is made to the Court of Tax Appeals, the action or ruling of the
Commissioner shall be final and conclusive.852

847
Sec. 2304
848
Sec. 2305
849
supra
850
Sec. 2306.
851
Sec. 2307
852
Sec. 2402

247
2) Taxpayer

a. Protest

When a ruling or decision of the Collector is made whereby liability for duties, fees,
or other money charge is determined, except the fixing of fines in seizure cases, the party
adversely affected may protest such ruling or decision by presenting to the Collector at the
time when payment of the amount claimed to be due the Government is made, or within
thirty (30) days thereafter, a written protest setting forth his objections to the ruling or
decision in question, together with the reasons therefor. No protest shall be considered
unless payment of the amount due after final liquidation has first been made.853

In all cases subject to protest, the interested party who desires to have the action of
the Collector reviewed, shall make a protest, otherwise, the action of the Collector shall be
final and conclusive against him, except as to matters correctible for manifest error.854

Every protest shall point out the particular decision or ruling of the Collector to
which exception is taken or objection made, and shall indicate with reasonable precision the
particular ground or grounds upon which the protesting party bases his claim for relief.

The scope of a protest shall be limited to the subject matter of a single adjustment or
other independent transaction; but any number of issues may be raised in a protest with
reference to the particular item or items constituting the subject matter of the protest.

"Single adjustment" refers to the entire content of one liquidation, including all
duties, fees, surcharges or fines incident thereto.855

If the nature of the articles permit, importers filing protests involving questions of
fact must, upon demand, supply the Collector with samples of the articles which are the
subject matter of the protests. Such samples shall be verified by the custom official who
made the classification against which the protest are filed.856

When a protest in proper form is presented in a case where protest in required, the
Collector shall reexamine the matter thus presented, and if the protest is sustained, in whole
or in part, he shall enter the appropriate order, the entry reliquidated if necessary.

In seizure cases, the Collector, after a hearing, shall in writing make a declaration of
forfeiture or fix the amount of the fine or take such other action as may be proper.857

The person aggrieved by the decision or action of the Collector in any matter
presented upon protest or by his action in any case of seizure may, within fifteen (15) days
after notification in writing by the Collector of his action or decision, give written notice to

853
Sec. 2308
854
Sec. 2309
855
Sec. 2310.
856
Sec. 2311
857
Sec. 2312

248
the Collector of his desire to have the matter reviewed by the Commissioner. Thereupon the
Collector shall forthwith transmit all the records of the proceedings to the Commissioner,
who shall approve, modify or reverse the action or decision of the Collector and take such
steps and make such orders as may be necessary to give effect to his decision.858

Notice of the decision of the Commissioner shall be given to the party by whom the
case was brought before him for review, and in seizure cases such notice shall be effected by
personal service if practicable.859

If in any case involving the assessment of duties the importer shall fail to protest the
ruling of the Collector, and the Commissioner shall be of the opinion that the ruling was
erroneous and unfavorable to the Government, the latter may order a reliquidation; and if
the ruling of the Commissioner in any unprotested case should, in the opinion of the
department head, be erroneous and unfavorable to the Government, the department head
may require the Commissioner to order a reliquidation.860

b. Abandonment

Express - when it is made direct to the Collector by the interested party in writing.
Implied when an intention to abandon can be clearly inferred from the action or
omission of the interested party.
The failure of any interested party to file the import entry within fifteen days or any
extension thereof from the discharge of the vessel or aircraft shall be implied abandonment.

An implied abandonment shall not be effective until the article is declared by the
Collector to have been abandoned after notice thereof is given to the interested party as in
seizure cases.

Any person who abandons an imported article renounces all his interests and
property rights therein.861

The owner or importer of any articles may, within ten (10) days after filing of the
import entry, abandon to the Government all or a part of the articles included in an invoice,
and, thereupon, he shall be relieved from the payment of duties, taxes and all other charges
and expenses due thereon.

The portion so abandoned is not less than ten per cent (10%) of the total invoice
and is not less than one package, except in cases of articles imported for personal or family
use. The article so abandoned shall be delivered by the owner or importer at such place
within the port of arrival as the Collector shall designate, and upon his failure to so comply,
the owner or importer shall be liable for all expenses that may be incurred in connection
with the disposition of the articles.

858
Sec. 2313
859
Sec. 2314
860
Sec. 2315
861
Sec. 1801

249
Nothing shall be construed as relieving such owner or importer from any criminal
liability which may arise from any violation of law committed in connection with the
importation of the abandoned article.862

The owner or importer of an article impliedly abandoned may, at any time before it
is sold or otherwise disposed of, reclaim such article provided all legal requirements
regarding its importation are complied with and the corresponding duties, taxes and other
charges as well as all expenses incurred as a consequence of the abandonment, are paid.863

c. Abatement and refund

No abatement of duties shall be made on account of damage incurred or


deterioration suffered during the voyage of importation; and duties will be assessed on the
actual quantity imported, as shown by the return of weighers, gaugers, measures, examiners
or appraisers, as the case may be.864

When any package or packages appearing on the manifest or bill of lading are
missing, a remission or refund of the duty thereon shall be made if it is shown by proof
satisfactory to the Collector that the package or packages in question have not been
imported into the Philippines.865

If, upon opening any package, a deficiency or absence of any article, or of part of the
contents thereof, as called for by the invoice shall be found to exist, such deficiency shall be
certified to the Collector by the appraiser; and upon the production of proof satisfactory to
the Collector showing that the shortage occurred before the arrival of the article in the
Philippines, the proper abatement or refund of the duty shall be made.866

A Collector may abate or refund the amount of duties accruing or paid, and may
likewise make a corresponding allowance or credit on the entry bond, or other document,
upon satisfactory proof of the injury, destruction, or loss by theft, fire or other causes of any
article as follows:

a. While within the limits of any port of entry prior to unlading under customs
supervision.
b. While remaining in customs custody after unlading.
c. While in transit under bond from the port of entry to any port in the Philippines.
d. While released under bond to export, except in case of loss by theft.867

862
Sec. 1802
863
Sec. 1803
864
Sec. 1701
865
Sec. 1702
866
Sec. 1703
867
Sec. 1704

250
Where it is satisfactorily shown to the Collector that an animal which is the subject
of importation dies or suffers injury before arrival, or while in customs custody, the duty
shall be correspondingly abated by him, provided the carcass of any dead animal remaining
on board or in customs custody be removed in the manner required by the Collector and at
the expense of the importer.868

The Collector shall in all cases of allowances, abatements or refunds of duties, cause
an examination and report in writing to be made as to any fact discovered during such
examination which tends to account for the discrepancy or difference and cause the
corresponding adjustment to be made on the import entry.869

Manifest clerical errors made in an invoice or entry, errors in return of weight,


measure and gauge, when duly certified to by the surveyor or examining official870and errors
in the distribution of charges on invoices not involving any question of law and certified to
by the examining official, may be corrected in the computation of duties, if such errors be
discovered before the payment of duties, or, if discovered within one year after the final
liquidation, upon written request and notice of error from the importer, or upon statement
of error certified by the Collector.

For the purpose of correcting the specified errors, the Collector is authorized to
reliquidate entries and collect additional charges, or to make refunds on statement of error
within the statutory time limit.871

All claims for refund of duties shall be made in writing, and forwarded to the
Collector to whom such duties are paid, who upon receipt of such claim shall verify the
same by the records of his office, and if found to be correct and in accordance with law,
shall certify the same to theCommissioner with his recommendation together with all
necessary papers and documents. Upon receipt by the Commissioner of such certified claim
he shall cause the same to be paid if found correct.872

868
Sec. 1705
869
Sec. 1706
870
when there are such officials at the port
871
Sec. 1707
872
Sec. 1708

251
V. Judicial Remedies873

A. Jurisdiction of the Court of Tax Appeals

1. Exclusive appellate jurisdiction over civil tax cases

a. Cases within the jurisdiction of the Court en banc

(a) Decisions or resolutions on motions for reconsideration or new trial of the Court
in Divisions in the exercise of its exclusive appellate jurisdiction over:

(1) Cases arising from administrative agencies Bureau of Internal Revenue,


Bureau of Customs, Department of Finance, Department of Trade and Industry,
Department of Agriculture;

(2) Local tax cases decided by the Regional Trial Courts in the exercise of
their original jurisdiction; and

(3) 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;

(b) Decisions, resolutions or orders of the Regional Trial Courts in local tax cases
decided or resolved by them in the exercise of their appellate jurisdiction;

(c) Decisions, resolutions or orders of the Regional Trial Courts in tax collection
cases decided or resolved by them in the exercise of their appellate jurisdiction;

(d) 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;

873
Republic Act 1125,as amended, and the Revised Rules of the Court of Tax Appeals
The Court of Tax Appeals (CTA) is a court of special appellate jurisdiction and a part of our judicial
system. The proceedings therein are judicial in nature although the Court is not bound by the technical
rules of evidence. (Purakan Plantation Co. vs. Domingo L-18571, 29 Oct. 1966)
It is a regular court vested with exclusive appellate jurisdiction over cases arising under the:
1.National Internal Revenue Code
2.Tariff and Customs Code
3.Assessment law
The CTA is a highly specialized body specially created for the purpose of reviewing tax cases, its findings
will not be ordinarily be reviewed absent a showing of gross error or abuse on its part. These findings are
binding upon the Supreme Court and in the absence of strong reasons for the court to delve on facts, only
questions of law are open for determination.

252
(e) 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;

(f) 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;

(g) 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

(h) Decisions, resolutions or orders of the Regional trial Courts in the exercise of
their appellate jurisdiction over criminal offenses mentioned in subparagraph (f).874

b. Cases within the jurisdiction of the Court in divisions

(a) Exclusive original or appellate jurisdiction to review by appeal the following:

(1) Decisions of the Commissioner of Internal Revenue in cases involving


disputed assessments, refunds of internal revenue taxes, fees or other charges,
penalties in relation thereto, or other matters arising under the National Internal
Revenue Code or other laws administered by the Bureau of Internal Revenue;

(2) Inaction by the Commissioner of Internal Revenue in cases involving


disputed assessments, refunds of internal revenue taxes, fees or other charges,
penalties in relation thereto, or other matters arising under the National Internal
Revenue Code or other laws administered by the Bureau of Internal Revenue, where
the National Internal Revenue Code or other applicable law provides a specific
period for action.

In case of disputed assessments, the inaction of the Commissioner of


Internal Revenue within the one hundred eighty day-period under Section 228875 of
the National Internal revenue Code shall be deemed a denial for purposes of
allowing the taxpayer to appeal his case to the Court and does not necessarily
constitute a formal decision of the Commissioner of Internal Revenue on the tax
case.

Should the taxpayer opt to await the final decision of the Commissioner of
Internal Revenue on the disputed assessments beyond the one hundred eighty day-

874
Rule 4, Sec. 2, Revised Rules of the Court Of Tax Appeals
875
supra

253
period abovementioned, the taxpayer may appeal such final decision to the Court
under Section 3(a), Rule 8876 of these Rules.

In the case of claims for refund of taxes erroneously or illegally collected, the
taxpayer must file a petition for review with the Court prior to the expiration of the
two-year period under Section 229877 of the National Internal Revenue Code;

(3) Decisions, resolutions or orders of the Regional Trial Courts in local tax
cases decided or resolved by them in the exercise of their original jurisdiction;

(4) Decisions of the Commissioner of Customs in cases involving liability for


customs duties, fees or other money charges, seizure, detention or release of
property affected, fines, forfeitures of other penalties in relation thereto, or other
matters arising under the Customs Law or other laws administered by the Bureau of
Customs;

(5) Decisions of the Secretary of Finance on customs cases elevated to him


automatically for review from decisions of the Commissioner of Customs adverse to
the Government under Section 2315878 of the Tariff and Customs Code; and

(6) Decisions of the Secretary of Trade and Industry, in the case of


nonagricultural product, commodity or article, and the Secretary of Agriculture, in
the case of agricultural product, commodity or article, involving dumping and
countervailing duties under Section 301 and 302,879 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;

(b) Exclusive jurisdiction over cases involving criminal offenses, to wit:

(1) Original jurisdiction over all criminal offenses arising from violations of
the National internal Revenue Code or Tariff and Customs Code and other laws

876
A party adversely affected by a decision, ruling or the inaction of the Commissioner of Internal
Revenue on disputed assessments or claims for refund of internal revenue taxes, or by a decision or ruling
of the Commissioner of Customs, the Secretary of Finance, the Secretary of Trade and Industry, the
Secretary of Agriculture, or a Regional Trial Court in the exercise of its original jurisdiction may appeal to
the Court by petition for review filed within thirty (30) days after receipt of a copy of such decision or
ruling, or expiration of the period fixed by law for the Commissioner of Internal Revenue to act on the
disputed assessments. In case of inaction of the Commissioner of Internal revenue on claims for refund of
internal revenue taxes erroneously or illegally collected, the taxpayer must file a petition for review within
the two-year period prescribed by law from payment or collection of the taxes.
877
supra
878
Supervisory Authority of Commissioner And of Department Head in Certain Cases. If in any case
involving the assessment of duties the importer shall fail to protest the ruling of the Collector, and the
Commissioner shall be of the opinion that the ruling was erroneous and unfavorable to the Government,
the latter may order a reliquidation; and if the ruling of the Commissioner in any unprotested case should,
in the opinion of the department head, be erroneous and unfavorable to the Government, the
department head may require the Commissioner to order a reliquidation.
879
supra

254
administered by the Bureau of Internal Revenue of the Bureau of Customs, where
the principal amount of taxes and fees, exclusive of charges and penalties, claimed is
one million pesos or more; and

(2) Appellate jurisdiction over appeals from the judgments, resolutions or


orders of the Regional Trial Courts in their original jurisdiction in 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 Bureau of
Customs, where the principal amount of taxes and fees, exclusive of charges and
penalties, claimed is less than one million pesos or where there is no specified
amount claimed;

(c) Exclusive jurisdiction over tax collections cases, to wit:

(1) Original jurisdiction in 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; and

(2) Appellate jurisdiction over appeals from the judgments, resolutions or


orders of the Regional Trial Courts in tax collection cases originally decided by them
within their respective territorial jurisdiction.880

2. Criminal cases

a. Exclusive original jurisdiction

Over all criminal cases arising from violations of the NIRC or Tariff and Customs
Code and other laws administered by the BIR or the Bureau of Customs

Where the principal amount of taxes and fees, exclusive of charges and penalties
claimed is less than one million pesos (P1,000, 000. 00) or where there is no specified
amount claimed - the offenses or penalties shall be tried by the regular courts and the
jurisdiction of the CTA shall be appellate.

The criminal action and the corresponding civil action for the recovery of civil
liability for taxes and penalties shall, at all times, be simultaneously instituted with, and jointly
determined in the same proceeding by the CTA, the filing of the criminal action being
deemed to necessarily carry with it the filing of the civil action, and no right to reserve the
filing of such civil action separately from the criminal action will be recognized.

b. Exclusive appellate jurisdiction in criminal cases

Over appeals from the judgments, resolutions or orders of the RTC in tax cases
originally decided by them, in their respective territorial jurisdiction.

880
Rule 4, Sec. 3, Revised Rules of the Court Of Tax Appeals

255
Over petitions for review of the judgments, resolutions, or orders of the RTC 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.

B. Judicial Procedures

1. Judicial action for collection of taxes

a. Internal revenue taxes

Upon the issuance of any ruling, order or decision by the CTA favorable to the
national government, the CTA shall issue an order authorizing the Bureau of Internal
Revenue, through the Commissioner to 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 and/or levy the real property of
such persons in sufficient quantity to satisfy the tax or charge together with any increment
thereto incident to delinquency. This remedy shall not be exclusive and shall not preclude
the Court from availing of other means under the Rules of Court.881

b. Local taxes

1) Prescriptive period

Five (5) years from date of assessment.

2. Civil cases

a. Who may appeal, mode of appeal, effect of appeal

Any party adversely affected by a decision, ruling or inaction of the Commissioner of


Internal Revenue, the Commissioner of Customs, the Secretary of Finance, the Secretary of
Trade and Industry or the Secretary of Agriculture or the Central Board of Assessment
Appeals or the Regional Trial Courts may file an appeal with the CTA within thirty (30) days
after the receipt of such decision or ruling or after the expiration of the period fixed by law
for action as referred to in Section 7(a)(2) herein.

Appeal shall be made by filing a petition for review under a procedure analogous to
that provided for under Rule 42882 of the 1997 Rules of Civil Procedure with the CTA within
thirty (30) days from the receipt of the decision or ruling or in the case of inaction as herein
provided, from the expiration of the period fixed by law to act thereon. A Division of the
CTA shall hear the appeal: With respect to decisions or rulings of the Central Board of
Assessment Appeals and the Regional Trial Court in the exercise of its appellate jurisdiction
appeal shall be made by filing a petition for review under a procedure analogous to that

881
Sec. 13, R.A. No. 1125, as amended by Sec. 9 of RA No. 9282
882
See Reference

256
provided for under Rule 43883 of the 1997 Rules of Civil Procedure with the CTA, which
shall hear the case en banc.

All other cases involving rulings, orders or decisions filed with the CTA as provided
for in Section 7 shall be raffled to its Divisions. A party adversely affected by a ruling, order
or decision of a Division of the CTA may file a motion for reconsideration of new trial
before the same Division of the CTA within fifteens (15) days from notice thereof: Provide,
however, That in criminal cases, the general rule applicable in regular Courts on matters of
prosecution and appeal shall likewise apply.

No appeal taken to the CTA from the decision of the Commissioner of Internal
Revenue or the Commissioner of Customs or the Regional Trial Court, provincial, city or
municipal treasurer or the Secretary of Finance, the Secretary of Trade and Industry and
Secretary of Agriculture, as the case may be shall suspend the payment, levy, distraint,
and/or sale of any property of the taxpayer for the satisfaction of his tax liability as provided
by existing law. When in the opinion of the Court the collection by the aforementioned
government agencies may jeopardize the interest of the Government and/or the taxpayer
the Court any stage of the proceeding may suspend the said collection and require the
taxpayer either to deposit the amount claimed or to file a surety bond for not more than
double the amount with the Court.

In criminal and collection cases covered respectively by Section 7(b) and (c) of this
Act, the Government may directly file the said cases with the CTA covering amounts within
its exclusive and original jurisdiction.884

1) Suspension of collection of tax

a) Injunction not available to restrain


collection

Sec. 11 of RA No. 1125885 grants CTA power to suspend collection of tax if such
collection works to serious prejudice of either taxpayer or government.

However, Sec. 218 of the Tax Code provides that no court may grant injunction to
restrain collection of any tax, fee or charge imposed by Tax Code.886

Appeal to the CTA does not automatically suspend collection unless CTA issues
suspension order at any stage of proceedings.

883
Ibid.
884
Sec. 11 of R.A. No. 1125, id.
885
as amended by Sec. 9 of RA No. 9282
886
The provision in the Tax Code refers to courts other than the CTA (Blaquera vs. Rodriguez, GR No. L-
11295, March 29, 1958)

257
2) Taking of evidence

The Court maydirect that a case, or any issue thereof, be assigned to one of its
members for the taking of evidence, when the determination of a question of fact arises
upon motion or otherwise in any stage of the proceedings, or when the taking of an account
is necessary, or when the determination of an issue of fact requires the examination of a long
account. The hearing before such member shall proceed in all respects as though the same
had been made before the Court.

Upon the recommendation of such hearing of such member, he shall promptly


submit to the Court his report in writing, stating his findings and conclusions; and thereafter,
the Court shall render its decisions on the case, adopting, modifying, or rejecting the report
or the Court may recommit it with instructions, or receive further evidence.887

3) Motion for reconsideration or New trial

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 to the Court by filing before it a petition
for review within fifteen days from receipt of a copy of the questioned decision or
resolution. Upon proper motion and the payment of the full amount of the docket and other
lawful fees and deposit for costs before the expiration of the reglementary period herein
fixed, the Court may grant an additional period not exceeding fifteen days from the
expiration of the original period within which to file the petition for review.888

An appeal from a decision or resolution of the Court in Division on a motion for


reconsideration or new trial shall be taken to the Court by petition for review.889 The Court
en banc shall act on the appeal.890

b. Appeal to the CTA, en banc

No civil proceeding involving matter arising under the National Internal Revenue
Code, the Tariff and Customs Code or the Local Government Code shall be maintained,
until and unless an appeal has been previously filed with the CTA and disposed of.891

"A party adversely affected by a resolution of a Division of the CTA on a motion for
reconsideration or new trial, may file a petition for review with the CTA en banc.

c. 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.892

887
Sec. 12, R.A. 1125
888
Sec. 3 (b), Revised Rules of the CTA
889
as provided in Rule 43 of the Rules of Court
890
Sec. 4 (b), Revised Rules of the CTA
891
Sec. 18, id.
892
pursuant to Rule 45 of the 1997 Rules of Civil Procedure (Sec. 19. Id.)

258
3. Criminal cases

a. Institution and prosecution of criminal actions

1) Institution on civil action in criminal action

In cases within the jurisdiction of the Court, the criminal action and the
corresponding civil action for the recovery of civil liability for taxes and penalties shall be
deemed jointly instituted in the same proceeding. The filing of the criminal action shall
necessarily carry with it the filing of the civil action. No right to reserve the filing of such
civil action separately from the criminal action shall be allowed or recognized.893

b. Appeal and period to appeal

1) Solicitor General as counsel for the People and


government officials sued in their official capacity

The Solicitor General shall represent the People of the Philippines and government
officials sued in their official capacity in all cases brought to the Court in the exercise of its
appellate jurisdiction. He may deputized the legal officers of the Bureau of Internal Revenue
in cases brought under the National Internal Revenue Code or other laws enforced by the
Bureau of Internal Revenue, or the legal officers of the Bureau of Customs in cases brought
under the Tariff and Customs Code of the Philippines or other laws enforced by the Bureau
of Customs, to appear in behalf of the officials of said agencies sued in their official capacity.
Such duly deputized legal officers shall remain at all times under the direct control and
supervision of the Solicitor General.894

c. Petition for review on certiorari to the Supreme Court

A party adversely affected by a decision or ruling of the Court en banc may appeal
therefrom by filing with the Supreme Court a verified petition for review on certiorari within
fifteen (15) days from receipt of a copy of the decision or resolution.895 If such party has
filed a motion for reconsideration or for new trial, the period herein fixed shall run from the
partys receipt of a copy of the resolution denying the motion for reconsideration or for new
trial.896

893
Rule 9, Sec. 11, id.;, Rule 111, sec. 1[a], par. 1a; Rules of Court
894
Sec. 10, id.
895
as provided in Rule 45 of the Rules of Court
896
Rule 16, Sec. 1, id.

259
C. Taxpayers suit impugning the validity of tax measures or acts of taxing
authorities

a. Taxpayers suit, defined

A case where the act complained of directly involves the illegal disbursement of
public funds derived from taxation.897

b. Distinguished from citizens suit

The plaintiff in a taxpayers suit is in a different category from the plaintiff in a


citizens 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.898

c. Requisites for challenging the constitutionality of a tax


measure or act of taxing authority

1) Concept of locus standi as applied in taxation

It is a partys personal and substantial interest in the case, such that the party has
sustained or will sustain direct injury as a result of the government act being challenged. It
calls for more than just a generalized grievance.899

A party need not be a party to the contract to challenge its validity.900

2) Doctrine of transcendental importance

The Court has adopted a rule that even where the petitionershave failed to show
direct injury, they have been allowed to sue under the principle of "transcendental
importance."901

897
Justice Melo, dissenting in Kilosbayan, Inc. v. Guingona, Jr., 232 SCRA 110
Requisites for a taxpayers petition:
1. That money is being extracted and spent in violation of specific constitutional
protections against abuses of legislative power
2. That public money is being deflected to any improper purpose
3. That the petitioner seeks to restrain respondents from wasting public funds through the
enforcement of an invalid or unconstitutional law.
The Supreme Court has discretion whether or not to entertain taxpayers suit and could brush aside lack
of locus standi (Kilos Bayan vs. Guingona)
898
Beauchamp v. Silk
As held by the New York Supreme Court in People ex rel Case v. Collins: "In matters of mere public
right, howeverthe people are the real partiesIt is at least the right, if not the duty, of every citizen to
interfere and see that a public offence be properly pursued and punished, and that a public grievance be
remedied." With respect to taxpayers suits, Terr v. Jordan held that "the right of a citizen and a taxpayer
to maintain an action in courts to restrain the unlawful use of public funds to his injury cannot be denied."
899
Abaya v. Ebdane, G. R. No. 167919, February 14, 2007
900
Ibid.
901
David v. Arroyo, G.R. No. 171396 (2006)

260
The doctrine applies when paramount public interest is involved.

3) Ripeness for judicial determination

In our jurisdiction, the issue of ripeness is generally treated in terms of actual injury
to the plaintiff. Hence, a question is ripe for adjudication when the act being challenged has
had a direct adverse effect on the individual challenging it.902 An alternative road to review
similarly taken would be to determine whether an action has already been accomplished or
performed by a branch of government before the courts may step in.903
To be ripe for judicial adjudication, the petitioner must show a personal stake in the
outcome of the case or an injury to himself that can be redressed by a favorable decision of
the Court.904

An issue is of transcendental importance because of the following:


1. the character of the funds or other assets involved in the case;
2.the presence of a clear disregard of a constitutional or statutory prohibition by an instrumentality of
the government; and
3. the lack of any other party with a more direct and specific interest in raising the question.
(Francisco vs. House of Representatives, 415 SCRA 44; Senate v. Ermita G.R. No. 169777 (2006))
902
Guingona, Jr. v. Court of Appeals, 354 Phil. 415, 427-428 (1998).
903
Francisco, Jr. v. House of Representatives, 460 Phil. 830, 901-902 (2003).
904
ABAKADA Guro Party List, etc., v. Purisima, etc., citing Cruz v. Secretary of Environment and Natural
Resources, 400 Phil. 904 (2000), Vitug, J., separate opinion

261
Reference

National Internal Revenue Code of the Phils.905

Sec. 6. Power of the Commissioner to Make assessments and Prescribe additional Requirements
for Tax Administration and Enforcement.

xxx

(F) Authority of the Commissioner to inquire into Bank Deposit Accounts. -


Notwithstanding any contrary provision of Republic Act No. 1405 and other general or special
laws, the Commissioner is hereby authorized to inquire into the bank deposits of:

(1) a decedent to determine his gross estate; and

(2) any taxpayer who has filed an application for compromise of his tax liability under Sec. 204
(A) (2) of this Code by reason of financial incapacity to pay his tax liability.

In case a taxpayer files an application to compromise the payment of his tax liabilities on
his claim that his financial position demonstrates a clear inability to pay the tax assessed, his
application shall not be considered unless and until he waives in writing his privilege under
Republic Act No. 1405 or under other general or special laws, and such waiver shall constitute the
authority of the Commissioner to inquire into the bank deposits of the taxpayer.

Sec. 24

Sec. 32 (B)(6)(a)

Retirement benefits received under Republic Act No. 7641 and those received by officials and
employees of private firms, whether individual or corporate, in accordance with a reasonable private
benefit plan maintained by the employer: Provided, That the retiring official or employee has been in the
service of the same employer for at least ten (10) years and is not less than fifty (50) years of age at the
time of his retirement: Provided, further, That the benefits granted under this subparagraph shall be availed
of by an official or employee only once. For purposes of this Subsection, the term '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 officials or employees, wherein contributions are made by such employer
for the officials or employees, or both, for the purpose of distributing to such officials and employees the
earnings and principal of the fund thus accumulated, and wherein its is provided in said plan that at no time
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 the said officials and employees.

SEC. 33.Special Treatment of Fringe Benefit.-

(A) Imposition of Tax.- A final tax of thirty-four percent (34%) effective January 1, 1998; thirty-
three percent (33%) effective January 1, 1999; and thirty-two percent (32%) effective January 1, 2000 and
thereafter, is hereby imposed on the grossed-up monetary value of fringe benefit furnished or granted to the
employee (except rank and file employees as defined herein) by the employer, whether an individual or a
corporation (unless the fringe benefit is required by the nature of, or necessary to the trade, business or
profession of the employer, or when the fringe benefit is for the convenience or advantage of the

905
R.A. 8424, as amended

262
employer). The tax herein imposed is payable by the employer which tax shall be paid in the same manner
as provided for under Section 57 (A) of this Code. The grossed-up monetary value of the fringe benefit
shall be determined by dividing the actual monetary value of the fringe benefit by sixty-six percent (66%)
effective January 1, 1998; sixty-seven percent (67%) effective January 1, 1999; and sixty-eight percent
(68%) effective January 1, 2000 and thereafter: Provided, however, That fringe benefit furnished to
employees and taxable under Subsections (B), (C), (D) and (E) of Section 25 shall be taxed at the
applicable rates imposed thereat: Provided, further, That the grossed -Up value of the fringe benefit shall
be determined by dividing the actual monetary value of the fringe benefit by the difference between one
hundred percent (100%) and the applicable rates of income tax under Subsections (B), (C), (D), and (E) of
Section 25.

(B) Fringe Benefit defined.- For purposes of this Section, the term "fringe benefit" means any
good, service or other benefit furnished or granted in cash or in kind by an employer to an individual
employee (except rank and file employees as defined herein) such as, but not limited to, the following:

(1) Housing;
(2) Expenseaccount;
(3) Vehicle of any kind;
(4) Household personnel, such as maid, driver and others;
(5) Interest on loan at less than market rate to the extent of the difference between themarket rate
and actual rate granted;
(6) Membership fees, dues and other expenses borne by the employer for the employee insocial
and athletic clubs or other similar organizations;
(7) Expenses for foreign travel;
(8) Holiday and vacation expenses;
(9) Educational assistance to the employee or his dependents; and
(10) Life or health insurance and other non-life insurance premiums or similar amounts inexcess
of what the law allows.

(C) Fringe Benefits Not Taxable. - The following fringe benefits are not taxable under this Section:
(1) fringe benefits which are authorized and exempted from tax under special laws;
(2) Contributions of the employer for the benefit of the employee to retirement, insuranceand
hospitalization benefit plans;
(3) Benefits given to the rank and file employees, whether granted under a collectivebargaining
agreement or not; and
(4) De minimis benefits as defined in the rules and regulations to be promulgated bythe Secretary
of Finance, upon recommendation of the Commissioner.

SEC. 58. Returns and Payment of Taxes Withheld at Source. -

(A) Quarterly Returns and Payments of Taxes Withheld. - Taxes deducted and withheld under
Section 57 by withholding agents shall be covered by a return and paid to, except in cases where the
Commissioner otherwise permits, an authorized Treasurer of the city or municipality where the withholding
agent has his legal residence or principal place of business, or where the withholding agent is a corporation,
where the principal office is located.

The taxes deducted and withheld by the withholding agent shall be held as a special fund in trust
for the government until paid to the collecting officers.

The return for final withholding tax shall be filed and the payment made within twenty-five (25)
days from the close of each calendar quarter, while the return for creditable withholding taxes shall be filed
and the payment made not later than the last day of the month following the close of the quarter during
which withholding was made: Provided, That the Commissioner, with the approval of the Secretary of
Finance, may require these withholding agents to pay or deposit the taxes deducted or withheld at more
frequent intervals when necessary to protect the interest of the government.

263
(B) Statement of Income Payments Made and Taxes Withheld. - Every withholding agent
required to deduct and withhold taxes under Section 57 shall furnish each recipient, in respect to his or its
receipts during the calendar quarter or year, a written statement showing the income or other payments
made by the withholding agent during such quarter or year, and the amount of the tax deducted and
withheld therefrom, simultaneously upon payment at the request of the payee, but not late than the
twentieth (20th) day following the close of the quarter in the case of corporate payee, or not later than
March 1 of the following year in the case of individual payee for creditable withholding taxes. For final
withholding taxes, the statement should be given to the payee on or before January 31 of the succeeding
year.

(C) Annual Information Return. - Every withholding agent required to deduct and withhold taxes
under Section 57 shall submit to the Commissioner an annual information return containing the list of
payees and income payments, amount of taxes withheld from each payee and such other pertinent
information as may be required by the Commissioner. In the case of final withholding taxes, the return shall
be filed on or before January 31 of the succeeding year, and for creditable withholding taxes, not later than
March 1 of the year following the year for which the annual report is being submitted. This return, if made
and filed in accordance with the rules and regulations approved by the Secretary of Finance, upon
recommendation of the Commissioner, shall be sufficient compliance with the requirements of Section 68
of this Title in respect to the income payments.

The Commissioner may, by rules and regulations, grant to any withholding agent a reasonable
extension of time to furnish and submit the return required in this Subsection.

(D) Income of Recipient. - Income upon which any creditable tax is required to be withheld at
source under Section 57 shall be included in the return of its recipient but the excess of the amount of tax so
withheld over the tax due on his return shall be refunded to him subject to the provisions of Section 204; if
the income tax collected at source is less than the tax due on his return, the difference shall be paid in
accordance with the provisions of Section 56.

All taxes withheld pursuant to the provisions of this Code and its implementing rules and
regulations are hereby considered trust funds and shall be maintained in a separate account and not
commingled with any other funds of the withholding agent.

(E) Registration with Register of Deeds. - No registration of any document transferring real
property shall be effected by the Register of Deeds unless the Commissioner or his duly authorized
representative has certified that such transfer has been reported, and the capital gains or creditable
withholding tax, if any, has been paid: Provided, however, That the information as may be required by rules
and regulations to be prescribed by the Secretary of Finance, upon recommendation of the Commissioner,
shall be annotated by the Register of Deeds in the Transfer Certificate of Title or Condominium Certificate
of Title: Provided, further, That in cases of transfer of property to a corporation, pursuant to a merger,
consolidation or reorganization, and where the law allows deferred recognition of income in accordance
with Section 40, the information as may be required by rules and regulations to be prescribed by the
Secretary of Finance, upon recommendation of the Commissioner, shall be annotated by the Register of
Deeds at the back of the Transfer Certificate of Title or Condominium Certificate of Title of the real
property involved: Provided, finally, That any violation of this provision by the Register of Deeds shall be
subject to the penalties imposed under Section 269 of this Code.

Sec.. 75.

Declaration of Quarterly Corporate Income Tax. - Every corporation shall file in duplicate a
quarterly summary declaration of its gross income and deductions on a cumulative basis for the preceding
quarter or quarters upon which the income tax, as provided in Title II of this Code, shall be levied,
collected and paid. The tax so computed shall be decreased by the amount of tax previously paid or

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assessed during the preceding quarters and shall be paid not later than sixty (60) days from the close of
each of the first three (3) quarters of the taxable year, whether calendar or fiscal year.

Sec. 106

(a) Export Sales. - The term "export sales" means:

(1) The sale and actual shipment of goods from the Philippines to a foreign country, irrespective
of any shipping arrangement that may be agreed upon which may influence or determine the transfer of
ownership of the goods so exported and paid for in acceptable foreign currency or its equivalent in goods or
services, and accounted for in accordance with the rules and regulations of the BangkoSentralngPilipinas
(BSP);

(2) Sale of raw materials or packaging materials to a nonresident buyer for delivery to a resident
local export-oriented enterprise to be used in manufacturing, processing, packing or repacking in the
Philippines of the said buyer's goods and paid for in acceptable foreign currency and accounted for in
accordance with the rules and regulations of the BangkoSentralngPilipinas (BSP);

(3) Sale of raw materials or packaging materials to export-oriented enterprise whose export sales
exceed seventy percent (70%) of total annual production;

(4) Sale of gold to the BangkoSentralngPilipinas (BSP); and

(5) Those considered export sales under Executive Order NO. 226, otherwise known as the
Omnibus Investment Code of 1987, and other special laws.

(b) Foreign Currency Denominated Sale. - The phrase "foreign currency denominated sale"
means sale to a nonresident of goods, except those mentioned in Sections 149 and 150, assembled or
manufactured in the Philippines for delivery to a resident in the Philippines, paid for in acceptable foreign
currency and accounted for in accordance with the rules and regulations of the BangkoSentralngPilipinas
(BSP).

(c) 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.

Sec. 108

(B) Transactions Subject to Zero Percent (0%) Rate. - The following services performed in the Philippines
by VAT- registered persons shall be subject to zero percent (0%) rate.

(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 BangkoSentralngPilipinas
(BSP);

(2) Services other than those mentioned in the preceding paragraph, the consideration for which is paid
for in acceptable foreign currency and accounted for in accordance with the rules and regulations of the
BangkoSentralngPilipinas (BSP);

(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; `

(4) Services rendered to vessels engaged exclusively in international shipping; and

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(5) Services performed by subcontractors and/or contractors in processing, converting, of manufacturing
goods for an enterprise whose export sales exceed seventy percent (70%) of total annual production.

SEC. 111.Transitional/Presumptive Input Tax Credits. -

(A) Transitional Input Tax Credits. - A person who becomes liable to value-added tax or any
person who elects to be a VAT-registered person shall, subject to the filing of an inventory according to
rules and regulations prescribed by the Secretary of finance, upon recommendation of the Commissioner,
be allowed input tax on his beginning inventory of goods, materials and supplies equivalent for eight
percent (8%) of the value of such inventory or the actual value-added tax paid on such goods, materials and
supplies, whichever is higher, which shall be creditable against the output tax.

(B) Presumptive Input Tax Credits. -

(1) Persons or firms engaged in the processing of sardines, mackerel and milk, and in
manufacturing refined sugar and cooking oil, shall be allowed a presumptive input tax, creditable against
the output tax, equivalent to one and one-half percent (1 1/2%) of the gross value in money of their
purchases of primary agricultural products which are used as inputs to their production.

As used in this Subsection, the term "processing" shall mean pasteurization, canning and activities
which through physical or chemical process alter the exterior texture or form or inner substance of a
product in such manner as to prepare it for special use to which it could not have been put in its original
form or condition.

(2) Public works contractors shall be allowed a presumptive input tax equivalent to one and one-
half percent (1 1/2%) of the contract price with respect to government contracts only in lieu of actual input
taxes therefrom.

SEC. 112.Refunds or Tax Credits of Input Tax. -

(A) Zero-Rated or Effectively Zero-Rated Sales.- any VAT-registered person, whose sales are
zero-rated or effectively zero-rated may, within two (2) years after the close of the taxable quarter when the
sales were made, apply for the issuance of a tax credit certificate or 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: Provided, however, That in the case of zero-rated sales under Section
106(A)(2)(a)(1), (2) and (B) and Section 108 (B)(1) and (2), the acceptable foreign currency exchange
proceeds thereof had been duly accounted for in accordance with the rules and regulations of the
BangkoSentralngPilipinas (BSP): Provided, further, That 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.

(B) Capital Goods.- A VAT-registered person may apply for the issuance of a tax credit
certificate or refund of input taxes paid on capital goods imported or locally purchased, to the extent that
such input taxes have not been applied against output taxes. The application may be made only within two
(2) years after the close of the taxable quarter when the importation or purchase was made.

(C) Cancellation of VAT Registration. - A person whose registration has been cancelled due to
retirement from or cessation of business, or due to changes in or cessation of status under Section 106(C) of
this 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.

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(D) Period Within Which Refund or Tax Credit of Input Taxes Shall be Made. - In proper cases, the
Commissioner shall grant a refund or issue the tax credit certificate for creditable input taxes within one
hundred twenty (120) days from the date of submission of compete documents in support of the application
filed in accordance with Subsections (A) and (B) hereof.

In case of full or partial denial of the claim for tax refund or tax credit, or the failure on the part of the
Commissioner to act on the application within the period prescribed above, the taxpayer affected may,
within thirty (30) days from the receipt of the decision denying the claim or after the expiration of the one
hundred twenty day-period, appeal the decision or the unacted claim with the Court of Tax Appeals.-

(E) Manner of Giving Refund.- Refunds shall be made upon warrants drawn by the Commissioner 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 to the contrary notwithstanding:
Provided, That refunds under this paragraph shall be subject to post audit by the Commission on Audit.

SEC. 113.

Invoicing and Accounting Requirements for VAT-Registered Persons. -

(A) Invoicing Requirements. - A VAT-registered person shall, for every sale, issue an invoice or
receipt. In addition to the information required under Section 237, the following information shall be
indicated in the invoice or receipt:

(1) A statement that the seller is a VAT-registered person, followed by his taxpayer's identification
number (TIN); and
(2) The total amount which the purchaser pays or is obligated to pay to the seller with the
indication that such amount includes the value-added tax.

(B) Accounting Requirements. - Notwithstanding the provisions of Section 233, all persons
subject to the value-added tax under Sections 106 and 108 shall, in addition to the regular accounting
records required, maintain a subsidiary sales journal and subsidiary purchase journal on which the daily
sales and purchases are recorded. The subsidiary journals shall contain such information as may be required
by the Secretary of Finance.

Sec. 143.Tax on Business. - The municipality may impose taxes on the following businesses:

(a) On manufacturers, assemblers, repackers, processors, brewers, distillers, rectifiers, and


compounders of liquors, distilled spirits, and wines or manufacturers of any article of commerce of
whatever kind or nature, in accordance with the following schedule:

With gross sales or receipts for the preceding Amount of Tax Per
calendar year in the amount of: Annum
Less than 10,000.00 165.00
P 10,000.00 or more but less than 15,000.00 220.00
15,000.00 or more but less than 20,000.00 202.00
20,000.00 or more but less than 30,000.00 440.00
30,000.00 or more but less than 40,000.00 660.00
40,000.00 or more but less than 50,000.00 825.00
50,000.00 or more but less than 75,000.00 1,320.00

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75,000.00 or more but less than 100,000.00 1,650.00
100,000.00 or more but less than 150,000.00 2,200.00
150,000.00 or more but less than 200,000.00 2,750.00
200,000.00 or more but less than 300,000.00 3,850.00
300,000.00 or more but less than 500,000.00 5,500.00
500,000.00 or more but less than 750,000.00 8,000.00
750,000.00 or more but less than 1,000,000.00 10,000.00
1,000,000.00 or more but less than 2,000,000.00 13,750.00
2,000,000.00 or more but less than 3,000,000.00 16,500.00
3,000,000.00 or more but less than 4,000,000.00 19,000.00
4,000,000.00 or more but less than 5,000,000.00 23,100.00
5,000,000.00 or more but less than 6,500,000.00 24,375.00
6,000,000.00 or more at a rate not exceeding thirty-seven and a half percent
(37%) of one percent (1%)

(b) On wholesalers, distributors, or dealers in any article of commerce of whatever kind or nature
in accordance with the following schedule:

With gross sales or receipts for the preceding Amount of Tax Per
calendar year in the amount of: Annum
Less than 1,000.00 18.00
P 1,000.00 or more but less than 2,000.00 33.00
2,000.00 or more but less than 3,000.00 50.00
3,000.00 or more but less than 4,000.00 72.00
4,000.00 or more but less than 5,000.00 100.00
5,000.00 or more but less than 6,000.00 121.00
6,000.00 or more but less than 7,000.00 143.00
7,000.00 or more but less than 8,000.00 165.00
8,000.00 or more but less than 10,000.00 187.00
10,000.00 or more but less than 15,000.00 220.00
15,000.00 or more but less than 20,000.00 275.00
20,000.00 or more but less than 30,000.00 330.00
30,000.00 or more but less than 40,000.00 440.00
40,000.00 or more but less than 50,000.00 660.00
50,000.00 or more but less than 75,000.00 990.00
75,000.00 or more but less than 100,000.00 1,320.00

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100,000.00 or more but less than 150,000.00 1,870.00
150,000.00 or more but less than 200,000.00 2,420.00
200,000.00 or more but less than 300,000.00 3,300.00
300,000.00 or more but less than 500,000.00 4,400.00
500,000.00 or more but less than 750,000.00 6,600.00
750,000.00 or more but less than 1,000,000.00 8,800.00
1,000,000.00 or more but less than 2,000,000.00 10,000.00
2,000,000.00 or more at a rate not exceeding fifty percent (50%) of one
percent (1%).

(c) On exporters, and on manufacturers , millers, producers, wholesalers, distributors, dealers or


retailers of essential commodities enumerated hereunder at a rate not exceeding one-half () of the rates
prescribed under subsection (a), (b) and (d) of this Section:

(1) Rice and corn;

(2) Wheat or cassava flour, meat, dairy products, locally manufactured, processed or
preserved food, sugar, salt and other agricultural, marine, and fresh water products,
whether in their original state or not;

(3) Cooking oil and cooking gas;

(4) Laundry soap, detergents, and medicine;

(5) Agricultural implements. equipment and post-harvest facilities, fertilizers, pesticides,


insecticides, herbicides and other farm inputs;

(6) Poultry feeds and other animal feeds;

(7) School supplies; and

(8) Cement.

(d) On retailers.

With gross sales or receipts for the preceding Rate of Tax Per
calendar year in the amount of: Annum
P400,000.00 or less 2%
more than P400,000.00 1%

Provided, however, That barangays shall have the exclusive power to levy taxes, as provided
under Section 152 hereof, on gross sales or receipts of the preceding calendar year of Fifty
thousand pesos (P50,000.00) or less, in the case of cities, and Thirty thousand pesos (P30,000.00)
or less, in the case of municipalities.

(e) On contractors and other independent contractors, in accordance with the following schedule:

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With gross sales or receipts for the preceding Amount of Tax Per
calendar year in the amount of: Annum
Less than 5,000.00 27.50
P 5,000.00 or more but less than P 10,000.00 61.60
10,000.00 or more but less than 15,000.00 104.50
15,000.00 or more but less than 20,000.00 165.00
20,000.00 or more but less than 30,000.00 275.00
30,000.00 or more but less than 40,000.00 385.00
40,000.00 or more but less than 50,000.00 550.00
50,000.00 or more but less than 75,000.00 880.00
75,000.00 or more but less than 100,000.00 1,320.00
100,000.00 or more but less than 150,000.00 1,980.00
150,000.00 or more but less than 200,000.00 2,640.00
200,000.00 or more but less than 250,000.00 3,630.00
250,000.00 or more but less than 300,000.00 4,620.00
300,000.00 or more but less than 400,000.00 6,160.00
400,000.00 or more but less than 500,000.00 8,250.00
500,000.00 or more but less than 750,000.00 9,250.00
750,000.00 or more but less than 1,000,000.00 10,250.00
1,000,000.00 or more but less than 2,000,000.00 11,500.00
2,000,000.00 or more at a rate not exceeding fifty percent (50%) of one
percent (1%)

(f) On banks and other financial institutions, at a rate not exceeding fifty percent (50%) of one
percent (1%) on the gross receipts of the preceding calendar year derived 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.

(g) On peddlers engaged in the sale of any merchandise or article of commerce, at a rate not
exceeding Fifty pesos (P50.00) per peddler annually.

(h) On any business, not otherwise specified in the preceding paragraphs, which the sanggunian
concerned may deem proper to tax: Provided, That on any business subject to the excise, value-
added or percentage tax under the National Internal Revenue Code, as amended, the rate of tax
shall not exceed two percent (2%) of gross sales or receipts of the preceding calendar year.

The sanggunian concerned may prescribe a schedule of graduated tax rates but in no case to exceed the
rates prescribed herein.

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SEC. 236.Registration Requirements. -

(A) Requirements. - Every person subject to any internal revenue tax shall register once with the
appropriate Revenue District Officer:

(1) Within ten (10) days from date of employment, or

(2) On or before the commencement of business,or

(3) Before payment of any tax due, or

(4) Upon filing of a return, statement or declaration as required in this Code.

The registration shall contain the taxpayer's name, style, place of residence, business and such other
information as may be required by the Commissioner in the form prescribed therefor.

A person maintaining a head office, branch or facility shall register with the Revenue District Officer
having jurisdiction over the head office, brand or facility. For purposes of this Section, the term "facility"
may include but not be limited to sales outlets, places of production, warehouses or storage places.

(B) Annual Registration Fee. - An annual registration fee in the amount of Five hundred pesos (P500) for
every separate or distinct establishment or place of business, including facility types where sales
transactions occur, shall be paid upon registration and every year thereafter on or before the last day of
January: Provided, however, That cooperatives, individuals earning purely compensation income, whether
locally or abroad, and overseas workers are not liable to the registration fee herein imposed.

The registration fee shall be paid to an authorized agent bank located within the revenue district, or to the
Revenue Collection Officer, or duly authorized Treasurer of the city of municipality where each place of
business or branch is registered.

(C) Registration of Each Type of Internal Revenue Tax. - Every person who is required to register with the
Bureau of Internal Revenue under Subsection (A) hereof, shall register each type of internal revenue tax for
which he is obligated, shall file a return and shall pay such taxes, and shall updates such registration of any
changes in accordance with Subsection (E) hereof.

(D) Transfer of Registration. - In case a registered person decides to transfer his place of business or his
head office or branches, it shall be his duty to update his registration status by filing an application for
registration information update in the form prescribed therefor.

(E) Other Updates. - Any person registered in accordance with this Section shall, whenever applicable,
update his registration information with the Revenue District Office where he is registered, specifying
therein any change in type and other taxpayer details.

(F) Cancellation of Registration. - The registration of any person who ceases to be liable to a tax type shall
be cancelled upon filing with the Revenue District Office where he is registered an application for
registration information update in a form prescribed therefor.

(G) Persons Commencing Business. - Any person, who expects to realize gross sales or receipts subject to
value-added tax in excess of the amount prescribed under Section 109(z) of this Code for the next 12-
month period from the commencement of the business, shall register with the Revenue District Office
which has jurisdiction over the head office or branch and shall pay the annual registration fee prescribed in
Subsection (B) hereof.

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(H) Persons Becoming Liable to the Value-added Tax. - Any person, whose gross sales or receipts in any
12-month period exceeds the amount prescribed under Subsection 109(z) of this Code for exemption from
the value-added tax shall register in accordance with Subsection (A) hereof, and shall pay the annual
registration fee prescribed within ten (10) days after the end of the last month of that period, and shall be
liable to the value-added tax commencing from the first day of the month following his registration.

(I) Optional Registration of Exempt Person. - Any person whose transactions are exempt from value-added
tax under Section 109(z) of this Code; or any person whose transactions are exempt from the value-added
tax under Section 109(a), (b), (c), and (d) of this Code, who opts to register as a VAT taxpayer with respect
to his export sales only, may update his registration information in accordance with Subsection (E) hereof,
not later than ten (10) days before the beginning of the taxable quarter and shall pay the annual registration
fee prescribed in Subsection (B) hereof.

In any case, the Commissioner may, for administrative reasons, deny any application for registration
including updates prescribed under Subsection (E) hereof.

For purposes of Title IV of this Code, any person who has registered value-added tax as a tax type in
accordance with the provisions of Subsection (C) hereof shall be referred to as VAT-registered person who
shall be assigned only one Taxpayer Identification Number.

(J) Supplying of Taxpayer Identification Number (TIN). - Any person required under the authority of this
Code to make, render or file a return, statement or other document shall be supplied with or assigned a
Taxpayer Identification Number (TIN) which he shall indicate in such return, statement or document filed
with the Bureau of Internal Revenue for his proper identification for tax purposes, and which he shall
indicate in certain documents, such as, but not limited to the following:

(1) Sugar quedans, refined sugar release order or similar instruments;


(2) Domestic bills of lading;
(3) Documents to be registered with the Register of Deeds of Assessor's Office;
(4) Registration certificate of transportation equipment by land, sea or air;
(5) Documents to be registered with the Securities and Exchange Commission;
(6) Building construction permits;
(7) Application for loan with banks, financial institutions, or other financial intermediaries;
(8) Application for mayor's permit;
(9) Application for business license with the Department of Trade & Industry; and
(10) Such other documents which may hereafter be required under rules and regulations to be
promulgated by the Secretary of Finance, upon recommendation of the Commissioner.

In cases where a registered taxpayer dies, the administrator or executor shall register the estate of
the decedent in accordance with Subsection (A) hereof and a new Taxpayer Identification Number (TIN)
shall be supplied in accordance with the provisions of this Section.

In the case of a nonresident decedent, the executor or administrator of the estate shall register the
estate with the Revenue District Office where he is registered: Provided, however, That in case such
executor or administrator is not registered, registration of the estate shall be made with the Taxpayer
Identification Number (TIN) supplied by the Revenue District Office having jurisdiction over his legal
residence.

Only one Taxpayer identification Number (TIN) shall be assigned to a taxpayer. Any person who
shall secure more than one Taxpayer Identification Number shall be criminally liable under the provision of
Section 275 on 'Violation of Other Provisions of this Code or Regulations in General'.

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Sec. 237.

Issuance of Receipts or Sales or Commercial Invoices. All persons subject to an internal revenue
tax shall, for each sale or transfer of merchandise or for services rendered valued at Twenty-five pesos
(P25.00) or more, issue duly registered receipts or sales or commercial invoices, prepared at least in
duplicate, showing the date of transaction, quantity, unit cost and description of merchandise or nature of
service: Provided, however, That in the case of sales, receipts or transfers in the amount of One hundred
pesos (P100.00) or more, or regardless of the amount, where the sale or transfer is made by a person liable
to value-added tax to another person also liable to value-added tax; or where the receipt is issued to cover
payment made as rentals, commissions, compensations or fees, receipts or invoices shall be issued which
shall show the name, business style, if any, and address of the purchaser, customer or client: Provided,
further, That where the purchaser is a VAT-registered person, in addition to the information herein
required, the invoice or receipt shall further show the Taxpayer Identification Number (TIN) of the
purchaser.

The original of each receipt or invoice shall be issued to the purchaser, customer or client at the
time the transaction is effected, who, if engaged in business or in the exercise of profession, shall keep and
preserve the same in his place of business for a period of three (3) years from the close of the taxable year
in which such invoice or receipt was issued, while the duplicate shall be kept and preserved by the issuer,
also in his place of business, for a like period.

The Commissioner may, in meritorious cases, exempt any person subject to internal revenue tax
from compliance with the provisions of this Section.

SEC. 248.Civil Penalties.


xxx

(B) In case of willful neglect to file the return within the period prescribed by this Code or byrules
and regulations, or in case a false or fraudulent return is willfully made, the penaltyto be imposed shall be
fifty percent (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 thefalsity or fraud: Provided, That a substantial underdeclaration of
taxable sales, receiptsor income, or a substantial overstatement of deductions, as determined by
theCommissioner pursuant to the rules and regulations to be promulgated by the Secretaryof Finance, shall
constitute prima facie evidence of a false or fraudulent return: Provided,further, That failure to report sales,
receipts or income in an amount exceeding thirtypercent (30%) of that declared per return, and a claim of
deductions in an amountexceeding (30%) of actual deductions, shall render the taxpayer liable for
substantialunderdeclaration of sales, receipts or income or for overstatement of deductions, asmentioned
herein.

SEC. 282.

Informer's Reward to Persons Instrumental in the Discovery of Violations of the National Internal Revenue
Code and in the Discovery and Seizure of Smuggled Goods. -

(A) For Violations of the National Internal Revenue Code. - Any person, except an internal
revenue official or employee, or other public official or employee, or his relative within the sixth degree of
consanguinity, who voluntarily gives definite and sworn information, not yet in the possession of the
Bureau of Internal Revenue, leading to the discovery of frauds upon the internal revenue laws or violations
of any of the provisions thereof, thereby resulting in the recovery of revenues, surcharges and fees and/or
the conviction of the guilty party and/or the imposition of any of the fine or penalty, shall be rewarded in a
sum equivalent to ten percent (10%) of the revenues, surcharges or fees recovered and/or fine or penalty
imposed and collected or One Million Pesos (P1,000,000) per case, whichever is lower. The same amount
of reward shall also be given to an informer where the offender has offered to compromise the violation of

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law committed by him and his offer has been accepted by the Commissioner and collected from the
offender: Provided, That should no revenue, surcharges or fees be actually recovered or collected, such
person shall not be entitled to a reward: Provided, further, That the information mentioned herein shall not
refer to a case already pending or previously investigated or examined by the Commissioner or any of his
deputies, agents or examiners, or the Secretary of Finance or any of his deputies or agents: Provided,
finally, That the reward provided herein shall be paid under rules and regulations issued by the Secretary of
Finance, upon recommendation of the Commissioner.

(B) For Discovery and Seizure of Smuggled Goods. - To encourage the public to extend full
cooperation in eradicating smuggling, a cash reward equivalent to ten percent (10%) of the fair market
value of the smuggled and confiscated goods or One Million Pesos (P1,000,000) per case, whichever is
lower, shall be given to persons instrumental in the discovery and seizure of such smuggled goods.

The cash rewards of informers shall be subject to income tax, collected as a final withholding tax,
at a rate of ten percent (10%).
The provisions of the foregoing Subsections notwithstanding, all public officials, whether incumbent or
retired, who acquired the information in the course of the performance of their duties during their
incumbency, are prohibited from claiming informer's reward.

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RULES OF COURT

RULE 42

Petition for Review From the Regional Trial Courts to the Court of Appeals

Section 1.How appeal taken; time for filing. A party desiring to appeal from a decision of the
Regional Trial Court rendered in the exercise of its appellate jurisdiction may file a verified petition for
review with the Court of Appeals, paying at the same time to the clerk of said court the corresponding
docket and other lawful fees, depositing the amount of P500.00 for costs, and furnishing the Regional Trial
Court and the adverse party with a copy of the petition. The petition shall be filed and served within fifteen
(15) days from notice of the decision sought to be reviewed or of the denial of petitioner's motion for new
trial or reconsideration filed in due time after judgment. Upon proper motion and the payment of the full
amount of the docket and other lawful fees and the deposit for costs before the expiration of the
reglementary period, the Court of Appeals may grant an additional period of fifteen (15) days only within
which to file the petition for review. No further extension shall be granted except for the most compelling
reason and in no case to exceed fifteen (15) days. (n)

Section 2.Form and contents. The petition shall be filed in seven (7) legible copies, with the
original copy intended for the court being indicated as such by the petitioner, and shall (a) state the full
names of the parties to the case, without impleading the lower courts or judges thereof either as petitioners
or respondents; (b) indicate the specific material dates showing that it was filed on time; (c) set forth
concisely a statement of the matters involved, the issues raised, the specification of errors of fact or law, or
both, allegedly committed by the Regional Trial Court, and the reasons or arguments relied upon for the
allowance of the appeal; (d) be accompanied by clearly legible duplicate originals or true copies of the
judgments or final orders of both lower courts, certified correct by the clerk of court of the Regional Trial
Court, the requisite number of plain copies thereof and of the pleadings and other material portions of the
record as would support the allegations of the petition.

The petitioner shall also submit together with the petition a certification under oath that he has not
theretofore commenced any other action involving the same issues in the Supreme Court, the Court of
Appeals or different divisions thereof, or any other tribunal or agency; if there is such other action or
proceeding, he must state the status of the same; and if he should thereafter learn that a similar action or

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proceeding has been filed or is pending before the Supreme Court, the Court of Appeals, or different
divisions thereof, or any other tribunal or agency, he undertakes to promptly inform the aforesaid courts
and other tribunal or agency thereof within five (5) days therefrom. (n)

Section 3.Effect of failure to comply with requirements. The failure of the petitioner to comply
with any of the foregoing requirements regarding the payment of the docket and other lawful fees, the
deposit for costs, proof of service of the petition, and the contents of and the documents which should
accompany the petition shall be sufficient ground for the dismissal thereof. (n)

Section 4.Action on the petition. The Court of Appeals may require the respondent to file a
comment on the petition, not a motion to dismiss, within ten (10) days from notice, or dismiss the petition
if it finds the same to be patently without merit, prosecuted manifestly for delay, or that the questions raised
therein are too insubstantial to require consideration. (n)

Section 5.Contents of comment. The comment of the respondent shall be filed in seven (7)
legible copies, accompanied by certified true copies of such material portions of the record referred to
therein together with other supporting papers and shall (a) state whether or not he accepts the statement of
matters involved in the petition; (b) point out such insufficiencies or inaccuracies as he believes exist in
petitioner's statement of matters involved but without repetition; and (c) state the reasons why the petition
should not be given due course. A copy thereof shall be served on the petitioner. (a)

Section 6.Due course. If upon the filing of the comment or such other pleadings as the court
may allow or require, or after the expiration of the period for the filing thereof without such comment or
pleading having been submitted, the Court of Appeals finds prima facie that the lower court has committed
an error of fact or law that will warrant a reversal or modification of the appealed decision, it may
accordingly give due course to the petition. (n)

Section 7.Elevation of record. Whenever the Court of Appeals deems it necessary, it may order
the clerk of court of the Regional Trial Court to elevate the original record of the case including the oral
and documentary evidence within fifteen (15) days from notice. (n)

Section 8.Perfection of appeal; effect thereof. (a) Upon the timely filing of a petition for review
and the payment of the corresponding docket and other lawful fees, the appeal is deemed perfected as to the
petitioner.

The Regional Trial Court loses jurisdiction over the case upon the perfection of the appeals filed in due
time and the expiration of the time to appeal of the other parties.

However, before the Court of Appeals gives due course to the petition, the Regional Trial Court may issue
orders for the protection and preservation of the rights of the parties which do not involve any matter
litigated by the appeal, approve compromises, permit appeals of indigent litigants, order execution pending
appeal in accordance with section 2 of Rule 39, and allow withdrawal of the appeal. (9a, R41)

(b) Except in civil cases decided under the Rule on Summary Procedure, the appeal shall stay the judgment
or final order unless the Court of Appeals, the law, or these Rules shall provide otherwise. (a)

Section 9.Submission for decision. If the petition is given due course, the Court of Appeals
may set the case for oral argument or require the parties to submit memoranda within a period of fifteen
(15) days from notice. The case shall be deemed submitted for decision upon the filing of the last pleading
or memorandum required by these Rules or by the court itself. (n)

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RULE 43

Appeals From the Court of Tax Appeals and Quasi-Judicial Agencies to the Court of Appeals

Section 1.Scope. This Rule shall apply to appeals from judgments or final orders of the Court
of Tax Appeals and from awards, judgments, final orders or resolutions of or authorized by any quasi-
judicial agency in the exercise of its quasi-judicial functions. Among these agencies are the Civil Service
Commission, Central Board of Assessment Appeals, Securities and Exchange Commission, Office of the
President, Land Registration Authority, Social Security Commission, Civil Aeronautics Board, Bureau of
Patents, Trademarks and Technology Transfer, National Electrification Administration, Energy Regulatory
Board, National Telecommunications Commission, Department of Agrarian Reform under Republic Act
No. 6657, Government Service Insurance System, Employees Compensation Commission, Agricultural
Invention Board, Insurance Commission, Philippine Atomic Energy Commission, Board of Investments,
Construction Industry Arbitration Commission, and voluntary arbitrators authorized by law. (n)

Section 2.Cases not covered. This Rule shall not apply to judgments or final orders issued
under the Labor Code of the Philippines. (n)

Section 3.Where to appeal. An appeal under this Rule may be taken to the Court of Appeals
within the period and in the manner herein provided, whether the appeal involves questions of fact, of law,
or mixed questions of fact and law. (n)

Section 4.Period of appeal. The appeal shall be taken within fifteen (15) days from notice of
the award, judgment, final order or resolution, or from the date of its last publication, if publication is
required by law for its effectivity, or of the denial of petitioner's motion for new trial or reconsideration
duly filed in accordance with the governing law of the court or agency a quo. Only one (1) motion for
reconsideration shall be allowed. Upon proper motion and the payment of the full amount of the docket fee
before the expiration of the reglementary period, the Court of Appeals may grant an additional period of
fifteen (15) days only within which to file the petition for review. No further extension shall be granted
except for the most compelling reason and in no case to exceed fifteen (15) days. (n)

Section 5.How appeal taken. Appeal shall be taken by filing a verified petition for review in
seven (7) legible copies with the Court of Appeals, with proof of service of a copy thereof on the adverse
party and on the court or agency a quo. The original copy of the petition intended for the Court of Appeals
shall be indicated as such by the petitioner.

Upon the filing of the petition, the petitioner shall pay to the clerk of court of the Court of Appeals the
docketing and other lawful fees and deposit the sum of P500.00 for costs. Exemption from payment of
docketing and other lawful fees and the deposit for costs may be granted by the Court of Appeals upon a
verified motion setting forth valid grounds therefor. If the Court of Appeals denies the motion, the
petitioner shall pay the docketing and other lawful fees and deposit for costs within fifteen (15) days from
notice of the denial. (n)

Section 6.Contents of the petition. The petition for review shall (a) state the full names of the
parties to the case, without impleading the court or agencies either as petitioners or respondents; (b) contain
a concise statement of the facts and issues involved and the grounds relied upon for the review; (c) be
accompanied by a clearly legible duplicate original or a certified true copy of the award, judgment, final
order or resolution appealed from, together with certified true copies of such material portions of the record
referred to therein and other supporting papers; and (d) contain a sworn certification against forum
shopping as provided in the last paragraph of section 2, Rule 42. The petition shall state the specific
material dates showing that it was filed within the period fixed herein. (2a)

Section 7.Effect of failure to comply with requirements. The failure of the petitioner to comply
with any of the foregoing requirements regarding the payment of the docket and other lawful fees, the

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deposit for costs, proof of service of the petition, and the contents of and the documents which should
accompany the petition shall be sufficient ground for the dismissal thereof. (n)

Section 8.Action on the petition. The Court of Appeals may require the respondent to file a
comment on the petition not a motion to dismiss, within ten (10) days from notice, or dismiss the petition if
it finds the same to be patently without merit, prosecuted manifestly for delay, or that the questions raised
therein are too unsubstantial to require consideration. (6a)

Section 9.Contents of comment. The comment shall be filed within ten (10) days from notice in
seven (7) legible copies and accompanied by clearly legible certified true copies of such material portions
of the record referred to therein together with other supporting papers. The comment shall (a) point out
insufficiencies or inaccuracies in petitioner's statement of facts and issues; and (b) state the reasons why the
petition should be denied or dismissed. A copy thereof shall be served on the petitioner, and proof of such
service shall be filed with the Court of Appeals. (9a)

Section 10.Due course. If upon the filing of the comment or such other pleadings or documents
as may be required or allowed by the Court of Appeals or upon the expiration of the period for the filing
thereof, and on the records the Court of Appeals finds prima facie that the court or agency concerned has
committed errors of fact or law that would warrant reversal or modification of the award, judgment, final
order or resolution sought to be reviewed, it may give due course to the petition; otherwise, it shall dismiss
the same. The findings of fact of the court or agency concerned, when supported by substantial evidence,
shall be binding on the Court of Appeals. (n)

Section 11.Transmittal of record. Within fifteen (15) days from notice that the petition has
been given due course, the Court of Appeals may require the court or agency concerned to transmit the
original or a legible certified true copy of the entire record of the proceeding under review. The record to be
transmitted may be abridged by agreement of all parties to the proceeding. The Court of Appeals may
require or permit subsequent correction of or addition to the record. (8a)

Section 12.Effect of appeal. The appeal shall not stay the award, judgment, final order or
resolution sought to be reviewed unless the Court of Appeals shall direct otherwise upon such .terms as it
may deem just. (10a)

Section 13.Submission for decision. If the petition is given due course, the Court of Appeals
may set the case for oral argument or require the parties to submit memoranda within a period of fifteen
(15) days from notice. The case shall be deemed submitted for decision upon the filing of the last pleading
or memorandum required by these Rules or by the court of Appeals. (n)

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