BAR STAR NOTES

TAXATION
VER. 2010.06.12
copyrighted 2010

Prepared by Prof. Abelardo T. Domondon

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

How to use the BAR STAR

NOTES. The BAR STAR NOTES in the

form of questions and answers as well as

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

Nice to know

Should know
Must know and master
It is further suggested that the reader
should merely browse those without stars.

THE BEST OF LUCK

AND ADVANCE
CONGRATULATIONS

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

2.
What is the nature of
the States power to tax? Explain
briefly.
SUGGESTED ANSWER: The nature of
the states power to tax is two-fold. It is both
an inherent power and a legislative power.
It is inherent in nature being an
attribute of sovereignty. This is so, because
without the taxes, the states existence would
be imperiled. There is thus, no need for a
constitutional grant for the state to exercise
this power.
It
is
a
legislative power because it involves the
promulgation of rules. Taxation is a set of
rules, how much is the tax to be paid, who
pays the tax, to whom it should be paid, and
when the tax should be paid.

3. What is the underlying

theory of taxation? Explain briefly.

SUGGESTED ANSWER: Taxes are the

lifeblood of the nation.
Without
revenue
raised
from
taxation,
the
government will not survive, resulting in
detriment to society.
Without taxes, the
government would be paralyzed for lack of

2
motive power to activate and operate it.
(Commissioner of Internal Revenue v. Algue, Inc.
et al., 158 SCRA 8, 16-17)

4. Marshall said that, the

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

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

5. Discuss
basis/bases,
taxation.

or

briefly
rationale

the
of

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

6. Discuss

briefly
but
comprehensively the objectives or
purposes of taxation.
SUGGESTED ANSWER: The purposes
or objectives of taxation are the following:
a.
1)
purposes

The primary purpose:

Revenue purpose.
b.
The

secondary

1)
Sumptuary or regulatory
purpose.
2)
Compensatory purpose.
3)
To
implement the power of eminent domain.

7. Distinguish a tax from a

license fee.

SUGGESTED
ANSWER: The following are the distinctions:
a.
Purpose:
Tax imposed for
revenue while license fee for regulation. Tax
for general public purposes while license fee
for regulatory purposes only.
b.
Basis: Tax imposed under power of
taxation while license fee under police power.
c.
Amount: In taxation, no limit
as to amount while license fee limited to cost
of the license and the expenses of police
surveillance and regulation.
d.
Time of payment:
Taxes
normally paid after commencement of
business while license fee before.
e.
Effect
of
payment:
Failure to pay a tax does not make the
business illegal while failure to pay license
fee makes business illegal.
f.
Surrender: Taxes, being the lifeblood
of the state, cannot be surrendered except
for lawful consideration while a license fee
may be surrendered with or without
consideration. (Cooley on Taxation, pp. 11371138; Pacific Commercial Company v. Romualdez,
et al., 49 Phil. 924)

8. How may the power to

tax be utilized to carry out the
social justice program of our
government?

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

In recent years, the increasing social

challenges of the times expanded the scope
of the state activity, and taxation has become
a tool to realize social justice and the
equitable distribution of wealth, economic
progress and the protection of local
industries as well as public welfare and

3
similar objectives. (Batangas Power Corporation
v. Batangas City, et al., G. R. No. 152675, and
companion case, April 28, 2004 citing National
Power Corporation v. City of Cabanatuan, G. R.
No. 149110, April 9, 2003)

9.
Explain the
purpose of taxation.

sumptuary

SUGGESTED ANSWER: The sumptuary

purpose of taxation is to promote the general
welfare and to protect the health, safety or
morals of the inhabitants. It is in the joint
exercise of the power of taxation and police
power where regulatory taxes are collected.
Taxation may be made the implement
of the states police power. The motivation
behind many taxation measures is the
implementation of police power goals.
[Southern Cross Cement Corporation v. Cement
Manufacturers Association of the Philippines, et al.,
G. R. No. 158540, August 3, 2005) The reader
should note that the August 3, 2005 Southern
Cross case is the decision on the motion for
reconsideration of the July 8, 2004 Southern
Cross decision.
The so-called sin taxes on alcohol and
tobacco manufacturers help dissuade the
consumers from excessive intake of these
potentially harmful products. (Southern Cross
Cement Corporation v. Cement Manufacturers
Association of the Philippines, et al., G. R. No.
158540, August 3, 2005)

Taxation
distinguished
police power.
Taxation is

10.

from

distinguishable from police power as to the

means employed to implement these public
goals. Those doctrines that are unique to
taxation arose from peculiar considerations
such as those especially punitive effects
(Southern Cross Cement Corporation v.

Cement Manufacturers Association of the

Philippines, et al., G. R. No. 158540, August 3,

2005) as the power to tax involves the power

to destroy and the belief that taxes are
lifeblood of the state. (Ibid.) taxes being the
lifeblood of the government, their prompt and
certain availability is of the essence.
These considerations necessitated the
evolution of taxation as a distinct legal concept
from police power. (Ibid.)

11. How
the
power
of
taxation may be used to implement

power of eminent domain.

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

Establishments granting the 20%

senior citizens discount may claim the
discounts granted to senior citizens as tax
deduction based on the net cost of the
goods sold or services rendered: Provided,
That the cost of the discount shall be allowed
as deduction from gross income for the same
taxable year that the discount is granted.
Provided, further, That the total amount of
the claimed tax deduction net of value added
tax if applicable, shall be included in their
gross sales receipts for tax purposes and
shall be subject to proper documentation and
to the provisions of the National Internal
Revenue Code, as amended. [M.E. Holding
Corporation v. Court of Appeals, et al., G.R. No.
160193, March 3, 2008 citing Expanded Senior
Citizens Act of 2003, Sec. 4 (a)]

12. What are the three

basic principles of a sound tax
system? Explain each briefly.
SUGGESTED
ANSWER:
The canons of a sound tax
system, also known as the characteristics or,
principles of a sound tax system, are used as
a criterion in order to determine whether a
tax system is able to meet the purposes or
objectives of taxation. They are:
a.
Fiscal adequacy.
b.
Administrative feasibility.
c.
Theoretical justice.

13. What are the elements or

characteristics of a tax?

SUGGESTED ANSWER:
a.
Enforced contribution.
b.
Generally payable in money.
c.
Proportionate in character.
d.
Levied on persons, property or
exercise of a right or privilege.
e.
Levied by the state having
jurisdiction.

4
f.
g.
h.
intervals.

Levied by the legislature.

Levied for a public purpose.
Paid at regular periods

or

14. State the requisites of a

valid tax.

SUGGESTED ANSWER:
a.
A valid tax should be within the
jurisdiction of the taxing authority.
b.
That the assessment and
collection of certain kinds (The same as the
inherent limitations of the power of taxation)
should be for a public purpose.
c.
The rule of taxation should be
uniform.
d.
That either the person or
property of taxes guarantees against
injustice to individuals, especially by way or
notice and opportunity for hearing be
provided.
e.
The tax must not impinge on
the inherent and Constitutional limitations on
the power of taxation.

15. What are the classes or

kinds of taxes according to the
subject matter or object?

SUGGESTED ANSWER:
a.
Personal, poll or capitalization
imposed on all residents, whether citizen or
not. Example Community Tax.
b.
property.

Property Imposed
Example Real property tax.

on

c.
Excise imposed upon the
performance of an act, the enjoyment of a
privilege or the engaging in an occupation.
Example income tax, estate tax.

16. What are the kinds of

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

Long Distance Telephone Company, G. R. No.

140230, December 15, 2005); they are
impositions for which a taxpayer is directly
liable on the transaction or business he is
engaged in, (Commissioner of Internal Revenue
v. Philippine Long Distance Telephone Company,
supra)
which liability cannot be shifted or
transferred to another. Example income
tax, estate tax, donors tax, etc.
b.
Indirect taxes are those that are
demanded in the first instance, from, or are
paid by, one person in the expectation and
intention that he can shift the burden to
(Commissioner of Internal Revenue v. Philippine
Long Distance Telephone Company, supra) to
someone else not as a tax but as part of the
purchase price. (Commissioner, of Internal

Revenue v. American Express International,

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

17.

Silkair (Singapore)
PTE, Ltd., an international carrier,
purchased aviation gas from Petron
Corporation, which it uses for its
operations. It now claims for refund
or tax credit for the excise taxes it
paid claiming that it is exempt from
the payment of excise taxes under
the provisions of Sec. 135 of the
NIRC of 1997 which provides that
petroleum products are exempt from
excise taxes when sold to
Exempt
entities or agencies covered by tax treaties,
conventions, and other international agreements
for their use and consumption:
Provided,
however, That the country of said foreign
international carrier or exempt entities or agencies
exempts from similar taxes petroleum products
sold to Philippine carriers, entities or agencies

Silkair further anchors its claim

on Article 4(2) of the Air Transport
Agreement
between
the
Government of the Republic of the
Philippines and the Government of
the Republic of Singapore (Air
Transport Agreement between RP
and Singapore) which reads: Fuel,
lubricants, spare parts, regular equipment and

5
aircraft stores introduced into, or taken on board
aircraft in the territory of one Contracting party by,
or on behalf of, a designated airline of the other
Contracting Party and intended solely for use in the
operation of the agreed services shall, with the
exception of charges corresponding to the service
performed, be exempt from the same customs
duties, inspection fees and other duties or taxes
imposed in the territories of the first Contracting
Party , even when these supplies are to be used on
the parts of the journey performed over the
territory of the Contracting Party in which they are
introduced into or taken on board. The materials
referred to above may be required to be kept under
customs supervision and control.

Silkair likewise argues that it is

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

154028, July 29, 2005, 465 SCRA 308, 317-318)

The NIRC provides that the excise tax should

be paid by the manufacturer or producer
before removal of domestic products from
place of production. Thus, Petron Corporation,
not Silkair, is the statutory taxpayer which is
entitled to claim a refund based on Section
135 of the NIRC of 1997 and Article 4(2) of

the Air Transport Agreement between RP and

Singapore.
Even if Petron Corporation passed on
to Silkair the burden of the tax, the additional
amount billed to Silkair for jet fuel is not a tax
but part of the price which Silkair had to pay
as a purchaser. [Philippine Acetylene Co., Inc. v.
Commissioner of Internal Revenue, 127 Phil. 461,
470 (1967)]

b. Silkair could not seek refuge

under Maceda v. Macaraig, Jr., G.R. No.
88291, May 31, 1991, 197 SCRA 771.which
upheld the claim for tax credit or refund by
the National Power Corporation (NPC) on the
ground that the NPC is exempt even from the
payment of indirect taxes.
In Commissioner of Internal Revenue

v. Philippine Long Distance Telephone

Company, G.R. No. 140230, December 15,

2005, 478 SCRA 61

the Supreme Court
clarified the ruling in Maceda v. Macaraig, Jr.,
viz: It may be so that in Maceda vs. Macaraig,
Jr., the Court held that an exemption from
all taxes granted to the National Power
Corporation (NPC) under its charter includes
both direct and indirect taxes.
An exemption from all taxes
excludes indirect taxes, unless the exempting
statute, like NPCs charter, is so couched as to
include indirect tax from the exemption. The
amendment under Republic Act No. 6395
enumerated the details covered by NPCs
exemption. Subsequently, P.D. 380, made
even more specific the details of the
exemption of NPC to cover, among others,
both direct and indirect taxes on all petroleum
products used in its operation. Presidential
Decree No. 938 [NPCs amended charter]
amended the tax exemption by simplifying the
same law in general terms. It succinctly
exempts NPC from all forms of taxes, duties,
fees The use of the phrase all forms of
taxes demonstrates the intention of the law to
give NPC all the tax exemptions it has been
enjoying before.
The exemption granted under Section
135 (b) of the NIRC of 1997 and Article 4(2)
of the Air Transport Agreement between RP
and Singapore cannot, without a clear
showing of legislative intent, be construed as
including indirect taxes. Statutes granting tax
exemptions must be construed in strictissimi
juris against the taxpayer and liberally in favor
of the taxing authority, and if an exemption is

6
found to exist, it must not be enlarged by
construction. (Silkair (Singapore) PTE, Ltd., v.
Commissioner of Internal Revenue, G.R. No. 173594,
February 6, 2008)

18.
What
are
the
different kinds of taxes classified as
to purpose?

SUGGESTED ANSWER:
a.
General, fiscal or revenue
imposed for the purpose of raising public
funds for the service of the government.
b.
Special or regulatory imposed
primarily for the regulation of useful or nonuseful occupation or enterprises and
secondarily only for the raising of public
funds.

LIMITATIONS OR RESTRICTIONS
ON THE POWER
1.
Purpose
for
the
limitations on the power of taxation.

The inherent and constitutional limitations to

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

INHERENT LIMITATIONS
1.
limitations
taxation?

What are the inherent

on
the
power
of

SUGGESTED ANSWERS:
a.
Public purpose. The revenues
collected from taxation should be devoted to a
public purpose.
b.
No improper delegation of
legislative authority to tax.
Only the
legislature can exercise the power of taxes
unless the same is delegated to some other
governmental body by the constitution or
through a law which does not violate any
provision of the constitution.
c.
Territoriality. The taxing power
should be exercised only within territorial
boundaries of the taxing authority.

d.
Recognition
of
government
exemptions; and
e.
Observance of the principle of
comity. Comity is the respect accorded by
nations to each other because they are equals.
On the other hand, taxation is an act of
sovereign. Thus, the power should be imposed
upon equals out of respect.
Some authorities include no double
taxation.

2.

What
are
the
principles to consider in the
determination of whether tax
revenues are devoted for a public
purpose?

SUGGESTED ANSWER:
a.
The tax revenues are for a
public purpose if utilized for the benefit of the
community in general.
An alternative
meaning is that tax proceeds should be
utilized only to attain the objectives of
government.
b.
Inequalities resulting from the
singling out of one particular class for
taxation
or
exemption
infringe
no
constitutional limitation.
REASON: It is inherent in the power
to tax that the legislature is free to select the
subjects of taxation.
BASIS: The lifeblood theory.
c.
An individual taxpayer
need not derive direct benefits from the tax.
REASON:
The
paramount
consideration is the welfare of the greater
portion of the population.
d.
A tax may be imposed,
not so much for revenue purposes, but under
police power for the general welfare of the
community. This would still be for a public
purpose.
e.
Public purpose continually
expanding. Areas formerly left to private
initiative now lose their boundaries and may
be undertaken by the government if it is to
meet the increasing social challenges of the
times.
f.
Tax revenue must not be
used for purely private purposes or for the
exclusive benefit of private persons.
g. Private
persons
may
be
benefited but such benefit should be merely

7
incidental as its main object is the benefit of
the community in general.
h. Determined at the time of
enactment of tax law and not at the time of
implementation.
i. There is a presumption of public
purpose even if the tax law does not
specifically provide for its purpose. (Santos &
Co., v. Municipality of Meycauayan, et al., 94 Phil.
1047)

j. Public use is no longer confined to

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

3.
A law was enacted
imposing a tax on manufacturers of
coconut oil, the proceeds of which
are to be used exclusively for the
protection and promotion of the
coconut
industry,
namely,
to
improve the working conditions in
coconut mills and to conduct
research on the use of coconut oil
for motor fuel.
Some of the
manufacturers
of
coconut
oil
challenge the validity of the law,
contending that the tax is to be
used for a private purpose, and
therefore, the law violates the rule
that public revenues shall not be
appropriated for anything but a
public purpose.
Decide with
reason.

SUGGESTED ANSWER: The levy is for

a public purpose. It cannot be denied that
the coconut industry is one of the major
industries supporting the national economy.
It is, therefore, the states concern to make it
a strong and secure source not only of the
livelihood of the significant segment of the
population, but also of export earnings, the
sustained growth of which is one of the
imperatives of economic growth. (Philippine
Coconut Producers Federation, Inc. (Cocofed
v. Presidential Commission on Good Government,
178 SCRA 236, 252)

4.

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

b.
showing:

For taxpayers, there must be a

337 SCRA

733, 741)

1)
That tax money is being
extracted and spent in
violation of specific
constitutional protections against abuses
of legislative power.
(Flast v.
Cohen, 392 U.S.
83)
2)
That public money is
being deflected to any
improper
purpose (Pascual v. Secretary of Public
Works, 110 Phil. 33) or a
claim
of
illegal disbursement of public funds
or
that the tax measure is unconstitutional.
(David, supra)
3)
A taxpayer is allowed to
sue where there is a
claim that
public
funds are illegally disbursed, or that public
money is being
deflected to any
improper purpose, or that there is a wastage
of
public funds through the enforcement
of
an invalid or unconstitutional
law.
(Abaya v. Ebdane, G. R. No.
167919,
February
14, 2007; Garcia v. Enriquez, Jr.
G.R. No. 112655 December 9, 1993, Minute
Resolution)
A taxpayers suit is properly
brought only when there is
an exercise
of the spending or taxing power of
Congress. (Automotive
Industry
Workers Alliance (AIWA), etc., et al., v. Romulo,
etc., et al., G. R. No. 157509,
January 18, 2005 citing Gonzales v.
Narvasa, G. R. No. 140835, August 14, 2000,
c. For voters, there must be a
showing of obvious interest in the validity of
the election law in question.
d. For concerned citizens, there
must be a showing that the issues raised are
of transcendental importance which must be
settled early.
e. For legislators, there must be a
claim that the official action complained of
infringes upon their prerogatives as
legislators. (David, et al., v. President Gloria

Macapagal-Arroyo, etc., et al., G. R. No.

171396, May 3, 2006)

5. Only
those
directly
affected have locus standi to
impugn the alleged encroachment
by the executive department into
the legislative domain of Congress.
a. Only those who shall be directly
affected by such executive encroachment,
such as for example employees who would
find themselves subject to disciplinary powers
that may be imposed under the questioned
Executive Order as they have a direct and
specific interest in raising the substantive
issue therein (Automotive Industry Workers

Alliance (AIWA),etc., et al., v. Romulo, etc.

,et al., G. R. No. 157509, January 18, 2005)

or employees who are going to be demoted,

transferred or otherwise affected by any
personnel action subject o the rule on
exhaustion of administrative remedies.
b.
Moreover, and if at all, only
Congress, can claim any injury from the
alleged executive encroachment of the
legislative function to amend, modify and/or
repeal laws. (Automotive Industry Workers
Alliance (AIWA), etc., et al., supra, citing
Gonzales v. Narvasa, G. R. No. 140835,
August 14,2000, 337 SCRA 733, 741)

6.
Locus standi being merely
a matter of procedure, have been
waived in certain instances where a
party who is not personally injured
may be allowed to bring suit. The

following are examples of instances where

suits have been brought by parties who have
not have been personally injured by the
operation of a law or any other government
act but by concerned citizens, taxpayers or
voters who actually sue in the public interest:
a.
Taxpayers suits to question
contracts entered into by the national
government
or
government-owned
or
controlled
corporations
allegedly
in
contravention of the law.
b.
A taxpayer is allowed to sue
where there is a claim that public funds are
illegally disbursed, or that public money is
being deflected to any improper purpose, or
that there is a wastage of public funds through
the
enforcement
of
an
invalid
or

unconstitutional law. (Abaya v. Ebdane, G. R.

No. 167919, February 14, 2007)

7.

The VAT law provides

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

8.
Instances of proper
delegation: When taxing power
could be delegated: Exceptions to
the rule on non-delegation:
a.
Delegation of tariff powers by
Congress to the President under the flexible
tariff clause, Section 28 (2), Article VI of the
Constitution.

9
b.
Delegation of emergency powers
to the President under Section 23 (2) of
Article VI of the Constitution.
c. The delegation to the President of
the Philippines to enter into executive
agreements, and to ratify treaties which may
contain tax exemption provisions subject to
the concurrence by the Senate in the
ratification made by the President.
d.
Delegation to the people at large.
e.
Delegation to administrative
bodies [Abakada Guro Party List (Formerly
AASJS), etc., v, Ermita, et al., G. R.
No.168056, September 1, 2005], which is
referred to as subordinate legislation.
In this instance, there is a
requirement that the law is complete in all
aspects so what is delegated is merely the
implementation of the law or there exists
sufficiently determinate standards to guide
the delegate and prevent a total transference
of the taxing power.

9.
Paradigm shift from
exclusive Congressional power to
direct grant of taxing power to local
legislative bodies. The power to tax is no

longer vested exclusively on Congress; local

legislative bodies are now given direct
authority to levy taxes, fees and other charges
pursuant to Article X, section 5 of the 1987
Constitution. (Batangas Power Corporation v.
Batangas City, et al. G. R. No. 152675, and
companion case, April 28, 2004 citing National
Power Corporation v. City of Cabanatuan, G. R. No.
149110, April 9, 2003)

Local government legislation, is not

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

10. Taxing power of the local

government is limited. The taxing
power of local governments is limited in the
sense that Congress can enact legislation
granting tax exemptions.
While the system of local government
taxation has changed with the onset of the
1987 Constitution, the power of local
government units to tax is still limited.

While the power to tax by local

governments may be exercised by local
legislative bodies, no longer merely by virtue
of a valid delegation as before, but pursuant
to direct authority conferred by Section 5,
Article X of the Constitution, the basic
doctrine on local taxation remains essentially
the same power to tax is [still] primarily
vested in the Congress. (Quezon City, et al.,
v. ABS-CBN Broadcasting Corporation, G. R. No.
166408, October 6, 2008 citing City Government
of Quezon City, et al. v.
Bayan
Telecommunications, Inc., G.R. No. 162015,
March 6, 2006, 484 SCRA 169 in turn referring to

Mactan Cebu International Airport Authority, v.

Marcos, G.R. No. 120082, September 11, 1996,
261 SCRA 667, 680)

11. Further amplification by

Bernas of the local governments
power to tax. What is the effect of

Section 5 on the fiscal position of municipal

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

10

12. Reconciliation of the local

governments authority to tax and
the Congressional general taxing
power. Congress has the inherent power

to tax, which includes the power to grant tax

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

Indeed, the grant of taxing powers to

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

13. General principles of

income taxation in the Philippines
or the source rule of income
taxation as provided in the NIRC of
1997.

a. A citizen of the Philippines residing

therein is taxable on all income derived from
sources within and without the Philippines;
b.
A nonresident citizen is
taxable only on income derived from
sources within the Philippines;
c.
An individual citizen of the
Philippines who is working and deriving
income abroad as an overseas contract

worker is taxable only on income from

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

14.
Juliane
a
nonresident alien appointed as a
commission agent by a domestic
corporation with a sales commission
of 10% all sales actually concluded
and collected through her efforts.
The local company withheld the
amount of P107,000 from her sales
commission and remitted the same
to the BIR.
She filed a claim for refund
alleging that her sales commission is
not taxable because the same was a
compensation for her services
rendered in Germany and therefore
considered as income from sources
outside the Philippines.
Is her contention correct?
SUGGESTED ANSWER:
Yes.
The
important factor which determines the source
of income of personal services is not the
residence of the payor, or the place where the
contract for service is entered into, or the
place of payment, but the place where the
services were actually performed.
Since the activity of securing the sales
were in Germany, then the income did not
originate from sources from within the
Philippines. (Commissioner of Internal Revenue v.
Baier-Nickel, G. R. No. 153793, August 29, 2006)

11

15.

Ensite, Ltd. is a
Canadian corporation not doing
business in the Philippines. It holds
40% of the shares of Philippine
Stamping Plant, Inc., a Philippine
company while the 60% is owned
by Fred Corporation, a Filipinoowned
Philippine
corporation.
Ensite Co. also owns 100% of the
shares
of
Susanto
Co.,
an
Indonesian company which has a
duly licensed Philippine branch. Due
to worldwide restructuring of the
Ensite Ltd., group, Ensite Ltd.,
decided to sell all its shares in
Philippine Stamping Plant, Inc. and
Susanto Co. The negotiations for
the buy-out and the signing of the
Agreement of Sale were all done in
the Philippines.
The Agreement
provides that the purchase price
will be paid to Ensite Ltds bank
account in the U.S. and that title to
the Philippine Stamping Plant, Inc.
and Susanto Co. shall be transferred
to General Co., in Toronto Canada
where stock certificates will be
delivered. General Co. seeks your
advice as to whether or not it will
subject the payments of the
purchase price to withholding tax.
Explain your advice.
SUGGESTED ANSWER: The payments of the
purchase price will be subject to withholding
tax. Considering that all the activities (sales)
occurred within the Philippines, the income is
considered as income from within, subject to
Philippine income taxation. Ensite, Ltd. being
a foreign corporation is to be taxed on its
income derived from sources within the
Philippines.

16.
Ensite, Ltd. is a
Canadian corporation, which has a
duly licensed Philippine branch
engage in trading activities in the
Philippines.
Ensite, Ltd. also,
invested directly in 40% of the

shares of stock of Philippine

Stamping Plant, Inc.., a Philippine
corporation.
These shares are
booked in the Head Office of Ensite,
Ltd. and are not reflected as assets
of the Philippine branch. In 2009,
Philippine Stamping Plant, Inc.
declared
dividends
to
its
stockholders. Before remitting the
dividends to Ensite Ltd., Philippine
Stamping Plant, Inc. Co. seeks your
advice as to whether it will subject
the remittance to withholding tax.
There is no need to discuss WT
rates, if applicable.
Focus your
discussion on what is the issue.

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

17. Philippine Stamping

Plant, Inc., a Philippine corporation,
has an executive Larry who is a
Filipino
citizen.
Philippine
Stamping Plant, Inc., has a
subsidiary
in
Malaysia
(Kuala
Lumpur Manufacturing, Inc.) and
will assign Larry for an indefinite
period to work full time for Kuala
Lumpur Manufacturing, Inc. Larry
will bring his family to reside in
Malaysia and will lease out his
residence in the Philippines. The
salary of Larry will be shouldered
50% by Philippine Stamping Plant,
Inc. while the other 50% plus
housing,
cost
of
living
and
educational allowances of Larrys
dependents will be shouldered by
Kuala Lumpur Manufacturing, Inc.
Philippine Stamping Plant, Inc. will
credit the 50% of Larrys salary to
his Philippine bank account. Larry

12

will
sign
the
contract
of
employment in the Philippines. He
will also be receiving rental income
for the lease of his Philippine
residence.
Are these salaries, allowances and
rentals subject to Philippine income
tax? Explain briefly.

or doing business in the Philippines and their

income from sales of passage documents
here is income from within the Philippines.
Thus, the off-line air carrier liable for the
32% (now 30%) tax on its taxable income.
[South African Airways v. Commissioner of
Internal Revenue, G.R. No. 180356, February 16,
2010 citing Commissioner of Internal Revenue v.
British Overseas Airways Corporation (British
Overseas Airways), No. L-65773-74, April 30,
1987, 149 SCRA 395]

SUGGESTED ANSWER:
The salaries and
allowances of Larry, being derived from labor
or personal services rendered outside of the
Philippines is considered as income from
without. Since Larry is an OCW, then he is to
be taxed only on his income derived from
within the Philippines such as the rentals on
his Philippine residence, and not on his
income from without.

18.

Obama Airlines, Inc.,

a foreign airline company which
does not maintain any flight to and
from the Philippines sold air tickets
in the Philippines, through a general
sales agent, relating to the carriage
of passengers and cargo between
two points, both outside the
Philippines.
a. Is Obama, Inc., subject to
income taxes on the sale of the
tickets?

SUGGESTED ANSWER:
Yes.
The
source of income which is taxable is that
activity which produced the income. The
sale of tickets in the Philippines is the activity
that determines whether such income is
taxable in the Philippines.
The tickets exchanged hands here and
payments for fares were also made here in
Philippine currency. The situs of the source of
payments is the Philippines. the flow of
wealth proceeded from and occurred, within
the Philippine territory, enjoying the protection
accorded by the Philippine Government. In
consideration of such protection, the flow of
wealth should share the burden of supporting
the government. [Commissioner of Internal

Revenue v. British Overseas

Corporation (BOAC), 149 SCRA 395]

Airways

Off-line air carriers having general

sales agents in the Philippines are engaged in

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

c.
Would your answer be the
same if Obama, Inc. sold tickets
outside of the Philippines for
travelers who are going to picked up
by Obama, Inc., planes from the
Diosdado Macapagal Intl. Airport at
Clark, Angeles, Pampanga, bound for
Nairobi, Kenya? Reason out your
answer.

SUGGESTED ANSWER: No more. This

time Obama, Inc., would be subject to the
carriers tax based on Gross Philippine Billings.
(GPB).
Gross Philippine Billings refers to the
amount of gross revenue derived from
carriage of persons, excess baggage, cargo

13
and mail originating from the Philippines in a
continuous
and
uninterrupted
flight,
irrespective of the place of sale or issue and
the place of payment of the ticket or passage
document. [NIRC of 1997, Sec. 28(A)(3)(a)]
The place of sale is irrelevant; as
long as the uplifts of passengers and cargo
occur from the Philippines, income is included
in GPB. (South African Airways v. Commissioner
of Internal Revenue, G.R. No. 180356, February
16, 2010)

19. No improper delegation

of legislative authority to tax. The

power to tax is inherent in the State, such

power being inherently legislative, based on
the principle that taxes are a grant of the
people who are taxed, and the grant must be
made by the immediate representatives of
the people; and where the people have laid
the power, there it must remain and be
exercised. (Commissioner of Internal Revenue v.
Fortune Tobacco Corporation, G. R. Nos. 16727475, July 21, 2008)

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

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

3.
The specific
constitutional limitation.

or

direct

a.
No imprisonment for nonpayment of a poll tax;
b.
Taxation shall be uniform and
equitable;
c.
Congress shall evolve a
progressive system of taxation;
d.
All appropriation, revenue or
tariff bills shall originate exclusively in the
House of Representatives, but the Senate may
propose and concur with amendments;
e. The President shall have the power
to veto any particular item or items in an
appropriation, revenue, or tariff bill, but the
veto shall not affect the item or items to which
he does not object;
f.
Delegated power of the President
to impose tariff rates, import and export
quotas, tonnage and wharfage dues:
1)
Delegation by Congress
2)
through a law
3)
subject to Congressional
limits and
restrictions
4)
within the framework of
national development program.
g.
Tax exemption of charitable
institutions,
churches,
parsonages
and
convents appurtenant thereto, mosques, and
all lands, buildings and improvements of all
kinds actually, directly and exclusively used for
religious, charitable or educational purposes;
h.
No tax exemption without the
concurrence of majority vote of all members of
Congress;
i.
No use of public money or
property for religious purposes except if priest
is assigned to the armed forces, penal
institutions,
government
orphanage
or
leprosarium;
j.
Money collected on tax levied for
a special purpose to be used only for such
purpose, balance if any, to general funds;
k.
The Supreme Court's power to
review judgments or orders of lower courts in
all cases involving the legality of any tax,
impose, assessment or toll or the legality of
any penalty imposed in relation to the above;
l.
Authority of local government
units to create their own sources of revenue,
to levy taxes, fees and other charges subject
to guidelines and limitations imposed by

14
Congress consistent with the basic policy of
local autonomy;
m.
Automatic release of local
government's just share in national taxes;
n.
Tax exemption of all revenues
and assets of non-stock, non-profit educational
institutions used actually, directly and
exclusively for educational purposes;
o. Tax exemption of all revenues and
assets
of
proprietary
or
cooperative
educational institutions subject to limitations
provided by law including restrictions on
dividends and provisions for reinvestment of
profits;
p.
Tax
exemption
of grants,
endowments, donations or contributions used
actually,
directly
and
exclusively
for
educational purposes subject to conditions
prescribed by law.

5.
Equal protection of the
law clause is subject to reasonable
classification.
If the groupings are

characterized by substantial distinctions that

make real differences, one class may be
treated and regulated differently from another.
The classification must also be germane to the
purpose of the law and must apply to all those
belonging to the same class. (Tiu, et al., v. Court
of Appeals, et al., G.R. No. 127410, January 20,
1999)

6.
Requisites for valid
classification. All that is required of a

valid classification is that it be reasonable,

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

7.
Equal protection does not
demand absolute equality. It merely

requires that all persons shall be treated

alike,
under
like
circumstances
and
conditions, both as to the privileges
conferred and liabilities enforced. (Santos v.
People, et al, G. R. No. 173176, August 26, 2008)
It is imperative to duly establish that
the one invoking equal protection and the
person to which she is being compared were
indeed similarly situated, i.e., that they
committed identical acts for which they were
charged with the violation of the same
provisions of the NIRC; and that they
presented similar arguments and evidence in
their defense - yet, they were treated
differently. (Santos, supra)

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

9.
The
traditional
(or
rational basis) test used in order to
determine
the
validity
of
classification. The classification is valid if

it is rationally related to a constitutionally

permissible state interest.
The complainant must prove that the
classification is invidous, wholly arbitrary,
or capricious, otherwise the classification is
presumed to be valid. (Lindsley v. Natural
Carboinic Gas Co., 220 U.S. 61; McGowan v.
Maryland, 366 U.S. 420; United States Railroad
Retirement Board v. Fritz, 449 U.S. 166)

10. The strict scrutiny (or

compelling interest) test used in
order to determine the validity of
the
classification.
Government

regulation that intentionally discriminates

against a suspect class such as racial or
ethnic minorities, is subject to strict scrutiny
and considered to violate the equal
protection clause unless found necessary to
promote a compelling state interest.

15
A classification is necessary when it is
narrowly drawn so that no alternative, less
burdensome means is available to accomplish
the state interest.
Thus, it was held that denial of free
public education to the children of illegal
aliens imposes an enormous and lasting
burden based on a status over which the
children have no control is violative of equal
protection because there is no showing that
such denial furthers a substantial state
goal. (Plyler v. Doe, 457 U.S. 202)

11. The intermediate level of

scrutiny (or quasi-suspect class)
test used in order to determine the
validity
of
he
classification.

Classification based on gender or legitimacy

are not suspect, but neither are they
judged by the traditional or rational basis
test.
Intentional discriminations against
members of a quasi-suspect class violate
equal protection unless they are substantially
related to important government objectives.
(Craig v. Boren, 429 U.S. 190)
Thus, a state law granting a property
tax exemption to widows, but not widowers,
has been held valid for it furthers the state
policy of cushioning the financial impact of
spousal loss upon the sex for whom that loss
usually imposes a heavier burden. (Kahn v.
Shevin, 416 U.S. 351)

12. Equality and uniformity of

taxation may mean the same as
equal protection. In such a case, the

terms would mean that all subjects and

objects of taxation which are similarly situated
shall be subject to the same burdens and
granted the same privileges without any
discrimination whatsoever.

13. It is inherent in the power

to tax that the State be free to select
the subjects of taxation, and it has been

repeatedly held that, "inequalities which result

from a singling out of one particular class of
taxation,
or
exemption,
infringe
no
constitutional limitation." (Commissioner of
Internal Revenue, et al., v. Santos, et al., 277
SCRA 617)

9.

Benjie is a lawabiding citizen who pays his real

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

10. The rewards law to tax

collectors does not violate equal
protection. The equal protection clause

recognizes a valid classification, that is, a

classification
that
has
a
reasonable
foundation or rational basis and not arbitrary.
With respect to RA 9335, its expressed
public policy is the optimization of the
revenue-generation capability and collection
of the BIR and the BOC. Since the subject of
the law is the revenue- generation capability
and collection of the BIR and the BOC, the

16
incentives and/or sanctions provided in the
law should logically pertain to the said
agencies. Moreover, the law concerns only
the BIR and the BOC because they have the
common distinct primary function of
generating revenues for the national
government through the collection of taxes,
customs duties, fees and charges.
Indubitably,
such
substantial
distinction is germane and intimately related
to the purpose of the law. Hence, the
classification and treatment accorded to the
BIR and the BOC under RA 9335 fully satisfy
the demands of equal protection. (ABAKADA
Guro Party List, etc., v. Purisima, etc., et al.,
G. R. No. 166715, August 14, 2008)

11. The prosecution of one

guilty person while others equally
guilty are not prosecuted, however,
is not, by itself, a denial of the
equal protection of the laws. Where

the official action purports to be in conformity

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

12. Equal protection should

not be used to protect commission
of crime. While all persons accused of

crime are to be treated on a basis of equality

before the law, it does not follow that they
are to be protected in the commission of
crime. It would be unconscionable, for
instance, to excuse a defendant guilty of
murder because others have murdered with
impunity.

Likewise, if the failure of prosecutors

to enforce the criminal laws as to some
persons should be converted into a defense
for others charged with crime, the result
would be that the trial of the district attorney
for nonfeasance would become an issue in
the trial of many persons charged with
heinous crimes and the enforcement of law
would suffer a complete breakdown. (Santos
v. People, et al, G. R. No. 173176, August 26,
2008)

13.
Illustration of double
taxation in local taxation. there is

indeed double taxation if Coca-Cola is

subjected to the taxes under both Sections
14 and 21 of Tax Ordinance No. 7794, since
these are being imposed: (1) on the same
subject matter the privilege of doing
business in the City of Manila; (2) for the
same purpose to make persons conducting
business within the City of Manila contribute
to city revenues; (3) by the same taxing
authority City of Manila; (4) within the
same taxing jurisdiction within the
territorial jurisdiction of the City of Manila;
(5) for the same taxing periods per
calendar year; and (6) of the same kind or
character a local business tax imposed on
gross sales or receipts of the business. (The
City of Manila, et al., v. Coca-Cola Bottlers
Philippines, Inc., G. R. No. 181845, August 4,
2009)

14. A lawful tax on a new

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

15. The withdrawal of a tax

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

16. Tax
exemptions
in
franchises are always subject to

17

withdrawal.

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

It is enough to say that the parties to

a contract cannot, through the exercise of
prophetic discernment, fetter the exercise of
the taxing power of the State. For not only
are existing laws read into contracts in order
to fix obligations as between parties, but the
reservation of essential attributes of
sovereign power is also read into contracts as
a basic postulate of the legal order. The
policy of protecting contracts against
impairment presupposes the maintenance of
a government which retains adequate
authority to secure the peace and good order
of society. (Smart Communications, Inc. v. The
City of Davao, etc., et al., G. R. No. 155491,
September 16, 2008)

NOTES AND COMMENTS:

Philippine
Long Distance Telephone Company, Inc., v. City of
Davao, et al., etc., G. R. No. 143867, August 22,
2001 made the observation that since Smarts
franchise was granted after the effectivity of the
Local Government Code that its tax exemption
privilege was reinstated.
However, Smart

Communications, Inc. v. The City of Davao, etc.,

et al., G. R. No. 155491, September 16, 2008 is
explicit in its holding that Smart is not entitled to a
tax exemption.

17.
When withdrawal of
a tax exemption impairs the
obligation of contracts. The Contract

Clause has never been thought as a

limitation on the exercise of the States
power of taxation save only where a tax
exemption has been granted for a valid
consideration. (Smart Communications, Inc. v.
The City of Davao, etc., et al., G. R. No. 155491,
September 16, 2008) citing Tolentino v. Secretary
of Finance, G. R. No. 115455, August 25, 1994,
235 SCRA 630, 685) The author opines that
since practically all franchises granted to
telecommunications companies are similarly
worded that the above doctrine finds
application to the others)

18. The primary reason for the

withdrawal
of
tax
exemption
privileges granted to government
owned and controlled corporations
and all other units of government was that

such privilege resulted to serious tax base

erosion and distortions in the tax treatment of
similarly situated enterprises, hence resulting
in the need for these entities to share in the
requirements of development, fiscal or
otherwise, by paying the taxes and other
charges due them. (Philippine Ports Authority v.
City of Iloilo, G. R. No. 109791, July 14, 2003)

19. National
Power
Corporation
(NPC)
is of the
insistence that it is not subject to
the payment of franchises taxes
imposed by the Province of Isabela
because all of its shares are owned
by the Republic of the Philippines. It
is thus, an instrumentality of the
National Government which is
exempt from local taxation. As such
it is not a private corporation
engaged in business enjoying
franchise. Is such contention

meritorious?

SUGGESTED ANSWER: No. Philippine

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

20. In lieu of all taxes in

the franchise of ABS-CBN does not
exempt it from local franchise
taxes. It does not expressly provide what
kind of taxes ABS-CBN is exempted from. It
is not clear whether the exemption would
include both local, whether municipal, city or
provincial, and national tax. Whether the in
lieu of all taxes provision would include
exemption from local tax is not unequivocal.
The right to exemption from local
franchise tax must be clearly established and
cannot be made out of inference or
implications but must be laid beyond
reasonable doubt. Verily, the uncertainty in

18
the in lieu of all taxes provision should be
construed against ABS-CBN. ABS-CBN has
the burden to prove that it is in fact covered
by the exemption so claimed but has failed to
do so.
(Quezon City, et al., v. ABS-CBN
Broadcasting Corporation, G. R. No. 166408,
October 6, 2008)

NOTES AND COMMENTS:

This is
practically the same holding in an earlier case
involving another telecommunications company
Smart Communications, Inc. v. The City of Davao,
etc., et al., G. R. No. 155491, September 16,

2008. The author opines that since practically all

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

21.

In lieu of all taxes

refers to national internal revenue
taxes and not to local taxes. The in
lieu of all taxes clause applies only to
national internal revenue taxes and not to
local taxes. As appropriately pointed out in
the separate opinion of Justice Antonio T.
Carpio in a similar case involving a demand
for exemption from local franchise taxes:
[T]he "in lieu of all taxes" clause in
Smart's franchise refers only to taxes, other
than income tax, imposed under the National
Internal Revenue Code. The "in lieu of all
taxes" clause does not apply to local taxes.
The proviso in the first paragraph of Section
9 of Smart's franchise states that the grantee
shall "continue to be liable for income taxes
payable under Title II of the National Internal
Revenue Code." Also, the second paragraph
of Section 9 speaks of tax returns filed and
taxes paid to the "Commissioner of Internal
Revenue
or
his
duly
authorized
representative in accordance with the
National Internal Revenue Code." Moreover,
the same paragraph declares that the tax
returns "shall be subject to audit by the
Bureau of Internal Revenue." Nothing is
mentioned in Section 9 about local taxes. The
clear intent is for the "in lieu of all taxes"
clause to apply only to taxes under the
National Internal Revenue Code and not to
local taxes. Even with respect to national
internal revenue taxes, the "in lieu of all
taxes" clause does not apply to income tax.
If Congress intended the "in lieu of all
taxes" clause in Smart's franchise to also
apply to local taxes, Congress would have

expressly mentioned the exemption from

municipal and provincial taxes. Congress
could have used the language in Section 9(b)
of Clavecilla's old franchise, as follows:
x x x in lieu of any and all taxes of any
kind, nature or description levied, established
or collected by any authority whatsoever,
municipal, provincial or national, from which
the grantee is hereby expressly exempted, x
x x. (Emphasis supplied).
However, Congress did not expressly
exempt Smart from local taxes. Congress
used the "in lieu of all taxes" clause only in
reference to national internal revenue taxes.
The only interpretation, under the rule on
strict construction of tax exemptions, is that
the "in lieu of all taxes" clause in Smart's
franchise refers only to national and not to
local taxes.
[Smart Communications, Inc. v.
The City of Davao, etc., et al., G. R. No. 155491,
September 16, 2008 citing Philippine Long
Distance Telephone Company, Inc. v. City of
Davao, 447 Phil. 571, 594 (2003)]
NOTES AND COMMENTS: The author
opines that the above finds application to all
telecommunications companies.

22. The in lieu of all taxes

clause in the franchise of ABS-CBN
has become functus officio with the
abolition of the franchise tax on
broadcasting companies with yearly
gross receipts exceeding Ten Million
Pesos. The clause in lieu of all taxes does

not pertain to VAT or any other tax. It

cannot apply when what is paid is a tax other
than a franchise tax. Since the franchise tax
on the broadcasting companies with yearly
gross receipts exceeding ten million pesos
has been abolished, the in lieu of all taxes
clause has now become functus officio,
rendered inoperative. (Quezon City, et al., v.
ABS-CBN Broadcasting Corporation, G. R. No.
166408, October 6, 2008)

NOTES AND COMMENTS:

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

19

23.

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

24. Elements
duplicate taxation:
twice

a. Same
1)

authority
purpose
period

of

direct

Subject or object is taxed

2)

by

the

same

taxing

3)

for

the

same

taxing

4)

during the same taxable

b.
Taxing all of the subjects or
objects for the first time without taxing all of
them for the second time.
If any of the elements are absent,
then there is indirect duplicate taxation which
is not prohibited by the constitution.
NOTES AND COMMENTS:

a.
Presence of the 2nd element
violates the equal protection clause. If only
the 1st element is present, taxing the same subject
or object twice, by the same taxing authority, etc.,
there is no violation of the equal protection clause
because all subjects and objects that are similarly
situated are subject to the same burdens and
granted the same privileges without any
discrimination whatsoever,
The presence of the 2nd element, taxing all
of the subjects and objects for the first time,
without taxing all for the second time, results to
discrimination among subjects and objects that are
similarly situated, hence violative of the equal
protection clause.

25. Double taxation a valid

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

26. When an item of income

is taxed in the Philippines and the

same income is taxed in another

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

27. Methods for avoiding

double taxation (indirect duplicate
taxation).

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

28. Tax credit generally refers to

an amount that is subtracted directly from
ones total tax liability, an allowance against
the tax itself, or a deduction from what is
owned.
A tax credit reduces the tax due,
including whenever applicable the income
tax that is determined after applying the
corresponding tax rates to taxable income.
(Commissioner of Internal Revenue v. Central Luzon
Drug Corporation, G. R. No. 159647, April 15, 2005)
29. A tax deduction is defined as
a subtraction fro income for tax purposes, or
an amount that is allowed by law to reduce
income prior to the application of the tax rate
to compute the amount of tax which is due.
A tax deduction reduces the income
that is subject to tax in order to arrive at
taxable income. (Commissioner of Internal
Revenue v. Central Luzon Drug Corporation, G. R.
No. 159647, April 15, 2005)

30.

The
petitioners
allege that the R-VAT law is
constitutional because the Bicameral
Conference
Committed
has
exceeded its authority in including
provisions
which
were
never

20

included in the versions of both the

House and Senate such as inserting
the stand-by authority to the
President to increase the VAT from
10% to 12%; deleting entirely the
no pass-on provisions found in both
the House and Senate Bills; inserting
the provision imposing a 70% limit
on the amount of input tax to be
credited against the output tax; and
including
the
amendments
introduced only by Senate Bill No.
1950 regarding other kinds of taxes
in addition to the value-added tax.
Thus, there was a violation of the
constitutional mandate that revenue
bills shall originate exclusively from
the House of Representatives.
Are the contentions of such
weight as to constitute grave abuse
of discretion which may invalidate
the law? Explain briefly.
SUGGESTED ANSWER: No. There was
no grave abuse of discretion because all the
changes and modifications made by the
Bicameral Conference Committee were
germane to subjects of the provisions referred
to it for reconciliation.
The Bicameral Conference Committee
merely exercised the judicially recognized
long-standing legislative practice of giving said
conference committee ample latitude for
compromising differences between the Senate
and the House. [Abakada Guro Party List (etc.) v.
Ermita, etc., et al., G. R. No. 168056, September 1,
2005 and companion cases]

31. The VAT while regressive

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

Finance, et al., G. R. No. 115455, August 25, 1994,

235 SCRA 630]

32. All revenues and assets of

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

OTHER CONCEPTS
1. Distinguish tax from
debt.
TAX

DEBT

Basis

based on law

based on
contract or
judgment

Failure to
Pay

may result in
imprisonment

no
imprisonment

Mode of
Payment

generally
payable in
money

payable in
money,
property or
service

Assignability

not
assignable

assignable

Payment

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

may be a
subject

Interest

does not
draw interest
unless

draws
interest if
stipulated or

21

Authority

Prescription

delinquent

delayed

imposed by
public
authority

can be
imposed by
private
individuals

Prescriptive
periods for
tax under
NIRC

debt under
the Civil
Code

WARNING: Do not use the above

arrangement
in
answering
Bar
questions.

2.
Compensation takes place by
operation of law, where the local government
and the taxpayer are in their own right
reciprocally debtors and creditors of each
other, and that the debts are both due and
demandable, in consequence of Articles 1278
and 1279 of the Civil Code. (Domingo v.
Garlitos, 8 SCRA 443)
3.
May there be
compensation or set-off between a
national tax and a debt? Reason
out your answer.

SUGGESTED ANSWER: As a general

rule, there could be no compensation or setoff between a tax and a debt for the
following reasons:
a.
Lifeblood theory.
b.
Taxes are not contractual
obligations but arise out of a duty to, and are
the positive acts of government, to the
making and enforcing of which the personal
consent of the individual taxpayer is not
required. (Republic v. Mambulao Lumber Co., 4
SCRA 622)

c.
Taxes cannot be the subject of
compensation because the government and
taxpayer are not mutually creditors and
debtors of each other and a claim for taxes is
not such a debt, demand, contract or
judgment as is allowed to be set-off.
Thus, it is correct to say that the
offsetting of a taxpayers tax refund with its
alleged tax deficiency is unavailing under Art.
1279 of the Civil Code. (South African Airways
v. Commissioner of Internal Revenue, G.R. No.
180356, February 16, 2010 reiterating Caltex

Philippines, Inc. v. Commission on Audit,

which applied Francia v. Intermediate Appellate

Court)

4. Exceptions: When setoff or compensation allowed for

local taxes.

a.
Where both claims
already become overdue and demandable as
well as fully liquidated. Compensation takes
place by operation of law under Art. 1200 in
relation to Arts. 1279 and 1290 all of the Civil
Code. (Domingo v. Garlitos, 8 SCRA 443)
b.
Compensation
takes place by operation of law, where the
government and the taxpayer are in their
own right reciprocally debtors and creditors
of each other, and that the debts are both
due and demandable. This is in consequence
of Article 1278 and 1279 of the Civil Code.
(Domingo v. Garlitos, 8 SCRA 443)
c. The Supreme
Court upheld the validity of a set-off between
the taxpayer and the government. In both
cases, the claims of the taxpayers therein
were certain and liquidated. The claims were
certain since there were no doubts or
disputes as to their refundability. In fact, the
government admitted the fact of overpayment.
(Commissioner
of
Internal
Revenue
v. Esso Standard Eastern, Inc., 172
SCRA 364)
d. In case of a tax
overpayment, the BIRs obligation to refund
or off-set arises from the moment the tax
was paid. REASON: Solutio indebeti.
(Commissioner of Internal Revenue v. Esso
Standard Eastern, Inc 172 SCRA 364)
e.
While
judgment
should be rendered in favor of Republic for
unpaid taxes, judgment ought at the same
time to issue for Sampaguita Pictures
commanding payment to the latter by the
Republic of the value of the backpay
certificates which the Republic received.
(Republic v. Ericta, 172 SCRA 623)

5.
Gilbert obtained a
judgment for a sum of money
against
the
municipality
of
Camiling.
The
judgment
has
become final although execution
has not issued. Upon receiving an

22

assessment for municipal sales

taxes from the Municipal Treasurer,
Gilbert
executed
a
partial
assignment
of
his
judgment
sufficient to cover the assessment
in favor of the Municipality. May
the Municipal Treasurer validly
accept the assignment? Why?

SUGGESTED ANSWER:
Yes.
The
parties in this case are mutually debtors and
creditors of each other, and since both of the
claims became overdue, demandable and
fully liquidated, compensation takes place by
operation of law. Such was the holding in
Domingo v. Garlitos, 8 SCRA 443, a case
decided by the Supreme Court whose factual
antecedents are similar to the problem.

6.
In
case
of
doubt, tax laws must be construed
strictly against the State and
liberally in favor of the taxpayer
because taxes, as burdens which must be
endured by the taxpayer, should not be
presumed to go beyond what the law
expressly and clearly declares.
(Lincoln
Philippine Life Insurance Company, Inc., etc., v.
Court of Appeals, et al., 293 SCRA 92, 99)

7.
Interpretation
in
the
imposition of taxes, is not the
similar doctrine as that applied to
tax exemptions. The rule in the
interpretation of tax laws is that a statute will
not be construed as imposing a tax unless it
does
so
clearly,
expressly,
and
unambiguously. A tax cannot be imposed
without clear and express words for that
purpose. Accordingly, the general rule of
requiring adherence to the letter in
construing statutes applies with peculiar
strictness to tax laws and the provisions of a
taxing act are not to be extended by
implication. In answering the question of who
is subject to tax statutes, it is basic that in
case of doubt, such statutes are to be
construed most strongly against the
government and in favor of the subjects or
citizens because burdens are not to be
imposed nor presumed to be imposed
beyond what statutes expressly and clearly

import. [Commissioner of Internal Revenue v.

Fortune Tobacco Corporation, G. R. Nos. 16727475, July 21, 2008 citing CIR v. Court of Appeals,
338 Phil. 322, 330-331 (1997)] As burdens,
taxes should not be unduly exacted nor
assumed beyond the plain meaning of the
tax laws. (Ibid., citing CIR v. Philippine American
Accident Insurance Company, Inc., G.R. No.
141658, March 18, 2005, 453 SCRA 668)

8.
Strict interpretation of
tax exemption laws. Taxes are what

civilized people pay for civilized society. They

are the lifeblood of the nation.
Thus,
statutes granting tax exemptions are
construed stricissimi juris against the
taxpayer and liberally in favor of the taxing
authority. A claim of tax exemption must be
clearly shown and based on language in law
too plain to be mistaken. Otherwise stated,
taxation is the rule, exemption is the
exception. (Quezon City, et al., v. ABS-CBN
Broadcasting Corporation, G. R. No. 166408,
October 6, 2008 citing Mactan Cebu International
Airport Authority v. Marcos, G.R. No. 120082,
September 11, 1996, 261 SCRA 667, 680) The
burden of proof rests upon the party claiming
the exemption to prove that it is in fact
covered by the exemption so claimed.
(Quezon City, supra citing Agpalo, R.E., Statutory
Construction, 2003 ed., p. 301)

9.
Rationale
for
strict
interpretation of tax exemption
laws. The basis for the rule on strict

construction to statutory provisions granting

tax exemptions or deductions is to minimize
differential treatment and foster impartiality,
fairness and equality of treatment among
taxpayers. (Quezon City, et al., v. ABS-CBN
Broadcasting Corporation, G. R. No. 166408,
October 6, 2008)
He who claims an
exemption from his share of common burden
must justify his claim that the legislature
intended to exempt him by unmistakable
terms. For exemptions from taxation are not
favored in law, nor are they presumed. They
must be expressed in the clearest and most
unambiguous language and not left to mere
implications.
It has been held that
exemptions are never presumed the burden
is on the claimant to establish clearly his right
to exemption and cannot be made out of
inference or implications but must be laid

23
beyond reasonable doubt. In other words,
since taxation is the rule and exemption the
exception, the intention to make an
exemption ought to be expressed in clear
and unambiguous terms. (Quezon City, supra
citing Agpalo, R.E., Statutory Construction, 2003
ed., p. 302)

10. Why are tax exemptions

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

11. In
case
of
a
tax
overpayment, where the BIRs
obligation to refund or set-off arises
from the moment the tax was paid
under the principle of solutio
indebeti. (Commissioner of Internal Revenue v.
Esso Standard Eastern, Inc, 172 SRCA 364)

12. But note Nestle Phil. v.

Court of Appeals, et al., G.R. No.

134114, July 6, 2001 which held that in

order for the rule on solutio indebeti to apply it
is an essential condition that the petitioner
must first show that its payment of the
customs duties was in excess of what was
required by the law at the time the subject 16
importations of milk and milk products were
made.
Unless shown otherwise, the
disputable presumption of regularity of
performance of duty lies in favor of the
Collector of Customs.

13. Strict interpretation of a

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

Tax refunds (or tax credits), on the

other hand, are not founded principally on
legislative grace but on the legal principle

which underlies all quasi-contracts abhorring

a persons unjust enrichment at the expense
of another. [Commissioner, supra citing Ramie
Textiles, Inc. v. Hon. Mathay, Sr., 178 Phil. 482
(1979); Puyat & Sons v. City of Manila, et al., 117
Phil. 985 (1963)]

The dynamic of erroneous payment of

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

The Government is not exempt from

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

Indeed, the taxpayer expects fair

dealing from the Government, and the latter
has the duty to refund without any
unreasonable delay what it has erroneously
collected.
(Commissioner,
supra
citing
Commissioner of Internal Revenue v. Tokyo
Shipping Co., supra at 338) If the State expects
its taxpayers to observe fairness and honesty
in paying their taxes, it must hold itself
against the same standard in refunding
excess (or erroneous) payments of such
taxes. It should not unjustly enrich itself at
the expense of taxpayers. [Commissioner,
supra citing AB Leasing and Finance Corporation v.
Commissioner of Internal Revenue, 453 Phil. 297
in turn citing BPI-Family Savings Bank, Inc. v.
Court of Appeals, 330 SCRA 507, 510, 518 (2000)]
And so, given its essence, a claim for tax
refund necessitates only preponderance of
evidence for its approbation like in any other
ordinary civil case. (Commissioner, supra)

14. Tax refunds premised

upon a tax exemption strictly
construed, Tax exemption is a result of

legislative grace. And he who claims an

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

24
The rule is that tax exemptions must
be strictly construed such that the exemption
will not be held to be conferred unless the
terms under which it is granted clearly and
distinctly show that such was the intention.
[Commissioner, supra citing Phil. Acetylene Co. v.
Commission of Internal Revenue, et al., 127 Phil.
461, 472 (1967); Manila Electric Company v.
Vera, G.R. No. L-29987, 22 October 1975, 67
SCRA 351, 357-358; Surigao Consolidated Mining
Co. Inc. v. Commissioner of Internal Revenue,
supra]
A claim for tax refund may be based
on statutes granting tax exemption or tax
refund. In such case, the rule of strict
interpretation against the taxpayer is
applicable as the claim for refund partakes of
the nature of an exemption, a legislative
grace, which cannot be allowed unless
granted in the most explicit and categorical
language. The taxpayer must show that the
legislature intended to exempt him from the
tax by words too plain to be mistaken.
[Commissioner, supra with a note to see Surigao
Consolidated Mining Co. Inc. v. CIR, supra at 732733; Philex Mining Corp. v. Commissioner of
Internal Revenue, 365 Phil. 572, 579 (1999);
Davao Gulf Lumber Corp. v. Commissioner of
Internal Revenue, 354 Phil. 891-892 (1998); .
Commissioner of Internal Revenue v. Tokyo
Shipping Co., Ltd., 314 Phil. 220, 228 (1995)]

15. Effect of a BIR reversal of

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

16.

A tax amnesty is a general

pardon or intentional overlooking by the State

of its authority to impose penalties on persons
otherwise guilty of evasion or violation of a
revenue or a tax law.
It partakes of an absolute waiver by
the government of its right to collect what is
due it and to give tax evaders who wish to
relent a chance to start with a clean slate. A
tax amnesty, much like a tax exemption, is
never favored nor presumed in law. The
grant of a tax amnesty, similar to a tax

exemption, must be construed strictly against

the taxpayer and liberally in favor of the
taxing
authority.
(Philippine
Banking
Corporation, etc., v. Commissioner of Internal
Revenue, G. R. No. 170574, January 30, 2009)

17. The
amnesty is to

purpose

of

tax

a. give tax evaders who wish to relent

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

18. Tax
amnesty
distinguished from tax exemption.

a.
Tax amnesty is an immunity from
all criminal, civil and administrative liabilities
arising from nonpayment of taxes (People v.
Castaneda, G.R. No. L-46881, September 15,
1988) WHILE a tax exemption is an immunity
from civil liability only. It is an immunity or
privilege, a freedom from a charge or burden
to which others are subjected. (Florer v.

Sheridan, 137 Ind. 28, 36 NE 365)

b.
Tax amnesty applies only to past
tax periods, hence of retroactive application
(Castaneda, supra) WHILE tax exemption has
prospective application.

19.
Tax avoidance is the
use of legally permissible means to reduce the
tax while tax evasion is the use of illegal
means to escape the payment of taxes.
20. Tax evasion connotes the
integration of three factors:
a.
The end to be achieved, i.e., the

payment of less than that known by the

taxpayer to be legally due, or the nonpayment of tax when it is shown that a tax is
due;
b.
an accompanying state of mind
which is described as being evil on bad
faith, willful, or deliberate and not
accidental; and
c.
a course of action or failure of
action which is unlawful. (Commissioner of
Internal Revenue v. The Estate of Benigno P. Toda,
Jr. etc., G. R. No. 147188, September 14, 2004)

25

21. Tax

avoidance
distinguished from tax evasion.

a.
Tax avoidance is legal while tax
evasion is illegal.
b.
The objective of tax avoidance in
most instances is merely to reduce the tax
that is due while is tax evasion the object is to
entirely escape the payment of taxes.
c.
Tax evasion warrants the
imposition of civil, administrative and criminal
penalties while tax avoidance does not.

22. Tax sparing is a provision in

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

b.
any taxpayer who has filed an
application for compromise of his tax liability
by reason of financial incapacity to pay his tax
liability. [Sec. 5 (F), NIRC of 1997]
c.
A taxpayer who authorizes the
Commissioner to inquire into his bank
deposits.

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

3.
Purpose of shift from ad
valorem system to specific tax
system in taxation of cigarettes.
The shift from the ad valorem system to the

There may be instances where a

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

specific tax system is likewise meant to

promote fair competition among
the
players in the industries concerned, to
ensure an equitable distribution of the tax
burden and to simplify tax administration by
classifying cigarettes, among others, into
high, medium and low-priced based on their
net retail price and accordingly graduating
tax rates. (Commissioner of Internal Revenue v.
Fortune Tobacco Corporation, G. R. Nos. 167274-

NATIONAL INTERNAL
REVENUE CODE

1.
The
Tax
Code
has
included
under
the
term
corporation
partnerships,
no
matter how created or organized, jointstock companies, joint accounts (cuentas en
participacion), associations, or insurance

ORGANIZATION AND FUNCTIONS OF

THE
BUREAU
OF
INTERNAL
REVENUE
1.
Rep. Act No. 1405, the
Bank Deposits Secrecy Law prohibits
inquiry into bank deposits.
As
exceptions to Rep. Act No. 1405, the
Commissioner of Internal Revenue is
only authorized to inquire into the
bank deposits of:
a.
a decedent to determine his
gross estate; and

75, July 21, 2008)

TAX ON INCOME

companies. [Sec. 24 now Sec. 24 (B) of the

NIRC of 1997]

2.
In Evangelista v. Collector, 102
Phil. 140, the Supreme Court held citing
Mertens that the term partnership
includes a syndicate, group, pool, joint
venture or other unincorporated organization,
through or by means of which any business,
financial operation, or venture is carried on.

26

3. Certain
business
organizations do not fall under the
category of corporations under the
Tax Code, and therefore not subject to tax

as corporations, include:
a. General
professional
partnerships;
b. Joint venture or consortium
formed for the purpose of undertaking
construction projects engaging in petroleum,
coal,
geothermal,
and
other
energy
operations, pursuant to an operation or
consortium agreement under a service
contract with the Government. [1st sentence,
Sec. 22 (B), BIRC of 1997]

4. Co-heirs who own

inherited properties which produce
income should not automatically be
considered as partners of an
unregistered corporation subject to
income tax for the following
reasons:

a. The sharing of gross returns does

not of itself establish a partnership, whether or
not the persons sharing them have a joint or
common right or interest in any property from
which the returns are derived. There must be
an unmistakable intention to form a
partnership or joint venture. (Obillos, Jr. v.
Commissioner of Internal Revenue, 139 SCRA 436)
b. There is no contribution or
investment of additional capital to increase or
expand the inherited properties, merely
continuing the dedication of the property to
the use to which it had been put by their
forebears. (Ibid.)
c. Persons who contribute property
or funds to a common enterprise and agree to
share the gross returns of that enterprise in
proportion to their contribution, but who
severally retain the title to their respective
contribution, are not thereby rendered
partners. They have no common stock capital,
and no community of interest as principal
proprietors in the business itself from which
the proceeds were derived. (Elements of the
Law of Partnership by Floyd R. Mechem, 2nd Ed.,
Sec. 83, p. 74 cited in Pascual v. Commissioner of
Internal Revenue, 166 SCRA 560)

5. The common ownership

of property does not itself create a
partnership between the owners,

though they may use it for purpose of making

gains, and they may, without becoming
partners, are among themselves as to the
management and use of such property and
the application of the proceeds therefrom.
(Spurlock v,. Wilson, 142 S.W. 363, 160 No.
App. 14, cited in Pascual v. Commissioner of
Internal Revenue, 166 SCRA 560)

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

7.
Income is gain derived and
severed from capital, from labor or from both
combined.
For example, to tax a stock
dividend would be to tax a capital increase
rather than the income. (Commissioner of
Internal Revenue v. Court of Appeals, et al.,
G.R. No. 108576, January 20, 1999)

8.

The term taxable income

means the pertinent items of gross income

specified in the Tax Code, less the deductions
and/or personal and additional exemptions, if
any, authorized for such types of income by
the Tax Code or other special laws. (Sec. 31,
NIRC of 1997)

9.
The
cancellation
and
forgiveness of indebtedness may
amount to (a) payment of income; (b) gift; or
to a (c) capital transaction depending upon
the circumstances.

10. If an individual performs

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

debtor

as

11. An insolvent debtor does

not realize taxable income from the

27

cancellation
or
forgiveness.
(Commissioner v. Simmons Gin Co., 43 Fd 327
CCA 10th)

12. The
insolvent
debtor
realizes income resulting from the
cancellation
or
forgiveness
of
indebtedness when he becomes
solvent.
(Lakeland Grocery Co., v.
Commissioner 36 BTA (F) 289)
13. If a creditor merely
desires to benefit a debtor and
without any consideration therefor
cancels the amount of the debt it is a
gift from the creditor to the debtor
and need not be included in the
latters income.
14. If a corporation to which
a stockholder is indebted forgives
the debt, the transaction has the
effect of payment of a dividend. (Sec.
50, Rev. Regs. No. 2)

15. Members of cooperatives

not subject to tax on the interest
earned from their deposits with the
cooperative. No less than our Constitution
guarantees the protection of cooperatives.
Section 15, Article XII of the Constitution
considers cooperatives as instruments for social
justice and economic development. At the same
time, Section 10 of Article II of the Constitution
declares that it is a policy of the State to promote
social justice in all phases of national
development. In relation thereto, Section 2 of
Article XIII of the Constitution states that the
promotion of social justice shall include the
commitment to create economic opportunities
based on freedom of initiative and self-reliance.
Bearing in mind the foregoing provisions, we find
that an interpretation exempting the members of
cooperatives from the imposition of the final tax
under Section 24(B)(1) of the NIRC (tax on
interest earned by deposits) is more in keeping
with the letter and spirit of our Constitution.
(Dumaguete Cathedral Credit Coopertive [DCCC)]
etc., v. Commissioner of Internal Revenue, G. R.
No.

182722,

January

22,

2010)

In closing, cooperatives, including their

members, deserve a preferential tax treatment

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

16. The Global system of

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

17. The Schedular system of

income taxation is a system employed

where the income tax treatment varies and is

made to depend on the kind or category of
taxable income of the taxpayer. (Tan v. del

Rosario, Jr., 237 SCRA 324, 331)

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

20. Payment for services,

other than compensation income, is
considered as having been earned at
the place where the activity or
service was performed.
21. A non-resident alien, who
has stayed in the Philippines for an
aggregate period of more than 180
days during any calendar year, shall
be considered as a non-resident

28

alien
doing
business
in
the
Philippines. Consequently, he shall be

subject to income tax on his income derived

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

22. What are considered

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

shall not be considered in determining the

P30,000 ceiling of other benefits provided
under Section 32 (B)(7)(e) of the Code.
However, if the employer pays more than the
ceiling prescribed by these regulations, the
excess shall be taxable to the employee
receiving the benefits only if such excess is
beyond the P30,000.00 ceiling, provided,
further, that any amount given by the
employer as benefits to its employees,
whether classified as de minimis benefits or
fringe benefits, shall constitute as deductible
expense upon such employer. [Sec. 2.78.1
(A) (3), Rev. Regs. 2-98 as amended by Rev.
Regs. No. 8-2000]

23. Income subject to final

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

24.

Distinguish
exclusions from deductions.

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

29
An example of an exclusion from gross
income are life insurance proceeds, and an
example of a deduction are losses.

25.

What are excluded

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

26. What
are
the
conditions for excluding retirement
benefits from gross income, hence
tax-exempt?
SUGGESTED ANSWER:
a.
Retirement benefits received
under Republic Act No. 7641 and those
received by officials and employees of private
firms, whether individual or corporate, in
accordance with the employers reasonable
private benefit plan approved by the BIR.
b.
Retiring official or employee
1)
In the service of the same
employer for at least ten (10) years;

2)
Not less than fifty (50)
years of age at time of retirement;
3)
Availed of the benefit of
exclusion only once. [Sec. 32 (B) (6)
(a), NIRC of 1997] The retiring official
or employee should not have previously
availed of the privilege under the
retirement plan of the same or another
employer. [1st par., Sec. 2.78 (B) (1),
Rev. Regs. No. 2-98]

27.

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

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

30
Nonresident alien individuals not
engaged in trade or business in the Philippines
are not allowed to deduct this expense.
c. Taxes paid or incurred within the
taxable year in connection with the taxpayers
profession.
Resident citizens, resident alien
individuals and nonresident alien individuals
who are engaged in trade and business, on
their gross incomes other from compensation
income are allowed to deduct these expenses.
Domestic corporations, estates and trusts may
also deduct this expense. Nonresident citizens
and foreign corporations on their gross
incomes from within may also deduct this
expense.
Nonresident alien individuals not
engaged in trade or business in the Philippines
are not allowed to deduct this expense.
d. Ordinary losses, losses
from casualty, theft or embezzlement; and net
operating losses.
Resident citizens, resident alien
individuals and nonresident alien individuals
who are engaged in trade and business, on
their gross incomes other from compensation
income are allowed to deduct these expenses.
Domestic corporations, estates and trusts may
also deduct this expense. Nonresident citizens
and foreign corporations on their gross
incomes from within may also deduct this
expense.
Nonresident alien individuals not
engaged in trade or business in the Philippines
are not allowed to deduct this expense.
e. Bad debts due to the
taxpayer, actually ascertained to be worthless
and charged off within the taxable year,
connected with profession, trade or business,
not sustained between related parties.
Resident citizens, resident alien
individuals and nonresident alien individuals
who are engaged in trade and business, on
their gross incomes other from compensation
income are allowed to deduct these expenses.
Domestic corporations, estates and trusts may
also deduct this expense. Nonresident citizens
and foreign corporations on their gross
incomes from within may also deduct this
expense.
Nonresident alien individuals not
engaged in trade or business in the Philippines
are not allowed to deduct this expense.

f.
Depreciation or a reasonable
allowance for the exhaustion, wear and tear
(including
reasonable
allowance
for
obsolescence) of property used in trade or
business.
Resident citizens, resident alien
individuals and nonresident alien individuals
who are engaged in trade and business, on
their gross incomes other from compensation
income are allowed to deduct these expenses.
Domestic corporations, estates and trusts may
also deduct this expense. Nonresident citizens
and foreign corporations on their gross
incomes from within may also deduct this
expense.
Nonresident alien individuals not
engaged in trade or business in the Philippines
are not allowed to deduct this expense.
g. Depletion or deduction arising
from the exhaustion of a non-replaceable
asset, usually a natural resource.
Resident citizens, resident alien
individuals and nonresident alien individuals
who are engaged in trade and business, on
their gross incomes other from compensation
income are allowed to deduct these expenses.
Domestic corporations, estates and trusts may
also deduct this expense. Nonresident citizens
and foreign corporations on their gross
incomes from within may also deduct this
expense.
Nonresident alien individuals not
engaged in trade or business in the Philippines
are not allowed to deduct this expense.
h. Charitable and other
contributions. Resident citizens, resident
alien individuals and nonresident alien
individuals who are engaged in trade and
business, on their gross incomes other from
compensation income are allowed to deduct
these expenses.
Domestic corporations,
estates and trusts may also deduct this
expense. Nonresident citizens and foreign
corporations on their gross incomes from
within may also deduct this expense.
Nonresident alien individuals not
engaged in trade or business in the Philippines
are not allowed to deduct this expense.
i.
Research and development
expenditures treated as deferred expenses
paid or incurred by the taxpayer in connection
with his trade, business or profession, not
deducted as expenses and chargeable to

31
capital account but not chargeable to property
of a character which is subject to depreciation
or depletion.
Resident citizens, resident alien
individuals and nonresident alien individuals
who are engaged in trade and business, on
their gross incomes other from compensation
income are allowed to deduct these expenses.
Domestic corporations, estates and trusts may
also deduct this expense. Nonresident citizens
and foreign corporations on their gross
incomes from within may also deduct this
expense.
Nonresident alien individuals not
engaged in trade or business in the Philippines
are not allowed to deduct this expense.
j. Contributions to pension trusts.
Resident citizens, resident alien individuals and
nonresident alien individuals who are engaged
in trade and business, on their gross incomes
other from compensation income are allowed
to deduct these expenses.
Domestic
corporations, estates and trusts may also
deduct this expense. Nonresident citizens and
foreign corporations on their gross incomes
from within may also deduct this expense.
Nonresident alien individuals not
engaged in trade or business in the Philippines
are not allowed to deduct this expense.
k. Insurance premiums for health
and hospitalization. Resident citizens, resident
alien individuals and nonresident alien
individuals who are engaged in trade and
business, on their gross incomes other from
compensation income are allowed to deduct
these expenses. Nonresident citizens and
nonresident alien individual engaged in trade
or business in the Philippine on their gross
incomes from within may also deduct these
premiums.
Nonresident alien individuals not
engaged in trade or business in the Philippines
are not allowed to deduct these premiums.
l.
Personal and additional
exemptions. Resident citizens, and resident
alien on their gross incomes and from
compensation income are allowed to deduct
these premiums. Nonresident citizens on their
gross incomes from within may also deduct
this expense. Nonresident alien individuals
engaged in trade or business in the Philippines
are allowed to deduct these exemptions under
reciprocity.

Nonresident alien individuals not

engaged in trade or business in the Philippines
are not allowed to deduct this expense.

29. Distinguish ordinary

expenses from capital expenditures.

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

30. What
are
the
requisites for the deductibility of
business expenses?

SUGGESTED ANSWER: The following

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

31. What
are
the
requisites for the deductibility of
ordinary and necessary trade,
business, or professional expenses,
like expenses paid for legal and
auditing services?

SUGGESTED ANSWER:
a.
the expense must be ordinary
and necessary;
b.
it must have been paid or
incurred during the taxable year dependent
upon the method of accounting upon the basis
of which the net income is computed.

32
c.
it must be supported by receipts,
records
or
other
pertinent
papers.
(Commissioner of Internal Revenue v, Isabela
cultural Corporation, G. R. No. 172231,
February 12, 2007)

32. TMG Corporation is

issuing the accrual method of
accounting. In 2005 XYZ Law Firm
and ABC Auditing Firm rendered
various services which were billed
by these firms only during the
following year 2006. Since the bills
for legal and auditing services were
received only in 2006 and paid in the
same year, TMG deducted the same
from its 2006 gross income. The BIR
disallowed the deduction?
Who is correct, TMG or BIR?
Explain.

SUGGESTED ANSWER:
The BIR is
correct.
TMG should have deducted the
professional and legal fees in the year they
were incurred in 2005 and not in 2006
because at the time the services were
rendered in 2005, there was already an
obligation to pay them. (Commissioner of

Internal Revenue v, Isabela Cultural

Corporation, G. R. No. 172231, February 12,
2007)

NOTES AND COMMENTS:

a.
Accounting methods for tax
purposes comprise a set of rules for
determining when and how to report income
and deductions. (Commissioner of Internal
Revenue v, Isabela cultural Corporation, G. R.
No. 172231, February 12, 2007)
The two (2) principal accounting
methods for recognition of income are the (a)
accrual method; and the (b) cash method.
b.
Recognition of income and
expenses under the accrual method of
accounting.
Amounts of income accrue
where the right to receive them becomes
fixed, where there is created an enforceable
liability. Liabilities, are incurred when fixed
and determinable in nature without regard to
indeterminacy merely of time of payment.
(Commissioner of Internal Revenue v, Isabela
cultural Corporation, G. R. No. 172231,
February 12, 2007)

The accrual of income and expense is

permitted when the all-events test has been
met. (Ibid.)
c.
All-events test.
This test
requires:
1)
fixing of a right to income
or liability to pay; and
2)
the availability of the
reasonable accurate determination of
such income or liability.
The test does not demand that the
amount of such income or liability be known
absolutely, only that a taxpayer has at his
disposal the information necessary to compute
the amount with reasonable accuracy.
The all-events test is satisfied where
computation remains uncertain; if its basis is
unchangeable, the test is satisfied where a
computation may be unknown, but is not as
much as unknowable, within the taxable year.
The amount of liability does not have to be
determined exactly, it must be determined
with reasonable accuracy implies something
less than an exact or completely accurate
amount.
The propriety of an accrual must be
judged by the fact that a taxpayer knew, or
could reasonably be expected to have known,
at the closing of its books for the taxable year.
Accrual method of accounting presents largely
a question of fact; such that the taxpayer
bears the burden of proof of establishing the
accrual of an item of income or deduction.
(Commissioner of Internal Revenue v, Isabela
cultural Corporation, G. R. No. 172231,
February 12, 2007)
d. Under the cash method income
is to be construed as income for tax purposes
only upon actual receipt of the cash payment.
It is also referred to as the cash receipts and
disbursements method because both the
receipt and disbursements are considered.
Thus, income is recognized only upon actual
receipt of the cash payment but no deductions
are allowed from the cash income unless
actually disbursed through an actual payment
in cash.

33. The fringe benefits tax is a

final withholding tax imposed on the grossedup monetary value of fringe benefits furnished,
granted or paid by the employer to the

33
employee, except rank and file employees. [1st
par., Sec. 2.33 (A), Rev. Regs. No. 3-98]

34. What is meant by

fringe benefit for purposes of
taxation?

SUGGESTED ANSWER: For purposes of

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

35. Fringe benefits that are

not subject to the fringe benefits
tax:

a.
When the fringe benefit is
required by the nature of, or necessary to the
trade, business or profession of the employer;
or
b.
When the fringe benefit is for the
convenience or advantage of the employer.
[Sec. 32(A), NIRC of 1997; 1st par., Sec. 2.33
(A), Rev. Regs. No. 3-98]
c.
Fringe benefits which are
authorized and exempted from income tax
under the Tax Code or under any special law;
d.
Contributions of the employer for
the benefit of the employee to retirement,
insurance and hospitalization benefit plans;

e.
Benefits given to the rank and
file employees, whether granted under a
collective bargaining agreement or not; and
f.
De minimis benefits as defined in
the rules and regulations to be promulgated
by the Secretary of Finance upon
recommendation of the Commissioner of
Internal Revenue. [1st par., Sec. 32 (C), NIRC of
1997; Sec. 2.33 (C), Rev. Regs. No. 3-98]

36. De minimis benefits

are facilities and privileges (such as
entertainment, medical services, or so-called
courtesy discounts on purchases), furnished
or offered by an employer to his employees.
They are not considered as compensation
subject to income tax and consequently to
withholding tax, if such facilities are offered or
furnished by the employer merely as a means
of
promoting
the
health,
goodwill,
contentment, or efficiency of his employees.

[Sec. 2.78,1 (A) (3), Rev. Regs. 2-98 as amended

by Rev. Regs. No. 8-2000]

37. Preferred shares are

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

38. Bad debts are those

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

39.

Who

are

related

parties?
SUGGESTED ANSWER: The following
are related parties:
a.
Members of the same family.
The family of an individual shall include only
his brothers and sisters (whether by the whole
or half-blood), spouse, ancestors, and lineal
descendants;
b.
An individual and a corporation
more than fifty percent (50%) in value of the

34
outstanding stock of which is owned, directly
or indirectly, by or for such individual;
c.
Two corporations more than fifty
percent (50%) in value of the outstanding
stock of which is owned, directly or indirectly,
by or for the same individual;
d.
A grantor and a fiduciary of any
trust; or
e.
The fiduciary of a trust and the
fiduciary of another trust if the same person is
a grantor with respect to each trust; or
f.
A fiduciary of a trust and a
beneficiary of such. [Sec. 36 (B), NIRC of 1997]

40.
What are the
requisites for valid deduction of bad
debts from gross income?

SUGGESTED ANSWER:
a.
There must be an existing
indebtedness due to the taxpayer which must
be valid and legally demandable;
b. The same must be connected with
the taxpayers trade, business or practice of
profession;
c. The same must not be sustained in
a transaction entered into between related
parties;
d. The same must be actually charged
off the books of accounts of the taxpayer as of
the end of the taxable year; and
e. The debt must be actually
ascertained to be worthless and uncollectible
during the taxable year;
f. The debts are uncollectible despite
diligent effort exerted by the taxpayer. [Sec.
34 (E) (1), NIRC of 1997; Sec. 3, Rev. Regs.
No. 5-99 reiterated in Rev. Regs. No. 25-2002;

Philippine Refining Corporation v. Court of

Appeals, et al., 256 SCRA 667]
g.
Must have been reported as
receivables in the income tax return of the
current or prior years. (Sec. 103, Rev. Regs. No.
2)

41.
benefit rule?

What is the tax

SUGGESTED ANSWER: The tax benefit

rule posits that the recovery of bad debts
previously allowed as deduction in the
preceding year or years shall be included as
part of the taxpayers gross income in the year
of such recovery to the extent of the income
tax benefit of said deduction.

NOTES AND COMMENTS:

a.
If in the year, the taxpayer
claimed deduction of bad debts written-off, he
realized a reduction of the income tax due
from him on account of the said deduction, his
subsequent recovery thereof from his debtor
shall be treated as a receipt of realized taxable
income. (Sec. 4, Rev. Regs. 5-99)
b.
If the said taxpayer did not
benefit from the deduction of the said bad
debt written-off because it did not result to
any reduction of his income tax in the year of
such deduction (i.e. where the result of his
business operation was a net loss even
without deduction of the bad debts writtenoff), then his subsequent recovery thereof
shall be treated as a mere recovery or a return
of capital, hence, not treated as receipt of
realized taxable income. (Sec. 4, Rev. Regs. 599)

42. Depreciation is the gradual

diminution in the useful value of tangible
property resulting from ordinary wear and tear
and from normal obsolescence. The term is
also applied to amortization of the value of
intangible assets the use of which in the trade
or business is definitely limited in duration.
43. The
methods
depreciation are the following:

of

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

44. What are personal and

additional exemptions?

SUGGESTED ANSWER: These are the

theoretical persona, living and family expenses
of an individual allowed to be deducted from
the gross or net income of an individual
taxpayer.
These are arbitrary amounts which
have been calculated by our lawmakers to be

35
roughly equivalent to the minimum of
subsistence, taking into account the personal
status and additional qualified dependents of
the taxpayer. They are fixed amounts in the
sense that the amounts have been
predetermined by our lawmakers and until our
lawmakers make new adjustments on these
personal exemptions, the amounts allowed to
be deducted by a taxpayer are fixed as
predetermined by Congress.
[Pansacola v.
Commissioner of Internal Revenue, G. R. No.
159991, November 16, 2006 citing Madrigal and
Paterno v. Rafferty and Concepcion, 38 Phil. 414,
418 (1918)]

45.
What is the amount
allowed
as
basic
personal
exemption?
SUGGESTED ANSWER: There shall be
allowed a basic personal exemption
amounting to Fifty thousand pesos (P50,000)
for each individual taxpayer.
In the case of married individuals
where only one of the spouse is deriving
gross income, only such spouse shall be
allowed the personal exemption. [Sec. 35 (A),

NIRC of 1997 as amended by Rep. Act No. 9504;

Sec. 2.79 (I) (1) (a), Rev. Regs. No. 2-98 as
amended by Rev. Regs. No. 10-2008]

NOTES AND COMMENTS: It is clear

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

45. What are the amounts

of additional exemptions?

SUGGESTED ANSWER: An individual,

a.
whether single or married,
b.
shall be allowed an additional
exemption of Twenty-Five Thousand Pesos
(P25,000.00)
c.
for each qualified dependent
child,
d.
provided that the total number
of
dependents
for
which
additional
exemptions may be claimed
1)
shall not exceed four (4)
dependents. [1st par., Sec. 2.79 (I) (1)

(b), Rev. Regs. No. 2-98 as amended by

Rev. Regs. No. 10-2008, arrangement and
numbering supplied; Sec. 35 (B), NIRC of
1997 as amended by Rep. Act No. 9504]

NOTES AND COMMENTS:

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

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

36

47. Capital assets shall refer

to all real properties held by a taxpayer,
whether or not connected with his trade or
business, and which are not included among
the real properties considered as ordinary
assets. (Sec. 2.a, Rev. Regs. No. 7-2003)
The term capital assets means
property held by the taxpayer (whether or not
connected with his trade or business), BUT
DOES NOT INCLUDE:
a. Stock in trade of the taxpayer, or
b. Other property of a kind which
would properly be included in the inventory of
the taxpayer if on hand at the close of the
taxable year, or
c.
Property held by the taxpayer
primarily for sale to customers in the ordinary
course of his trade or business, or
d. Property used in the trade or business, of a
character which is subject to the allowance for
depreciation; or real property used in the
trade or business of the taxpayer. [Sec. 39 (A)
(1), NIRC of 1997, capitalized words, numbering
and arrangement supplied; Sec. 2.a, Rev. Regs. No.
7-2003]

48.

Examples of capital

assets:

a.
Stock and securities held by
taxpayers other than dealers in securities;
b.
Jewelry not used for trade and
business;
c.
Residential houses and lands
owned and used as such;
d.
Automobiles not used in trade
and business;
e.
Paintings, sculptures, stamp
collections, objects of arts which are not used
in trade or business;
f.
Inherited
large
tracts
of
agricultural land which were subdivided
pursuant to the government mandate under
land reform, then sold to tenants. (Roxas v.

Court of Tax Appeals, etc. L-25043, April 26,

1968)

g. Real property used by an

exempt corporation in its exempt operations,
such as a corporation included in the
enumeration of Section 30 of the Code, shall
not be considered used for business purposes,
and therefore considered as capital asset.
(last sentence, 3rd par., Sec. 3.b, Rev. Regs.
No. 7-2003)

h. Real property, whether single

detached, townhouse, or condominium unit,
not used in trade or business as evidenced by
a certification from the Barangay Chairman or
from the head of administration, in case of
condominium unit, townhouse or apartment,
and as validated from the existing available
records of the Bureau of Internal Revenue,
owned by an individual engaged in business,
shall be treated as capital asset. (last par.,
Sec. 3.b., Rev. Regs. No. 7-2003)

49. Ordinary assets shall

refer
to
all
real
properties
specifically excluded from the
definition of capital assets, namely:

a. Stock in trade of a taxpayer or other

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

50.. Examples of ordinary

assets hence not capital assets:

a.
The machinery and equipment of
a
manufacturing
concern
subject
to
depreciation;
b. The tractors, trailers and trucks of a
hauling company;
c. The condominium building owned by
a realty company the units of which are for
rent or for sale;
d.
The wood, paint, varnish, nails,
glue, etc. which are the raw materials of a
furniture factory;
e.
Inherited parcels of land of
substantial areas located in the heart of Metro
Manila, which were subdivided into smaller
lots then sold on installment basis after
introducing
comparatively
valuable
improvements not for the purpose of simply
liquidating the estate but to make them more
saleable ; the employment of an attorney-infact for the purpose of developing, managing,

37
administering and selling the lots; sales made
with frequency and continuity; annual sales
income from the sales was considerable; and
the heir was not a stranger to the real estate
business. (Tuazon, Jr. v. Lingad, 58 SCRA

170)

f.
Inherited agricultural property
improved by introduction of good roads,
concrete gutters, drainage and lighting
systems converts the property to an ordinary
asset. The property forms part of the stock in
trade of the owner, hence an ordinary asset.
This is so, as the owner is now engaged in the
business of subdividing real estate. (Calasanz v.
Commissioner of Internal Revenue, 144 SCRA at p.

52. The tax is imposed

upon capital gains presumed to have
been realized from the sale,
exchange, or other disposition of
real property located in the
Philippines, classified as capital
assets. [Sec. 24 (D) (1`), NIRC of 1997]
Revenue Regulations No. 7-2003 has defined

real property as having the same meaning

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

53. Transactions covered

672)

51. Tax treatment of real

properties
transferred.

that

have

been

Real properties classified as

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

by the presumed capital gains tax on

real property:
a.

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

54. In case the mortgagor

exercises his right of redemption

within one (1) year from the issuance of the

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

55. In case of non-redemption

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

38

56. The basis for the final

presumed capital gains tax of six per
cent (6%) is whichever is the higher of
the

a. gross selling price, or

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

It does not matter whether there was

an actual gain or loss because the tax is a
presumed capital gains tax.
It is the
transaction that is taxed not the gain.

57. Holding period not applied

to the taxation of the presumed capital gains

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

58.

The tax liability, of

individual taxpayers (not corporate),
if any, on gains from sales or other
dispositions
of
real
property,
classified as capital assets, to the
government or any of its political

subdivisions or agencies or to government

owned or controlled corporations shall be
determined, at the option of the taxpayer, by
including the proceeds as part of gross income
to be subjected to the allowable deductions
and/or personal and additional exemptions,
then to the schedular tax [Sec. 24 (D) (1), in
relation to Sec. 24 (A) (1), both of the NIRC of
1997] or the final presumed capital gains tax
of six percent (6%). [Sec. 24 (D) (1) in
relation to Sec. 6 (E), both of the NIRC of
1997]

59.
The seller of the real
property, classified as a capital
asset, pays the presumed capital
gains tax whether:

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

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

60.

Excepted from the

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

61. MBC was incorporated in

1961 and engaged in commercial
banking operations since 1987. On
May 22, 1987, it ceased operations
that year by reason of insolvency
and its assets and liabilities were
placed under the charge of a
government-appointed receiver. On
June 23, 1999, the BSP authorized
MBC to operate as a thrift bank.
In 2000, It filed its tax return
for the year 1999 paying the amount
of
P33
million
computed
in

39

accordance with the minimum

corporate income tax (MCIT). It
sought the BIRs ruling on whether
it is entitled to the four (4) year
grace period for paying on the basis
of MCIT reckoned from 1999. BIR
then ruled that cessation of business
activities as a result of being placed
under involuntary receivership may
be
an
economic
reason
for
suspending the imposition of the
MCIT.
As a result of the ruling MBC
filed an application for refund of the
P33 million.
Due to the BIRs
inaction, MBC filed a petition for
review with the CTA.
The CTA denied the petition on
the ground that MBC is not a newly
organized corporation. In a volte
facie, the BIR now maintains that
MBC should pay the MCIT beginning
January 1, 1998 as it did not close
its business operations in 1987 but
merely suspended the same. Even if
placed under receivership, the
corporate existence was never
affected. Thus, it falls under the
category of an existing corporation
recommencing
its
banking
operations.
Should the refund be granted?

SUGGESTED ANSWER: Yes. The MCIT

shall be imposed beginning in the fourth
taxable year immediately following the year in
which the corporation commenced its business
operations. [Sec. 27 (E) (1), NIRC of 1997]
The date of commencement of
operations of a thrift bank is the date it was
registered with the SEC or the date when the
Certificate of Authority to Operate was issued
to it by the Monetary Board, whichever comes
later. (Sec. 6, Rev. Regs. No. 4-95)
Clearly then. MBC is entitled to the
grace period of four years from June 23, 1999
when it was authorized by the BSP to operate
as a thrift bank before the MCIT should be
applied to it. (Manila Banking Corporation v.
Commissioner of Internal Revenue, G. R. No.
168118, August 26, 2006)

NOTES AND COMMENTS:

a.
The MCIT and when should
be imposed and the four (4) year grace
period. A minimum corporate income tax of
two percent (2%) of the gross income as of
the end of the taxable year, as defined herein,
is hereby imposed on a corporation taxable
under this Title, beginning on the fourth
taxable year immediately following the year in
which such corporation commenced its
business operations, when the minimum
corporate income tax is greater than the tax
computed under Subsection (A) of this section
for the taxable year. [Sec. 27 (E) (1), NIRC
of 1997]
b.
Period when a corporation
becomes subject to the MCIT.
(5)
Specific rules for determining the period when
a corporation becomes subject to the MCIT
(minimum corporate income tax) For purposes of the MCIT, the taxable
year in which business operations commenced
shall be the year in which the domestic
corporation registered with the Bureau of
Internal Revenue (BIR).
Firms which were registered with BIR in
1994 and earlier years shall be covered by the
MCIT beginning January 1, 1998. x x x (Rev.
Regs. No. 9-98)

Manila
Banking
Corporation
v.
Commissioner of Internal Revenue, G. R. No.

168118, August 26, 2006 did not apply Rev.

Regs. No. 9-98 because Rev. Regs. No. 4-95
specifically refers to thrift banks.)
c.
Purpose of the four (4) year
grace period. The intent of Congress relative
to the MCIT is to grant a four (43) year
suspension of tax payment to newly organized
corporations. Corporations still starting their
business operations have to stabilize their
venture in order to obtain a stronghold in the
industry. It does not come as a surprise then
when many companies reported losses in their
initial years of operations.
Thus, in order to allow new
corporations to grow and develop at the initial
stages of their operations, the lawmaking body
saw the need to provide a grace period of four
years from their registration before they pay
their minimum corporate income tax. (Manila

Banking Corporation v. Commissioner of

Internal Revenue, G. R. No. 168118, August
26, 2006)

40

ESTATE TAXES

irrespective of where they are situated are

includible in the gross estate of Smith.

1.
In determining the
gross estate of a decedent, are his
properties abroad to be included,
and
more
particularly,
what
constitutes gross estate?

3. Proceeds of life
insurance includible in a decedents
gross estate.

SUGGESTED ANSWER:
Yes, if the
decedent is a Filipino citizen or a resident
alien.
The gross estate of a Filipino citizen or
a resident alien comprises all his real
property, wherever situated; all his personal
property, tangible, intangible or mixed,
wherever situated, to the extent of his
interest existing therein at the time of his
death.
The gross estate of a non-resident alien
comprises all his real property, situated in the
Philippines; all his personal property,
tangible, intangible or mixed, situated in the
Philippines, to the extent of his interest
existing therein at the time of his death.

2.
William Smith, an
American citizen, was a permanent
resident of the Philippines. He died
in San Francisco, California. He left
10,000 shares of San Miguel
Corporation, a condominium unit at
the Twin Towers Building at Pasig,
Metro Manila and a house and lot
in Miami, Florida.
What assets shall be included in
the Estate Tax Return to be filed
with the BIR?
SUGGESTED ANSWER: All of the assets
should be included in the Estate Tax Return
to be filed with the BIR.
Smith, an American citizen and a
permanent resident of the Philippines is
considered, for Philippine estate tax
purposes, a resident alien. Consequently,
the assets to be included in the Estate Tax
Return to be filed with the BIR should be all
property, real or personal, tangible,
intangible or mixed, wherever situated, to
the extent of the interest that Smith has at
the time of his death. Thus, all of the
properties enumerated in the problem

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

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

4. Proceeds of life
insurance NOT included in a
decedents gross estate.
a.
The
decedent
takes
the
insurance policy on his own life, and
b.
the proceeds are receivable by a
beneficiary designated as irrevocable. [Sec.

85 (E), NIRC of 1997)

NOTES AND COMMENTS: The beneficiary
must not be the decedents estate, executor or
administrator, because the proceeds are includible
as part of gross estate whether or not the
decedent retained the power of revocation. (Ibid.)

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

41

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

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

5.
There is no transfer in
contemplation of death if there is no
showing that the transferor retained for
his life or for any period which does not in fact
end before his death: (1) the possession or
enjoyment of, or the right to the income from
the property, or (2) the right, either alone or
in conjunction with any person, to designate
the person who shall possess or enjoy the
property or the income therefrom. [Sec. 85
(B), NIRC of 1997]

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

7. Vanishing deduction
(property previously taxed) allowed
as a deduction from the gross
estate of a Filipino citizen, whether
resident or not, of a resident alien
decedent, or of a nonresident alien
decedent.

a.
An amount equal to the
value specified below of
b.
Any property forming a part of
the gross estate situated in the Philippines
c
Of any person who died within
five years prior to the death of the decedent,
or transferred to the decedent by gift within
five years prior to his death,
d.
Where such property can be
identified as having been received by the
decedent from the donor by gift, or from
such prior decedent by gift, bequest, devise,
or inheritance, or
e.
Which can be identified as
having been acquired in exchange for
property so received:
100% of the value if the prior
decedent died within one year prior to the
death of the decedent, or if the property was
transferred to him by gift within the same
period prior to his death;
80% of the value if the prior decedent
died more than one year but not more than
two years prior to the death of the decedent,
or if the property was transferred to him by
gift within the same period prior to his death;
60% of the value if the prior decedent
died more than two years but not more than
three years prior to the death of the
decedent, or if the property was transferred
to him by gift within the same period prior to
his death;
40% of the value if the prior decedent
died more than three years but not more
than four years prior to the death of the
decedent, or if the property was transferred
to him by gift within the same period prior to
his death; and
20% of the value if the prior decedent
died more than four years but not more than
five years prior to the death of the decedent,
or if the property was transferred to him by
gift within the same period prior to his death.
[Sec. 86 (A) (2) and (B) (2), NIRC of 1997,
numbering,
arrangement
and
underlining
supplied]

8.

The approval of the

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

42
issues which are not against the property of
the decedent, or a claim against the estate as
such, but is against the interest or property
right which the heir, legatee, devisee, etc. has
in the property formerly held by the decedent.
The notices of levy were regularly
issued within the prescriptive period.
The tax assessment having become
final, executory and enforceable, the same can
no longer be contested by means of a
disguised protest. (Marcos, II v. Court of
Appeals, et al., 273 SCRA 47)

DONORS TAXES

1.
What is the donors
tax rate if the donee is a stranger?
SUGGESTED ANSWER:
When
the
donee or beneficiary is a stranger, the tax
payable by the donor shall be 30% of the net
gifts.

2.

For purposes of the

donors tax who is a stranger?

SUGGESTED ANSWER: A stranger is a

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

3.
What is the tax base for
donations?

SUGGESTED ANSWER: The net gifts

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

4.
For purposes of the
donors tax, what is meant by net
gifts?
SUGGESTED ANSWER:
The net
economic benefit from the transfer that
accrues to the donee. Accordingly, if a
mortgaged property is transferred as a gift,
but imposing upon the donee the obligation
to pay the mortgage liability, then the net
gift is measured by deducting from the fair

market value of the property the amount of

the mortgage assumed. (last par., Sec. 11,
Rev. Regs.No.2-2003)

5.
How are gifts of personal
property to be valued for donors tax
purposes?

SUGGESTED ANSWER:
The market
value of the personal property at the time of
the gift shall be considered the amount of the
gift. (Sec. 102, NIRC of 1997)

6.
What is the valuation of
donated real property for donors tax
purposes?

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

7. A died leaving as his only

heirs, his surviving spouse B, and
three minor children, X, Y and Z.
Since B does not want to participate
in the distribution of the estate, she
renounced her hereditary share in
the estate.
a.
Is
the
renunciation
subject to donors tax? Explain.
SUGGESTED ANSWER:
No.
The
general renunciation by an heir, including the
surviving spouse, as in the case B, of her
share in the hereditary estate left by the
decedent is not subject to donors tax. (4th
par., Sec. 11, Rev. Regs. No. 2-2003)
This is so because the general
renunciation by B was not specifically and
categorically done in favor of identified heir/s
to the exclusion or disadvantage of the other
co-heirs in the hereditary estate.

b.
Supposing that instead of
a
general
renunciation,
B
renounced her hereditary share in

43

As estate to X who is a special

child, would your answer be the
same? Explain.

SUGGESTED ANSWER:
My answer
would be different. The renunciation in favor
of X would be subject to donors tax.
This is so because the renunciation
was specifically and categorically done in
favor of X and identified heir to the exclusion
or disadvantage of Y and Z, the other coheirs in the hereditary estate. (4th par., Sec.
11, Rev. Regs. No. 2-2003)

8. Give some donations

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

its agencies which is not conducted for

profit, or to any political subdivisions of the

said Government;
f.
Gifts made by residents or nonresidents in favor of an educational and/or
charitable, religious, cultural or social welfare
corporation, institution, foundation, trust or
philanthropic organization or research
institution or organization:
Provided,
however, That not more than thirty percent

(30%) of said gifts shall be used by such

donee for administration purposes. [Sec. 101
(A), NIRC of 1997, numbering and
arrangement supplied]
g.
Gifts made by non-resident aliens
outside of the Philippines to Philippine
residents are exempt from donors taxes
because taxation is basically territorial. The
transaction, which should have been subject to
tax was made by non-resident aliens and took
place outside of the Philippines.

9. What is the concept of

donation or gift splitting? Illustrate.

SUGGESTED ANSWER: Donation or gift

splitting is spreading the gift over numerous
calendar years in order to avail of lower
donors taxes.
In 2008 Leon was thinking of donating
a P200,000.00 to Miklos, his first cousin. The
P200,000.00 is the totality of the net gifts for
2008.
If he donated the P200,000.00 in
2008 the first P100,000 would be exempt and
the remaining P50,000.00 would be subject
to donors tax
If Leon spreads the P200,000 donation
over two (2) calendar years, donating
P100,000.00 on December 30, 2008 and the
remaining P100,000.00 on January 1, 2009
the transaction would be exempt from
donors tax. This is so even if the donation is
separated only by two days because the
basis is the calendar year. Leon would be
enjoying the exemption for the first
P100,000.00 net gifts for each calendar year.

10. A, who is engaged in

the car buy and sell business sold
to B P7 million Jaguar for only P4
million. The proper VAT on the sale
was paid.
If you are the BIR
examiner assigned to review the
sale, would you issue a tax
assessment on the transaction?
Explain your answer briefly.

SUGGESTED ANSWER: Donors taxes

would be due on the insufficiency of
consideration.
Where property, other than real
property that has been subjected to the final
capital gains tax, is transferred for less than
an adequate and full consideration in money

44
or moneys worth, then the amount by which
the fair market value of the property at the
time of the execution of the Contract to Sell
or execution of the Deed of Sale which is not
preceded by a Contract to Sell exceeded the
value of the agreed or actual consideration or
selling price shall be deemed a gift, and shall
be included in computing the amount of gifts
made during the calendar year. (5th par., Sec.
11, Rev. Regs. No. 2-2003)

VALUE-ADDED TAXES (VAT)

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

1. Value-added
tax
(VAT) is a tax which is imposed only on the
increase in the worth, merit or importance of
goods, properties or services, and not on the
total value of the goods or services being
sold or rendered.

2. Nature of VAT. VAT is

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

VAT is a percentage tax imposed on

any person whether or not a franchise
grantee, who in the course of trade or
business, sells, barters, exchanges, leases,
goods or properties, renders services. It is
also levied on every importation of goods
whether or not in the course of trade or
business. The tax base of the VAT is limited
only to the value added to such goods,
properties, or services by the seller,

transferor or lessor. Further, the VAT is an

indirect tax and can be passed on to the
buyer.
(Quezon City, et al., v. ABS-CBN
Broadcasting Corporation, G. R. No. 166408,
October 6, 2008)

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

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

5.
The VAT is a tax on
consumption.
Meaning
of
consumption as used under the VAT
system. Consumption is "the use of a

thing in a way that thereby exhausts it."

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

45

6.
Illustration
of
the
meaning of consumption as used
under the VAT system. For example,

the services rendered by a local firm to its

foreign client are performed or successfully
completed upon its sending to a foreign client
the drafts and bills it has gathered from
service establishments here. Its services,
having been performed in the Philippines, are
therefore also consumed in the Philippines.
Such facilitation service has no physical
existence, yet takes place upon rendition,
and therefore upon consumption, in the
Philippines. [Commissioner of Internal Revenue
v. Placer Dome Technical Services (Phils.), Inc. G.
R. No. 164365, June 8, 2007]

7. Who are liable for

the value-added tax.

a.
Any person who, in the course
of his trade or business,
1)
Sells, barters, exchanges
or leases goods
or properties, or
2)
renders services, and
b.
any person who imports goods
xxx
However, in the case of importation of
taxable goods, the importer, whether an
individual or corporation and whether or not
made in the course of his trade or business,
shall be liable to VAT xxx. (Rev. Regs. No. 162005, Sec. 4.105-1, paraphrasing supplied)

8. Various
methods and systems.

VAT

a.
Cost deduction method. This
is a single-stage tax which is payable only by
the original sellers. (Abakada Guro Party List
(etc.) v. Ermita, etc., et al., G. R. No. 168056,
September 1, 2005 and companion cases) This
was subsequently modified and a mixture of
cost deduction method and tax credit
method was used to determine the valueadded tax payable. (Ibid.)
b.
Tax credit method.
This
method relies on invoices, an entity can
credit against or subtract from the VAT
charged on its sales or outputs the VAT paid
on its purchases, inputs and imports.
[Commissioner of Internal Revenue v.
Seagate Technology (Philippines), G. R. No.
153866, February 11, 2005]

If at the end of a taxable period, the

output taxes charged by a seller are equal to
the input taxes passed on by the suppliers,
no payment is required. It is when the
output taxes exceed the input taxes that the
excess has to be paid.
If however, the input taxes exceed the
output taxes, the excess shall be carried over
to the succeeding quarter or quarters.
Should the input taxes result from zero-rated
or effectively 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. (Ibid.)

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

10. The right to credit the

input tax be limited by legislation
because it is a mere creation of
law. Prior to the enactment of multi-stage

sales taxation, the sales taxes paid at every

level of distribution are not recoverable from
the taxes payable. With the advent of
Executive Order No. 273 imposing a 10%
multi-stage tax on all sales, it was only then
that the crediting of the input tax paid on
purchase or importation of goods and
services by VAT-registered persons against
the
output
tax
was
established.
This continued with the Expanded VAT Law
(R.A. No. 7716), and The Tax Reform Act of
1997 (R.A. No. 8424). The right to credit
input tax as against the output tax is clearly
a privilege created by law, a privilege that
also the law can limit. It should be stressed
that a person has no vested right in statutory
privileges. (ABAKADA Guro Party List, etc. et al.
vs. Ermita, G.R. No. 168207, October 15, 2005,
and companion
reconsideration)

cases,

on

the

motion

for

11. Output tax is the

value-added tax due on the sale or lease or

46
taxable goods, properties or services by any
VAT-registered person.

12. Input

tax is the value-

added tax due on or paid by a VATregistered person on importation of good or

local purchases of goods or services,
including lease or use of properties, in the
course of his trade or business. (Rev. Regs.
No. 4.110-1, 1st par.)

13.

Included in the input tax.

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

14. Concept of transitional

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

15. Concept of presumptive

input tax credits.
Persons or firms
engaged in the processing of sardines,

mackerel, and milk, and in manufacturing

refined sugar, cooking oil and packed noodlebased instant meals, shall be allowed a
presumptive input tax, creditable against the
output tax, equivalent to four percent (4%)
of the gross value in money of their
purchases of primary agricultural products
which are used as inputs to their production.
As used in this paragraph, the term
processing
shall
mean
pasteurization,
canning and activities which through physical
or chemical process alter the exterior texture
or form or inner substance of a product in
such a manner as to prepare it for special
use to which it could not have been put in its
original form or condition. [Rev. Regs. No. 162005, Sec.4.111-1, (b)]

16. The VAT registration fee

does NOT violate religious freedom.

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

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

18. Pursuant

to

a
government
program
of
privatization, NDC, a VAT-registered
entity created for the purpose of
selling real property, decided to sell
to private enterprise all of its shares

47

in its wholly-owned subsidiary the

National Marine Corporation (NMC).
The NDC decided to sell in one lot
its NMC shares and five (5) of its
ships, which are 3,700 DWT TweenDecker, "Kloeckner" type vessels.
The vessels were constructed for
the NDC between 1981 and 1984,
then initially leased to Luzon
Stevedoring Company, also its
wholly-owned
subsidiary.
Subsequently, the vessels were
transferred and leased, on a
bareboat basis, to the NMC.
The
NMC shares and the vessels were
offered for public bidding. Among
the stipulated terms and conditions
for the public auction was that the
winning bidder was to pay "a valueadded tax of 10% on the value of
the vessels." Magsaysay Lines, Inc.,
offered to buy the shares and the
vessels for P168,000,000.00. The
bid was made by Magsaysay Lines,
purportedly for a new company still
to be formed composed of itself,
Baliwag Navigation, Inc., and FIM
Limited of the Marden Group based
in Hongkong. The bid was approved
by the Committee on Privatization,
and a Notice of Award was issued to
Magsaysay Lines.
Is the sale subject to VAT?

SUGGESTED ANSWER: No. The term

"carrying on business" does not mean the
performance of a single disconnected act, but
means conducting, prosecuting and
continuing business by performing
progressively all the acts normally incident
thereof; while "doing business" conveys the
idea of business being done, not from time to
time, but all the time. "Course of business"
is what is usually done in the management of
trade or business. "Course of business" or
"doing business" connotes regularity of
activity. In the instant case, the sale was an
isolated transaction.
The sale

which was involuntary and made pursuant to

the declared policy of Government for
privatization could no longer be repeated or
carried on with regularity. It should be
emphasized that the normal VAT-registered
activity of NDC is leasing personal property.
This finding is confirmed by the
Revised Charter of the NDC which bears no
indication that the NDC was created for the
primary purpose of selling real property.
(Commissioner of Internal Revenue v. Magsaysay
Lines, Inc., et al., G. R. No. 146984, July 28,
2006)

19. Under

the ValueAdded Tax (VAT), the tax is

imposed on sales, barter, or
exchange or goods and services.
The VAT is also imposed on certain
transactions deemed sales which
include:
a.
Transfer,
consumption not in the course
or properties originally intended
for use in the course of business.

use
or
of business
for sale or
xxx

b.

Distribution or transfer to:

1)
Shareholders or investors
as share in the profits of the VATregistered person; xxx or
2)
Creditors in payment of
debt or obligation
c.
Consignment
of goods
if
actual sale is not made within sixty (60) days
following the date such goods were
consigned. Consigned goods returned by the
consignee within the 60-day period are not
deemed sold.
d.
Retirement from or cessation
of business, with respect to all goods on
hand,
1)
whether capital goods,
stock-in-trade, supplies or materials
as of the date of such retirement, or
cessation,
2)
whether or not the
business is continued by the new
owner or successor. xxx [Rev. Regs.
No. 16-2005, Sec. 4.106-7, paraphrasing,
arrangement and numbering supplied]

20. Transactions considered

retirement or cessation of business
deemed sale subject to VAT.

48
a. Change of ownership of the
business. There is change in the ownership
of the business where a single proprietorship
incorporates; or
1) the proprietor of a single
proprietorship
sells
his
entire
business.
b.
Dissolution of a partnership and
creation of a new partnership which takes
over the business. [Rev. Regs. No. 16-2005,
Sec.
4.106-7
(a),
(4)
paraphrasing,
arrangement and numbering supplied]

21. Sale of or lease of real

properties subject to VAT. Sale of real
properties primarily for sale to customers or
held for lease in the ordinary course of trade
or business of the seller shall be subject to
VAT. (Rev. Regs. No. 16-2005, Sec. 4.106-3, 1st
par.)

Thus, capital transactions of individuals

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

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

23.

The following
sales of real properties are exempt
from VAT, namely:

a.
Sale of real properties not
primarily held for sale to customers or held
for lease in the ordinary course of trade or
business;
b.
Sale of real properties utilized
for low-cost housing as defined by RA No.
7279, otherwise known as the Urban and
Development Housing Act of 1992 and other
related laws, such as RA No. 7835 and RA
No. 8763.
xxx
xxx
xxx

c.
Sale of real properties utilized
for socialized housing as defined under RA
No. 7279, and other related laws wherein the
price ceiling per unit is P225,000.00 or as
may from time to time be determined by the
HUDCC and the NEDA and other related
laws.
xxx
xxx
xxx
d.
Sale of residential lot valued at
One Million Five Hundred Thousand Pesos
(P1,500,000.00) and below, or house & lot
and other residential dwellings valued at Two
Million Give Hundred Thousand Pesos
(P2,500,000.00) and below where the
instrument of sale/transfer/disposition was
executed on or after November 1, 2005,
provided, That not later than January 31,
2009 and every three (3) years thereafter,
the amounts stated herein shall be adjusted
to its present value using the Consumer Price
Index, as published by the National Statistics
Office (NSO); provided, further, that such
adjustment shall be published through
revenue regulations to be issued not later
than March 31 of each year.
If two or more adjacent residential lots
are sold or disposed in favor of one buyer,
for the purpose of utilizing the lots as one
residential lot, the sale shall be exempt from
VAT only if the aggregate value of the lots do
not exceed P1,500,000.00.
Adjacent
residential lots, although covered by separate
titles and/or separate tax declarations, when
sold or disposed of to one and the same
buyer, whether covered by one or separate
Deed of Conveyance, shall be presumed as a
sale of one residential lot. [Rev. Regs. No.
4.109-1
(B),
(p),
paraphrasing
and
numbering supplied]

24. VAT on services and lease

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

49

25. Sale or exchange of

services, defined. The term sale or

exchange
of
services
means
the
performance of all kinds of services in the
Philippines for others for a fee, remuneration
or consideration, whether in kind or in cash,
including those performed or rendered by the
following:
a.
construction and service
contractors;
b. stock,
real
estate,
commercial,
customs and immigration brokers;
c.
lessors of property, whether
personal or real;
d. persons engaged in warehousing
services
e.
lessors or distributors of cinematographic
films;
f.
persons
engaged
in
milling,
processing,
manufacturing or repacking goods for others;
g. proprietors, operators or keepers of
hotels, motels, rest-houses, pension houses,
inns, resorts; theaters, and movie houses;
h.
proprietors or operators of
restaurants, refreshment parlors, cafes and
other eating places, including clubs and
caterers;
i.
dealers in securities;
j.
lending investors;
k. transportation contractors on their
transport of goods or cargoes, including
persons who transport goods or cargoes for
hire and other domestic common carriers by
land relative to their transport of goods or
cargoes;
l.
common
carriers by air and sea relative to their
transport of passengers, goods or cargoes
from one place in the Philippines to another
place in the Philippines;
m.
sales
of
electricity
by
generation
companies,
transmission, and/or distribution companies;
n. franchise grantees of electric utilities,
telephone and telegraph, radio and television
broadcasting and all other franchise grantees
except franchise grantees of radio and/or
television broadcasting whose annual gross

receipts of the preceding year do not exceed

Ten Million Pesos (P10,000,000.00), and
franchise grantees of gas and water utilities;
o.
non-life
insurance
companies (except their crop insurances),
including surety, fidelity, indemnity and
bonding companies; and
p.
similar
services
regardless of whether or not the performance
thereof calls for the exercise or use of the
physical or mental faculties. [NIRC of 1997,

Sec. 108 (A), as amended by R.A. No. 9337; Rev.

Regs. No. 16-2005, Sec. 4,108-2, 1st par.,
arrangement and numbering supplied]

26. Also
phrase sale
services.

included in the
or exchange of

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

50
h.
The lease or the use of or the
right to use radio, television, satellite
transmission and cable television time. (Rev.
Regs. No. 16-2005, Sec. 4.108-2, 2nd par.)

27. Zero-rated

Sales of

Goods or Properties. A zero-rated sale

of goods or properties by a sale by a VATregistered 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 in accordance with Rev.
Regulations No. 16-2005. (Rev. Regs. No. 162005,

1st

par.)

28. Concept

of

VAT

zero-rating. The tax rate is set at zero.

When applied to the tax base, such rate

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

29. Situs of taxation of zerorated

VAT
services
such
as
facilitating
the
collection
of
receivables
from
credit
card
members situated in the Philippines
and
payment
to
service
establishments in the Philippines.
The place where the service is rendered
determines the jurisdiction to impose the VAT

Performed in the Philippines, the

service is necessarily subject to its jurisdiction
for the State necessarily has to have a
substantial connection to it in order to
enforce a zero rate. The place of payment is
immaterial much less is the place where the
output of the service will be further or
ultimately used.
This is so because the law neither
makes a qualification nor adds a condition in
determining the tax situs of a zero-rated
service. (Commissioner of Internal Revenue v.
American Express International, Inc. (Philipppine
Branch), G. R. No. 152609, June 29, 2005)

30.
Destination
principle under the VAT System. As
a general rule, the VAT system uses the
destination principle as a basis for the
jurisdictional reach of the tax.
Goods and services are taxed only in
the country where they are consumed. Thus,
exports are zero-rated, while imports are
taxed.
This is also known as the Cross
Border Doctrine.

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

32. Rationale

for zero-

rating of exports.

The Philippine VAT

system adheres to the Cross-Border Doctrine,
according to which, no VAT shall be imposed
to form part of the cost of goods destined for
consumption outside of the territorial border
of the taxing authority. [Commissioner of
Internal Revenue v. Toshiba Information
Equipment (Phils.), Inc., G. R.. No. 150154,
August 9, 2005] The Cross Border Doctrine is
also known as the destination principle.
Hence, actual or constructive export of
goods and services from the Philippines to a
foreign country must be zero-rated for VAT;
while, those destined for use or consumption

51
within the Philippines shall be imposed the
twelve percent (12%) VAT.

33. Zero-rated
distinguished
transactions:

from

sale
exempt

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

34. Zero-rated sales by

VAT-registered persons. The following

sales by VAT-registered persons shall be

subject to zero percent (0%) rate:
a.
Export sales;
b.
Considered export sales under
Executive Order No. 224;
c.
Foreign currency denominated
sale; and
d.
Sales to persons or entities
deemed tax-exempt under special law or
international agreement. (Rev. Regs. No. 162005, Sec.
supplied)

4.106-5,

2nd

par.,

paraphrasing

35. Sale of gold to the

Central Bank considered as export
sales. As export sales, the sale of gold to

the Central Bank is zero-rated, hence, no tax

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

36. Sales to ecozone, such as

PEZA,
considered
export-sale.
Notably, while an ecozone is geographically

within the Philippines, it is deemed a

separate customs territory and is regarded in
law as foreign soil. Sales by suppliers from
outside the borders of the ecozone to this
separate customs territory are deemed as
exports and treated as export sales. These
sales are zero-rated or subject to a tax rate
of zero percent. (Commissioner of Internal
Revenue v. Sekisui Jushi Philippines, Inc., G. R.
No. 149671,
authorities)

July

21,

2006

citing

various

37. Ecozone, defined.

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

38. Zero-rated

sale

of

service, defined.

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

2005. [Rev. Regs. No. 16-2005, Sec. Sec. 4.1085 (a), words in italics supplied)

39. Service performed

by American Express in facilitating
the collection of receivables from
credit card members situated in the
Philippines and payment to service
establishments in the Philippines in
behalf of its Hong-Kong based
client is subject to VAT but zero-

52

rated. This is so because it meets all the

requirements for VAT imposition, as follows:
a.
It regularly renders in the
Philippines the service of facilitating the
collection and payment of receivables
belonging to a foreign company that is a
clearly separate and distinct entity.
b.
Such service is commercial in
nature; carried on over a sustained period of
time; on a significant scale with a reasonable
degree of frequency; and not at random,
fortuitous, or attenuated.
c.
For this service, it definitely
receives consideration in foreign currency
that is accounted for in conformity with law.
d.
It is not an entity exempt under
any of our laws or international agreements.
(Commissioner, of Internal Revenue v. American
Express International, Inc. (Philippine Branch), G.
R. No. 152609, June 29, 2005)

40. While
the
service
performed by American Express is
subject to VAT it is zero-rated, and
BIR Revenue Regulations that alter
the legal requirements for zerorating are ultra vires and invalid.

The VAT system uses the destination

principle which posits that the goods and
services are taxed only in the country where
they are consumed,
However, the law itself provides for
clear exceptions under which the supply of
services shall be zero-rated, among which
are the following:
a.
The service is performed in the
Philippines;
b.
The services are within the
categories provided for under the Tax Code;
and
c.
It is paid for in acceptable
foreign currency of the Bangko Sentral ng
Pilipinas.
American Express renders assistance
to its foreign clients by receiving the bills of
service establishments located in the country
and forwarding them to their clients abroad.
The services are performed or successfully
completed upon send to its foreign clients the
drafts and bills it has gathered from service
establishments here, its services, having
been performed in the Philippines are
therefore also consumed in the Philippines.

Thus, its services are exempt from the

destination principle and are zero-rated.
The BIR could not change the law.
[Commissioner, of Internal Revenue v. American
Express International, Inc. (Philippine Branch), G.
R. No. 152609, June 29, 2005]

41. A
foreign
Consortium composed of BWSCDenmark, Mitsui Engineering and
Shipbuilding Ltd., and Mitsui and
Co., Ltd., which entered into a
contract with NAPOCOR for the
operation and maintenance of two
power barges appointed BWSCDenmark
as
its
coordination
manager. BWSCMI was established
as the subcontractor to perform the
actual work in the Philippines. The
Consortium
paid
BWSCMI
in
acceptable foreign exchange and
accounted for in accordance with
the rules and regulations of the
BSP.
Through a February 14, 1995
ruling the BIR declared that
BWSCMI may choose to register as
a VAT persons subject to VAT at
zero rate. For 1996, it filed the
proper VAT returns showing zero
rating.
On December 29, 1997,
believing that it is covered by Rev.
Regs. 5-96, dated February
20,
1996, BWSCMI paid 10% output
VAT for the period April-December
1996,
through
the
Voluntary
Assessment Program (VAP).
On January 7, 1999, BWSCMI
was able to obtain a Ruling from
the BIR reconfirming that it is
subject to VAT at zero-rating. On
this basis, BWSCMI applied for a
refund of the output VAT it paid.
a.
Is BWSCMI subject to the
10% VAT or is it zero rated?
SUGGESTED ANSWER: Yes. BWSCMI
is not zero rated and is subject to the 10%
VAT.
It is rendering service for the
Consortium which is not doing business in

53
the Philippines. Zero-rating finds application
only where the recipient of the services are
other persons doing business outside of the
Philippines. BWSCMI provides services to the
Consortium which by virtue of its contract
with NAPOCOR is doing business within the
Philippines. (Commissioner of Internal Revenue v.
Burmeister and Wain Scandinavian Contractor
Mindanao, Inc., G. R. No. 153205, January 22,
2007)

b.
Could it obtain a refund
of the VAT it paid through the VAP?
Explain.

SUGGESTED ANSWER: Yes. BWSCMI

is entitled to refund of the 10% output VAT it
paid the based on the non-retroactivity of the
prejudicial revocation of the BIR Rulings
which held that its services are subject to
0% VAT and which BWSCMI invoked in
applying for refund of the output VAT.
(Commissioner of Internal Revenue v.

Burmeister and Wain Scandinavian Contractor

Mindanao, Inc., supra)

NOTES AND COMMENTS:

a.
Do not confuse the
BWSCMI case with the American
Express case.
American Express

International, Inc. (Philippine Branch)] is a

VAT-registered person that facilitates the
collection and payment of receivables
belonging to its non-resident foreign
client [American Express International, Inc.
(Hongkong Branch)], for which it gets paid in
acceptable foreign currency inwardly remitted
and accounted for in accordance with BSP
rules and regulations.
(Commissioner of

Internal Revenue v. Burmeister and Wain

Scandinavian Contractor Mindanao, Inc., G. R.
No. 153205, January 22, 2007)

42. What

are VAT-Exempt
transactions? SUGGESTED ANSWER:

The sale of goods or properties and/or

services and the use or lease of
properties that is
b.not subject to VAT (output tax) and
c.
the seller is not allowed any tax
credit on VAT (input tax) purchases.
The person making the exempt sale of
goods, properties or services shall not bill any
output tax to his customers because the said
transaction is not subject to VAT. [Rev. Regs.

No. 16-2005, Sec. 4.109-1 (A), arrangement and

numbering supplied]

43. VAT-exempt
transactions distinguished
VAT-exempt entities.

from
a.

An exempt transaction, on the one hand,

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

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

44. Transactions are exempt

from VAT. (Subject to the election by a
VAT-registered person not to be subject to
the value-added tax), the following shall be
exempt from VAT:
(A) Sale or importation of agricultural
and marine food products in their original
state, livestock and poultry of a kind
generally used as, or yielding or producing
foods for human consumption; and breeding
stock and genetic materials therefor.
Livestock shall include cows, bulls and
calves, pigs, sheep, goats and rabbits.
Poultry shall include fowls, ducks, geese and
turkey, Livestock or poultry does not include
fighting cocks, race horses, zoo animals and
other animals generally considered as pets.
Marine food products shall include fish
and crustaceans, such as, but not limited to,
eels, trout, lobster, shrimps, prawns, oysters,
mussels and clams.
Meat, fruit, fish, vegetables and other
agricultural and marine food Products
classified under this paragraph shall be
considered in their original state even if they
have undergone the simple processes of

54
preparation or preservation for the market,
such as freezing, drying, salting, broiling,
roasting, smoking or stripping, including
those using advanced technological means of
packaging, such as shrink wrapping in
plastics, vacuum packing, tetra-pack, and
other similar packaging methods. Polished
and/or husked rice, corn grits, raw cane
sugar and molasses, ordinary salt, and copra
shall be considered in their original state.
Sugar whose content of sucrose by
weight, in the dry state, has a polarimeter
reading of 99.5o and above are presumed to
be refined sugar.
Cane sugar produced from the
following shall be presumed, for internal
revenue purposes, to be refined sugar:
(1)
product of a refining process,
(2)
products of a sugar refinery,
or
(3)
product of a production line
of a sugar mill accredited by the BIR to be
producing sugar with polarimeter reading of
99.5o and above, and for which the quedan
issued therefor, and verified by the Sugar
Regulatory Administration, identifies the
same to be of a polarimeter reading of 99.5o
and above.
Bagasse is not included in the
exemption provided for under this section.
(B)
Sale or importation of fertilizers;
seeds, seedlings and fingerlings; fish, prawn,
livestock and poultry feeds, including
ingredients, whether locally produced or
imported, used in the manufacture of
finished feeds (except specialty feeds for race
horses, fighting cocks, aquarium fish, zoo
animals and other animals generally
considered as pets);
Specialty feeds refers to nonagricultural feeds or food for race horses,
fighting cocks, aquarium fish, zoo animals
and other animals generally considered as
pets.
(C)
Importation of personal and
household effects belonging to the residents
of the Philippines returning from abroad and
nonresident citizens coming to resettle in the
Philippines: Provided, That such goods are
exempt from customs duties under the Tariff
and Customs Code of the Philippines;
(D) Importation
of
professional
instruments
and
implements, wearing
apparel, domestic animals, and personal

household effects (except any vehicle, vessel,

aircraft, machinery, other goods for use in
the manufacture and merchandise of any
kind in commercial quantity) belonging to
persons coming to settle in the Philippines,
for their own use and not for sale, barter or
exchange, accompanying such persons, or
arriving within ninety (90) days before or
after their arrival, upon the production of
evidence satisfactory to the Commissioner of
Internal Revenue, that such persons are
actually coming to settle in the Philippines
and that the change of residence is bona
fide;
(E) Services subject to percentage tax
under Title V of the Tax Code, as
enumerated below:
(1)
Sale or lease of goods or
properties or the performance of
services
of
non-VAT-registered
persons, other than the transactions
mentioned in paragraphs (A) to (U)
of Sec. 109 (1) of the Tax Code, the
annual sales and/or receipts of which
does not exceed the amount of One
Million Five Hundred thousand Pesos
(P1,500,000.00), Provided, That not
later than January 31, 2009 and
every three (3) years thereafter, the
amount herein stated shall be
adjusted to its present value using
the Consumer Price Index, as
published by the National Statistics
Office (NSO). (Sec. 116, Tax Code)
(2)
Services rendered by
domestic common carriers by land
for the transport of passengers and
keepers of garages. (Sec. 117)
(3)
Services rendered by
international air/shipping carriers.
(Sec. 118)
(4)
Service
rendered
by
franchise grantees of radio and/or
television broadcasting whose annual
gross receipts of the preceding year
do not exceed Ten Million Pesos
(P10,000,000.00) and by franchises
of gas and water utilities. (Sec. 119)
(5)
Service
rendered
for
overseas dispatch message or
conversation originating from the
Philippines. (Sc. 120)
(6)
Services rendered by any
person, company or corporation

55
(except
purely
cooperative
companies or associations ) doing life
insurance business of any sort in the
Philippines. (Sec. 123)
(7)
Services rendered by fire,
marine or miscellaneous insurance
agents
of
foreign
insurance
companies. (Sec. 124)
(8)
Services of proprietors,
lessees or operators of cockpits,
cabarets, night or day clubs, boxing
exhibitions professional basketball
games, jai-Alai and race tracks.
(Sec. 125). and
(9)
Receipts on sale, barter
or exchange of shares of stock listed
and traded through the local stock
exchange or through initial public
offering. (Sec. 127)
(F)
Services by agricultural contract
growers and milling for others of palay into
rice, corn into grits and sugar cane into raw
sugar;
Agricultural contract growers refers
to those persons producing for others
poultry, livestock or other agricultural and
marine food products in their original state.
(G) Medical, dental, hospital and
veterinary services except those rendered by
professionals;
Laboratory services are exempted. If
the hospital or clinic operates a pharmacy or
drug store, the sale of drugs and medicine is
subject to VAT.
(H) Educational services rendered
by private educational institutions, duly
accredited by the Department of Education
(DEPED), the Commission on Higher
Education (CHED), the Technical Education
And Skills Development Authority (TESDA)
and those rendered by government
educational institutions;
Educational services shall refer to
academic, technical or vocational education
provided by private educational institutions
duly accredited by the DepED, the CHED and
TESDA and those rendered by government
educational institutions and it does not
include seminars, in-service training, review
classes and other similar services rendered
by persons who are not accredited by the
DepED, the CHED and/or the TESDA.

(I)
Services rendered by individuals
pursuant
to
an
employer-employee
relationship;
(J)
Services rendered by regional or
area headquarters established in the
Philippines by multinational corporations
which act as supervisory, communications
and coordinating centers for their affiliates,
subsidiaries or branches in the Asia-Pacific
Region and do not earn or derive income
from the Philippines;
(K)
Transactions which are exempt
under international agreements to which the
Philippines is a signatory or under special
laws, except those under Presidential Decree
No.
529

Petroleum
Exploration
Concessionaires under the Petroleum Act of
1949; and;
(L)
Sales
by
agricultural
cooperatives duly registered with the
Cooperative Development Authority (CDA) to
their members as well as sale of their
produce, whether in its original state or
processed form, to non-members; their
importation of direct farm inputs, machineries
and equipment, including spare parts thereof,
to be used directly and exclusively in the
production and/or processing of their
produce;
(M) Gross receipts from lending
activities by credit or multi-purpose
cooperatives duly registered and in good
standing with the Cooperative Development
Authority;
(N) Sales by non-agricultural, nonelectric and non-credit cooperatives duly
registered with the Cooperative Development
Authority: Provided, That the share capital
contribution of each member does not
exceed Fifteen thousand pesos (P15,000) and
regardless of the aggregate capital and net
surplus ratably distributed among the
members;
Importation by non-agricultural, nonelectric and non-credit cooperatives of
machineries and equipment, including spare
parts thereof, to be used by them are subject
to VAT.
(O) Export sales by persons who are
not VAT-registered;
(P)
Sale of real properties not
primarily held for sale to customers or held
for lease in the ordinary course of trade or
business, or real property utilized for low-cost

56
and socialized housing as defined by Republic
Act No. 7279, otherwise known as the Urban
Development and Housing Act of 1992, and
other related laws, such as RA No. 7835 and
RA No. 8765, residential lot valued at One
million five hundred thousand pesos (P
1,500,000) and below, house and lot, and
other residential dwellings valued at Two
million five hundred thousand pesos (P
2,500,000) and below: Provided, That not
later than January 31, 2009 and every three
(3) years thereafter, the amounts herein
stated shall be adjusted to their present
values using the Consumer Price Index, as
published by the National Statistics Office
(NSO);
(Q) Lease of a residential unit with a
monthly rental not exceeding Ten thousand
pesos (P 10,000) Provided, That not later
than January 31, 2009 and every three (3)
years thereafter, the amount herein stated
shall be adjusted to its present value using
the Consumer Price Index as published by
the National Statistics Office (NSO);
(R) Sale, importation, printing or
publication of books and any newspaper,
magazine, review or bulletin which appears
at regular intervals with fixed prices for
subscription and sale and which is not
devoted principally to the publication of paid
advertisements;
(S)
Sale, importation or lease of
passenger or cargo vessels and aircraft,
including engine, equipment and spare parts
thereof for domestic or international
transport operations;
Provided, that the
exemption from VAT on the importation and
local purchase of passenger and/or cargo
vessels shall be limited to those of one
hundred fifty (150) tons and above, including
engine and spare parts of said vessels;
Provided, further, that the vessels be
imported shall comply with the age limit
requirement, at the time of acquisition
counted from the date of the vessels original
commissioning, as follows: (i) for passenger
and/or cargo vessels, the age limit is fifteen
years (15) years old, (ii) for tankers, the
age limit is ten (10) years old, and (iii) For
high-speed passenger cars, the age limit is
five (5) years old, Provided, finally, that
exemption shall be subject to the provisions
of section 4 of Republic Act No. 9295,

otherwise known as The Domestic Shipping

Development Act of 2004.
(T)
Importation of fuel, goods and
supplies by persons engaged in international
shipping or air transport operations;
Provided, that the said fuel, goods and
supplies shall be used exclusively or shall
pertain to the transport of goods and/or
passenger from a port in the Philippines
directly to a foreign port without stopping at
any other port in the Philippines; provided,
further, that if any portion of such fuel,
goods or supplies is used for purposes other
than that mentioned in this paragraph, such
portion of fuel, goods and supplies shall be
subject to 10% VAT (now 12%);
(U) Services of banks, non-bank
financial intermediaries performing quasibanking functions, and other non-bank
financial intermediaries; and

(V) Sale or lease of goods or

properties or the performance of services
other than the transactions mentioned in the
preceding paragraphs, the gross annual sales
and/or receipts do not exceed the amount of
One million five hundred thousand pesos
(P1,500,000): Provided, That not later than
January 31, 2009 and every three (3) years
thereafter, the amount herein stated shall be
adjusted to its present value using the
Consumer Price Index as published by the
National Statistics Office (NSO).
For purposes of the threshold of
P1,500,000.00, the husband and wife shall be
cnsidered separate taxpayers. However, the
aggregation rule for each taxpayer shall
apply. For instance, if a profesional, aside
from the practice ofhis profession, also
derives revenue from other lines of business
which are otherwise subject to VAT, the
same shall be combined for purposes of
determining whether the threshold has been
exceeded. Thus, the VAT-exempt sales shall
to be icluded in determining the threshold.

[NIRC of 1997, Sec. 109 (1), as amended by R. A.

No. 9337; words in italics from Rev. Regs. No. 162005, Sec. 4.109-1 (B), words in parentheses
supplied]

45. Tax to be paid by

persons exempt from VAT.

57
a.
Any person, whose sales or
receipts are exempt under Sec. 109 (1) (V) of
the Tax Code,
(V) Sale or lease of goods or
properties or the performance of
services other than the transactions
mentioned
in
the
preceding
paragraphs, the gross annual sales
and/or receipts do not exceed the
amount of One million five hundred
thousand
pesos
(P1,500,000):
Provided, That not later than January
31, 2009 and every three (3) years
thereafter, the amount herein stated
shall be adjusted to its present value
using the Consumer Price Index as
published by the National Statistics
Office (NSO), from the payment of
VAT and
b.
who is not a VAT-registered
person
c.
shall pay a tax equivalent to
three percent (3%) of his gross monthly
sales or receipts;
Provided, that cooperatives shall be
exempt from the three (3%) gross receipts
tax herein imposed. (Rev. Regs. No. 16-2005,
Sec. 4.116-1, arrangement, numbering and words
in italics supplied)

RETURNS AND

WITHHOLDING

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

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

impracticable for the spouses to file one

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

5.
Computation of income
tax for married individuals whether
citizens, resident or non-resident
aliens, who do not derive income
purely from compensation required
file a consolidated return for the
taxable year but could not do so. For
married individuals, the husband and wife,
subject to no. 2, supra,, shall compute
separately their individual income tax based
on their respective total taxable income:
Provided, that if any income cannot be
definitely attributed to or identified as income
exclusively earned or realized by either of the
spouses, the same shall be divided equally
between the spouses for the purpose of
determining their respective taxable income.

to

[2nd to the last par., Sec. 24 (A) (2), NIRC of 1997

as amended by Rep. Act No. 9504]

a.
Every Filipino citizen residing in
the Philippines;
b.
Every Filipino citizen residing
outside the Philippines on his income from
sources within the Philippines;
c.
Every alien residing in the
Philippines on income derived from sources
within the Philippines; and
d.
Every nonresident alien engaged
in trade or business or in the exercise of
profession in the Philippines. [Sec. 51 (A) (1),

6.
Individuals who are not
required to file an income tax return.

2.
Individuals required
file an income tax return.

NIRC of 1997]

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

58
b.
An individual with respect to
pure compensation income, derived from
such sources within the Philippines, the
income tax on which has been correctly
withheld: Provided, That an individual
deriving compensation concurrently from two
or more employers at any time during the
taxable year shall file an income tax return

[Sec. 51 (A) (2), NIRC of 1997, as amended by

Rep. Act No. 9504, paraphrasing supplied]

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

1997 in relation to Sec. 22 (HH), both as amended

by Rep. Act. 9504]

7.
Minimum wage earners
are exempt from income taxation.
That minimum wage earners (is a worker in
the private sector paid the statutory
minimum wage, or is an employee in the
public sector with compensation income of
not more than the statutory minimum wage
in the non-agricultural sector where he/she is
assigned) shall be exempt from the payment
of income tax on their taxable income:
Provided, further, That the holiday pay,
overtime pay, night shift differential pay and
hazard pay received by such minimum wage
earners shall likewise be exempt from income
tax. [Sec. 51 (A) (2), NIRC of 1997 in relation to Sec.
22 (HH), both as amended by Rep. Act. 9504]

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

9.
A corporation files its
income tax return and pays its
income tax four (4) times during a
single taxable year. Quarterly returns
are required to be filed for the first three

quarters, then a final adjustment return is filed

covering the total taxable income for the
whole taxable year, be it calendar or fiscal.

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

11. The purpose of the above

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

12. An
individual
earning
purely compensation income files
only one annual income tax return
covering the total taxable compensation

income for the whole of the previous calendar

year.

13. Under the withholding tax

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

14.
explicitly
under the
of the tax

A withholding agent is
made personally liable
Tax Code for the payment
required to be withheld, in

order to compel the withholding agent to

withhold the tax under any and all
circumstances. In effect, the responsibility for
the collection of the tax as well as the

59
payment thereof is concentrated upon the
person over whom the Government has
jurisdiction. (Filipinas Synthetic Fiber Corporation
v. Court of Appeals, et al., G.R. Nos. 118498 &
124377, October 12, 1999) The system facilitates
tax collection and reduces tax evasion.

15. The two (2) types of

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

The liability for payment of the tax rests

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

17. Under
the
creditable
withholding tax system, taxes
withheld
on
certain
income
payments are intended to equal or at
least approximate the tax due from
the payee on the said income. The

a.
National Government and its
instrumentalities including provincial, city, or
municipal governments;
b.
Persons enjoying exemption from
payment of income taxes pursuant to the
provisions of any law, general or special, such
as but not limited to the following:
1) Sales of real property by a
corporation which is registered with and
certified by the HLURB or HUDCC as
engaged in socialized housing project
where the selling price of the house and
lot or only the lot does not exceed
P180,000.00 in Metro Manila and other
highly urbanized areas and P150,000.00
in other areas or such adjusted amount
of selling price for socialized housing as
may later be determined and adopted
by the HLURB;
2) Corporations registered with
the Board of Investments and enjoying
exemptions from income under the
Omnibus Investment Code of 1997;
3)
Corporations exempt from
income tax under Sec. 30, of the Tax
Code, like the SSS, GSIS, the PCSO, etc.
However, income payments arising
from any activity which is conducted for
profit or income derived from real or
personal property shall be subject to a
withholding tax. (Sec. 57.5, Rev. Regs.
No. 2-98)

20. For tax amnesty purposes,

the withholding agent is not a
taxpayer. He is made to pay the tax where

income recipient is still required to file an

income tax return and/or pay the difference
between the tax withheld and the tax due on
the income. [1st and 2nd sentences, Sec. 257(B),

he fails to withhold as a penalty and not

because the tax is due from him.
(Commissioner of Internal Revenue v. Court of
Appeals, et al., G.R. No. 108576, January 20, 1999,
the Anscor case)

18. The
two
kinds
of
creditable withholding taxes are (a)

PENALTIES, INTERESTS AND

SURCHARGES

Rev. Regs. No. 2-98]

taxes withheld on income payments covered

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

19. Payments to the following

are exempt from the requirement of
withholding or when no withholding
taxes required:

1.
Surtaxes or surcharges, also
known as the civil penalties, are the amounts
imposed in addition to the tax required.
They are in the nature of penalties and
shall be collected at the same time, in the
same manner, and as part of the tax.
[Sec.248 (A), NIRC of 1997]

60

2.
What are the two (2)
kinds of civil penalties?
SUGGESTED ANSWER:
a.
the 25% surcharge for late filing
or late payment [Sec. 248 (A), NIRC of 1997]
(also known as the delinquency surcharge),
and
b.
the 50% willful neglect or fraud
surcharge. [Sec. 248 (B), Ibid.]

tax.

3.

Define deficiency income

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

4.
defined.

Deficiency

interest,

The interest assessed and

collected on any unpaid amount of tax at the
rate of 20% per annum or such higher rate as
may be prescribed by regulations, from the
date prescribed for payment until the amount
is fully paid. [Sec. 249 (A) (B), NIRC of 1997]

5.
defined.

Delinquency

interest,

The interest assessed and

collected on the unpaid amount until fully paid
where there is failure on the part of the
taxpayer to pay the amount die on any return
required to be filed; or the amount of the tax
due for which no return is required; or a
deficiency tax, or any surcharge or interest
thereon, on the date appearing in the notice
and demand by the Commissioner of Internal
Revenue. [Sec.249 (c), NIRC of 1997]

6.
After resolving the issues
the BIR Commissioner reduced the
assessment.
Was it proper to
impose delinquency interest despite
the reduction of the assessment?
Why?

SUGGESTED ANSWER:
Yes.
The
intention of the law is to discourage delay in
the payment of taxes due to the State and in
this sense the surcharge and interest charged
are not penal but compensatory in nature
they are compensation to the State for the
delay in payment, or for the concomitant tuse

of the funds by the taxpayer beyond the date

he is supposed to have paid them to the State.
(Bank of the Philippine Islands v. Commissioner of
Internal Revenue, G. R. No. 137002, July 27, 2006)

7.
Compromise penalty is the
amount agreed upon between the taxpayer
and the Government to be paid as a penalty in
cases of a compromise.
8.
As a result of divergent
rulings on whether it is subject to
tax or not, the taxpayer was not able
to pay his taxes on time. Imposed
surcharges and interests for such
delay, the taxpayer not invokes good
faith with the BIR countering by
saying that good faith is not a valid
defense for violation of a special
law. Furthermore, the BIR further
raises
the
defense
that
the
government is not bound by the
errors of its agents. Who is correct?

SUGGESTED ANSWER: The taxpayer is

correct. The settled rule is that good faith and
honest belief that one is not subject to tax on
the basis of previous interpretation of
government agencies tasked to implement the
tax, are sufficient justification to delete the
imposition of surcharges. (Michel J. Lhuillier
Pawnshop, Inc. v. Commissioner of Internal
Revenue, G. R. No. 166786, September 11, 2006)

REPUBLIC ACT NO. 1125,

CREATING THE COURT OF
TAX APPEALS INCLUDING
JURISDICTION OF THE CTA,
AS AMENDED
COURT OF
GENERAL

TAX

APPEALS,

IN

1. Discuss the role of the

judiciary in taxation.

SUGGESTED
ANSWER: The role of the judiciary is to be
the sympathetic or vigilant court which would
check injustices or abuses of the legislative
and administrative agents of the State in
their exercise of the power of taxation.

61

2. What is the nature and

composition of the Court of Tax
Appeals?

SUGGESTED ANSWER:
The
Court of Tax Appeals is the special tax court
created under Republic Act No. 1125, as
amended, and is composed of a Presiding
Justice and eight (8) Associate Justices,
organized into three (3) divisions.

3. What are the purposes

for the creation of the Court of Tax
Appeals?
SUGGESTED ANSWER:

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

4. Jurisdiction
Court of Tax Appeals.

of

the

a.
Exclusive
appellate
jurisdiction to review by appeal, as
herein provided:
1.
Decisions of the Commissioner of
Internal Revenue in cases involving disputed
assessments, refunds of internal revenue
taxes, fees or other charges, penalties, in
relation thereto, or other matters arising under
the National Internal Revenue Code or other
laws administered by the Bureau of Internal
Revenue; (DIVISION)
2.
Inaction by the Commissioner of
Internal Revenue in cases involving disputed
assessments, refunds or internal revenue
taxes, fees or other charges, penalties in
relation thereto, or other matter arising under
the National Internal Revenue Code or other
laws administered by the Bureau of Internal
Revenue, where the National Internal Revenue
Code provides a specific period of action, in
which case the inaction shall be deemed a
denial; (The inaction on refunds in two years
from the time tax was paid. Thus, if the
prescriptive period of two years is about to

expire, the taxpayer should interpose a

petition for review with the CTA DIVISION)
3.
Decisions, orders or resolutions
of the Regional Trial Courts in local tax cases
originally decided or resolved by them in the
exercise of their original or appellate
jurisdiction; (If original DIVISION; if appellate
EN BANC)
4.
Decisions of the Commissioner of
Customs in cases involving liability for customs
duties, fees or other money charges, seizure,
detention or release of property affected,
fines, forfeitures or other penalties in relation
thereto, or other matters arising under the
Customs Law or other laws administered by
the Bureau of Customs; (DIVISION)
5.
Decisions of the Central Board of
Assessment Appeals in the exercise of its
appellate jurisdiction over cases involving the
assessment and taxation of real property
originally decided by the provincial or city
board of assessment appeals; (EN BANC)
6.
Decisions of the Secretary of
Finance on customs cases elevated to him
automatically for review from decisions of the
Commissioner of Customs which are adverse
to the Government under Section 2315 of the
Tariff and Customs Code; (This has reference
to forfeiture cases where the decision is to
release the seized articles DIVISION)
7.
Decisions of the Secretary of
Trade and Industry, in case of nonagricultural
product, commodity or article, and the
Secretary of Agriculture in the case of
agricultural product, commodity or article,
involving dumping and countervailing duties
under Section 301 and 302, respectively, of
the Tariff and Customs Code, and safeguard
measures under Republic Act No. 8800, where
either party may appeal the decision to impose
or not to impose said duties. (DIVISION)
b.
Jurisdiction over cases
involving criminal offenses as herein
provided:
1.
Exclusive original jurisdiction
over all criminal cases arising from
violations of the National Internal Revenue
Code or Tariff and Customs Code and other
laws administered by the Bureau of Internal
Revenue or the Bureau of Customs: Provided,
however, That offenses or felonies mentioned
in this paragraph where the principal amount
of taxes and fees, exclusive of charges and
penalties claimed, is less than One million

62
pesos (P1,000,000.00) or where there is no
specified amount claimed shall be tried by the
regular Courts and the jurisdiction of the CTA
shall be appellate. Any provision of law or the
Rules
of
Court
to
the
contrary
notwithstanding, the criminal action and the
corresponding civil action for the recovery of
civil liability for taxes and penalties shall at all
times be simultaneously instituted with, and
jointly determined in the same proceeding by
the CTA, the filing of the criminal action being
deemed to necessarily carry with it the filing of
the civil action, and no right to reserve the
filing of such civil action separately from the
civil action will be recognized.
2.
Exclusive
appellate
jurisdiction in criminal offenses:
a)
Over appeals from the
judgments, resolutions or orders of
the
Regional Trial Courts in tax cases originally
decided by them, in
their
respective
territorial jurisdiction.
b)
Over petitions for review
of the judgments, resolutions
or orders of
the Regional Trial Courts in the exercise of
their appellate
jurisdiction over tax cases
originally decided by the Metropolitan Trial
Courts, Municipal Trial Courts and
Municipal Circuit Trial Courts in their
respective jurisdiction.
c.
Jurisdiction
over
tax
collection cases:
1.
Exclusive original jurisdiction in
tax collection cases involving final and
executory assessments for taxes, fees,
charges and penalties: Provided, however,
that collection cases where the principal
amount of taxes and fees, exclusive of charges
and penalties, claimed is less than One million
pesos (P1,000,000) shall be tried by the
proper Municipal Trial Court, Metropolitan Trial
Court and Regional Trial Court.
2.
Exclusive appellate jurisdiction in
tax collection cases:
a)
Over
appeals
from
judgments, resolutions, or orders of
the
Regional Trial Courts in tax collection cases
originally decided by
them,
in
their
respective territorial jurisdiction.
b)
Over petitions for review
of the judgments, resolutions
or orders of
the Regional Trial Courts in the exercise of
their appellate
jurisdiction
over
tax
collection cases originally decided by the

Metropolitan Trial Courts, Municipal

Trial Courts and Municipal Circuit Trial Courts,
in their respective jurisdiction. (Sec. 7, R. A.
No. 1125,
as amended by R. A. No. 9282,
emphasis and words in parentheses supplied)

The petition for review to be

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

5.

It is the Regional
Trial Court that has jurisdiction to
rule upon the constitutionality of a
tax law or a regulation issued by the
taxing authorities. Where what is
assailed is the validity or constitutionality of a
law, or a rule or regulation issued by the
administrative agency in the performance of
its quasi-legislative function, the regular
courts have jurisdiction to pass upon the
same.
The determination of whether a
specific rule or set of rules issued by an
administrative agency contravenes the law or
the constitution is within the jurisdiction of
the regular courts.
Indeed, the Constitution vests the
power of judicial review or the power to
declare a law, treaty, international or
executive agreement, presidential decree,
order, instruction, ordinance, or regulation in
the courts, including the regional trial courts.
This is within the scope of judicial power,
which includes the authority of the courts to
determine in an appropriate action the
validity of the acts of the political
departments. Judicial power includes the

63
duty of the courts of justice to settle actual
controversies involving rights which are
legally demandable and enforceable, and to
determine whether or not there has been a
grave abuse of discretion amounting to lack
or excess of jurisdiction on the part of any
branch or instrumentality of the Government.
(British American Tobacco v. Camacho et al., G. R.
No. 163583, August 20, 2008 with an intervenor)

NOTES AND COMMENTS: The above

doctrine
supersedes
Asia International

Auctioneers, Inc., etc et al., .v. Parayno, Jr.,

etc.,, et al., G. R. No. 103445, December 18,

2007 which ruled that it is the Court of Tax

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

6.
Instances
where
the
Court of Tax Appeals would have
jurisdiction even if there is no
decision of the Commissioner of
Customs:

a.
Decisions of the Secretary of
Trade and Industry or the Secretary of
Agriculture in anti-dumping and countervailing
duty cases are appealable to the Court of Tax
Appeals within thirty (30) days from receipt of
such decisions.
b. In case of automatic review by the
Secretary of Finance in seizure or forfeiture
cases where the value of the importation
exceeds P5 million or where the decision of
the Collector of Customs which fully or partially
releases the shipment seized is affirmed by
the Commissioner of Customs.
c. In case of automatic review by the
Secretary of Finance of a decision of a
Collector of Customs acting favorably upon a
customs protest.

ASSESSMENT
OF
REVENUE TAXES

INTERNAL

1. Outline of tax remedies

of a taxpayer and the government
relative to ASSESSMENT of internal
revenue taxes.
a. The taxpayer files his tax return.
b. A Letter of Authority is issued
authorizing BIR examiner to audit or examine
the tax return and determines whether the full
and complete taxes have been paid.
c. If the examiner is satisfied that
the tax return is truly reflective of the taxable
transaction and all taxes have been paid, the
process ends. However, if the examiner is not
satisfied that the tax return is truly reflective
of the taxable transaction and that the taxes
have not been fully paid, a Notice of Informal
Conference is issued inviting the taxpayer to
explain why he should not be subject to
additional taxes.
d. If the taxpayer attends the
informal conference and the examiner is
satisfied with the explanation of the taxpayer,
the process is again ended.
If the taxpayer ignores the invitation
to the informal conference, or if the examiner
is not satisfied with taxpayers explanation,
and he believes that proper taxes should be
assessed, the Commissioner of Internal
Revenue or his duly authorized representative
shall then notify the taxpayer of the findings in
the form of a pre-assessment notice. The preassessment notice requires the taxpayer to
explain within fifteen (15) days from receipt
why no notice of assessment and letter of
demand for additional taxes should be
directed to him.
e.
If the Commissioner is satisfied
with the explanation of the taxpayer, then the
process is again ended.
If the taxpayer ignores the preassessment notice by not responding or his
explanations are not accepted by the
Commissioner, then a notice of assessment
and a letter of demand is issued.
The notice of assessment must be
issued by the Commissioner to the taxpayer
within a period of three (3) years from the
time the tax return was filed or should have
been filed whichever is the later of the two
events. Where the taxpayer did not file a tax
return or where the tax return filed is false or
fraudulent, then the Commissioner has a
period of ten (10) years from discovery of the

64
failure to file a tax return or from discovery of
the fraud within which to issue an assessment
notice. The running of the above prescriptive
periods may however be suspended under
certain instances.
The notice of assessment must be
issued within the prescriptive period and must
contain the facts, law and jurisprudence relied
upon by the Commissioner. Otherwise it
would not be valid.
f.
The taxpayer should then file an
administrative protest by filing a request for
reconsideration or reinvestigation within thirty
(30) days from receipt of the assessment
notice.
The taxpayer could not immediately
interpose an appeal to the Court of Tax
Appeals because there is no decision yet of
the Commissioner that could be the subject of
a review.
To be valid the administrative protest
must be filed within the prescriptive period,
must show the error of the Bureau of Internal
Revenue and the correct computations
supported by a statement of facts, and the law
and jurisprudence relied upon by the taxpayer.
There is no need to pay under protest. If the
protest was not seasonably filed, the
assessment becomes final and collectible and
the Bureau of Internal Revenue could use its
administrative and judicial remedies in
collecting the tax.
g. Within sixty (60) days from filing
of the protest, all relevant supporting
documents shall be submitted, otherwise the
assessment shall become final and collectible
and the BIR could use its administrative and
judicial remedies to collect the tax.
Once an assessment has become final
and
collectible,
not
even
the
BIR
Commissioner could change the same. Thus,
the taxpayer could not pay the tax, then apply
for a refund, and if denied appeal the same to
the Court of Tax Appeals.
h. If the protest is denied in whole
or in part, or is not acted upon within one
hundred eighty (180) days from the
submission of documents, the taxpayer
adversely affected by the decision or inaction
may appeal to the Court of Tax Appeals within
thirty (30) days from receipt of the adverse
decision, or from the lapse of the one hundred
eighty (180-) day period, with an application
for the issuance of a writ of preliminary

injunction to enjoin the BIR from collecting the

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

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

65
Corporation, et al., G.R. No. 128315, June 29,
1999)

For internal revenue taxation

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

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

4.
defined.

Self-assessed

tax,

A tax that the taxpayer himself

assesses or computes and pays to the taxing
authority. It is a tax that self-assessed by the
taxpayer without the intervention of an
assessment by the tax authority to create the
tax liability.
The Tax Code follows the pay-as-youfile system of taxation under which the
taxpayer computes his own tax liability,
prepares the return, and pays the tax as he
files the return. The pay-as-you-file system is
a self-assessing tax return.
Internal revenue taxes are selfassessing. (Dissent of J. Carpio in Philippine
National Oil Company v. Court of Appeals, et al., G.
R. No. 109976, April 26, 2005 and companion case)

A clear example of a self-assessed tax is

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

5.

Sec. 6 (B) of the NIRC

of 1997 allows the BIR to make or
amend a tax return from his own
knowledge or obtained through
testimony or otherwise. Thus, the

Commissioner
of
Internal
Revenue
investigates any circumstance which led him
to believe that the taxpayer had taxable
income larger than that reported. Necessarily,
this inquiry would have to be outside of the
books because they supported the return as
filed. He may take the sworn testimony of the
taxpayer, he may take the testimony of third
parties; he may examine and subpoena, if
necessary, traders and brokers accounts and
books and the taxpayers books of accounts.
The Commissioner is not bound to follow any
set of patterns. The existence of unreported
income may be shown by any particular proof
that is available in the circumstances of the
particular situation. (Commissioner of Internal
Revenue v. Hantex Trading Co., Inc. G. R. No.
136975, March 31, 2005)

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

in the absence of accounting records of a

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

However, the rule does not apply where

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

7.
Meaning of "best evidence
obtainable" under Sec. 6 (B), NIRC of 1997.

This means that the original documents must

be produced. If it could not be produced,
secondary evidence must be adduced. (Hantex
Trading Co., Inc. v. Commissioner of Internal
Revenue, CA - G.R. SP No. 47172, September 30,
1998)

66

8.

The following are the

general methods developed by the
Bureau of Internal Revenue for
reconstructing a taxpayers income

where the records do not show the true

income or where no return was filed or what
was filed was a false and fraudulent return
(a) Percentage method;
(b) Net worth method.;
(c) Bank deposit method;
(d) Cash expenditure method;
(e) Unit and value method;
(f) Third party information or access
to records method;
(g)
Surveillance and assessment
method. (Chapter XIII. Indirect Approach to
Investigation, Handbook on Audit Procedures
and Techniques Volume I, pp. 68-74)

9. Third party information

or access to records method. The BIR

may require third parties, public or private to

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

10. A pre-assessment notice is

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

be given notice in the form of a preassessment notice, and for him to explain why
he should not be the subject of an assessment
notice.

11.

Instances where a
pre-assessment
notice
is
not
required
before
a
notice
of
assessment is sent to the taxpayer.

a. When the finding for any deficiency

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

12. Prescriptive periods

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

b. ten years from discovery of the

failure to file the tax return or discovery of
falsity or fraud in the return [Sec. 222 (a), NIRC
of 1997[ ; or

67
c. within the period agreed upon
between the government and the taxpayer
where there is a waiver of the prescriptive
period for assessment (Sec. 222 (b), NIRC of
1997).

13. Purpose of period of

limitations in taxation. For the purpose
of
safeguarding
taxpayers
from
any
unreasonable examination, investigation or
assessment, our tax law provides a statute of
limitations in the collection of taxes.
[Commissioner of Internal Revenue v. B.F. Goodrich
Phils, Inc., (now Sime Darby International Tire Co.,
Inc.), et al., G.R. No. 104171, February 24, 1999,
303 SCRA 546; Philippine Journalists, Inc. v.
Commissioner of Internal Revenue, G. R. No.
162852, December 16, 2004], as well as their
assessments.
The law prescribing a limitation of
actions for the collection of the income tax is
beneficial both to the Government and to its
citizens; to the Government because tax
officers would be obliged to act promptly in
the making of assessment, and to citizens
because after the lapse of the period of
prescription citizens would have a feeling of
security against unscrupulous tax agents who
will always find an excuse to inspect the books
of taxpayers, not to determine the latters real
liability, but to take advantage of every
opportunity to molest peaceful, law-abiding
citizens. Without such a legal defense
taxpayers, would furthermore be under
obligation to always keep their books and
keep them open for inspection subject to
harassment by unscrupulous tax agents. The
law on prescription being a remedial measure
should be interpreted in a way conducive to
bringing about the beneficent purpose of
affording protection to the taxpayer within the
contemplation of the Commission which
recommend the approval of the law. [Bank of
Philippine Islands (Formerly Far East Bank and
Trust Company) v. Commissioner of Internal
Revenue, G. R. No. 174942, March 7, 2008]
This mandate governs the question of
prescription of the governments right to
assess internal revenue taxes primarily to
safeguard the interests of taxpayers from
unreasonable investigation. Accordingly, the
government must assess internal revenue
taxes on time so as not to extend indefinitely
the period of assessment and deprive the

taxpayer of the assurance that it will no

longer be subjected to further investigation
for taxes after the expiration of reasonable
period of time.
(Commissioner of Internal
Revenue v. FMF Development Corporation, G. R.
No. 167765, June 30, 2008 citing Philippine
Journalists, Inc. v. Commissioner of Internal
Revenue G.R. No. 162852, December 16, 2004,
447 SCRA 214, 225)

14.
Unreasonable
investigation contemplates cases
where the period for assessment
extends indefinitely because this

deprives the taxpayer of the assurance that it

will not longer be subjected to further
investigation for taxes after the expiration of a
reasonable period of time.
(Philippine
Journalists, Inc. v. Commissioner of Internal
Revenue, G. R. No. 162852, December 16, 2004
with note to see Republic v. Ablaza, 108 Phil. 1105.
1108)

Laws on prescription should be liberally

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

The prescriptive period was precisely

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

15.

A jeopardy assessment

is a delinquency tax assessment which was

assessed without the benefit of complete or
partial audit by an authorized revenue officer,
who has reason to believe that the
assessment and collection of a deficiency tax
will be jeopardized by delay because of the
taxpayers failure to comply with the audit and
investigation requirements to present his

68
books of accounts and/or pertinent records, or
to substantiate all or any of the deductions,
exemptions, or credits claimed in his return.
[Sec. 3.1 (a), Rev. Regs. No. 6-2000)
Jeopardy assessment is an indication of
the doubtful validity of the assessment, hence
it may be subject to a compromise. [Sec. 3.1
(a), Rev. Regs. No. 6-2000]

16. Requisites

for
and

Formal Letter of Demand

Assessment Notice. The formal letter of

demand and assessment notice shall be

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

17.
What are the
requirements for the validity of a
formal letter of demand and
assessment notice?

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

18. What are the reasons for

presumption of correctness of
assessments?

SUGGESTED ANSWER:
a.
Lifeblood theory
b.
Presumption
of
regularity
(Commissioner of Internal Revenue v. Hantex
Trading Co., Inc., G, R. No. 136975, March 31,
2005) in the performance of public functions.
(Commissioner of Internal Revenue v. Tuazon, Inc.,
173 SCRA 397)

c.
The likelihood that the taxpayer
will have access to the relevant information
[Commissioner of Internal Revenue, supra citing
United States v. Rexach, 482 F.2d 10 (1973). The

certiorari was denied by the United States Supreme

Court on November 19, 1973]

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

19. Give instances where

prima facie correctness of a tax
assessment does not apply.
SUGGESTED ANSWER:
The prima
facie correctness of a tax assessment does not

apply upon proof that an assessment is utterly

without foundation, meaning it is arbitrary and
capricious. Where the BIR has come out with
a naked assessment i.e., without any
foundation character, the determination of the
tax due is without rational basis.
[Commissioner of Internal Revenue v. Hantex
Trading Co., Inc., G, R. No. 136975, March 31,
2005 citing United States v. Janis, 49 L. Ed. 2d 1046
(1976); 428 US 433 (1976)] In such a situation,
the determination of the Commissioner
contained in a deficiency notice disappears.
[Commissioner of Internal Revenue, supra citing a
U.S. Court of Appeals ruling, in Clark and Clark v.
Commissioner of Internal Revenue, 266 F. 2d 698
(1959)] Hence, the determination by the CTA
must rest on all the evidence introduced and
its ultimate determination must find support in
credible evidence. [Commissioner of Internal
Revenue, supra]

20. What
are
the
instances that suspends the running
of the prescriptive periods (Statute
of Limitations) within which to make
an assessment and the beginning of
distraint or levy or of a proceeding in
court for the collection, in respect of
any tax deficiencies?

SUGGESTED ANSWER:
a.
When the Commissioner is
prohibited from making the assessment, or
beginning distraint, or levy or proceeding in
court and for sixty (60) days thereafter;
b.
When the taxpayer requests for
and is granted a reinvestigation by the
commissioner;

69
c.
When the taxpayer could not be
located in the address given by him in the
return filed upon which the tax is being
assessed or collected;
d.
When the warrant of distraint
and levy is duly served upon the taxpayer, his
authorized representative, or a member of his
household with sufficient discretion, and no
property could be located; and
e.
When the taxpayer is out of the
Philippines.
NOTES AND COMMENTS:
The holding in Commissioner of Internal
Revenue v. Court of Appeals, et al., G.R. No.
115712, February 25, 1999 (Carnation case)
that the waiver of the period for assessment
must be in writing and have the written
consent of the BIR Commissioner is still
doctrinal because of the provisions of Sec.
223, NIRC of 1997 which provides for the
suspension of the prescriptive period:

21. Under RMO No. 2090, which implements Sections 203

and
222
(b),
the
following
procedures should be followed for a
valid waiver of the prescriptive
period for an assessment:
a.
The waiver must be in the
proper form;
b.
The waiver shall be signed by the
taxpayer himself or his duly authorized
representative. In the case of a corporation,
the waiver must be signed by any of its
responsible officials.
Soon after the waiver is signed by the
taxpayer, the Commissioner of Internal
Revenue or the revenue official authorized by
him, as hereinafter provided, shall sign the
waiver indicating that the Bureau has
accepted and agreed to the waiver. The
date of such acceptance by the Bureau
should be indicated. Both the date of
execution by the taxpayer and date of
acceptance by the Bureau should be before
the expiration of the period of prescription or
before the lapse of the period agreed upon in
case a subsequent agreement is executed.
c.
The following revenue officials
are authorized to sign the waiver.

Office

A.

In

the

National

xxxx

3.
Commissioner
For tax cases involving more than
P1M
B.
In the Regional Offices
1.
The
Revenue District Officer with respect to tax
cases still pending investigation and the
period to assess is
about to prescribe
regardless of amount.
xxxx
d. The waiver must be
executed in three (3) copies, the original
copy to be attached to the docket of the
case, the second copy for the taxpayer
and the third copy for the Office accepting
the waiver. The fact of receipt by the
taxpayer of his/her file copy shall be
indicated in the original copy.
d.
The foregoing procedures shall be
strictly followed.
Any revenue official
found not to have complied with this Order
resulting in prescription of the right to
assess/collect shall be administratively dealt
with. (Renumbering and emphasis supplied.)
If the above are not followed there is
no valid waiver and prescription would run.
(Commissioner of Internal Revenue v. FMF
Development Corporation, G. R. No. 167765, June
30, 2008 citing Philippine Journalists, Inc. v.
Commissioner of Internal Revenue G.R. No.

162852, December 16, 2004, 447 SCRA 214, 228229)

22.

The procedures in
RMO No. 20-90 are NOT merely
directory and that the execution of a
waiver is a renunciation of a
taxpayers
right
to
invoke
prescription. RMO No. 20-90 must
be strictly followed. A waiver of the
statute of limitations under the NIRC, to a
certain extent being a derogation of the
taxpayers right to security against prolonged
and unscrupulous investigations, must be
carefully and strictly construed. The waiver of
the statute of limitations does not mean that
the taxpayer relinquishes the right to invoke

70
prescription unequivocally, particularly where
the language of the document is equivocal.
Thus, a waiver becomes unlimited in
time, and invalid, because it did not specify a
definite date, agreed upon between the BIR
and the taxpayer, within which the former
may assess and collect taxes. It also would
have no binding effect on the taxpayer if there
was no consent by the Commissioner. On this
basis, no implied consent can be presumed,
nor can it be contended that the concurrence
to such waiver is a mere formality.
(Commissioner of Internal Revenue v. FMF
Development Corporation, G. R. No. 167765, June
30, 2008 citing Philippine Journalists, Inc. v.
Commissioner of Internal Revenue G.R. No.
162852, December 16, 2004, 447 SCRA 214, 229
in turn citing Id. at 229, citing Commissioner of
Internal Revenue v. Court of Appeals, G.R. No.
115712, February 25, 1999, 303 SCRA 614, 620622.)

23. BIR cannot rely on its

invocation of the rule that the
government cannot be estopped by
the mistakes of its revenue officers in
the enforcement of RMO No. 20-90

because the law on prescription should be

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

24. The signatures of

both the Commissioner and the
taxpayer, are required for a waiver
of the prescriptive period, thus a

unilateral waiver on the part of the taxpayer

does not suspend the prescriptive period.
[Commissioner of Internal Revenue v. Court of
Appeals, et al., G.R. No. 115712, February 25, 1999
(Carnation case)]

47. The act of requesting a

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

PROTESTING INTERNAL REVENUE

TAX ASSESSMENTS
1. What is the presumption that
flows from a taxpayers failure to
protest an assessment?

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

18 August 1988, 164 SCRA 524, 530, citations

omitted)

2.

What are the two

ways of protesting an assessment
notice for an internal revenue tax?
Alternatively, what are the two
types of protests? Explain briefly.
SUGGESTED ANSWER:

71
a.
Request
for
reconsideration
which refers to a plea for re-evaluation of an
assessment on the basis of existing records
without need of additional evidence. It may
involve both a question of fact or of law or
both.
b.
Request for reinvestigation which
refers to a plea for re-evaluation of an
assessment on the basis of newly-discovered
evidence or additional evidence that a
taxpayer intends to present in the
investigation. It may also involve a question
of fact or law or both. (Commissioner of Internal
Revenue v. Philippine Global Communication, Inc.,
G. R. No. 167146, October 31, 2006 citing Rev.
Regs. No. 12-85)

3.

What is that type of

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

reinvestigation, the time employed in

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

Undoubtedly, a reinvestigation, which

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

No. 139736, 17 October 2005, 473 SCRA 205, 230231)

4.

What
are
the
requirements for the validity of a
taxpayers protest?

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

5. Relevant supporting
documents, defined.
The term

relevant supporting documents should be

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

JUDICIAL REMEDIES INVOLVING

PROTESTED ASSESSMENTS

72

1.
Acts of BIR
Commissioner
that
may
be
considered as denial of a protest
which serve as basis for appeal to
the Court of Tax Appeals.

a.
Filing by the BIR of a civil suit for
collection of the deficiency tax is considered a
denial of the request for reconsideration.
(Commissioner of Internal Revenue v. Union
Shipping Corporation, 185 SCRA 547)
b.
An indication to the taxpayer by
the Commissioner in clear and unequivocal
language of his final denial not the issuance
of the warrant of distraint and levy. What is
the subject of the appeal is the final decision
not the warrant of distraint? (Ibid.)
c.
A BIR demand letter sent to the
taxpayer after his protest of the assessment
notice is considered as the final decision of the
Commissioner on the protest. (Surigao Electric
Co., Inc. v. Court of Tax Appeals, et al., 57 SCRA
523)

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

e.
Final notice before seizure
considered as commissioners decision of
taxpayers request for reconsideration who
received no other response. Commissioner of

Internal Revenue v. Isabela Cultural

Corporation, G.R. No. 135210, July 11, 2001
held that not only is the Notice the only
response received: its content and tenor
supports the theory that it was the CIRs final
act regarding the request for reconsideration.
The very title expressly indicated that it was a
final notice prior to seizure of property. The
letter itself clearly stated that the taxpayer
was being given this LAST OPPORTUNITY to
pay; otherwise, its properties would be
subjected to distraint and levy.

2.
The taxpayer seasonably
protested the assessment issued by
the
Commissioner
of
Internal
Revenue. During the pendency of
the protest the CIR issued a warrant
of distraint and levy to collect the
taxes subject of the protest.

As counsel, what advice shall

you give the taxpayer.
Explain
briefly your answer.

SUGGESTED ANSWER: The taxpayer

should appeal, by way of a petition for review,
to the Court of Tax Appeals not on the ground
of the denial of the protest but on other
matter arising under the provisions of the
National Internal Revenue Code. The actual
issuance of a warrant of distraint and levy in
certain cases cannot be considered a final
decision on a disputed assessment.
To be a valid decision on a disputed
assessment, the decision of the Commissioner
or his duly authorized representative shall (a)
state the facts, the applicable law, rules and
regulations, or jurisprudence on which such
decision is based, otherwise, the decision shall
be void, in which case the same shall not be
considered a decision on the disputed
assessment; and (b) that the same is his final
decision. (Sec. 3.1.6, Rev. Regs. 12-99) These
conditions are not complied with by the mere
issuance of a warrant of distraint and levy.
(Commissioner of Internal Revenue v. Union
Shipping Corp., 185 SCRA 547)
Furthermore, a motion for the
suspension of the collection of the tax may be
filed together with the petition for review (Sec.
3, Rule 10, RRCTA effective December 15, 2005)

because the collection of the tax may

jeopardize the interest of the taxpayer.

3.
As a general rule, there
must always be a decision of the
Commissioner of Internal Revenue
or Commissioner of Customs before
the Court of Tax Appeals, would
have jurisdiction. If there is no such
decision, the petition would be dismissed for
lack of jurisdiction unless the case falls under
any of the following exceptions.

4.
Instances
where
the
Court of Tax Appeals would have
jurisdiction even if there is no
decision yet by the Commissioner of
Internal Revenue:

a. Where the Commissioner has not

acted on the disputed assessment after a
period of 180 days from submission of
complete supporting documents, the taxpayer

73
has a period of 30 days from the expiration of
the 180-day period within which to appeal to
the Court of Tax Appeals. (last par., Sec. 228
(e), NIRC of 1997; Commissioner of Internal
Revenue v. Isabela Cultural Corporation, G.R. No.
135210, July 11, 2001)

b. Where the Commissioner has not

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

5.
The characteristic of
a BIR denial of a protest such as
would enable the taxpayer to appeal
the same to the Court of Tax
Appeals. The Commissioner of Internal
Revenue should always indicate to the
taxpayer in clear and unequivocal language
whenever his action on an assessment
questioned by a taxpayer constitutes his final
determination on the disputed assessment.
On the basis of his statement
indubitably showing that the Commissioners
communicated action is his final decision on
the contested assessment, the aggrieved
taxpayer would then be able to take recourse
to the tax court at the opportune time.
Without needless difficulty, the taxpayer would
be able to determine when his right to appeal
to the tax court accrues. (Commissioner of
Internal Revenue v. Bank of the Philippines Islands,
G. R. No. 134062, April 17, 2007)

COLLECTION
OF
REVENUE TAXES

INTERNAL

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

2.
Why is the collection of
taxes imprescriptible?

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

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

3.
What is the prescriptive
period
for
collecting
internal
revenue taxes?

SUGGESTED ANSWER: There are four

(4) prescriptive periods for the collection of an
internal revenue tax:
a.
Collection upon a false or
fraudulent return or no return without
assessment. In case of a false or fraudulent
return with the intent to evade tax or of failure
to file a return, a proceeding in court for the
collection of such tax may be filed without
assessment, at any time within ten (10) years
after the discovery of the falsity, fraud or
omission. [Sec. 222 (a), NIRC of 1997]
b.
Collection upon a false or
fraudulent return or no return with
assessment. Any internal revenue tax which
has been assessed (because the return is false
or fraudulent with intent to evade tax or of
failure to fail a return), within a period of ten
(10) years from discovery of the falsity, fraud
or omission may be collected by distraint
or levy or by a proceeding in court within
five (5) years following the assessment
of the tax. [Sec. 222 (c), in relation to Sec. 222
(a) NIRC of 1997, emphasis supplied]

c.
Collection upon an extended
assessment. Where a tax has been assessed
with the period agreed upon between the
Commissioner and the taxpayer in writing

74
(which should initially be within three (3) years
from the time the return was filed or should
have been filed), or any extensions before the
expiration of the period agreed upon, the tax
may be collected by distraint or levy or
by a proceeding in court within the
period agreed upon in writing before the
expiration of the five (5) year period.
The period so agreed upon may be extended
by subsequent written agreements made
before the expiration of the period previously
agreed upon. [Sec. 222 (d), in relation to Secs.
222 (b) and 203, NIRC of 1997, emphasis supplied]

d.
Collection upon a return that is
not false or fraudulent, or where the
assessment is not an extended assessment.
Except as provided in Section 222, internal
revenue taxes shall be assessed within three
(3) years after the last day prescribed by law
for the filing of the return, and no
proceeding in court without assessment
for the collection of such taxes shall be
begun after the expiration of such
period; Provided, that in case where a return
is filed beyond the period prescribed by law,
the three (3) year period shall be computed
from the day the return was filed.
For
purposes of this Section, a return filed before
the last day prescribed by law for the filing
thereof shall be considered filed on such last
day. (Sec. 203, NIRC of 1997, emphasis supplied)
When the BIR validly issues an
assessment within the three (3)-year period,
it has another three (3) years within which to
collect the tax due by distraint, levy, or court
proceeding. The assessment of the tax is
deemed made and the three (3)-year period
for collection of the assessed tax begins to
run on the date the assessment notice had
been released, mailed or sent to the
taxpayer. [Bank of Philippine Islands (Formerly
Far East Bank and Trust Company) v.
Commissioner of Internal Revenue, G. R. No.
174942, March 7, 2008 citing
BPI v.
Commissioner of Internal Revenue, G.R. No.
139736, 17 October 2005, 473 SCRA 205, 222223]

NOTES AND COMMENTS:

a.
Both the former Sec. 269,
NIRC of 1977 and Sec.222 of NIRC of
1997 do not refer to a regular return.
It is clear that in enacting Sec. 222, entitled
Exceptions as to the period of limitation of
assessment and collection of taxes, the NIRC

of 1997 has eliminated sub-paragraph c of the

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

4. What is a compromise?
SUGGESTED ANSWER: A compromise
is a contract whereby the parties, by making
reciprocal concessions, avoid a litigation or put
an end to one already commenced. (Art. 2028,
Civil Code)

A compromise penalty could not be

imposed by the BIR, if the taxpayer did not
agree. A compromise being, by its nature,
mutual in essence requires agreement. The
payment made under protest could only
signify that there was no agreement that had
effectively been reached between the parties.
(Vda. de San Agustin, et al., v. Commissioner of

75
Internal Revenue, G. R. No. 138485, September 10,
2001)

5. What tax cases may be

the subject of a compromise?

SUGGESTED ANSWER: The following

cases may, upon taxpayers compliance with
the basis for compromise, be the subject
matter of compromise settlement:
a. Delinquent accounts;
b. Cases
under
administrative
protest after issuance of the Final Assessment
Notice to the taxpayer which are still pending
in the Regional Offices, Revenue District
Offices, Legal Service, Large Taxpayer Service
(LTS), Collection Service, Enforcement Service
and other offices in the National Office;
c.
Civil tax cases being disputed
before the courts;
d. Collection cases filed in courts;
e. Criminal violations, other than
those already filed in court, or those involving
criminal tax fraud. (Sec. 2, Rev. Regs. No. 302002)

6. What tax cases could

not be the subject of compromise?
SUGGESTED ANSWER:
a. Withholding tax cases unless the
applicant-taxpayer invokes provisions of law
that cast doubt on the taxpayers obligation to
withhold.;
b. Criminal tax fraud cases, confirmed
as such by the Commissioner of Internal
Revenue or his duly authorized representative;
c. Criminal violations already filed in
court;
d. Delinquent accounts with duly
approved schedule of installment payments;
e. Cases where final reports of
reinvestigation or reconsideration have been
issued resulting to reduction in the original
assessment and the taxpayer is agreeable to
such decision by signing the required
agreement form for the purpose. On the
other hand, other protested cases shall be
handled by the Regional Evaluation Board
(REB) or the National Evaluation Board (NEB)
on a case to case basis;
f.
Cases which become final and
executory after final judgment of a court
where compromise is requested on the ground
of doubtful validity of the assessment; and

g. Estate
tax
cases
where
compromise is requested on the ground of
financial incapacity of the taxpayer. (Sec. 2,
Rev. Regs. No. 30-2002)

7.
When may the
Commissioner of Internal Revenue
compromise the payment of any
internal revenue tax? Alternatively,
what are the grounds for a
compromise, and what are the
amounts for which a compromise
may be entered into?
SUGGESTED ANSWER:
a. A reasonable doubt as to the
validity of the claim against the taxpayer exists
provided that the minimum compromise
entered into is equivalent to forty percent
(40%) of the basic tax; or
b. The financial position of the
taxpayer demonstrates a clear inability to pay
the assessed tax provided that the minimum
compromise entered into is equivalent to ten
percent (10%) of the basic assessed tax
In
the
above
instances
the
Commissioner is allowed to enter into a
compromise only if the basic tax involved does
not exceed One million pesos (P1,000,000.00),
and the settlement offered is not less than the
prescribed percentages. [Sec. 204 (A), NIRC of
1997]

In instances where the Commissioner is

not authorized, the compromise shall be
subject to the approval of the Evaluation
Board composed of the Commissioner and the
four (4) Deputy Commissioners.

8.
When
is
the
Commissioner of Internal Revenue
authorized to abate or cancel a tax
liability?

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

9.
The collection of a tax
may not be suspended. Only the Court

76
of Tax Appeals may issue an order suspending
the collection of a tax.

10. As a general rule, No

with the petition for review or with the

answer, or in a separate motion filed by the
interested party at any stage of the
proceedings. (Sec. 3, Rule 10, RRCTA effective

court shall have the authority to

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

REFUND OF INTERNAL REVENUE

TAXES

NIRC)

No appeal taken to the CTA from the

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

The Supreme Court may enjoin the

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

11.

What
is
procedure
for
suspension
collection of taxes?

the
of

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

December 15, 2005)

1.

What
are
the
grounds for refund or credit of
internal revenue taxes?

SUGGESTED ANSWER: The grounds for

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

2.

What are the three

(3) conditions for the grant of a
claim for refund of creditable
withholding tax?

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

NOTES AND COMMENTS:

a.
Proof of fact of withholding.
Sec. 10. Claim for tax credit or refund. (a)
Claims for Tax Credit or Refund of Income tax
deducted and withheld on income payments
shall be given due course only when it is
shown on the return that the income payment
received has been declared as part of the

77
gross income and the fact of withholding is
established by a copy of the Withholding Tax
Statement duly issued by the payor to the
payee showing the amount paid and the
amount of the tax withheld therefrom xxx
(Rev. Regs. No. 6-85, as amended)
The document which may be accepted
as evidence of the third condition, that is, the
fact of withholding, must emanate from the
payor itself, and not merely from the payee,
and must indicate the name of the payor, the
income payment basis of the tax withheld, the
amount of the tax withheld and the nature of
the tax paid.
(Banco Filipino Savings and
Mortgage Bank v. Court of Appeals, et al., G. R. No.
155682, March 27, 2007)

3.
What
should
be
established by a taxpayer for the
grant of a tax refund? Why?

SUGGESTED ANSWER:
A taxpayer
needs to establish not only that the refund is
justified under the law, but also the correct
amount that should be refunded.
If the latter requisite cannot be
ascertained with particularity, there is cause to
deny the refund, or allow it only to the extent
of the sum that is actually proven as due.
Tax refunds partake of the nature of tax
exemptions and are thus construed strictissimi
juris against the person claiming the
exemption. The burden in proving the claim
for refund necessarily falls on the taxpayer.
(Far East Bank Trust and Company, etc., v.
Commissioner of Internal Revenue, et al., G. R. No.
138919, May 2, 2006)

4.

What is the legal

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

5.
The two (2) year
period and the thirty (30) day period
should be applied on a whichever
comes first basis. Thus, if the 30 days is

within the 2 years, the 30 days applies, if the

2-year period is about to lapse but there is no
decision yet by the Commissioner which would
trigger the 30-day period, the taxpayer should
file an appeal, despite the absence of a
decision. (Commissioners, etc. v. Court of Tax
Appeals, et al., G. R. No. 82618, March 16, 1989,
unrep.)

6. Where the taxpayer is

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

It is only when the return, covering

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

7.

What
is
solutio
indebiti as applied to tax cases?
SUGGESTED ANSWER:
Under the
principle of solutio indebiti provided in Art.
2154, Civil Code, If something is received
when there is no right to demand it, and it
was unduly delivered through mistake, the
obligation to return it arises. The BIR
received something when there [was] no
right to demand it, and thus, it has the
obligation to return it.
[State Land

Investment Corporation v. Commissioner of

Internal Revenue, G. R. No. 171956, January
18, 2008citing Citibank, N. A. v. Court of
Appeals and Commissioner of Internal
Revenue, G.R. No. 107434, October 10,
1997, 280 SCRA 459, in turn citing Ramie
Textiles, Inc. v. Mathay, Sr., 89 SCRA 586
(1979)]. It is an ancient principle that no
one, not even the state, shall enrich oneself

78
at the expense of another. Indeed, simple
justice requires the speedy refund of the
wrongly held taxes. (Ibid.)

8.

Why

is

it

To afford the Commissioner an opportunity to

correct his errors or that of subordinate
officers. (Gonzales v. Court of Tax Appeals, et al.,
14
SCRA79)

b.
To notify the Government that
such taxes have been questioned and the
notice should be borne in mind in estimating
the revenue available for expenditures.

9.

As a general rule the

filing of an application for refund or
credit with the Bureau of Internal
Revenue
is
an
administrative
precondition before a suit may be
filed with the Court of Tax Appeals?

SUGGESTED ANSWER: Yes. The failure to

first file a written claim for refund or credit is
not fatal to a petition for review involving a
disputed assessment where an assessment
was disputed but the protest was denied by
the Bureau of Internal Revenue. To hold that
the taxpayer has now lost the right to appeal
from the ruling on the disputed assessment
and require him to file a claim for a refund of
the taxes paid as a condition precedent to his
right to appeal, would in effect require of him
to go
through a useless and needless
ceremony that would only delay the
disposition of the case, for the Commissioner
would certainly disallow the claim for refund in
the same way as he disallowed the protest
against the assessment. The law, should not
be interpreted as to result in absurdities. (vda.
de San Agustin., etc., v. Commissioner of Internal
Revenue, G.R. No. 138485, September 10, 2001
citing Roman Catholic Archbishop of Cebu v.
Collector of Internal Revenue, 4 SCRA 279) NOTE:
Reconciliation between above two
numbers (8 and 9). An application for
refund or credit under Sec. 229 of the NIRC of
1997 is required where the case filed before
the CTA is a refund case, which is not
premised upon a disputed assessment. There
is no need for a prior application for refund or
credit, if the refund is merely a consequence

of the resolution of the BIRs denial of a

protested assessment.

necessary

to Who could
file applyan
10.
for a

refund or credit?

SUGGESTED ANSWER: The person

who paid the tax may apply for a refund or
credit.

A withholding tax agent may also

apply for a refund. In a sense, he is also a
taxpayer because the tax may be collected
from him if he does not withhold.

11. What is the nature of the

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

SUGGESTED ANSWER: Sec. 69 of the

1977 NIRC (now Sec. 76 of the NIRC of 1997)
provides that any excess of the total quarterly
payments over the actual income tax
computed in the adjustment or final corporate
income tax return, shall either (a) be refunded
to the corporation, or (b) may be credited
against the estimated quarterly income tax
liabilities for the quarters of the succeeding
taxable year. To ease the administration of
tax collection, these remedies are in the
alternative and the choice of one precludes the
other. Since the Bank has chosen the tax
credit approach it cannot anymore avail of the
tax
refund.
(Philippine
Bank
of

Communications v. Commissioner of Internal

Revenue, et al., G.R. No. 112024, January 28,
1999)

NOTES AND COMMENTS:

a.
The choice, is given to the
taxpayer, whether to claim for refund
under Sec. 76 or have its excess taxes
applied as tax credit for the succeeding
taxable year, such election is not final. Prior
verification and approval by the Commissioner
of Internal Revenue is required.
The

administra

79
availment of the remedy of tax credit is not
absolute and mandatory. It does not confer
an absolute right on the part of the taxpayer
to avail of the tax credit scheme if it so
chooses. Neither does it impose a duty on the
part of the government to sit back and allow
an important facet of tax collection to be at
the sole control and discretion of the taxpayer.
(Paseo Realty & Development Corporation v.
Court of Appeals, et al., G. R. No. 119286,
October 13, 2004)

12.

What
is
the
irrevocability rule in claims for
refund and what is the rationale
behind this?
SUGGESTED ANSWER: A corporation
entitled to a tax credit or refund of the
excess estimated quarterly income taxes paid
has two options: (1) to carry over the excess
credit or (2) to apply for the issuance of a tax
credit certificate or to claim a cash refund. If
the option to carry over the excess credit is
exercised, the same shall be irrevocable for
that taxable period.
In
exercising
its
option,
the
corporation must signify in its annual
corporate adjustment return (by marking the
option box provided in the BIR form) its
intention either to carry over the excess
credit or to claim a refund. To facilitate tax
collection, these remedies are in the
alternative and the choice of one precludes
the other. [Systra Philippines, Inc., v.
Commissioner of Internal Revenue, G. R. No.
176290, September 21, 2007 citing Philippine
Bank of Communications v. Commissioner of
Internal Revenue, 361 Phil. 916 (1999)]
This is known as the irrevocability
rule and is embodied in the last sentence of
Section 76 of the Tax Code. The phrase
such option shall be considered irrevocable
for that taxable period means that the
option to carry over the excess tax credits of
a particular taxable year can no longer be
revoked.
The rule prevents a taxpayer from
claiming twice the excess quarterly taxes
paid: (1) as automatic credit against taxes
for the taxable quarters of the succeeding
years for which no tax credit certificate has
been issued and (2) as a tax credit either for
which a tax credit certificate will be issued or

which will be claimed for cash refund. (Systra

Philippines, Inc., supra citing De Leon, Hector,
THE NATIONAL INTERNAL REVENUE
Seventh Edition, 2000, p. 430)

CODE,

13. In the year 2000 Systra

derived excess tax credits and
exercised the option to carry them
over as tax credits for the next
taxable year. However, the tax due
for the next taxable year is lower
than excess tax credits. It now
applies for a refund of the
unapplied tax credits.
May its
refund be granted? If the refund is
denied, does Systra lose the
unapplied tax credits? Explain
briefly your answer.

SUGGESTED ANSWER: Systras claim

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

Supposing in the above problem

that
Systra
permanent
ceased
operations, what happens to the
unapplied credits?
SUGGESTED ANSWER: Where, the
corporation
permanently
ceases
its
operations before full utilization of the tax
credits it opted to carry over, it may then be
allowed to claim the refund of the remaining
tax credits. In such a case, the remaining tax
credits can no longer be carried over and the

80
irrevocability rule ceases to apply. Cessante
ratione legis, cessat ipse lex. (Footnote no.
23, Systra Philippines, Inc., v. Commissioner
of Internal Revenue, G. R. No. 176290,
September 21, 2007)
NOTES AND COMMENTS: The holding
in State Land Investment Corporation v.
Commissioner of Internal Revenue, G. R. No.
171956, January 18, 2008 that the taxpayer
is entitled to a refund because during the
succeeding year there was no tax due
against which the excess tax credits may be
applied is not doctrinal. This is so because it
interpreted the provisions of then Sec. 69 of
the NIRC, which did not provide for the
irrevocability rule now contained in Sec. 76
of the NIRC of 1997.

14. A simultaneous filing of

the application with the BIR for
refund/credit and the institution of
the court suit with the CTA is
allowed. There is no need to wait for a BIR

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

15. The grant of a refund is

founded on the assumption that the
tax return is valid, i.e. that the facts
stated

therein

are

true

and

correct.

(Commissioner of Internal Revenue v. Court of

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

However, in BPI-Family Savings Bank v.

Court of Appeals, 386 Phil. 719; 326 SCRA 641

(2000), refund was granted, despite the failure

to present the tax return, because other
evidence was presented to prove that the
overpaid taxes were not applied. (Ibid.)

16. Discuss the difference

between tax refund and tax credit.

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

NOTES AND COMMENTS: It may be

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

17. A
bank-trustee
of
employee trusts filed an application
for the refund of taxes withheld on
the interest incomes of the
investments made of the funds of
the employees trusts. Instead of
presenting separate accounts for

81

interest incomes made of these

investments,
the
bank-trustee
instead
presented
witness
to
establish that it would next to
impossible to single out the specific
transactions
involving
the
employees trust funds from the
totality of all interest income from
its total investments. On the above
basis, will the application for refund
prosper?

SUGGESTED ANSWER:
No.
The
application for refund will not prosper.
The bank-trustee needs to establish
not only that the refund is justified under the
law (which is so because incomes of
employees trusts are tax exempt), but also
the correct amount that should be refunded.
Tax refunds partake of the nature of
tax exemptions and are thus construed
strictissimi juris against the person or entity
claiming the exemption.
The burden in
proving the amount to be refunded
necessarily falls on the bank-trustee, and
there is an apparent failure to do so.
A necessary consequence of the
special exemption enjoyed alone by
employees trusts would be a necessary
segregation in the accounting of such
income, interest or otherwise, earned from
those trusts from that earned by the other
clients of the bank-trustee. (Far East Bank

and Trust Company, etc., v. Commissioner,

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

The amounts that are the exempt earnings of

the employees trust has not been shown as
they have been commingled with the interest
income of the other clients of the banktrustee.

18. CTA Circular No. 1-95

clearly requires that photocopies of
the receipts or invoices must be
pre-marked and submitted to the
CTA to verify the correctness of the
summary listing and the CPA
certification. CTA Circular No. 1-95,
issued on 25 January 1995, reads:
1.
The party who desires to
introduce as evidence such voluminous
documents must present: (a) Summary
containing the total amount/s of the tax

account or tax paid for the period involved

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

19. Manila Electric Company

a grantee of a legislative franchise
under Act No. 484, as amended by
Republic
Act
No.
4159
and
1[3]
Presidential Decree No. 551,
had
been paying a 2% franchise tax
based on its gross receipts, in lieu
of all other taxes and assessments
of whatever nature.
Upon the
effectivity of Executive Order No.
72 on February 10, 1987, however,
respondent became subject to the
payment of regular corporate
income tax.
For the last quarter ending
December 31, 1987, respondent

82

filed on April 15, 1988 its tentative

income tax reflecting a refundable
amount of P101,897,741, but only
P77,931,812 was applied as tax
credit for the succeeding taxable
year 1988.
Acting on a yearly routinary
Letter of Authority No. 0018064 NA
dated June 27, 1988 issued by
petitioner,
directing
the
investigation of tax liabilities of
respondent for taxable year 1987,
an investigation was conducted by
Revenue Officer Frederick Capitan
which showed that respondent was
liable for 1. deficiency income tax
in the amount of P2,340,902.52;
and 2. deficiency franchise tax in
the amount of P2,838,335.84.
On April 17, 1989, respondent
filed an amended final corporate
Income
Tax
Return
ending
December 31, 1988 reflecting a
refundable
amount
of
P107,649,729.
Respondent thus filed on
March 30, 1990 a letter-claim for
refund or credit in the amount of
P107,649,729
representing
overpaid income taxes for the years
1987 and 1988.
Petitioner not having acted
on its request, respondent filed on
April 6, 1990 a judicial claim for
refund or credit with the Court of
Tax Appeals.
It is gathered that respondent
paid the deficiency franchise tax in
the amount of P2,838,335.84. It
protested the payment of the
alleged deficiency income tax and
claimed as an alternative remedy
the deduction thereof from its claim
for refund or credit.
The Court of Tax Appeals
granted the P107,649,729 claim for
refund, or in the alternative for the

BIR to issue a tax credit. Is the

Court of Tax Appeals correct ?

SUGGESTED ANSWER:
Yes. Section
69 of the National Internal Revenue Code of
1986, now Sec. 76 provides, if the sum of
the quarterly tax payments made during a
taxable year is not equal to the total tax due
on the entire taxable income of that year as
shown in its final adjustment return, the
corporation has the option to either: (a) pay
the excess tax still due, or (b) be refunded
the excess amount paid.
The returns
submitted are merely pre-audited which
consist mainly of checking mathematical
accuracy of the figures in the return. After
such checking, the purpose of which being to
insure prompt action on corporate annual
income tax returns showing refundable
amounts arising from overpaid quarterly
income taxes, (Revenue Memorandum
Order No. 32-76 dated June 11, 1976) the
refund
or
tax
credit
is
granted.
(Commissioner of Internal Revenue v. Manila
Electric Company, G. R. No. 121666, October
10, 2007)

TARIFF AND CUSTOMS

LAWS
ORGANIZATION AND FUNCTIONS
OF THE BUREAU OF INTERNAL
REVENUE
TARIFF AND CUSTOMS CODE
1. When does importation
begin, and why is it important to
know whether importation has
already begun or not?

SUGGESTED ANSWER:
Importation
begins when the conveying vessel or aircraft
enters the jurisdiction of the Philippines with
intention to unlade therein. (Sec. 1202, TCCP)
The jurisdiction of the Bureau of
Customs to enforce the provisions of the TCCP
including seizure and forfeiture also begins
from the beginning of importation. Thus, the
Bureau of Customs obtains jurisdiction over
imported articles only after importation has
begun.

83

2.

When is importation
deemed terminated and why is it
important
to
know
whether
importation has already ended?

SUGGESTED ANSWER: Importation is

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

3.
The flexible tariff
clause is a provision in the Tariff and
Customs Code, which implements the

constitutionally delegated power to the

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

4.

Customs duties defined.

Customs duties is the name given to taxes on

the
importation
and
exportation
of
commodities, the tariff or tax assessed upon
merchandise imported from, or exported to, a
foreign country. (Nestle Phils. v. Court of
Appeals, et al., G.R. No. 134114, July 6, 2001)

5. Special customs duties are

additional import duties imposed on
specific kinds of imported articles
under certain conditions. The special
customs duties under the Tariff and Customs
Code (TCCP) are the anti-dumping duty, the
countervailing duty, the discriminatory duty,
and the marking duty, and under the
Safeguard Measures Act (SMA) additional
tariffs as safeguard measures.

6. The special customs duties

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

7.
Dumping duty is an
additional special duty amounting to
the difference between the export
price and the normal value of such
product, commodity or article (Sec.

301 (s) (1), TCC, as amended by Rep. Act No.

8752, Anti-Dumping Act of 1999.) imposed on

the importation of a product, commodity or

article of commerce into the Philippines at less
than its normal value when destined for
domestic consumption in the exporting
country which is causing or is threatening to
cause material injury to a domestic industry,
or materially retarding the establishment of a
domestic industry producing the like product.
[Sec. 301 (s) (5), TCC, as amended by Rep. Act No.
8752, Anti-Dumping Act of 1999]

8.

When is the antidumping duty imposed?

SUGGESTED ANSWER:
The antidumping duty is imposed
a. Where a product, commodity or
article of commerce is exported into the
Philippines at a price less than its normal value
when destined for domestic consumption in
the exporting country,
b. and such exportation is causing or is
threatening to cause material injury to a
domestic industry, or materially retards the
establishment of a domestic industry
producing the like product. [Sec. 301 (a), TCC,

as amended by Rep. Act No. 8752, Anti-Dumping

Act of 1999]

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

10. The imposing authority

for the anti-dumping duty is the

84

Secretary of Trade and Industry in

the case of non-agricultural product,
commodity, or article or the
Secretary of Agriculture, in the case
of agricultural product, commodity
or article, after formal investigation and

affirmative finding of the Tariff Commission.

[Sec. 301 (a), TCC, as amended by Rep. Act No.
8752, Anti-Dumping Act of 1999]

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

contravene the recommendation of the Tariff

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

12. In the determination of

whether to impose the anti-dumping
duty, the Tariff Commission, may
consider among others, the effect of
imposing an anti-dumping duty on
the welfare of the consumers and/or
the general public, and other related
local industries. (Sec. 301 (a), TCC, as

amended by Rep. Act No. 8752, Anti-Dumping Act

of 1999)

13.
The amount of antidumping duty that may be imposed
is the difference between the export
price and the normal value of such
product, commodity or article. (Sec.
301 (s) (1), TCC, as amended by Rep. Act No.
8752, Anti-Dumping Act of 1999)

The anti-dumping duty shall be equal to

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

14.

What
are
countervailing duties and when are
they imposed?

SUGGESTED ANSWER: Countervailing

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

15. The imposing authority for

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

16. The countervailing duty is

equivalent to the value of the
specific subsidy.

17. Marking duties are the

additional customs duties imposed on foreign
articles (or its containers if the article itself
cannot be marked), not marked in any official
language in the Philippines, in a conspicuous
place as legibly, indelibly and permanently in
such manner as to indicate to an ultimate
purchaser in the Philippines the name of the
country of origin.

85

18.
The Commissioner of
Customs imposes the marking duty.
19.
The marking duty is
equivalent to five percent (5%) ad
valorem.

20. A discriminatory duty

is a new and additional customs duty imposed
upon articles wholly or in part the growth or
product of, or imported in a vessel, of any
foreign country which imposes, directly or
indirectly,
upon
the
disposition
or
transportation in transit through or reexportation from such country of any article
wholly or in part the growth or product of the
Philippines,
any
unreasonable
charge,
exaction, regulation or limitation which is not
equally enforced upon like articles of every
foreign country, or discriminates against the
commerce of the Philippines, directly or
indirectly, by law or administrative regulation
or practice, by or in respect to any customs,
tonnage, or port duty, fee, charge, exaction,
classification, regulation, condition, restriction
or prohibition, in such manner as to place the
commerce of the Philippines at a disadvantage
compared with the commerce of any foreign
country.

21.
The President of the
Philippines
imposes
the
discriminatory duties.

22.

Safeguard measures

are emergency measures, including tariffs, to

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

The DTI Secretary cannot impose the

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

23. Imposing authority for

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

24. Safeguards measures that

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

25. The basis of dutiable

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

26.
The
above
transaction value is the primary
method of determining dutiable
value. If the transaction value of the
imported article could not be
determined using the above, the
following
alternative
methods
should be used one after the other:
goods
goods

a.

Transaction value of identical

b.

Transaction

c.
d.
e.

Deductive method
Computed method
Fallback method

value

of

similar

86

27. How and to whom should

claims for refund of customs duties
be made ?

SUGGESTED ANSWER: All claims for

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

28. What is mean by the term

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

29. A flight stewardess arrived

from Singapore. Upon her arrival,
she was asked whether she has
anything to declare. She answered
none, and she submitted her
Customs
Baggage
Declaration
Form which she accomplished and
signed with nothing or written on
the space for items to be declared.
When her hanger bag was examined
some pieces of jewelry were found
concealed within the lining of said
bag.
She was then convicted of
violating of Sec. 3601 of the Tariff
and Customs Code for unlawful
importation which penalizes any
person who shall fraudulently import

or bring into the Philippines any

article contrary to law.
She now appeals claiming that
lower court erred n convicting her
under Sec. 3601 when the facts
alleged both in the information and
those shown by the prosecution
constitute the offense under Sec.
2505 Failure to Declare Baggage,
of which she was acquitted. Is she
correct?

SUGGESTED ANSWER: No. Sec. 3601

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

30. Payment is not a defense

in smuggling.
When upon trial for

violation of this section, the defendant is

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

87

How
committed?
31.

is

smuggling

SUGGESTED ANSWER: Smuggling is

committed by any person who:
a.
fraudulently imports or brings
into the country any article contrary to law;
b.
assists in so doing any article
contrary to law; or
c.
receives, conceals, buys, sells or
in any manner facilitates the transportation,
concealment or sale of such goods after
importation, knowing the same to have been
imported contrary to law.
(Jardeleza v.
People, G.R. No. 165265, February 6, 2006
citing Rodriguez v. Court of Appeals, G. R.
No. 115218, September 18, 1995, 248 SCRA
288, 296)
NOTES AND COMMENTS:
a.
Importation
consists
of
bringing an article into the country from the
outside.
Importation begins when the
conveying vessel or aircraft enters the
jurisdiction of the Philippines with intention to
unload therein.
b.
When unlawful importation
is complete. In the absence of a bona fide
intent to make entry and pay duties when
the prohibited article enters the Philippine
territory. Importation is complete when the
taxable, dutiable commodity is brought within
the limits of the port of entry. Entry through
a custom house is not the essence of the act.
(Jardeleza v. People, G.R. No. 165265,
February 6, 2006)

32. The Collector of

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

What is the rationale for this

doctrine?
SUGGESTED ANSWER:
a.
Regional Trial Courts have no
jurisdiction to replevin a property which is

subject to seizure and forfeiture proceedings

for violation of the Tariff and Customs Code
otherwise, actions for forfeiture of property for
violation of the Customs laws could easily be
undermined by the simple device of replevin.
(De la Fuente v. De Veyra, et al., 120 SCRA
455)
b.
The
doctrine
of
exclusive
customs jurisdiction over customs cases to the
exclusion of the RTCs is anchored upon the
policy of placing no unnecessary hindrance on
the governments drive, not only to prevent
smuggling and other frauds upon Customs,
c.
but more importantly, to render
effective and efficient the collection of import
and export duties due the State, which
enables the government to carry out the
functions it has been instituted to perform.

(Jao, et al., v. Court of Appeals, et al., and

companion case, 249 SCRA 35, 43)

d.
The issuance by regular courts of
writs of preliminary injunction in seizure and
forfeiture proceedings before the Bureau of
Customs may arouse suspicion that the
issuance or grant was for consideration other
than the strict merits of the case. (Zuno v.
Cabredo, 402 SCRA 75 [2003])
e.
Under the doctrine of primary
jurisdiction, the Bureau of Customs has
exclusive administrative jurisdiction to conduct
searches, seizures and forfeitures of
contraband without interference from the
courts. It could conduct searches and seizures
without need of a judicial warrant except if the
search is to be conducted in a dwelling place.
Where an administrative office has
obtained a technical expertise in a specific
subject, even the courts must defer to this
expertise.
NOTES AND COMMENTS: The Bureau
of Customs could search and seize articles
without need of a judicial warrant unless the
place to be searched is a dwelling place. In
such a case customs requires a judicial
warrant.

33. A claiming to be the

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

88

over the vessel.

prosper?

Would the suit

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

34. The customs authorities

do not have to prove to the
satisfaction of the court that the
articles on board a vessel were
imported from abroad or are
intended to be shipped abroad
before they may exercise the power
to effect customs searches, seizures,
or arrests provided by law and
continue with the administrative
hearings. (The Bureau of Customs, et al., v.
Ogario, et al., G.R. No. 138081, March 20,
2000)

35. The Tariff and Customs Code

allows the Bureau of Customs to resort to
the administrative remedy of seizure,
such as by enforcing the tax lien on
the imported article when the
imported articles could be found and
be subject to seizure and forfeiture.

Customs v. Court of Tax Appeals, et al., G. R.

No. 171516-17, February 13, 2009

Section 2301. Warrant for Detention of
Property-Cash Bond. Upon making any
seizure, the Commissioner shall issue a
warrant for the detention of the property;
and if the owner or importer desires to
secure the release of the property for
legitimate use, the Collector shall, with the
approval of the Commissioner of Customs,
surrender it upon the filing of a cash bond, in
an amount fixed by him, conditioned upon
the payment of the appraised value of the
article and/or any fine, expenses and costs
which may be adjudged in the case:
Provided, That such importation shall not
be released under any bond when there
is prima facie evidence of fraud in the
importation of the article: Provided,
further, That articles the importation of which
is prohibited by law shall not be released
under any circumstances whatsoever:
Provided, finally, That nothing in this section
shall be construed as relieving the owner or
importer from any criminal liability which may
arise from any violation of law committed in
connection with the importation of the article.
(emphasis supplied)

38. Instances where there is

no right of redemption of seized and
forfeited articles:

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

36. The Tariff and Customs Code

allows the Bureau of Customs to resort to
the judicial remedy of filing an action
in court when the imported articles
could not anymore be found.

39. In Aznar v. Court of Tax

Appeals, 58 SCRA 519, reiterated in Farolan,
Jr. v. Court of Tax appeals, et al., 217 SCRA
298, the Supreme Court clarified that the

37. Section 2301 of the

be intentional, consisting of deception, willfully

and deliberately done or resorted to in order
to induce another to give up some right.

TCCP states that seized articles may

not be released under bond if there
is prima facie evidence of fraud in
their importation. Commissioner of

fraud contemplated by law must be

actual and not constructive. It must

40.

Requisites
forfeiture of imported goods:

for

89
a.
Wrongful making by the owner,
importer, exporter or consignee of any
declaration or affidavit, or the wrongful
making or delivery by the same person of any
invoice, letter or paper all touching on the
importation or exportation of merchandise.
b.
the falsity of such declaration,
affidavit, invoice, letter or paper; and
c.
an intention on the part of the
importer/consignee to evade the payment of
the duties due. (Republic, etc., v. The Court of
Appeals, et al., G.R. No. 139050, October 2,
2001)

41. On January 7, 1989, the

vessel M/V Star Ace, coming from
Singapore laden with cargo, entered
the Port of San Fernando, La Union
for needed repairs.
When the
Bureau of Customs later became
suspicious that the vessels real
purpose in docking was to smuggle
cargo into the country, seizure
proceedings were instituted and
subsequently two Warrants of
Seizure and Detention were issued
for the vessel and its cargo.
Cesar does not own the vessel
or any of its cargo but claimed a
preferred maritime lien. Cesar then
brought several cases in the RTC to
enforce his lien. Would these suits
prosper?

SUGGESTED ANSWER:
No.
The
Bureau of Customs having first obtained
possession of the vessel and its goods has
obtained jurisdiction to the exclusion of the
trial courts.
When Cesar has impleaded the vessel
as a defendant to enforce his alleged maritime
lien, in the RTC, he brought an action in rem
under the Code of Commerce under which the
vessel may be attached and sold.
However, the basic operative fact is the
actual or constructive possession of the res by
the tribunal empowered by law to conduct the
proceedings. This means that to acquire
jurisdiction over the vessel, as a defendant,
the trial court must have obtained either
actual or constructive possession over it.
Neither was accomplished by the RTC as the

vessel was already in the possession of the

Bureau of Customs.
(Commissioner of
Customs v. Court of Appeals, et al., G. R. Nos.
111202-05, January 31, 2006)
NOTES AND COMMENTS:
a.
Forfeiture of seized goods in
the Bureau of Customs is in the nature of
a proceeding in rem, i.e. directed against
the res or imported goods and entails a
determination of the legality of their
importation. In this proceeding, it is in legal
contemplation the property itself which
commits the violation and is treated as the
offender, without reference whatsoever to the
character or conduct of the owner.
The issue is limited to whether the
imported goods should be forfeited and
disposed of in accordance with law for
violation of the Tariff and Customs Code.

.(Transglobe International, Inc. v. Court of

Appeals, et al., G.R. No. 126634, January 25,
1999)

Forfeiture of seized goods in the Bureau

of Customs is a proceeding against the goods
and not against the owner. (Asian Terminals,
Inc. v. Bautista-Ricafort, G .R. No. 166901,
October 27, 2006 citing Transglobe)

42. The Collector of Customs

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

43. Smuggled goods seized by

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

90

44.

Decisions of
the
Commissioner of Customs in cases
involving liability for customs
duties, fees or other money
charges that must be appealed to
the Court of Tax Appeals Division
within thirty (30) days from receipt
specifically

refer

to

his

decisions

on

administrative tax protest cases, as stated in

Section 2402 of the Tariff and Customs Code
of the Philippines (TCCP):
Section

2402.

Review by Court of Tax

Appeals. The party

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

45. Administrative tax

protest under the Tariff and
Customs Code (TCCP). A tax protest

case, under the TCCP, involves a protest of

the liquidation of import entries. (Pilipinas Shell
Petroleum Corporation v. Commissioner of
Customs, G. R. No. 176380, June 18, 2009)

46. Liquidation, defined.

A
liquidation is the final computation and
ascertainment by the collector of the duties
on imported merchandise, based on official
reports as to the quantity, character, and
value thereof, and the collectors own finding
as to the applicable rate of duty; it is akin to
an assessment of internal revenue taxes
under the National Internal Revenue Code
where the tax liability of the taxpayer is

definitely determined.
(Pilipinas Shell
Petroleum Corporation v. Commissioner of
Customs, G. R. No. 176380, June 18, 2009)

47.

The following letters

of demand can not be considered as
a liquidation or an assessment of
Shells import tax liabilities that can
be the subject of an administrative
tax protest proceeding before the
Commissioner of Customs whose
decision is appealable to the Court
of Tax Appeals:

a.
the One Stop Shop Inter-Agency
Tax Credit and Duty Drawback Center (the
Center) November 3 letter, signed by the
Secretary of Finance, informing it of the
cancellation of the Tax Credit Certificates
(TCCs);
b.
the Commissioner of Customs
November 19 letter requiring Shell to replace
the amount equivalent to the amount of the
cancelled TCCs used by Shell; and
c.
the Commissioner of Customs
collection letters, issued through Deputy
Commissioner
Atty.
Valera,
formally
demanding the amount covered by the
cancelled TCCs.
None of these letters, however, can be
considered as a liquidation or an assessment
of Shells import tax liabilities that can be the
subject of an administrative tax protest
proceeding before the respondent whose
decision is appealable to the CTA. Shells
import tax liabilities had long been computed
and ascertained in the original assessments,
and Shell paid these liabilities using the TCCs
transferred to it as payment.
It is even an error to consider the
letters as a reassessment because they
refer to the same tax liabilities on the same
importations covered by the original
assessments. The letters merely reissued the
original assessments that were previously
settled by Shell with the use of the TCCs.
However, on account of the cancellation of
the TCCs, the tax liabilities of Shell under the
original
assessments
were
considered
unpaid; hence, the letters and the actions for
collection.
When Shell went to the CTA, the
issues it raised in its petition were all related

91
to the fact and efficacy of the payments
made, specifically the genuineness of the
TCCs; the absence of due process in the
enforcement of the decision to cancel the
TCCs; the facts surrounding the fraud in
originally securing the TCCs; and the
application of estoppel. These are payment
and collection issues, not tax protest issues
within the CTAs jurisdiction to rule upon.
Shell never protested the original
assessments of its tax liabilities and in fact
settled them using the TCCs. These original
assessments, therefore, have become final,
incontestable, and beyond any subsequent
protest proceeding, administrative or judicial,
to rule upon.
To be very precise, Shells petition
before the CTA principally questioned the
validity of the cancellation of the TCCs a
decision that was made not by the
Commissioner of Customs, but by the Center.
As the CTA has no jurisdiction over decisions
of the Center, Shells remedy against the
cancellation should have been a certiorari
petition before the regular courts, not a tax
protest case before the CTA. Records do not
show that Shell ever availed of this remedy.
Alternatively, as held in Shell v.
Republic of the Philippines, G.R. No. 161953,
March 6, 2008, 547 SCRA 701, the
appropriate forum for Shell under the
circumstances of this case should be at the
collection cases before the RTC where Shell
can put up the fact of its payment as a
defense.
(Pilipinas
Shell
Petroleum
Corporation v. Commissioner of Customs, G.
R. No. 176380, June 18, 2009)

48.

A case becomes ripe

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

The assessment has long been final,

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

the continuation of the collection suits.

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

Petroleum Corporation v. Commissioner of

Customs, supra)

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

2. A law which deprives

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

3. Under the now prevailing

Constitution, where there is neither

92

a grant nor prohibition by statute,

the
taxing
power
of
local
governments must be deemed to
exist although Congress may provide
statutory limitations and guidelines

in order to safeguard the viability and selfsufficiency of local government units by

directly granting them general and broad tax
powers. (City Government of San Pablo,
Laguna, et al., v. Reyes, et al., G.R. No.
127708, March 25, 1999)

4.
The Local Government
Code explicitly authorizes provinces
and cities, notwithstanding any
exemption granted by any law or
other special law to impose a tax on
businesses enjoying a franchise.

Indicative of the legislative intent to carry out

the constitutional mandate of vesting broad
tax powers to local government units, the
Local Government Code has withdrawn tax
exemptions or incentives theretofore enjoyed
by certain entities. (City Government of San
Pablo, Laguna, et al., v. Reyes, et al., G.R. No.
127708, March 25, 1999)

5.

Philippine Long Distance

Telephone Company, Inc., v. City of
Davao, et al., etc., G. R. No. 143867,

August 22, 2001, upheld the authority of

the City of Davao, a local government unit, to
impose and collect a local franchise tax
because the Local Government has withdrawn
all tax exemptions previously enjoyed by all
persons and authorized local government units
to impose a tax on business enjoying a
franchise tax notwithstanding the grant of tax
exemption to them.

6.

Explain the concept

of the paradigm shift in local
government taxation.

SUGGESTED ANSWER: Paradigm shift

from exclusive Congressional power to direct
grant of taxing power to local legislative
bodies. The power to tax is no longer vested
exclusively on Congress; local legislative
bodies are now given direct authority to levy
taxes, fees and other charges pursuant to
Article X, section 5 of the 1987 Constitution.
(Batangas Power Corporation v. Batangas City,

et al. G. R. No. 152675, and companion case,

April 28, 2004 citing National Power
Corporation v. City of Cabanatuan, G. R. No.
149110, April 9, 2003)

7.
The fundamental law did
not intend the direct grant to local
government units to be absolute and
unconditional, the constitutional objective

obviously is to ensure that, while local

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

8.
Taxing power of the local
government is limited. The taxing

power of local governments is limited in the

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

Mactan Cebu International Airport Authority, v.

Marcos, G.R. No. 120082, September 11, 1996,
261 SCRA 667, 680)

93

9.
Further amplification by
Bernas of the local governments
power to tax. What is the effect of

Section 5 on the fiscal position of municipal

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

10. Reconciliation of the local

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

The Supreme Court in a series of cases

has sustained the power of Congress to grant
tax exemptions over and above the power of
the local governments delegated power to
tax. (Quezon City, et al., v. ABS-CBN Broadcasting

Corporation, G. R. No. 166408, October 6, 2008

citing City Government of Quezon City, et al. v.
Bayan Telecommunications, Inc., G.R. No.
162015, March 6, 2006, 484 SCRA 16)

Indeed, the grant of taxing powers to

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

Telephone Company, Inc. (PLDT) vs. City of

Davao]

11.

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

12. Requirements:
Any
individual or corporation employing a person
subject to professional tax shall require
payment by that person of the tax on his
profession before employment and annually
thereafter.
Any person subject to the professional
tax shall write in deeds, receipts, prescriptions,
reports, books of account, plans and designs,

94
surveys and maps, as the case may be, the
number of the official receipt issued to him.
Exemption: Professionals exclusively
employed in the government shall be exempt
from payment. (Sec. 139, LGC)
NOTE: For the purpose of collecting the
tax, the provincial or city treasurer or his duly
authorized representative shall require from
such professionals their current annual
registration cards issued by competent
authority before accepting payment of their
professional tax for the current year. The PRC
shall likewise require the professionals
presentation of proof of payment before
registration of professionals or renewal of their
licenses.
(last par., Art. 228, Rules and
Regulations
Implementing
the
Local
Government Code of 1991)

13.
Who are the
professionals who, if they are in
practice of their profession, are
subject to professional tax?

SUGGESTED
ANSWER:
The
professionals subject to the professional tax
are only those who have passed the bar
examinations, or any board or other
examinations conducted by the Professional
Regulation Commission (PRC). for example, a
lawyer who is also a Certified Public
Accountant (CPA) must pay the professional
tax imposed on lawyers and that fixed for
CPAs, if he is to practice both professions.
[Sec. 238 (f), Rule XXX, Rules and Regulations
Implementing the Local Government Code of
1991]

14.

X City issued a
notice of assessment against ABC
Condominium
Corporation
for
unpaid business taxes.
The
Condominium Corporation is a duly
constituted
condominium
corporation in accordance with the
Condominium Act which owns and
holds title to the common and
limited common areas of the
condominium.
Its membership
comprises the unit owners and is
authorized under its By-Laws to
collect regular assessments from its

members for operating expenses,

capital expenditures on the common
areas and other special assessments
as provided for in the Master Deed
with? Declaration of Restrictions of
the Condominium.
ABC Condominium Corporation
insists that the X City Revenue Code
and the Local Government Code do
not contain provisions upon which
the assessment could be based.
Resolve the controversy.

SUGGESTED ANSWER: ABC is correct.

Condominium corporations are generally
exempt from local business taxation under the
Local Government Code, irrespective of any
local ordinance that seeks to declare
otherwise.
X City, is authorized under the Local
Government Code, to impose a tax on
business, which is defined under the Code as
trade or commercial activity regularly engaged
in as a means of livelihood or with a view to
profit. By its very nature, a condominium
corporation is not engaged in business, and
any profit that it derives is merely incidental,
hence it may not be subject to business taxes.
(Yamane, etc. v. BA Lepanto Condominium
Corporation, G. R. No. 154993, October 25,
2005)

15.

Authority of Local
Government Units (LGUs) such as
the City of Manila to impose
business taxes. Section 143 of the LGC,

is the very source of the power of

municipalities and cities to impose a local
business tax, and to which any local business
tax imposed by cities or municipalities such
as the City of Manila must conform. It is
apparent from a perusal thereof that when a
municipality or city has already imposed a
business tax on manufacturers, etc. of
liquors, distilled spirits, wines, and any other
article of commerce, pursuant to Section
143(a) of the LGC, said municipality or city
may
no
longer
subject
the
same
manufacturers, etc. to a business tax under
Section 143(h) of the same Code. Section
143(h) may be imposed only on businesses
that are subject to excise tax, VAT, or
percentage tax under the NIRC, and that are

95
not otherwise specified in preceding
paragraphs. In the same way, businesses
such as respondents, already subject to a
local business tax under Section 14 of Tax
Ordinance No. 7794 [which is based on
Section 143(a) of the LGC], can no longer be
made liable for local business tax under
Section 21 of the same Tax Ordinance [which
is based on Section 143(h) of the LGC]. (The

City of Manila, et al., v. Coca-Cola Bottlers

Philippines, Inc., G. R. No. 181845, August 4,
2009)

REAL PROPERTY TAXATION

1.
The
fundamental
principles of real property taxation
are:

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

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

3.
Fair market value is the
price at which a property may be
sold by a seller who is not compelled
to sell and bought by a buyer who is
not compelled to buy, taking into
consideration all uses to which the property is
adopted and might in reason be applied.

The criterion established by the statute

contemplates a hypothetical sale. Hence, the
buyers need not be actual and existing
purchasers. (Allied Banking Corporation, etc.,
v. Quezon City Government, et al., G. R. No.
154126, October 11, 2005)
NOTES AND COMMENTS: In fixing the
value of real property, assessors have to
consider all the circumstances and elements of
value and must exercise prudent discretion in
reaching conclusions.
(Allied Banking

Corporation, etc., v. Quezon City Government,

et al., G. R. No. 154126, October 11, 2005)

Preparation of fair market values:

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

4.
Approaches in estimating
the fair market value of real
property for real property tax
purposes?

a.
Sales Analysis Approach. The
sales price paid in actual market transactions
is considered by taking into account valid sales
data accumulated from among the Registrar of
Deeds, notaries public, appraisers, brokers,
dealers, bank officials, and various sources
stated under the Local Government Code.
b.
Income Capitalization Approach.
The value of an income-producing property is

96
no more than the return derived from it. An
analysis of the income produced is necessary
in order to estimate the sum which might be
invested in the purchase of the property.
c.
Reproduction cost approach is a
formal approach used exclusively n appraising
man-made improvements such as buildings
and other structures, based on such data as
materials and labor costs to reproduce a new
replica of the improvement.
The assessor uses any or all of these
approaches in analyzing the data gathered to
arrive at the estimated fair market value to be
included in the ordinance containing the
schedule of fair market values. (Allied Banking

Corporation, etc., v. Quezon City Government,

et al., G. R. No. 154126, October 11, 2005
citing Local Assessment Regulations No. 1-92)

5.

An ordinance whereby
the parcels of land sold, ceded,
transferred
and
conveyed
for
remuneratory consideration after
the effectivity of this revision shall
be subject to real estate tax based
on the actual amount reflected in
the deed of conveyance or the
current approved zonal valuation of
the Bureau of Internal Revenue
prevailing at the time of sale,
cession, transfer and conveyance,
whichever is higher, as evidenced by
the certificate of payment of the
capital gains tax issued therefore is
INVALID being contrary to public policy and
for restraining trade for the following reasons:
a.
It mandates an exclusive rule in
determining the fair market value and departs
from the established procedures such as the
sales analysis approach, the income
capitalization approach and the reproduction
approach
provided
under
the
rules
implementing the statute. It unduly interferes
with the duties statutorily placed upon the
local assessor by completely dispensing with
his analysis and discretion which the Local
Government Code and the regulations require
to be exercised.
An ordinance that
contravenes any statute is ultra vires and void.
b.
The consideration approach in
the ordinance is illegal since the appraisal,
assessment, levy and collection of real

property tax shall not be let to any private

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

6. Examples of personal
property under the civil law that

97

may be considered as real property

for purposes of taxes. Personal property

under the civil law may be considered as real

property for purposes of taxes where the
property is essential to the conduct of the
business.
a.
Underground tanks are essential
to the conduct of the business of a gasoline
station without which it would not be
operational. (Caltex Phils., Inc. v. Central Board of
Assessment Appeals, et al., 114 SCRA 296)
b.
Light Rail Transit (LRT)
improvements such as buildings, carriageways,
passenger terminals stations, and similar
structures do not form part of the public roads
since the former are constructed over the
latter in such a way that the flow of vehicular
traffic would not be impaired.
The
carriageways and terminals serve a function
different from the public roads. Furthermore,
they are not open to use by the general public
hence not exempt from real property taxes.
Even granting that the national
government owns the carriageways and
terminal stations, the property is not exempt
because their beneficial use has been granted
to LRTA a taxable entity. (Light Rail Transit
Authority v. Central Board of Assessment Appeals,
et al., G. R. No. 127316, October 12, 2000)
c.
Barges on which were mounted
gas turbine power plants designated to
generate electrical power, the fuel oil barges
which supplied fuel oil to the power plant
barges, and the accessory equipment
mounted on the barges were subject to real
property taxes.
Moreover, Article 415(9) of the Civil
Code provides that [d]ocks and structures
which, though floating, are intended by their
nature and object to remain at a fixed place
on a river, lake or coast are considered
immovable property by destination being
intended by the owner for an industry or work
which may be carried on in a building or on a
piece of land and which tend directly to meet
the needs of said industry or work. (FELS
Energy, Inc., v. Province of Batangas, G. R. No.
168557, February 16, 2007 and companion case)

7. Unpaid realty taxes attach

to the property and is chargeable
against the person who had actual
or beneficial use and possession of it

regardless of whether or not he is

the owner. To impose the real property tax

on the subsequent owner which was neither

the owner not the beneficial user of the
property during the designated periods would
not only be contrary to law but also unjust.
Consequently, MERALCO the former
owner/user of the property was required to
pay the tax instead of the new owner
NAPOCOR. (Manila Electric Company v. Barlis, G.R.
No. 114231, May 18, 2001)

NOTES AND COMMENTS: The above

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

8. Secretary of Justice can

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

Taxpayer files appeal to the

Secretary of Justice, within 30 days
from effectivity thereof. In case the

Secretary decides the appeal, a period also of

30 days is allowed for an aggrieved party to
go to court. But if the Secretary does not act
thereon, after the lapse of 60 days, a party
could already seek relief in court within 30
days from the lapse of the 60 day period.
These three separate periods are clearly
given for compliance as a prerequisite before
seeking redress in a competent court. Such
statutory periods are set to prevent delays as
well as enhance the orderly and speedy
discharge of judicial functions. For this reason
the courts construe these provisions of
statutes as mandatory. (Reyes, et al., v. Court of
Appeals, et al., G.R. No. 118233, December 10,
1999)

9.
Public
hearings
are
mandatory prior to approval of tax
ordinance, but this still requires the

98
taxpayer to adduce evidence to show that no
public hearings ever took place. (Reyes, et al.,
v. Court of Appeals, et al., G.R. No. 118233,
December 10, 1999)
Public hearings are
required to be conducted prior to the
enactment of an ordinance imposing real
property taxes. (Figuerres v. Court of Appeals, et
al., G.R. No. 119172, March 25, 1999)

10. The
concurrent
and
simultaneous remedies afforded
local government units in enforcing
collection of real property taxes:
a.
b.

Distraint of personal property;

Sale of delinquent real property,

and

c.
Collection of real property tax
through ordinary court action.

11. Notice and publication, as

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

12. The reason behind the

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

13.

FELS Energy, Inc.,

had a contract to supply NPC with
the electricity generated by FELS
power barges. The contract also
stated that NPC shall be responsible
for all real estate taxes and
assessments. FELS then received an
assessment of real property taxes on
its power barges from the Provincial
Assessor of Batangas. If filed a
motion for reconsideration with the
Provincial Assessor.
a.
Upon
denial,
FELS
elevated the matter to the Local
Board
of
Assessment
Appeals

(LBAA), where it raised the following

issues:
1)
Since NPC is taxexempt then FELs should also
be tax-exempt because of its
contract with NPC.
2)
The power barges
are not real property subject to
real property taxes.
b.
Upon the other hand the
Local Treasurer insists that the
assessment has attained a state of
finality hence the appeal to the LBAA
should be dismissed.
Rule
on
the
conflicting
contentions.

SUGGESTED ANSWER:
a.
All the contentions of FELS are
without merit:
1)
NPC is not the owner of
the power barges nor the operator of
the power barges. The tax exemption
privilege granted to NPC cannot be
extended to FELS. the covenant is
between NPC and FELs and does not
bind a third person not privy to the
contract such as the Province of
Batangas.
2)
The Supreme Court of
New York in Consolidated Edison

Company of New York, Inc., et al., v.

The City of New York, et al., 80 Misc. 2d
1065 (1975) cited in FELS Energy, Inc.,
v. Province of Batangas, G. R. No.

168557, February 16, 2007 and

companion case, held that barges on
which were mounted gas turbine power
plants designated to generate electrical
power, the fuel oil barges which
supplied fuel oil to the power plant
barges, and the accessory equipment
mounted on the barges were subject to
real property taxes.
Moreover, Article 415(9) of the
Civil Code provides that [d]ocks and
structures which, though floating, are
intended by their nature and object to
remain at a fixed place on a river, lake
or coast are considered immovable
property by destination being intended
by the owner for an industry or work
which may be carried on in a building or

99
on a piece of land and which tend
directly to meet the needs of said
industry or work.
b.
The Treasurer is correct. The
procedure do not allow a motion for
reconsideration to be filed with the Provincial
Assessor.
To allow the procedure would indeed
invite corruption in the system of appraisal and
assessment. it conveniently courts a graftprone situation where values of real property
ay be initially set unreasonably high, and then
subsequently reduced upon the request of a
property owner.
In the latter instance,
allusions of possible cover, illicit trade-off
cannot be avoided, and in fact can
conveniently take place. Such occasion for
mischief must be prevented and excised from
our system. (FELS Energy, Inc., v. Province of
Batangas, G. R. No. 168557, February 16, 2007 and
companion case)

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

15.
If the ground for the
protest is validity of the real
property tax ordinance and not the
unreasonableness of the amount collected the
tax must be paid under protest, and the issue
of legality may be raised to the proper courts
on certiorari without need of exhausting
administrative remedies.

16.
If the ground for the
protest is unreasonableness of the
amounts collected there is need to
pay under protest and administrative
remedies must be resorted to before recourse
to the proper courts.

17. Procedure for refund of

real property taxes based on
unreasonableness or excessiveness
of amounts collected.

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

18. The entitlement to a tax

refund does not necessarily call for
the automatic payment of the sum
claimed. The amount of the claim being a

factual matter, it must still be proven in the

normal course and in accordance with the
administrative procedure for obtaining a
refund of real property taxes, as provided
under the Local Government Code. (Allied
Banking Corporation, etc., v. Quezon City
Government, et al., G. R. No. 154126, September
15, 2006)

NOTES AND COMMENTS: In the above

Allied Banking case, the Supreme Court

provided for the starting date of computing

100
the two-year prescriptive period within which
to file the claim with the Treasurer, which is
from finality of the Decision. The procedure to
be followed is that shown below.

19. Procedure for refund of

real property taxes based on validity
of the tax measure or solutio

indebeti.

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

20.
Charitable
institutions,
churches
and
parsonages or convents appurtenant
thereto,
mosques,
non-profit
cemeteries, and all lands, buildings
and improvements that are actually,
directly and exclusively used for
religious, charitable or educational

purposes are exempt from taxation.

[Sec.28 (3) Article VI, 1987 Constitution]

21. The constitutional

tax exemptions refer only to real
property taxes that are actually, directly

and exclusively used for religious, charitable or

educational purposes, and that the only
constitutionally recognized exemption from
taxation of revenues are those earned by nonprofit, non-stock educational institutions which
are actually, directly and exclusively used for
educational purposes. (Commissioner of

Internal Revenue v. Court of Appeals, et al.,

298 SCRA 83)

The constitutional tax exemption covers
property taxes only. What is exempted is not
the institution itself, those exempted from real
estate taxes are lands, buildings and
improvements actually, directly and exclusively
used for religious, charitable or educational
purposes. (Lung Center of the Philippines v.
Quezon City, et al., etc., G. R. No. 144104,
June 29, 2004)

22. The 1935 Constitution

stated that the lands, buildings, and
improvements
are
used
exclusively
but
the
present
Constitution requires that the lands,
buildings and improvements are
actually, directly and exclusively
used. The change should not be ignored.

Reliance on past decisions would have sufficed

were the words actually as well as: directly
are not added. There must be proof therefore
of the actual and direct use to be exempt from
taxation. (Lung Center of the Philippines v.
Quezon City, et al., etc., G. R. No. 144104, June 29,
2004)

23. The actual, direct

and exclusive use of the property
for charitable purposes is the direct
and
immediate
and
actual
application of the property itself to
the purposes for which the charitable
institution is organized. It is not the use of the
income from the real property that is
determinative of whether the property is used
for tax-exempt purposes.

101
If real property is used for one or more
commercial purposes, it is not exclusively used
for the exempted purpose but is subject to
taxation. The words dominant use or
principal use cannot be substituted for the
words used exclusively without doing
violence to the Constitution and the law. Solely
is synonymous with exclusively. (Lung Center of
the Philippines v. Quezon City, et al., etc., G. R. No.
144104, June 29, 2004)

24. Portions of the land of a

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

25. As a general principle, a

charitable institution does not lose
its character as such and its
exemption
from
taxes
simply
because it derives income from
paying patients, whether outpatient, or confined in the hospital,
or receives subsidies from the
government.
So long as the money
received is devoted or used altogether to the
charitable object which it is intended to
achieve; and no money inures to the private
benefit of the persons managing or operating
the institution. (Lung Center of the Philippines v.
Quezon City, et al., etc., G. R. No. 144104, June 29,
2004)

26. Property that are

exempt from the payment of real
property tax under the Local
Government Code.
a.
Real property owned by the
Republic of the Philippines or any of its
political subdivisions except when the
beneficial use thereof has been granted to a
taxable person for a consideration or
otherwise;

b.
Charitable institutions, churches,
parsonages or convents appurtenant thereto,
mosques, non-profit or religious cemeteries,
and all lands, buildings and improvements
actually, directly and exclusively used for
religious, charitable and educational purposes;
c.
Machineries and equipment,
actually, directly and exclusively used by local
water districts; and government owned and
controlled corporations engaged in the supply
and distribution of water and generation and
transmission of electric power;
d.
Real property owned by duly
registered cooperatives;
e.
Machinery and equipment used
for pollution control and environmental
protection.

27.

Manila International
Airport Authority (MIAA) it is not a
government owned or controlled
corporation but an instrumentality
of the government that is exempt
from taxation.

It is not a stock corporation because

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

102
(Manila International Airport Authority v. City of
Pasay, et al., G. R. No. 163072, April 2, 2009)

28. A
telecommunications
company was granted by Congress
on July 20, 1992, after the
effectivity of the Local Government
Code on January 1, 1992, a
legislative
franchise
with
tax
exemption privileges which partly
reads, The grantee, its successors
or assigns shall be liable to pay the
same taxes on their real estate,
buildings and personal property,
exclusive of this franchise, as other
persons or corporations are now or
hereafter may be required by law to
pay. This provision existed in the
companys franchise prior to the
effectivity of the Local Government
Code. A City then enacted an
ordinance in 1993 imposing a real
property on all real properties
located within the city limits, and
withdrawing all tax exemptions
previously
granted.
Among
properties covered are those owned
by the company from which the City
is now collecting P43 million. The
properties of the company were
then scheduled by the City for sale
at public auction.
The company then filed a
petition for the issuance of a writ of
prohibition
claiming
exemption
under its legislative franchise. The
City defended its position raising
the following:
a.
There was no exhaustion
of administrative remedies because
the matter should have first been
filed before the Local Board of
Assessment Appeals;
b.
The companys properties
are exempt from tax under its
franchise.
Resolve the issues raised.
SUGGESTED ANSWERS:

a.
There is no need to exhaust
administrative remedies as the appeal to the
LBAA is not a speedy and adequate remedy
within the law. This is so because the
properties are already scheduled for auction
sale.
Furthermore, one of the recognized
exceptions to the rule on exhaustion is that if
the issue is purely legal in character which is
so in this case.
b.
The properties are exempt from
taxation. The grant of taxing powers to local
governments under the Constitution and the
Local Government Code does not affect the
power of Congress to grant tax exemptions.
The term exclusive of this franchise
is interpreted to mean properties actually,
directly and exclusively used in the radio or
telecommunications
business.
The
subsequent piece of legislation which
reiterated the phrase exclusive of this
franchise found in the previous tax
exemption grant to the company is an
express and real intention on the part of
Congress to once against remove from the
LGCs delegated taxing power, all of the
companys properties that are actually,
directly and exclusively used in the pursuit of
its franchise.
(The City Government of

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

29. The owner operator

of a BOT and not the ultimate owner
is subject to real property taxes.

Consistent with the BOT concept and as

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

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