SUGGESTED ANSWER: The inherent power of the
How to use the BAR STAR NOTES. The sovereign exercised through the legislature to impose
BAR STAR NOTES in the form of questions and
answers as well as textual discussion were specially
prepared by Prof. Domondon for the exclusive use
of Bar Reviewees who attended his 2010 Lectures on
TAXATION held at the University of the Philippines.
Included in the presentation are doctrines contained in
Supreme Court decisions up to April 2010.
The purpose of the BAR STAR NOTES is to
provide the Bar Reviewee with a handy review material
which serves as memory-joggers for the September
12, 2010 Bar Examinations in Taxation. The author tries
to second guess what would be included in the Bar
Exams using statistical analysis. The actual Bar
questions may not be formulated in the same manner as
the BAR STAR NOTES. However, the doctrines tested
in the Bar would in all probability be included in these
Notes.
If pressed for time, the author suggests that the
reader should focus his attention on the following:
Nice to know
Should know
Must know and master
It is further suggested that the reader should
merely browse those without stars.
WARNING:
These materials are copyrighted and/or based on
the writers books on Taxation and future revisions. It is
prohibited to reproduce any part of these Notes in any
form or any means, electronic or mechanical, including
photocopying without the written permission of the
author. Unauthorized users shall not be prosecuted but
SHALL BE SUBJECT TO THE LAW OF KARMA SUCH
THAT THEY WILL NEVER PASS THE BAR OR
WOULD BE UNHAPPY IN LIFE for stealing the
intellectual property of the author.
THE BEST OF LUCK AND
ADVANCE
CONGRATULATIONS
TAXATION
GENERAL PRINCIPLES OF TAXATION
TAXATION, IN GENERAL
1. State briefly and concisely the nature
of taxation. Alternatively, define taxation.
burdens upon subjects and objects within its jurisdiction
for the purpose of raising revenues to carry out the
legitimate objects of government.
2. What is the nature of the States
power to tax ? Explain briefly.
SUGGESTED ANSWER: The nature of the states
power to tax is two-fold. It is both an inherent power and
a legislative power. It is inherent in nature
being an attribute of sovereignty. This is so, because
without the taxes, the states existence would be
imperiled. There is thus, no need for a constitutional
grant for the state to exercise this power.
It is a legislative power because it involves the
promulgation of rules. Taxation is a set of rules, how
much is the tax to be paid, who pays the tax, to whom it
should be paid, and when the tax should be paid.
3. What is the underlying theory of
taxation ? Explain briefly.
SUGGESTED ANSWER: Taxes are the lifeblood
of the nation. Without revenue raised from
taxation, the government will not survive, resulting in
detriment to society. Without taxes, the government
would be paralyzed for lack of motive power to activate
and operate it. (Commissioner of Internal Revenue v. Algue,
Inc. et al., 158 SCRA 8, 16-17)
4. Marshall said that, the power to tax
involves the power to destroy. On the other
hand, Holmes stated that the power to tax is
not the power to destroy while the court
sits.
Reconcile the statements.
In the alternative, what
are the implications that flow from the above
statements ?
SUGGESTED ANSWERS: Marshalls view refers
to a valid tax while the Holmes view refers to an invalid
tax.
a
a. The imposition of
valid tax could not be judicially restrained merely
because it would prejudice taxpayers property.
b. An illegal tax could be judicially
declared invalid and should not work to prejudice a
taxpayers property.
5. Discuss briefly the basis/bases, or
rationale of taxation.
SUGGESTED ANSWER: a.
Reciprocal duties of protection and support
between the state and its citizens and residents.
Also called symbiotic relation between the state
and its citizens.
 2
b. Jurisdiction by the state over the social justice provisions of the constitution
persons and property within its territory. through the progressive system of taxation, which
6. Discuss briefly but would result to equal distribution of wealth, etc.
comprehensively the objectives or Progressive income taxes alleviate the
purposes of taxation. margin between rich and poor. (Southern Cross
Cement Corporation v. Cement Manufacturers
SUGGESTED ANSWER: The purposes or
Association of the Philippines, et al., G. R. No. 158540,
objectives of taxation are the following: August 3, 2005)
In recent years, the increasing social
a. The primary purpose: challenges of the times expanded the scope of the
1) state activity, and taxation has become a tool to
Revenue purpose. realize social justice and the equitable distribution
of wealth, economic progress and the protection
b. The secondary of local industries as well as public welfare and
purposes similar objectives. (Batangas Power Corporation
1) Sumptuary or regulatory v. Batangas City, et al., G. R. No. 152675, and
companion case, April 28, 2004 citing National Power
purpose. 2)
Corporation v. City of Cabanatuan, G. R. No. 149110,
Compensatory purpose. April 9, 2003)
3) To implement the
power of eminent domain. 9. Explain the sumptuary purpose
of taxation.
SUGGESTED ANSWER: The sumptuary
7. Distinguish a tax from a license purpose of taxation is to promote the general
fee. SUGGESTED ANSWER: The welfare and to protect the health, safety or morals
of the inhabitants. It is in the joint exercise of the
following are the distinctions: a.
power of taxation and police power where
Purpose: Tax imposed for revenue while regulatory taxes are collected.
license fee for regulation. Tax for general public Taxation may be made the implement of the
purposes while license fee for regulatory purposes states police power. The motivation behind many
only. taxation measures is the implementation of police
power goals. [Southern Cross Cement Corporation v.
b. Basis: Tax imposed under
Cement Manufacturers Association of the Philippines, et
power of taxation while license fee under police al., G. R. No. 158540, August 3, 2005) The reader
power. should note that the August 3, 2005 Southern
c. Amount: In taxation, Cross case is the decision on the motion for
no limit as to amount while license fee limited to reconsideration of the July 8, 2004 Southern Cross
decision.
cost of the license and the expenses of police The so-called sin taxes on alcohol and
surveillance and regulation. tobacco manufacturers help dissuade the
consumers from excessive intake of these
d. Time of payment: Taxes normally potentially harmful products. (Southern Cross
paid after commencement of business while Cement Corporation v. Cement Manufacturers
Association of the Philippines, et al., G. R. No. 158540,
license fee before. e. August 3, 2005)
Effect of payment: Failure to pay a tax
does not make the business illegal while failure to 10. Taxation distinguished from
pay license fee makes business illegal. f. police power. Taxation is distinguishable from
Surrender: Taxes, being the lifeblood of police power as to the means employed to
implement these public goals. Those doctrines that
the state, cannot be surrendered except for lawful
are unique to taxation arose from peculiar
consideration while a license fee may be considerations such as those especially punitive
surrendered with or without consideration. (Cooley effects (Southern Cross Cement Corporation v.
on Taxation, pp. 1137-1138; Pacific Commercial Cement Manufacturers Association of the
Company v. Romualdez, et al., 49 Phil. 924) Philippines, et al., G. R. No. 158540, August 3,
2005) as the power to tax involves the power to
8. How may the power to tax be destroy and the belief that taxes are lifeblood of the
utilized to carry out the social justice state. (Ibid.) taxes being the lifeblood of the
program of our government ? government, their prompt and certain availability is
SUGGESTED ANSWER: The of the essence.
compensatory purpose of taxation is to implement
 3
These considerations necessitated the 14. State the requisites of a valid tax.
evolution of taxation as a distinct legal concept SUGGESTED ANSWER:
from police power. (Ibid.) a. A
valid tax should be within the jurisdiction of the
11. How the power of taxation may taxing authority.
be used to implement power of eminent b. That the assessment and collection
domain. Tax measures are but enforced of certain kinds (The same as the inherent
contributions exacted on pain of penal sanctions limitations of the power of taxation) should be for
and clearly imposed for public purpose. In most a public purpose.
recent years, the power to tax has indeed become c. The rule of taxation should be
a most effective tool to realize social justice, public uniform.
welfare, and the equitable distribution of wealth. d. That either the person or
(Commissioner of Internal Revenue v. Central Luzon property of taxes guarantees against injustice to
Drug Corporation, G.R. No. 159647, April 16, 2005) individuals, especially by way or notice and
Establishments granting the 20% senior opportunity for hearing be provided.
citizens discount may claim the discounts granted e. The tax must not impinge on the
to senior citizens as tax deduction based on the inherent and Constitutional limitations on the
net cost of the goods sold or services rendered:
power of taxation.
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. 15.
Provided, further, That the total amount of the What are the classes or kinds of taxes
claimed tax deduction net of value added tax if
applicable, shall be included in their gross sales according to the subject matter or
receipts for tax purposes and shall be subject to object ?
proper documentation and to the provisions of the SUGGESTED ANSWER:
National Internal Revenue Code, as amended. a. Personal,
[M.E. Holding Corporation v. Court of Appeals, et al.,
G.R. No. 160193, March 3, 2008 citing Expanded Senior poll or capitalization imposed on all residents,
Citizens Act of 2003, Sec. 4 (a)] whether citizen or not. Example Community
Tax.
12. What are the three basic
principles of a sound tax system? b. Property - Imposed on property.
Explain each briefly. Example Real property tax.
SUGGESTED ANSWER: The canons of a
sound tax system, also known as the c. Excise imposed upon the
characteristics or, principles of a sound tax performance of an act, the enjoyment of a
system, are used as a criteria in order to privilege or the engaging in an occupation.
determine whether a tax system is able to meet
Example income tax, estate tax.
the purposes or objectives of taxation. They are:
a. Fiscal adequacy. 16. What are the kinds of taxes
b. Administrative feasibility.
c. Theoretical justice.
classified as to who bears the burden ?
Explain each briefly.
SUGGESTED ANSWER: Based on the
13. What are the elements or possibility of shifting the incidence of taxation, or
characteristics of a tax ? SUGGESTED as to who shall bear the burden of taxation, taxes
ANSWER: may be classified into:
a. Enforced contribution. a. Direct taxes. Those that are
b. Generally payable in money. extracted from the very person who, it is intended
c. Proportionate in character. or desired, should pay them (Commissioner of
d. Levied on persons, property or Internal Revenue v. Philippine Long Distance
Telephone Company, G. R. No. 140230, December 15,
exercise of a right or privilege.
2005); they are impositions for which a taxpayer is
e. Levied by the state having
directly liable on the transaction or business he is
jurisdiction.
engaged in, (Commissioner of Internal Revenue v.
f. Levied by the legislature. Philippine Long Distance Telephone Company, supra)
g. Levied for a public purpose. which liability cannot be shifted or transferred to
h. Paid at regular periods or intervals. another. Example income tax, estate tax,
donors tax, etc.
 4
b. Indirect taxes are those that are
demanded in the first instance, from, or are paid
by, one person in the expectation and intention
that he can shift the burden to (Commissioner of
Internal Revenue v. Philippine Long Distance
Telephone Company, supra) to someone else not as
a tax but as part of the purchase price.
(Commissioner, of Internal Revenue v. American
Express International, Inc. (Philippine Branch), G.
R. No. 152609, June 29, 2005 citing various
cases and authorities) Example value added tax
(VAT), documentary stamp tax, excise tax,
percentage tax, etc.
17. Silkair (Singapore) PTE,
Ltd., an international carrier, purchased
aviation gas from Petron Corporation,
which it uses for its operations. It now
claims for refund or tax credit for the
excise taxes it paid claiming that it is
exempt from the payment of excise taxes
under the provisions of Sec. 135 of the
NIRC of 1997 which provides that
petroleum products are exempt from
excise taxes when sold to Exempt entities or
agencies covered by tax treaties, conventions, and
other international agreements for their use and
consumption: Provided, however, That the country of
said foreign international carrier or exempt entities or
agencies exempts from similar taxes petroleum
products sold to Philippine carriers, entities or
agencies
Silkair further anchors its claim on
Article 4(2) of the Air Transport Agreement
between the Government of the Republic
of the Philippines and the Government of
the Republic of Singapore (Air Transport
Agreement between RP and Singapore)
which reads: Fuel, lubricants, spare parts, regular
equipment and aircraft stores introduced into, or taken
on board aircraft in the territory of one Contracting party
by, or on behalf of, a designated airline of the other
Contracting Party and intended solely for use in the
operation of the agreed services shall, with the
exception of charges corresponding to the service
performed, be exempt from the same customs duties,
inspection fees and other duties or taxes imposed in the
territories of the first Contracting Party , even when
these supplies are to be used on the parts of the journey
performed over the territory of the Contracting Party in
which they are introduced into or taken on board. The
materials referred to above may be required to be kept
under customs supervision and control.
Silkair likewise argues that it is
exempt from indirect taxes because the Air
Transport Agreement between RP and
Singapore grants exemption from the
same customs duties, inspection fees and
other duties or taxes imposed in the
territory of the first Contracting Party. It
invokes Maceda v. Macaraig, Jr., G.R. No.
88291, May 31, 1991, 197 SCRA 771.which
upheld the claim for tax credit or refund by
the National Power Corporation (NPC) on
the ground that the NPC is exempt even
from the payment of indirect taxes.
Is Silkair entitled to the tax refund or
credit it seeks ? Reason out your answer.
SUGGESTED ANSWER: Silkair is not
entitled to tax refund or credit for the following
reasons:
a. The excise tax on aviation fuel is an
indirect tax. The proper party to question, or seek a
refund of, an indirect tax is the statutory taxpayer,
the person on whom the tax is imposed by law and
who paid the same even if he shifts the burden
thereof to another. (Philippine Geothermal, Inc. v.
Commissioner of Internal Revenue, G.R. No. 154028,
July 29, 2005, 465 SCRA 308, 317-318) The NIRC
provides that the excise tax should be paid by the
manufacturer or producer before removal of
domestic products from place of production. Thus,
Petron Corporation, not Silkair, is the statutory
taxpayer which is entitled to claim a refund based
on Section 135 of the NIRC of 1997 and Article
4(2) of the Air Transport Agreement between RP
and Singapore.
Even if Petron Corporation passed on to
Silkair the burden of the tax, the additional amount
billed to Silkair for jet fuel is not a tax but part of
the price which Silkair had to pay as a purchaser.
[Philippine Acetylene Co., Inc. v. Commissioner of
Internal Revenue, 127 Phil. 461, 470 (1967)]
b. Silkair could not seek refuge under
Maceda v. Macaraig, Jr., G.R. No. 88291, May 31,
1991, 197 SCRA 771.which upheld the claim for
tax credit or refund by the National Power
Corporation (NPC) on the ground that the NPC is
exempt even from the payment of indirect taxes.
In Commissioner of Internal Revenue v.
Philippine Long Distance Telephone Company,
G.R. No. 140230, December 15, 2005, 478 SCRA
61 the Supreme Court clarified the ruling in
Maceda v. Macaraig, Jr., viz: It may be so that in
Maceda vs. Macaraig, Jr., the Court held that an
exemption from all taxes granted to the National
Power Corporation (NPC) under its charter
includes both direct and indirect taxes.
An exemption from all taxes excludes
indirect taxes, unless the exempting statute, like
NPCs charter, is so couched as to include indirect
tax from the exemption. The amendment under
Republic Act No. 6395 enumerated the details
covered by NPCs exemption. Subsequently, P.D.
380, made even more specific the details of the
exemption of NPC to cover, among others, both
direct and indirect taxes on all petroleum products
used in its operation. Presidential Decree No. 938
[NPCs amended charter] amended the tax
exemption by simplifying the same law in general

terms. It succinctly exempts NPC from all forms
of taxes, duties, fees The use of the phrase all
forms of taxes demonstrates the intention of the
law to give NPC all the tax exemptions it has been
enjoying before.
The exemption granted under Section 135
(b) of the NIRC of 1997 and Article 4(2) of the Air
Transport Agreement between RP and Singapore
cannot, without a clear showing of legislative
intent, be construed as including indirect taxes.
Statutes granting tax exemptions must be
construed in strictissimi juris against the taxpayer
and liberally in favor of the taxing authority, and if
an exemption is found to exist, it must not be
enlarged by construction. (Silkair (Singapore) PTE,
Ltd., v. Commissioner of Internal Revenue, G.R. No.
173594, February 6, 2008)
18.
What are the different kinds of taxes
classified as to purpose ?
SUGGESTED
ANSWER:
a. General, fiscal or revenue imposed
for the purpose of raising public funds for the
service of the government.
b. Special or regulatory imposed
primarily for the regulation of useful or non-useful
occupation or enterprises and secondarily only for
the raising of public funds.
LIMITATIONS OR RESTRICTIONS ON
THE POWER
1. Purpose for the limitations on
the power of taxation.
The inherent and constitutional limitations to the
power of taxation are safeguards which would
prevent abuse in the exercise of this otherwise
unlimited and plenary power.
The limitations also serve as a standard to
measure the validity of a tax law or the act of a
taxing authority. A violation of the limitations serves
to invalidate a tax law or act in the exercise of the
power to tax.
INHERENT LIMITATIONS
1. What are the inherent
limitations on the power of taxation ?
SUGGESTED ANSWERS:
a. Public purpose. The revenues
collected from taxation should be devoted to a
public purpose.
b. No improper delegation of legislative
authority to tax. Only the legislature can exercise
the power of taxes unless the same is delegated to
some other governmental body by the constitution
5
or through a law which does not violate any
provision of the constitution.
c. Territoriality. The taxing power should
be exercised only within territorial boundaries of the
taxing authority.
d. Recognition of government
exemptions; and
e. Observance of the principle of comity.
Comity is the respect accorded by nations to each
other because they are equals. On the other hand
taxation is an act of sovereign. Thus, the power
should be imposed upon equals out of respect.
Some authorities include no double taxation.
2. What are the principles to
consider in the determination of whether
tax revenues are devoted for a public
purpose ?
SUGGESTED ANSWER:
a. The tax revenues are for a public
purpose if utilized for the benefit of the community
in general. An alternative meaning is that tax
proceeds should be utilized only to attain the
objectives of government.
b. Inequalities resulting from the
singling out of one particular class for taxation or
exemption infringe no constitutional limitation.
REASON: It is inherent in the power to tax
that the legislature is free to select the subjects of
taxation.
BASIS: The lifeblood theory.
c. An individual taxpayer need not
derive direct benefits from the tax.
REASON: The paramount consideration is
the welfare of the greater portion of the
population.
d. A tax may be imposed, not so much
for revenue purposes, but under police power for
the general welfare of the community. This would
still be for a public purpose.
e. Public purpose continually
expanding. Areas formerly left to private initiative
now lose their boundaries and may be undertaken
by the government if it is to meet the increasing
social challenges of the times.
f. Tax revenue must not be used for
purely private purposes or for the exclusive
benefit of private persons.
g. Private persons may be benefited
but such benefit should be merely incidental as its
main object is the benefit of the community in
general.
h. Determined at the time of enactment
of tax law and not at the time of implementation.
i. There is a presumption of public
purpose even if the tax law does not specifically
provide for its purpose. (Santos & Co., v.
Municipality of Meycauayan, et al., 94 Phil. 1047)
j. Public use is no longer confined to the
traditional notion of use by the public but held
 6
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. For taxpayers, there must be a
showing:
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, 337 SCRA 733, 741)
c. For voters, there must be a showing
of obvious interest in the validity of the election
law in question.
d. For concerned citizens, there must
be a showing that the issues raised are of
transcendental importance which must be settled
early.
e. For legislators, there must be a claim
that the official action complained of infringes
upon their prerogatives as legislators. (David, et
al., v. President Gloria Macapagal-Arroyo, etc., et
al., G. R. No. 171396, May 3, 2006)
5. Only those directly affected
have locus standi to impugn the alleged
encroachment by the executive
department into the legislative domain of
Congress.
a. Only those who shall be directly
affected by such executive encroachment, such
as for example employees who would find
themselves subject to disciplinary powers that
may be imposed under the questioned Executive
Order as they have a direct and specific interest in
raising the substantive issue therein (Automotive
Industry Workers Alliance (AIWA),etc., et al., v.
Romulo, etc. ,et al., G. R. No. 157509, January
18, 2005) or employees who are going to be
demoted, transferred or otherwise affected by any
personnel action subject o the rule on exhaustion
of administrative remedies.
b. Moreover, and if at all, only Congress,
can claim any injury from the alleged executive
encroachment of the legislative function to amend,
modify and/or repeal laws. (Automotive Industry
Workers Alliance (AIWA),etc., et al., supra, citing
Gonzales v. Narvasa, G. R. No. 140835, August
14,2000, 337 SCRA 733, 741)
6. Locus standi being merely a
matter of procedure, have been waived in
certain instances where a party who is not
personally injured may be allowed to bring
suit. The following are examples of instances
where suits have been brought by parties who
have not have been personally injured by the
operation of a law or any other government act but
 7
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 four-fifth percent (2 4/5%) or (ii)
national government deficit as a charges pursuant to Article X, section 5 of the 1987
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.
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
Constitution. (Batangas Power Corporation v.
Batangas City, et al. G. R. No. 152675, and companion
case, April 28, 2004 citing National Power Corporation v.
City of Cabanatuan, G. R. No. 149110, April 9, 2003)
Local government legislation, is not
regarded as a transfer of general legislative
power, but rather as the grant of authority to
prescribe local regulations, according to
immemorial practice, subject, of course, to the
interposition of the superior in cases of necessity.
(People v. Vera, 65 Phil. 56)
10. Taxing power of the local
government is limited. The taxing power of
local governments is limited in the sense that
Congress can enact legislation granting tax
exemptions.
While the system of local government
taxation has changed with the onset of the 1987
Constitution, the power of local government units
to tax is still limited.
While the power to tax by local
governments may be exercised by local legislative
bodies, no longer merely by virtue of a valid
delegation as before, but pursuant to direct
authority conferred by Section 5, Article X of the
Constitution, the basic doctrine on local taxation
remains essentially the same, the power to tax is
[still] primarily vested in the Congress. (Quezon
City, et al., v. ABS-CBN Broadcasting Corporation, G.
R. No. 166408, October 6, 2008 citing City Government
of Quezon City, et al. v. Bayan Telecommunications,
Inc., G.R. No. 162015, March 6, 2006, 484 SCRA 169
in turn referring to Mactan Cebu International Airport
 8
Authority, v. Marcos, G.R. No. 120082, September 11,
1996, 261 SCRA 667, 680)
11. Further amplification by
Bernas of the local governments power to
tax. What is the effect of Section 5 on the fiscal
position of municipal corporations? Section 5
does not change the doctrine that municipal
corporations do not possess inherent powers of
taxation. What it does is to confer municipal
corporations a general power to levy taxes and
otherwise create sources of revenue. They no
longer have to wait for a statutory grant of these
powers. The power of the legislative authority
relative to the fiscal powers of local governments
has been reduced to the authority to impose
limitations on municipal powers. Moreover, these
limitations must be consistent with the basic
policy of local autonomy. The important legal
effect of Section 5 is thus to reverse the principle
that doubts are resolved against municipal
corporations. Henceforth, in interpreting statutory
provisions on municipal fiscal powers, doubts will
be resolved in favor of municipal corporations. It
is understood, however, that taxes imposed by
local government must be for a public purpose,
uniform within a locality, must not be confiscatory,
and must be within the jurisdiction of the local unit
to pass. (Quezon City, et al., v. ABS-CBN
Broadcasting Corporation, G. R. No. 166408, October
6, 2008 citing City Government of Quezon City, et al. v.
Bayan Telecommunications, Inc., G.R. No. 162015,
March 6, 2006, 484 SCRA 169)
12. Reconciliation of the local
governments authority to tax and the
Congressional general taxing power.
Congress has the inherent power to tax, which
includes the power to grant tax exemptions. On
the other hand, the power of local governments,
such as provinces and cities for example Quezon
City, to tax is prescribed by Section 151 in
relation to Section 137 of the LGC which
expressly provides that notwithstanding any
exemption granted by any law or other special
law, the City or a province may impose a franchise
tax. It must be noted that Section 137 of the LGC
does not prohibit grant of future exemptions.
The Supreme Court in a series of cases
has sustained the power of Congress to grant tax
exemptions over and above the power of the local
governments delegated power to tax. (Quezon
City, et al., v. ABS-CBN Broadcasting Corporation, G.
R. No. 166408, October 6, 2008 citing City Government
of Quezon City, et al. v. Bayan Telecommunications,
Inc., G.R. No. 162015, March 6, 2006, 484 SCRA 16)
Indeed, the grant of taxing powers to local
government units under the Constitution and the
LGC does not affect the power of Congress to
grant exemptions to certain persons, pursuant to a
declared national policy. The legal effect of the
constitutional grant to local governments simply
means that in interpreting statutory provisions on
municipal taxing powers, doubts must be resolved
in favor of municipal corporations. [Ibid., referring
to Philippine Long Distance Telephone Company, Inc.
(PLDT) vs. City of Davao]
13. General principles of
income taxation in the Philippines or the
source rule of income taxation as
provided in the NIRC of 1997.
a. A citizen of the Philippines residing
therein is taxable on all income derived from
sources within and without the Philippines;
b. A nonresident citizen is taxable
only on income derived from sources within the
Philippines;
c. An individual citizen of the
Philippines who is working and deriving income
abroad as an overseas contract worker is
taxable only on income from sources within the
Philippines: Provided, That a seaman who is a
citizen of the Philippines and who receives
compensation for services rendered abroad as a
member of the complement of a vessel engaged
exclusively in international trade shall be treated
as an overseas contract worker;
d. An alien individual, whether a
resident or not of the Philippines, is taxable only
on income derived from sources within the
Philippines;
e. A domestic corporation is taxable on all
income derived from sources within and without
the Philippines; and
f. A foreign corporation, whether engaged
or not in trade or business in the Philippines, is
taxable only on income derived from sources
within the Philippines. (Sec. 23, NIRC of 1997,
emphasis supplied)
14. Juliane a non-resident
alien appointed as a commission agent by
a domestic corporation with a sales
commission of 10% all sales actually
concluded and collected through her
efforts. The local company withheld the
amount of P107,000 from her sales
commission and remitted the same to the
BIR.
She filed a claim for refund alleging
that her sales commission is not taxable
because the same was a compensation for
her services rendered in Germany and
therefore considered as income from
sources outside the Philippines.
Is her contention correct ?
SUGGESTED ANSWER: Yes. The
important factor which determines the source of
 9
income of personal services is not the residence of
the payor, or the place where the contract for
service is entered into, or the place of payment, but
the place where the services were actually
performed.
Since the activity of securing the sales were
in Germany, then the income did not originate from
sources from within the Philippines. (Commissioner
of Internal Revenue v. Baier-Nickel, G. R. No. 153793,
August 29, 2006)
15. Ensite, Ltd.. is a Canadian
corporation not doing business in the
Philippines. It holds 40% of the shares of
Philippine Stamping Plant, Inc.,., a
Philippine company while the 60% is
owned by Fred Corporation, a Filipino-
owned Philippine corporation. Ensite Co.
also owns 100% of the shares of Susanto
Co., an Indonesian company which has a
duly licensed Philippine branch. Due to
worldwide restructuring of the Ensite
Ltd.,. group, Ensite Ltd.,. decided to sell
all its shares in Philippine Stamping Plant,
Inc. and Susanto Co. The negotiations for
the buy-out and the signing of the
Agreement of Sale were all done in the
Philippines. The Agreement provides that
the purchase price will be paid to Ensite
Ltds bank account in the U.S. and that
title to the Philippine Stamping Plant, Inc.
and Susanto Co. shall be transferred to
General Co., in Toronto Canada where
stock certificates will be delivered.
General Co. seeks your advice as to
whether or not it will subject the payments
of the purchase price to withholding tax.
Explain your advice. SUGGESTED
ANSWER: The payments of the purchase price
will be subject to withholding tax. Considering that
all the activities (sales) occurred within the
Philippines, the income is considered as income
from within, subject to Philippine income taxation.
Ensite, Ltd. being a foreign corporation is to be
taxed on its income derived from sources within
the Philippines.
16. Ensite, Ltd. is a
Canadian corporation, which has a duly
licensed Philippine branch engage in
trading activities in the Philippines.
Ensite, Ltd.. also invested directly in 40%
of the shares of stock of Philippine
Stamping Plant, Inc.., a Philippine
corporation. These shares are booked in
the Head Office of Ensite, Ltd.. and are not
reflected as assets of the Philippine
branch. In 2009, Philippine Stamping
Plant, Inc.. declared dividends to its
stockholders. Before remitting the
dividends to Ensite Ltd.,., Philippine
Stamping Plant, Inc. Co. seeks your
advice as to whether it will subject the
remittance to withholding tax. There is no
need to discuss WT rates, if applicable.
Focus your discussion on what is the
issue.
SUGGESTED ANSWER: Philippine
Stamping Plant, Inc.. should subject the
remittance to withholding tax.. Since Philippine
Stamping Plant. is a Philippine corporation, its
shares of stock have obtained a business situs in
the Philippines, hence the dividends are
considered as income from within. Ensite. Ltd.,
being a foreign corporation, should be subject to
tax on its income from within.
17. Philippine Stamping
Plant, Inc., a Philippine corporation, has
an executive Larry who is a Filipino
citizen. Philippine Stamping Plant, Inc,.
has a subsidiary in Malaysia (Kuala
Lumpur Manufacturing, Inc.) and will
assign Larry for an indefinite period to
work full time for Kuala Lumpur
Manufacturing, Inc.. Larry will bring his
family to reside in Malaysia and will lease
out his residence in the Philippines. The
salary of Larry will be shouldered 50% by
Philippine Stamping Plant, Inc.. while the
other 50% plus housing, cost of living and
educational allowances of Larrys
dependents will be shouldered by Kuala
Lumpur Manufacturing, Inc.. Philippine
Stamping Plant, Inc.. will credit the 50% of
Larrys salary to his Philippine bank
 10
account. Larry will sign the contract of
employment in the Philippines. He will
also be receiving rental income for the
lease of his Philippine residence.
Are these salaries, allowances
and rentals subject to Philippine income
tax? Explain briefly.
SUGGESTED ANSWER: The salaries and
allowances of Larry, being derived from labor or
personal services rendered outside of the
Philippines is considered as income from without.
Since Larry is an OCW, then he is to be taxed
only on his income derived from within the
Philippines such as the rentals on his Philippine
residence, and not on his income from without.
18. Obama Airlines, Inc., a
foreign airline company which does not
maintain any flight to and from the
Philippines sold air tickets in the
Philippines, through a general sales agent,
relating to the carriage of passengers and
cargo between two points, both outside the
Philippines.
a. Is Obama, Inc., subject to
income taxes on the sale of the tickets ?
SUGGESTED ANSWER: Yes. The source
of income which is taxable is that activity which
produced the income. The sale of tickets in the
Philippines is the activity that determines whether
such income is taxable in the Philippines.
The tickets exchanged hands here and
payments for fares were also made here in
Philippine currency. The situs of the source of
payments is the Philippines. the flow of wealth
proceeded from and occurred, within the Philippine
territory, enjoying the protection accorded by the
Philippine Government. In consideration of such
protection, the flow of wealth should share the
burden of supporting the government.
[Commissioner of Internal Revenue v. British
Overseas Airways Corporation (BOAC), 149 SCRA
395]
Off-line air carriers having general sales
agents in the Philippines are engaged in or doing
business in the Philippines and their income from
sales of passage documents here is income from
within the Philippines. Thus, the off-line air carrier
liable for the 32% (now 30%) tax on its taxable
income. [South African Airways v. Commissioner of
Internal Revenue, G.R. No. 180356, February 16, 2010
citing Commissioner of Internal Revenue v. British
Overseas Airways Corporation (British Overseas
Airways), No. L-65773-74, April 30, 1987, 149 SCRA
395]
b. Supposing that Obama, Inc.,
sells tickets outside of the Philippines for
passengers it carry from Gold City, South
Africa to the Philippines but returns to
South Africa without any cargo or
passengers. Would it then be subject to
any Philippine tax on such sales ?
SUGGESTED ANSWER: It would not be
subject to any tax. It is not subject to any income
tax because the activity which generated the
income (the sale of the tickets) was performed
outside of the Philippines.
It is not subject to the carriers tax based
on gross Philippine billings because there were no
lifts that originated from the Philippines. Gross
Philippine Billings refers to the amount of gross
revenue derived from carriage of persons, excess
baggage, cargo and mail originating from the
Philippines in a continuous and uninterrupted
flight, irrespective of the place of sale or issue and
the place of payment of the ticket or passage
document. [NIRC of 1997, Sec. 28(A)(3)(a)]
c. Would your answer be the same
if Obama, Inc. sold tickets outside of the
Philippines for travelers who are going to
picked up by Obama, Inc., planes from the
Diosdado Macapagal Intl. Airport at Clark,
Angeles, Pampanga, bound for Nairobi,
Kenya ? Reason out your answer.
SUGGESTED ANSWER: No more. This
time Obama, Inc., would be subject to the carriers
tax based on Gross Philippine Billings. (GPB).
Gross Philippine Billings refers to the
amount of gross revenue derived from carriage of
persons, excess baggage, cargo and mail
originating from the Philippines in a continuous
and uninterrupted flight, irrespective of the place
of sale or issue and the place of payment of the
ticket or passage document. [NIRC of 1997, Sec.
28(A)(3)(a)]
The place of sale is irrelevant; as long as
the uplifts of passengers and cargo occur from the
Philippines, income is included in GPB. (South
African Airways v. Commissioner of Internal Revenue,
G.R. No. 180356, February 16, 2010)
19. No improper delegation of
legislative authority to tax. The power to tax
is inherent in the State, such power being
inherently legislative, based on the principle that
taxes are a grant of the people who are taxed,
and the grant must be made by the immediate
representatives of the people; and where the
people have laid the power, there it must remain
and be exercised. (Commissioner of Internal
Revenue v. Fortune Tobacco Corporation, G. R. Nos.
167274-75, July 21, 2008)
CONSTITUTIONAL LIMITATIONS
 11
h. No tax exemption without the
1. Constitutional limitations on the concurrence of majority vote of all members of
power of taxation . The general or indirect Congress;
constitutional limitations as well as the specific or i. No use of public money or property
direct constitutional limitations. for religious purposes except if priest is assigned to
the armed forces, penal institutions, government
2. The general or indirect orphanage or leprosarium;
constitutional limitations on the power of j. Money collected on tax levied for a
special purpose to be used only for such purpose,
taxation are:
balance if any, to general funds;
a. Due process clause;
k. The Supreme Court's power to review
b. Equal protection clause;
judgments or orders of lower courts in all cases
c. Freedom of the press;
involving the legality of any tax, impose,
d. Religious freedom;
assessment or toll or the legality of any penalty
e. No taking of private property without
imposed in relation to the above;
just compensation;
l. Authority of local government units to
f. Non-impairment clause;
create their own sources of revenue, to levy taxes,
g. Law-making process:
fees and other charges subject to guidelines and
1) Bill should embrace only one
limitations imposed by Congress consistent with
subject expressed in the title thereof;
the basic policy of local autonomy;
2) Three (3) readings on three
m. Automatic release of local
separate days;
government's just share in national taxes;
3) Printed copies in final form
n. Tax exemption of all revenues and
distributed three (3) days before passage.
assets of non-stock, non-profit educational
h. Presidential power to grant reprieves,
institutions used actually, directly and exclusively
commutations and pardons and remittal of fines
for educational purposes;
and forfeiture after conviction by final judgment.
o. Tax exemption of all revenues and assets
of proprietary or cooperative educational
3. The specific or direct institutions subject to limitations provided by law
constitutional limitation. including restrictions on dividends and provisions
a. No imprisonment for non-payment of for reinvestment of profits;
a poll tax; p. Tax exemption of grants,
b. Taxation shall be uniform and endowments, donations or contributions used
equitable; actually, directly and exclusively for educational
c. Congress shall evolve a progressive purposes subject to conditions prescribed by law.
system of taxation;
d. All appropriation, revenue or tariff bills 5. Equal protection of the law
shall originate exclusively in the House of
clause is subject to reasonable
Representatives, but the Senate may propose and
concur with amendments; classification. If the groupings are
e. The President shall have the power to characterized by substantial distinctions that make
veto any particular item or items in an real differences, one class may be treated and
appropriation, revenue, or tariff bill, but the veto regulated differently from another. The
shall not affect the item or items to which he does classification must also be germane to the purpose
not object; of the law and must apply to all those belonging to
f. Delegated power of the President to the same class. (Tiu, et al., v. Court of Appeals, et al.,
G.R. No. 127410, January 20, 1999)
impose tariff rates, import and export quotas,
tonnage and wharfage dues:
1) Delegation by Congress 6. Requisites for valid
2) through a law classification. All that is required of a valid
3) subject to Congressional limits classification is that it be reasonable, which
and restrictions means that a. the classification should be
4) within the framework of based on substantial distinctions which make for
national development program. real differences,
g. Tax exemption of charitable b. that it must be germane to the
institutions, churches, parsonages and convents purpose of the law;
appurtenant thereto, mosques, and all lands, c. that it must not be limited to existing
buildings and improvements of all kinds actually, conditions only; and
directly and exclusively used for religious, d. that it must apply equally to each
charitable or educational purposes; 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.
A classification is necessary when it is
narrowly drawn so that no alternative, less
burdensome means is available to accomplish the
state interest.
12
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 law-abiding
citizen who pays his real estate taxes
promptly. Due to a series of typhoons and
adverse economic conditions, an
ordinance is passed by Soliman City
granting a 50% discount for payment of
unpaid real estate taxes for the preceding
year and the condonation of all penalties
on fines resulting from the late payment.
Arguing that the ordinance rewards
delinquent tax payers and discriminates
against prompt ones, Benjie demands that
he be refunded an amount equivalent to
one-half of the real property taxes he paid.
The municipal attorney rendered an
 13
opinion that Benjie cannot be reimbursed
because the ordinance did not provide for
such reimbursement. Benjie files suit to
declare the ordinance void on the ground
that it is a class legislation. Will his suit
prosper ? Explain your answer briefly.
SUGGESTED ANSWER: No. There is no
class legislation because there is no violation of
the equal protection suit. There is a valid
classification between those who already paid
their taxes and those who have not. Furthermore,
the taxing authority has the prerogative to select
the subjects and objects of taxation, including
granting a 50% discount in the payment of unpaid
real estate taxes, and the condonation of all
penalties on fines resulting from late payment.
10. The rewards law to tax
collectors does not violate equal
protection. The equal protection clause
recognizes a valid classification, that is, a
classification that has a reasonable foundation or
rational basis and not arbitrary. With respect to RA
9335, its expressed public policy is the
optimization of the revenue-generation capability
and collection of the BIR and the BOC. Since the
subject of the law is the revenue- generation
capability and collection of the BIR and the BOC,
the incentives and/or sanctions provided in the
law should logically pertain to the said agencies.
Moreover, the law concerns only the BIR and the
BOC because they have the common distinct
primary function of generating revenues for the
national government through the collection of
taxes, customs duties, fees and charges.
Indubitably, such substantial distinction is
germane and intimately related to the purpose of
the law. Hence, the classification and treatment
accorded to the BIR and the BOC under RA 9335
fully satisfy the demands of equal protection.
(ABAKADA Guro Party List, etc., v. Purisima, etc., et al.,
G. R. No. 166715, August 14, 2008)
11. The prosecution of one guilty
person while others equally guilty are not
prosecuted, however, is not, by itself, a
denial of the equal protection of the laws .
Where the official action purports to be in
conformity to the statutory classification, an
erroneous or mistaken performance of the
statutory duty, although a violation of the statute,
is not without more a denial of the equal
protection of the laws.
The unlawful administration by officers of a
statute fair on its face, resulting in its unequal
application to those who are entitled to be treated
alike, is not a denial of equal protection unless
there is shown to be present in it an element of
intentional or purposeful discrimination. This may
appear on the face of the action taken with
respect to a particular class or person, or it may
only be shown by extrinsic evidence showing a
discriminatory design over another not to be
inferred from the action itself.
(Santos v. People, et al, G. R. No. 173176, August 26,
2008)
12. Equal protection should not be
used to protect commission of crime .
While all persons accused of crime are to be
treated on a basis of equality before the law, it
does not follow that they are to be protected in the
commission of crime. It would be unconscionable,
for instance, to excuse a defendant guilty of
murder because others have murdered with
impunity.
Likewise, if the failure of prosecutors to
enforce the criminal laws as to some persons
should be converted into a defense for others
charged with crime, the result would be that the
trial of the district attorney for nonfeasance would
become an issue in the trial of many persons
charged with heinous crimes and the enforcement
of law would suffer a complete breakdown.
(Santos v. People, et al, G. R. No. 173176, August 26,
2008)
13. Illustration of double
taxation in local taxation. there is indeed
double taxation if Coca-Cola is subjected to the
taxes under both 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)
 14
16. Tax exemptions in franchises
are always subject to withdrawal. A because all of its shares are owned by the
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
Republic of the Philippines. It is thus, an
instrumentality of the National Government
which is exempt from local taxation. As
such it is not a private corporation
engaged in business enjoying franchise
Is such contention meritorious ?
SUGGESTED ANSWER: No. Philippine
Long Distance Telephone Company, Inc., v. City of
Davao, et al., etc., G. R. No. 143867, August 22,
2001, upheld the authority of the City of Davao, a
local government unit, to impose and collect a local
franchise tax because the Local Government Code
has withdrawn all tax exemptions previously
enjoyed by all persons and authorized local
government units to impose a tax on business
enjoying a franchise tax notwithstanding the grant
of tax exemption to them.
20. In lieu of all taxes in the
franchise of ABS-CBN does not exempt it
from local franchise taxes. It does not
expressly provide what kind of taxes ABS-CBN is
exempted from. It is not clear whether the
exemption would include both local, whether
municipal, city or provincial, and national tax.
Whether the in lieu of all taxes provision would
include exemption from local tax is not
unequivocal.
The right to exemption from local franchise
tax must be clearly established and cannot be
made out of inference or implications but must be
laid beyond reasonable doubt. Verily, the
uncertainty in the in lieu of all taxes provision
should be construed against ABS-CBN. ABS-
CBN has the burden to prove that it is in fact
covered by the exemption so claimed but has
failed to do so. (Quezon City, et al., v. ABS-CBN
Broadcasting Corporation, G. R. No. 166408, October
6, 2008)
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:
 15
[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.)
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 of direct
duplicate taxation:
a. Same
1) Subject or object is taxed twice
2) by the same taxing authority
3) for the same taxing purpose
4) during the same taxable period
b. Taxing all of the subjects or objects
for the first time without taxing all of them for the
second time.
If any of the elements are absent then
there is indirect duplicate taxation which is not
prohibited by the constitution.
NOTES AND COMMENTS:
a. Presence of the 2nd element violates
the equal protection clause. If only the 1 st 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
 16
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. Thepetitioners allege that the
R-VAT law is constitutional because the
Bicameral Conference Committed has
exceeded its authority in including
provisions which were never included in
the versions of both the House and Senate
such as inserting the stand-by authority to
the President to increase the VAT from 10%
to 12%; deleting entirely the no pass-on
provisions found in both the House and
Senate Bills; inserting the provision
imposing a 70% limit on the amount of
input tax to be credited against the output
tax; and including the amendments
introduced only by Senate Bill No. 1950
regarding other kinds of taxes in addition
to the value-added tax. Thus, there was a
violation of the constitutional mandate that
revenue bills 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
 17
Basis based on law deficiency
based on contract or is unavailing under Art. 1279 of the Civil
judgment Code. (South African Airways v. Commissioner of
Internal Revenue, G.R. No. 180356, February 16, 2010
Failure to Pay may result in no imprisonment
reiterating Caltex Philippines, Inc. v. Commission
imprisonment on Audit, which applied Francia v. Intermediate
Appellate Court)
Mode of generally payable in payable in money,
Payment money property or service
4. Exceptions: When set-off or
Assignability not assignable assignable
compensation allowed for local taxes.
Payment unless it becomes a may be a subject a.
debt is not subject to Where both claims already become
compensation or set- overdue and demandable as well as fully
off liquidated. Compensation takes place by
Interest does not draw draws interest operation
if of law under Art. 1200 in relation to Arts.
interest unless 1279 and 1290 all of the Civil Code. (Domingo v.
stipulated or delayed
delinquent Garlitos, 8 SCRA 443)
b. Compensation takes place by
Authority imposed by public can be imposed by
operation of law, where the government and the
authority private individuals
taxpayer are in their own right reciprocally debtors
Prescription Prescriptive periods debt under theand
Civilcreditors of each other, and that the debts are
for tax under NIRC Code both due and demandable. This is in
consequence of Article 1278 and 1279 of the Civil
WARNING: Do not use the above Code. (Domingo v. Garlitos, 8 SCRA 443)
arrangement in answering Bar questions. c. ,The
Supreme Court upheld the validity of a set-off
2. Compensation takes place by
operation of law, where the local government and between the taxpayer and the government. In
the taxpayer are in their own right reciprocally both cases, the claims of the taxpayers therein
debtors and creditors of each other, and that the were certain and liquidated. The claims were
debts are both due and demandable, in certain since there were no doubts or disputes as
consequence of Articles 1278 and 1279 of the Civil
to their refundability. In fact, the government
Code. (Domingo v. Garlitos, 8 SCRA 443)
admitted the fact of over-payment.
(Commissioner of Internal Revenue v. Esso
3. May there be compensation
Standard Eastern, Inc., 172 SCRA 364)
or set-off between a national tax and a
debt ? Reason out your answer. d. In case of a tax overpayment, the
SUGGESTED ANSWER: As a BIRs obligation to refund or off-set arises from the
general rule, there could be no compensation or moment the tax was paid. REASON: Solutio
set-off between a tax and a debt for the following indebeti. (Commissioner of Internal Revenue v. Esso
reasons: Standard Eastern, Inc 172 SCRA 364)
a. Lifeblood
theory.
e. While judgment should be
b. Taxes are not contractual
obligations but arise out of a duty to, and are the rendered in favor of Republic for unpaid taxes,
positive acts of government, to the making and judgment ought at the same time to issue for
enforcing of which the personal consent of the Sampaguita Pictures commanding payment to the
individual taxpayer is not required. (Republic v. latter by the Republic of the value of the backpay
Mambulao Lumber Co., 4 SCRA 622)
c. Taxes cannot be the certificates which the Republic received. (Republic
subject of compensation because the government v. Ericta, 172 SCRA 623)
and taxpayer are not mutually creditors and
debtors of each other and a claim for taxes is not
5. Gilbert obtained a
such a debt, demand, contract or judgment as is judgment for a sum of money against the
allowed to be set-off. municipality of Camiling. The judgment
Thus, it is correct to say that the offsetting has become final although execution has
of a taxpayers tax refund with its alleged tax not issued. Upon receiving an
 18
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. 167274-75,
July 21, 2008 citing CIR v. Court of Appeals, 338 Phil.
322, 330-331 (1997)] As burdens, taxes should not
be unduly exacted nor assumed beyond the plain
meaning of the tax laws. (Ibid., citing CIR v.
Philippine American Accident Insurance Company, Inc.,
G.R. No. 141658, March 18, 2005, 453 SCRA 668)
8. Strict interpretation of tax
exemption laws. Taxes are what civilized
people pay for civilized society. They are the
lifeblood of the nation. Thus, statutes granting tax
exemptions are construed stricissimi juris against
the taxpayer and liberally in favor of the taxing
authority. A claim of tax exemption must be
clearly shown and based on language in law too
plain to be mistaken. Otherwise stated, taxation is
the rule, exemption is the exception. (Quezon City,
et al., v. ABS-CBN Broadcasting Corporation, G. R. No.
166408, October 6, 2008 citing Mactan Cebu
International Airport Authority v. Marcos, G.R. No.
120082, September 11, 1996, 261 SCRA 667, 680)
The burden of proof rests upon the party claiming
the exemption to prove that it is in fact covered by
the exemption so claimed. (Quezon City, supra citing
Agpalo, R.E., Statutory Construction, 2003 ed., p. 301)
9. Rationale for strict
interpretation of tax exemption laws. The
basis for the rule on strict construction to statutory
provisions granting tax exemptions or deductions
is to minimize differential treatment and foster
impartiality, fairness and equality of treatment
among taxpayers. (Quezon City, et al., v. ABS-CBN
Broadcasting Corporation, G. R. No. 166408, October
6, 2008) He who claims an exemption from his
share of common burden must justify his claim
that the legislature intended to exempt him by
unmistakable terms. For exemptions from
taxation are not favored in law, nor are they
presumed. They must be expressed in the
clearest and most unambiguous language and not
left to mere implications. It has been held that
exemptions are never presumed the burden is on
the claimant to establish clearly his right to
exemption and cannot be made out of inference
or implications but must be laid beyond
reasonable doubt. In other words, since taxation
is the rule and exemption the exception, the
intention to make an exemption ought to be
expressed in clear and unambiguous terms.
(Quezon City, supra citing Agpalo, R.E., Statutory
Construction, 2003 ed., p. 302)
10. Why are tax exemptions are
strictly construed against the taxpayer and
liberally in favor of the State ?
SUGGESTED ANSWER: Taxes are
necessary for the continued existence of the State.
11. In case of a tax overpayment,
where the BIRs obligation to refund or 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
 19
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)]
The rule is that tax exemptions must be
strictly construed such that the exemption will not
be held to be conferred unless the terms under
which it is granted clearly and distinctly show that
such was the intention. [Commissioner, supra citing
Phil. Acetylene Co. v. Commission of Internal Revenue,
et al., 127 Phil. 461, 472 (1967); Manila Electric
Company v. Vera, G.R. No. L-29987, 22 October 1975,
67 SCRA 351, 357-358; Surigao Consolidated Mining
Co. Inc. v. Commissioner of Internal Revenue, supra]
A claim for tax refund may be based on
statutes granting tax exemption or tax refund. In
such case, the rule of strict interpretation against
the taxpayer is applicable as the claim for refund
partakes of the nature of an exemption, a
legislative grace, which cannot be allowed unless
granted in the most explicit and categorical
language. The taxpayer must show that the
legislature intended to exempt him from the tax by
words too plain to be mistaken. [Commissioner,
supra with a note to see Surigao Consolidated Mining
Co. Inc. v. CIR, supra at 732-733; Philex Mining Corp.
v. Commissioner of Internal Revenue, 365 Phil. 572,
579 (1999); Davao Gulf Lumber Corp. v. Commissioner
of Internal Revenue, 354 Phil. 891-892 (1998); .
Commissioner of Internal Revenue v. Tokyo Shipping
Co., Ltd., 314 Phil. 220, 228 (1995)]
15. Effect of a BIR reversal of a
previous ruling interpreting a law as
exempting a taxpayer. A reversal of a BIR
ruling favorable to a taxpayer would not necessarily
create a perpetual exemption in his favor, for after
all the government is never estopped from
collecting taxes because of mistakes or errors on
the part of its agents. (Lincoln Philippine Life
Insurance Company, Inc., etc., v. Court of Appeals, et al.,
293 SCRA 92, 99)
16. A tax amnesty is a general pardon
or intentional overlooking by the State of its
authority to impose penalties on persons otherwise
guilty of evasion or violation of a revenue or a tax
law.
It partakes of an absolute waiver by the
government of its right to collect what is due it and
to give tax evaders who wish to relent a chance to
start with a clean slate. A tax amnesty, much like a
tax exemption, is never favored nor presumed in
law. The grant of a tax amnesty, similar to a tax
exemption, must be construed strictly against the
taxpayer and liberally in favor of the taxing
authority. (Philippine Banking Corporation, etc., v.
 20
Commissioner of Internal Revenue, G. R. No. 170574, residence allows as credit the amount that would
January 30, 2009) have been paid, as if no reduction has been
made. (Vogel, Klaus on Double Taxation Conventions,
17. The purpose of tax amnesty is to Third Edition, p.1255 cited in Segarra, Venice H, Tax
a. give tax evaders who wish to relent a Treaties: Trick or treat ?, Philippine Daily Inquirer,
chance to start a clean slate, and to December 6, 2002, p. C5)
b. give the government a chance to collect There may be instances where a particular
uncollected tax from tax evaders income is exempt from taxation in order to
without having to go through the tedious encourage foreign investments which may lead to
process of a tax case. (Banas, Jr. v. Court of economic development. If the tax credit method is
Appeals, et al., G.R. No. 102967, February 10, 2000) used, there would be no more tax to credit since
there is no more tax to credit as a result of the tax
18. Tax amnesty distinguished exemption. Consequently, when the tax method
from tax exemption. credit method is applied to these items of income,
a. Tax amnesty is an immunity from all such incentives are siphoned off since, in effect,
criminal, civil and administrative liabilities arising the tax benefits are cancelled out. (Ibid.) Thus, the
from nonpayment of taxes (People v. Castaneda, need for the tax sparing provision.
G.R. No. L-46881, September 15, 1988) WHILE a
tax exemption is an immunity from civil liability only. NATIONAL INTERNAL REVENUE
It is an immunity or privilege, a freedom from a
charge or burden to which others are subjected.
CODE
(Florer v. Sheridan, 137 Ind. 28, 36 NE 365)
b. Tax amnesty applies only to past tax ORGANIZATION AND FUNCTIONS OF THE
periods, hence of retroactive application BUREAU OF INTERNAL REVENUE
(Castaneda, supra) WHILE tax exemption has
prospective application. 1. Rep. Act No. 1405, the Bank
Deposits Secrecy Law prohibits inquiry
19. Tax avoidance is the use of legally into bank deposits. As exceptions to Rep.
permissible means to reduce the tax while tax Act No. 1405, the Commissioner of Internal
evasion is the use of illegal means to escape the Revenue is only authorized to inquire into
payment of taxes. the bank deposits of:
a. a decedent to determine his gross
20. Tax evasion connotes the estate; and
integration of three factors: b. any taxpayer who has filed an
a. The end to be achieved, i.e., the application for compromise of his tax liability by
payment of less than that known by the taxpayer to reason of financial incapacity to pay his tax liability.
be legally due, or the non-payment of tax when it is [Sec. 5 (F), NIRC of 1997]
shown that a tax is due; c. A taxpayer who authorizes the
b. an accompanying state of mind which Commissioner to inquire into his bank deposits.
is described as being evil on bad faith, willful,
or deliberate and not accidental; and 2. Purpose of the NIRC of 1997.
c. a course of action or failure of action Revenue generation has undoubtedly
which is unlawful. (Commissioner of Internal Revenue been a major consideration in the passage
v. The Estate of Benigno P. Toda, Jr., , etc., G. R. No.
of the Tax Code. (Commissioner of Internal
147188, September 14, 2004)
Revenue v. Fortune Tobacco Corporation, G. R. Nos.
167274-75, July 21, 2008)
21. Tax avoidance
distinguished from tax evasion. 3.
a. Tax avoidance is legal while tax Purpose of shift from ad valorem
evasion is illegal. system to specific tax system in taxation
b. The objective of tax avoidance in of cigarettes. The shift from the ad valorem
most instances is merely to reduce the tax that is system to the specific tax system is likewise
due while is tax evasion the object is to entirely meant to promote fair competition among the
escape the payment of taxes. players in the industries concerned, to ensure an
c. Tax evasion warrants the imposition equitable distribution of the tax burden and to
of civil, administrative and criminal penalties while simplify tax administration by classifying
tax avoidance does not. cigarettes, among others, into high, medium and
low-priced based on their net retail price and
22. Tax sparing is a provision in some accordingly graduating tax rates. (Commissioner of
tax treaties which provides that the state of
 21
Internal Revenue v. Fortune Tobacco Corporation, G. R.
Nos. 167274-75, July 21, 2008)
TAX ON INCOME
1. The Tax Code has included
under the term corporation partnerships,
no matter how created or organized, joint-stock
companies, joint accounts (cuentas en
participacion), associations, or insurance
companies. [Sec. 24 now Sec. 24 (B) of the NIRC
of 1997]
2. In Evangelista v. Collector, 102 Phil.
140, the Supreme Court held citing Mertens that
the term partnership includes a syndicate,
group, pool, joint venture or other unincorporated
organization, through or by means of which any
business, financial operation, or venture is carried
on.
3. Certain business organizations
do not fall under the category of
corporations under the Tax Code, and
therefore not subject to tax as corporations,
include:
a. General professional partnerships;
b. Joint venture or consortium formed for
the purpose of undertaking construction projects
engaging in petroleum, coal, geothermal, and other
energy operations, pursuant to an operation or
consortium agreement under a service contract
with the Government. [1st sentence, Sec. 22 (B),
BIRC of 1997]
4. Co-heirs who own
inherited properties which produce income
should not automatically be considered as
partners of an unregistered corporation
subject to income tax for the following
reasons:
a. The sharing of gross returns does not of
itself establish a partnership, whether or not the
persons sharing them have a joint or common right
or interest in any property from which the returns
are derived. There must be an unmistakable
intention to form a partnership or joint venture.
(Obillos, Jr. v. Commissioner of Internal Revenue, 139
SCRA 436)
b. There is no contribution or investment
of additional capital to increase or expand the
inherited properties, merely continuing the
dedication of the property to the use to which it had
been put by their forebears. (Ibid.)
c. Persons who contribute property or
funds to a common enterprise and agree to share
the gross returns of that enterprise in proportion to
their contribution, but who severally retain the title
to their respective contribution, are not thereby
rendered partners. They have no common stock
capital, and no community of interest as principal
proprietors in the business itself from which the
proceeds were derived. (Elements of the Law of
Partnership by Floyd R. Mechem, 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 debtor as compensation for his services.
11. An insolvent debtor does not
realize taxable income from the
cancellation or forgiveness. (Commissioner
v. Simmons Gin Co., 43 Fd 327 CCA 10th)
 22
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 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;
 23
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.
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
 24
employee should not have previously
availed of the privilege under the retirement
plan of the same or another employer. [1 st
par., Sec. 2.78 (B) (1), Rev. Regs. No. 2-98]
27. What kind of separation
(retirement) pay is excluded from gross
income, hence tax-exempt ?
SUGGESTED ANSWER:
a. Any amount received by an official,
employee or by his heirs,
b. From the employer
c. As a consequence of separation of
such official or employee from the service of the
employer because of
1) Death, sickness or other
physical disability; or
2) For any cause beyond the
control of said official or employee [Sec. 32
(B) (6) (b), NIRC of 1997], such as
retrenchment, redundancy and cessation
of business. [1st par., Sec. 2.78 (B), (1) (b),
Rev. Regs. No. 2-98]
28. What are the Itemized
deductions from gross income and who
may avail of them ?
a. Ordinary and necessary trade,
business or professional expenses.
b. The amount of interest paid or
incurred within a taxable year on indebtedness in
connection with the taxpayers profession, trade or
business.
Resident citizens, resident alien individuals
and nonresident alien individuals who are engaged
in trade and business, on their gross incomes
other from compensation income are allowed to
deduct these expenses. Domestic corporations,
estates and trusts may also deduct this expense.
Nonresident citizens and foreign corporations on
their gross incomes from within may also deduct
this expense.
Nonresident alien individuals not engaged
in trade or business in the Philippines are not
allowed to deduct this expense.
c. Taxes paid or incurred within the
taxable year in connection with the taxpayers
profession.
Resident citizens, resident alien individuals
and nonresident alien individuals who are engaged
in trade and business, on their gross incomes
other from compensation income are allowed to
deduct these expenses. Domestic corporations,
estates and trusts may also deduct this expense.
Nonresident citizens and foreign corporations on
their gross incomes from within may also deduct
this expense.
Nonresident alien individuals not engaged
in trade or business in the Philippines are not
allowed to deduct this expense.
d. Ordinary losses, losses from
casualty, theft or embezzlement; and net operating
losses.
Resident citizens, resident alien individuals
and nonresident alien individuals who are engaged
in trade and business, on their gross incomes
other from compensation income are allowed to
deduct these expenses. Domestic corporations,
estates and trusts may also deduct this expense.
Nonresident citizens and foreign corporations on
their gross incomes from within may also deduct
this expense.
Nonresident alien individuals not engaged
in trade or business in the Philippines are not
allowed to deduct this expense.
e. Bad debts due to the taxpayer,
actually ascertained to be worthless and charged
off within the taxable year, connected with
profession, trade or business, not sustained
between related parties.
Resident citizens, resident alien individuals
and nonresident alien individuals who are engaged
in trade and business, on their gross incomes
other from compensation income are allowed to
deduct these expenses. Domestic corporations,
estates and trusts may also deduct this expense.
Nonresident citizens and foreign corporations on
their gross incomes from within may also deduct
this expense.
Nonresident alien individuals not engaged
in trade or business in the Philippines are not
allowed to deduct this expense.
f. Depreciation or a reasonable
allowance for the exhaustion, wear and tear
(including reasonable allowance for obsolescence)
of property used in trade or business.
Resident citizens, resident alien individuals
and nonresident alien individuals who are engaged
in trade and business, on their gross incomes
other from compensation income are allowed to
deduct these expenses. Domestic corporations,
estates and trusts may also deduct this expense.
Nonresident citizens and foreign corporations on
their gross incomes from within may also deduct
this expense.
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.
 25
Nonresident citizens and foreign corporations on
their gross incomes from within may also deduct
this expense.
Nonresident alien individuals not engaged
in trade or business in the Philippines are not
allowed to deduct this expense.
h. Charitable and other
contributions. Resident citizens, resident alien
individuals and nonresident alien individuals who
are engaged in trade and business, on their gross
incomes other from compensation income are
allowed to deduct these expenses. Domestic
corporations, estates and trusts may also deduct
this expense. Nonresident citizens and foreign
corporations on their gross incomes from within
may also deduct this expense.
Nonresident alien individuals not engaged
in trade or business in the Philippines are not
allowed to deduct this expense.
i. Research and development
expenditures treated as deferred expenses paid or
incurred by the taxpayer in connection with his
trade, business or profession, not deducted as
expenses and chargeable to capital account but
not chargeable to property of a character which is
subject to depreciation or depletion.
Resident citizens, resident alien individuals
and nonresident alien individuals who are engaged
in trade and business, on their gross incomes
other from compensation income are allowed to
deduct these expenses. Domestic corporations,
estates and trusts may also deduct this expense.
Nonresident citizens and foreign corporations on
their gross incomes from within may also deduct
this expense.
Nonresident alien individuals not engaged
in trade or business in the Philippines are not
allowed to deduct this expense.
j. Contributions to pension trusts.
Resident citizens, resident alien individuals and
nonresident alien individuals who are engaged in
trade and business, on their gross incomes other
from compensation income are allowed to deduct
these expenses. Domestic corporations, estates
and trusts may also deduct this expense.
Nonresident citizens and foreign corporations on
their gross incomes from within may also deduct
this expense.
Nonresident alien individuals not engaged
in trade or business in the Philippines are not
allowed to deduct this expense.
k. Insurance premiums for health and
hospitalization. Resident citizens, resident alien
individuals and nonresident alien individuals who
are engaged in trade and business, on their gross
incomes other from compensation income are
allowed to deduct these expenses. Nonresident
citizens and nonresident alien individual engaged
in trade or business in the Philippine on their gross
incomes from within may also deduct these
premiums.
Nonresident alien individuals not engaged
in trade or business in the Philippines are not
allowed to deduct these premiums.
l. Personal and additional exemptions.
Resident citizens, and resident alien on their gross
incomes and from compensation income are
allowed to deduct these premiums. Nonresident
citizens on their gross incomes from within may
also deduct this expense. Nonresident alien
individuals engaged in trade or business in the
Philippines are allowed to deduct these exemptions
under reciprocity.
Nonresident alien individuals not engaged
in trade or business in the Philippines are not
allowed to deduct this expense.
29. Distinguish ordinary
expenses from capital expenditures.
SUGGESTED ANSWER: Ordinary
expenses are those which are common to incur in
the trade or business of the taxpayer WHILE
capital expenditures are those incurred to improve
assets and benefits for more than one taxable year.
Ordinary expenses are usually incurred during a
taxable year and benefits such taxable year.
Necessary expenses are those which are
appropriate or helpful to the business.
30. What are the requisites for
the deductibility of business expenses ?
SUGGESTED ANSWER: The following are
the requisites for deductibility of business
expenses:
a. Compliance with the business test:
1) Must be ordinary and
necessary;
2) Must be paid or incurred within
the taxable year;
3) Must be paid or incurred in
carrying on a trade or business.
4) Must not be bribes, kickbacks
or other illegal expenditures
b. Compliance with the substantiation test.
Proof by evidence or records of the deductions
allowed by law including compliance with the
business test.
31. What are the requisites for
the deductibility of ordinary and necessary
trade, business, or professional expenses,
like expenses paid for legal and auditing
services ?
SUGGESTED ANSWER:
a. the expense must be ordinary and
necessary;
b. it must have been paid or incurred
during the taxable year dependent upon the
 26
method of accounting upon the basis of which the
net income is computed.
c. it must be supported by receipts,
records or other pertinent papers. (Commissioner
of Internal Revenue v, Isabela cultural Corporation,
G. R. No. 172231, February 12, 2007)
32. TMG Corporation is
issuing the accrual method of accounting.
In 2005 XYZ Law Firm and ABC Auditing
Firm rendered various services which were
billed by these firms only during the
following year 2006. Since the bills for
legal and auditing services were received
only in 2006 and paid in the same year,
TMG deducted the same from its 2006
gross income. The BIR disallowed the
deduction ?
Who is correct, TMG or BIR ?
Explain.
SUGGESTED ANSWER: The BIR is
correct. TMG should have deducted the
professional and legal fees in the year they were
incurred in 2005 and not in 2006 because at the
time the services were rendered in 2005, there was
already an obligation to pay them. (Commissioner
of Internal Revenue v, Isabela Cultural Corporation,
G. R. No. 172231, February 12, 2007)
NOTES AND COMMENTS:
a. Accounting methods for tax
purposes comprise a set of rules for determining
when and how to report income and deductions.
(Commissioner of Internal Revenue v, Isabela
cultural Corporation, G. R. No. 172231, February
12, 2007)
The two (2) principal accounting methods for
recognition of income are the (a) accrual method;
and the (b) cash method.
b. Recognition of income and
expenses under the accrual method of
accounting. Amounts of income accrue where
the right to receive them becomes fixed, where
there is created an enforceable liability. Liabilities,
are incurred when fixed and determinable in nature
without regard to indeterminacy merely of time of
payment.. (Commissioner of Internal Revenue v,
Isabela cultural Corporation, G. R. No. 172231,
February 12, 2007)
The accrual of income and expense is
permitted when the all-events test has been met.
(Ibid.)
c. All-events test. This test requires:
1) fixing of a right to income or
liability to pay; and
2) the availability of the
reasonable accurate determination of such
income or liability.
The test does not demand that the amount
of such income or liability be known absolutely,
only that a taxpayer has at his disposal the
information necessary to compute the amount with
reasonable accuracy.
The all-events test is satisfied where
computation remains uncertain; if its basis is
unchangeable, the test is satisfied where a
computation may be unknown, but is not as much
as unknowable, within the taxable year. The
amount of liability does not have to be determined
exactly,; it must be determined with reasonable
accuracy implies something less than an exact or
completely accurate amount.
The propriety of an accrual must be judged
by the fact that a taxpayer knew, or could
reasonably be expected to have known, at the
closing of its books for the taxable year. Accrual
method of accounting presents largely a question
of fact; such that the taxpayer bears the burden of
proof of establishing the accrual of an item of
income or deduction. (Commissioner of Internal
Revenue v, Isabela cultural Corporation, G. R. No.
172231, February 12, 2007)
d. Under the cash method income is to
be construed as income for tax purposes only upon
actual receipt of the cash payment. It is also
referred to as the cash receipts and
disbursements method because both the receipt
and disbursements are considered. Thus, income
is recognized only upon actual receipt of the cash
payment but no deductions are allowed from the
cash income unless actually disbursed through an
actual payment in cash.
33. The fringe benefits tax is a final
withholding tax imposed on the grossed-up
monetary value of fringe benefits furnished,
granted or paid by the employer to the employee,
except rank and file employees. [1st par., Sec. 2.33
(A), Rev. Regs. No. 3-98]
34. What is meant by fringe
benefit for purposes of taxation ?
SUGGESTED ANSWER: For purposes of
taxation, fringe benefit means any good, service, or
other benefit furnished or granted in cash or in kind
by an employer to an individual employee (except
rank and file employees), such as but not limited to:
a. Housing;
b. Expense account;
c. Vehicle of any kind;
d. Household personnel, such as maid,
driver and others;
e. Interest on loan at less than market
rate to the extent of the difference between the
market rate and actual rate granted;
f. Membership fees, dues and other
expenses borne by the employer for the employee
in social and athletic clubs or other similar
organizations;
g. Expenses for foreign travel;
 27
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 outstanding
stock of which is owned, directly or indirectly, by or
for such individual;
c. Two corporations more than fifty
percent (50%) in value of the outstanding stock of
which is owned, directly or indirectly, by or for the
same individual;
d. A grantor and a fiduciary of any trust;
or
e. The fiduciary of a trust and the
fiduciary of another trust if the same person is a
grantor with respect to each trust; or
f. A fiduciary of a trust and a beneficiary
of such. [Sec. 36 (B), NIRC of 1997]
40. What are the requisites for
valid deduction of bad debts from gross
income ?
SUGGESTED ANSWER:
a. There must be an existing indebtedness
due to the taxpayer which must be valid and legally
demandable;
b. The same must be connected with the
taxpayers trade, business or practice of
profession;
c. The same must not be sustained in a
transaction entered into between related parties;
d. The same must be actually charged off
the books of accounts of the taxpayer as of the end
of the taxable year; and
e. The debt must be actually
ascertained to be worthless and uncollectible
during the taxable year;
f. The debts are uncollectible despite
diligent effort exerted by the taxpayer. [Sec. 34 (E)
(1), NIRC of 1997; Sec. 3, Rev. Regs. No. 5-99
reiterated in Rev. Regs. No. 25-2002; Philippine
Refining Corporation v. Court of Appeals, et al.,
256 SCRA 667]
g. Must have been reported as receivables
in the income tax return of the current or prior
years. (Sec. 103, Rev. Regs. No. 2)
:
41. What is the tax benefit
rule ?
SUGGESTED ANSWER: The tax benefit
rule posits that the recovery of bad debts
previously allowed as deduction in the preceding
year or years shall be included as part of the
taxpayers gross income in the year of such
 28
recovery to the extent of the income tax benefit of Revenue, G. R. No. 159991, November 16, 2006 citing
said deduction. Madrigal and Paterno v. Rafferty and Concepcion, 38
NOTES AND COMMENTS: Phil. 414, 418 (1918)]
a. If in the year the taxpayer claimed
deduction of bad debts written-off, he realized a 45. What is the amount allowed
reduction of the income tax due from him on as basic personal exemption ?
account of the said deduction, his subsequent SUGGESTED ANSWER: There shall be
recovery thereof from his debtor shall be treated as allowed a basic personal exemption amounting to
a receipt of realized taxable income. (Sec. 4, Rev. Fifty thousand pesos (P50,000) for each individual
Regs. 5-99) taxpayer.
b. If the said taxpayer did not benefit In the case of married individuals where
from the deduction of the said bad debt written-off only one of the spouse is deriving gross income,
because it did not result to any reduction of his only such spouse shall be allowed the personal
income tax in the year of such deduction (i.e. exemption. [Sec. 35 (A), NIRC of 1997 as amended
where the result of his business operation was a by Rep. Act No. 9504; Sec. 2.79 (I) (1) (a), Rev. Regs.
net loss even without deduction of the bad debts No. 2-98 as amended by Rev. Regs. No. 10-2008]
written-off), then his subsequent recovery thereof NOTES AND COMMENTS: It is clear from
shall be treated as a mere recovery or a return of Rep. Act No. 9504 that each of the spouses may
capital, hence, not treated as receipt of realized claim the P50,000.00. Thus, the total familial
taxable income. (Sec. 4, Rev. Regs. 5-99) basic personal exemption for spouses is
P100,000.00.
42. Depreciation is the gradual Furthermore, the distinctions between the
diminution in the useful value of tangible property concepts of single, married and head of the family
resulting from ordinary wear and tear and from for purpose of availing of the basic personal
normal obsolescence. The term is also applied to exemption has already been eliminated by Rep.
amortization of the value of intangible assets the Act No. 9504.
use of which in the trade or business is definitely
limited in duration. 45. What are the amounts of
additional exemptions ?
43. The methods of depreciation SUGGESTED ANSWER: An individual,
are the following: a. whether single or married,
a. Straight line method; b. shall be allowed an additional
b. Declining balance method; exemption of Twenty-Five Thousand Pesos
c. Sum of years digits method; and (P25,000.00)
d. Any other method prescribed by the c. for each qualified dependent child,
Secretary of Finance upon the recommendation of d. provided that the total number of
the Commissioner of Internal Revenue: dependents for which additional exemptions may
1) Apportionment to units of be claimed
production; 1) shall not exceed four (4)
2) Hours of productive use; dependents. [1st par., Sec. 2.79 (I) (1) (b),
3) Revaluation method; and Rev. Regs. No. 2-98 as amended by Rev. Regs.
4) Sinking fund method. No. 10-2008, arrangement and numbering
supplied; Sec. 35 (B), NIRC of 1997 as
amended by Rep. Act No. 9504]
44. What are personal and NOTES AND COMMENTS:
additional exemptions ? a. It is clear that under the amendment,
SUGGESTED ANSWER: These are the single individuals may now claim for the additional
theoretical persona, living and family expenses of exemptions. Furthermore, the concept of head of
an individual allowed to be deducted from the gross a family does not find application anymore.
or net income of an individual taxpayer. b. A dependent means
These are arbitrary amounts which have a. a legitimate, illegitimate or legally
been calculated by our lawmakers to be roughly adopted child
equivalent to the minimum of subsistence, taking b. chiefly dependent upon and living
into account the personal status and additional with the taxpayer
qualified dependents of the taxpayer. They are c. if such dependent is
fixed amounts in the sense that the amounts have 1) not more than twenty-one (21)
been predetermined by our lawmakers and until years of age,
our lawmakers make new adjustments on these 2) unmarried and
personal exemptions, the amounts allowed to be 3) not gainfully employed or
deducted by a taxpayer are fixed as predetermined d. if such dependent,
by Congress. [Pansacola v. Commissioner of Internal 1) regardless of age
 29
2) is incapable of self-support
3) because of mental or physical
defect. [2nd par., Sec. 2.79 (I) (1) (b), Rev.
Regs. No. 2-98 as amended by Rev. Regs. No.
10-2008, arrangement and numbering supplied;
Sec. 35 (b), NIRC of 1997, as amended by Rep.
Act No. 9504]
c. It is to be noted that under the NIRC
of 1997, as amended by Rep. Act No. 9504, only
qualified dependent children are considered for
additional exemptions. Grandparents, parents, as
well, as brothers or sisters, and other collateral
relatives are not qualified dependents to be
claimed as additional exemptions.
However, if they are senior citizens they
may qualify as additional exemptions under the
Senior Citizens Law but not under the NIRC of
1997, as amended by Rep. Act No. 9504.
Senior citizen shall be treated as
dependents provided for in the National Internal
Revenue Code, as amended, and as such,
individual taxpayers caring for them, be they
relatives or not shall be accorded the privileges
granted by the Code insofar as having
dependents are concerned. [last par. Sec. 5 (a),
Rep. Act No. 7432, as amended by Rep. Act 9257, The
Expanded Senior Citizens Act of 2003]
47. Capital assets shall refer to all
real properties held by a taxpayer, whether or not
connected with his trade or business, and which
are not included among the real properties
considered as ordinary assets. (Sec. 2.a, Rev. Regs.
No. 7-2003)
The term capital assets means property
held by the taxpayer (whether or not connected
with his trade or business), BUT DOES NOT
INCLUDE:
a. Stock in trade of the taxpayer, or
b. Other property of a kind which would
properly be included in the inventory of the
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
 30
installment basis after introducing comparatively
valuable improvements not for the purpose of
simply liquidating the estate but to make them
more saleable ; the employment of an attorney-in-
fact for the purpose of developing, managing,
administering and selling the lots; sales made with
frequency and continuity; annual sales income from
the sales was considerable; and the heir was not a
stranger to the real estate business. (Tuazon, Jr.
v. Lingad, 58 SCRA 170)
f. Inherited agricultural property improved
by introduction of good roads, concrete gutters,
drainage and lighting systems converts the
property to an ordinary asset. The property forms
part of the stock in trade of the owner, hence an
ordinary asset. This is so, as the owner is now
engaged in the business of subdividing real estate.
(Calasanz v. Commissioner of Internal Revenue, 144
SCRA at p. 672)
51. Tax treatment of real
properties that have been transferred. Real
properties classified as capital or ordinary asset in
the hands of the seller/transferor may change their
character in the hands of the buyer/transferee. The
classification of such property in the hands of the
buyer/transferee shall be determined in accordance
with the following rules:
a. Real property transferred through
succession or donation to the heir or donee who is
not engaged in the real estate business with
respect to the real property inherited or donated,
and who does not subsequently use such property
in trade or business, shall be considered as a
capital asset in the hands of the heir or donee.
b. Real property received as dividend by
stockholders who are not engaged in the real
estate business and who not subsequently use
such real property in trade or business shall be
treated as capital assets in the hands of the
recipient even if the corporation which declared the
real property dividend is engaged in real estate
business.
c. The real property received in an
exchange shall be treated as ordinary asset in the
hands of the transferee in the case of a tax-free
exchange by taxpayer not engaged in real estate
business to a taxpayer who is engaged in real
estate business, or to a taxpayer who, even if not
engaged in real estate business, will use in
business the property received in the exchange.
(Sec. 3.f., Rev. Regs. No. 7-2003)
52. The tax is imposed upon
capital gains presumed to have been
realized from the sale, exchange, or other
disposition of real property located in the
Philippines, classified as capital assets.
[Sec. 24 (D) (1`), NIRC of 1997] Revenue Regulations
No. 7-2003 has defined real property as having
the same meaning attributed to that term under
Article 415 of Republic Act No. 386, otherwise
known as the Civil Code of the Philippines. (Sec.
2.c, Rev. Regs. No. 7-2003)
53. Transactions covered by the
presumed capital gains tax on real
property:
a. sale,
b. exchange,
c. or other disposition, including pacto
de retro sales and other forms of conditional
sales. [Sec. 24 (D) (1), NIRC of 1997, numbering
and arrangement supplied]
d. Sale, exchange, or other disposition
includes taking by the government through
condemnation proceedings. (Gutierrez v. Court of Tax
Appeals, et al., 101 Phil. 713; Gonzales v. Court of Tax
Appeals, et al., 121 Phil. 861)
54. In case the mortgagor exercises
his right of redemption within one (1) year
from the issuance of the certificate of sale, in a
foreclosure of mortgage sale of real property, no
capital gains tax shall be imposed because no
capital gains has been derived by the mortgagor
and no sale or transfer of real property was
realized. [Sec. 3 (1), Rev. Regs. No. 4-99]
55. In case of non-redemption of the
property sold upon a foreclosure of mortgage
sale, the presumed capital gains tax shall be
imposed, based on the bid price of the highest
bidder but only upon the expiration of the one year
period of redemption provided for under Sec. 6 of
Act No. 3135, as amended by Act No. 4118, and
shall be paid within thirty (30) days from the
expiration of the said one-year redemption period.
[Sec. 3 (2), Rev. Regs. No. 4-99]
56. The basis for the final
presumed capital gains tax of six per cent
(6%) is whichever is the higher of the
a. gross selling price, or
b. the current fair market value as
determined below:
1) the fair market value or real
properties located in each zone or area as
determined by the Commissioner of
Internal Revenue after consultation with
competent appraisers both from the private
and public sectors; or
2) the fair market value as shown
in the schedule of values of the Provincial
and City Assessors. [Sec. 24 (D) (1) in
relation to Sec. 6 (E), both of the NIRC of 1997]
It does not matter whether there was an
actual gain or loss because the tax is a presumed
capital gains tax. It is the transaction that is taxed
not the gain.
 31
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 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.
 32
(Manila Banking Corporation v. Commissioner of
Internal Revenue, G. R. No. 168118, August 26,
2006)
NOTES AND COMMENTS:
a. The MCIT and when should be
imposed and the four (4) year grace period. A
minimum corporate income tax of two percent (2%)
of the gross income as of the end of the taxable
year, as defined herein, is hereby imposed on a
corporation taxable under this Title, beginning on
the fourth taxable year immediately following the
year in which such corporation commenced its
business operations, when the minimum corporate
income tax is greater than the tax computed under
Subsection (A) of this section for the taxable year.
[Sec. 27 (E) (1), NIRC of 1997]
b. Period when a corporation
becomes subject to the MCIT. (5) Specific rules
for determining the period when a corporation
becomes subject to the MCIT (minimum corporate
income tax) -
For purposes of the MCIT, the taxable year
in which business operations commenced shall be
the year in which the domestic corporation
registered with the Bureau of Internal Revenue
(BIR).
Firms which were registered with BIR in
1994 and earlier years shall be covered by the
MCIT beginning January 1, 1998. x x x (Rev.
Regs. No. 9-98)
Manila Banking Corporation v.
Commissioner of Internal Revenue, G. R. No.
168118, August 26, 2006 did not apply Rev. Regs.
No. 9-98 because Rev. Regs. No. 4-95 specifically
refers to thrift banks.)
c. Purpose of the four (4) year grace
period. The intent of Congress relative to the
MCIT is to grant a four (43) year suspension of
tax payment to newly organized corporations.
Corporations still starting their business operations
have to stabilize their venture in order to obtain a
stronghold in the industry. It does not come as a
surprise then when many companies reported
losses in their initial years of operations.
Thus, in order to allow new corporations to
grow and develop at the initial stages of their
operations, the lawmaking body saw the need to
provide a grace period of four years from their
registration before they pay their minimum
corporate income tax. (Manila Banking
Corporation v. Commissioner of Internal Revenue,
G. R. No. 168118, August 26, 2006)
ESTATE TAXES
1. In determining the gross
estate of a decedent, are his properties
abroad to be included, and more
particularly, what constitutes gross
estate ?
SUGGESTED ANSWER: Yes, if the
decedent is a Filipino citizen or a resident alien.
The gross estate of a Filipino citizen or a
resident alien comprises all his real property,
wherever situated; all his personal property,
tangible, intangible or mixed, wherever situated, to
the extent of his interest existing therein at the
time of his death.
The gross estate of a non-resident alien
comprises all his real property, situated in the
Philippines; all his personal property, tangible,
intangible or mixed, situated in the Philippines, to
the extent of his interest existing therein at the
time of his death.
2. William Smith, an American
citizen, was a permanent resident of the
Philippines. He died in San Francisco,
California. He left 10,000 shares of San
Miguel Corporation, a condominium unit
at the Twin Towers Building at Pasig,
Metro Manila and a house and lot in
Miami, Florida.
What assets shall be included in the
Estate Tax Return to be filed with the
BIR ?
SUGGESTED ANSWER: All of the assets
should be included in the Estate Tax Return to be
filed with the BIR.
Smith, an American citizen and a permanent
resident of the Philippines is considered, for
Philippine estate tax purposes, a resident alien.
Consequently, the assets to be included in the
Estate Tax Return to be filed with the BIR should
be all property, real or personal, tangible,
intangible or mixed, wherever situated, to the
extent of the interest that Smith has at the time of
his death. Thus, all of the properties enumerated
in the problem irrespective of where they are
situated are includible in the gross estate of
Smith.
3. Proceeds of life insurance
includible in a decedents gross estate.
a. The decedent takes the insurance
policy on his own life
1) The amounts are receivable by
a) the decedents estate,
b) his executor, or
c) administrator
irrespective of whether or not the
insured retained the power of
revocation, OR
2) The amounts are receivable
by any beneficiary designated in the
policy of insurance as revocable beneficiary.
[Sec. 85 (E), NIRC of 1997]
b. One, other than the decedent takes
the insurance policy on the life of the decedent
 33
1) The amounts are receivable deduction is called a vanishing deduction because
by the deduction allowed diminishes over a period of
a) the decedents estate, five (5) years.
b) his executor, or It is also known as a deduction for property
c) administrator previously taxed.
2) irrespective of whether or not
the insured retained the power of 7. Vanishing deduction (property
revocation. previously taxed) allowed as a deduction
from the gross estate of a Filipino citizen,
4. Proceeds of life insurance NOT whether resident or not, of a resident alien
included in a decedents gross estate. decedent, or of a nonresident alien
a. The decedent takes the insurance decedent.
policy on his own life, and a. An amount equal to the value
b. the proceeds are receivable by a specified below of
beneficiary designated as irrevocable. [Sec. 85 (E), b. Any property forming a part of the
NIRC of 1997)
NOTES AND COMMENTS: The beneficiary
gross estate situated in the Philippines
must not be the decedents estate, executor or c Of any person who died within five
administrator, because the proceeds are includible as years prior to the death of the decedent, or
part of gross estate whether or not the decedent transferred to the decedent by gift within five
retained the power of revocation. (Ibid.) years prior to his death,
c. Where the insurance was NOT taken d. Where such property can be
by the decedent upon his own life and the identified as having been received by the
beneficiary is not the decedents estate, his decedent from the donor by gift, or from such prior
executor or administrator. decedent by gift, bequest, devise, or inheritance,
or
4. Items deductible from the gross e. Which can be identified as having
estate of a resident or nonresident Filipino been acquired in exchange for property so
decedent or resident alien decedent: received:
a. Expenses, losses, claims, 100% of the value if the prior decedent died
indebtedness and taxes; within one year prior to the death of the decedent,
b. Property previously taxed; or if the property was transferred to him by gift
c. Transfers for public use; within the same period prior to his death;
d. The Family Home up to a value not 80% of the value if the prior decedent died
exceeding P1 million; more than one year but not more than two years
e. Standard deduction of P1 million; prior to the death of the decedent, or if the
f. Medical expenses not exceeding property was transferred to him by gift within the
P500,000.00; same period prior to his death;
g. Amount of exempt retirement 60% of the value if the prior decedent died
received by the heirs under Rep. Act Mo. 4917; more than two years but not more than three
h. Net share of the surviving spouse in years prior to the death of the decedent, or if the
the conjugal partnership. property was transferred to him by gift within the
same period prior to his death;
5. There is no transfer in 40% of the value if the prior decedent died
more than three years but not more than four
contemplation of death if there is no
years prior to the death of the decedent, or if the
showing that the transferor retained for his life property was transferred to him by gift within the
or for any period which does not in fact end before same period prior to his death; and
his death: (1) the possession or enjoyment of, or 20% of the value if the prior decedent died
the right to the income from the property, or (2) the more than four years but not more than five years
right, either alone or in conjunction with any prior to the death of the decedent, or if the
person, to designate the person who shall possess property was transferred to him by gift within the
or enjoy the property or the income therefrom. same period prior to his death. [Sec. 86 (A) (2) and
[Sec. 85 (B), NIRC of 1997] (B) (2), NIRC of 1997, numbering, arrangement and
underlining supplied]
6. Vanishing deduction
(deduction for property previously taxed), 8. The approval of the court
defined. The deduction allowed from the sitting in probate, or as a settlement
gross estates of citizens, resident aliens and tribunal over the estate of the deceased is
nonresident estates for properties which were not a mandatory requirement for the
previously subject to donors or estate taxes. The
 34
collection of the estate. The probate court is be considered the amount of the gift. (Sec. 102,
determining issues which are not against the NIRC of 1997)
property of the decedent, or a claim against the
estate as such, but is against the interest or 6. What is the valuation of
property right which the heir, legatee, devisee, etc. donated real property for donors tax
has in the property formerly held by the decedent. purposes ?
The notices of levy were regularly issued SUGGESTED ANSWER: The real property
within the prescriptive period. shall be appraised at its fair market value as of the
The tax assessment having become final, time of the gift.
executory and enforceable, the same can no However, the appraised value of the real
longer be contested by means of a disguised property at the time of the gift shall be whichever is
protest. (Marcos, II v. Court of Appeals, et al., 273 the higher of:
SCRA 47) a. the fair market value as determined
by the Commissioner of Internal Revenue (zonal
DONORS TAXES valuation) or
b. the fair market value as shown in the
1. What is the donors tax rate if schedule of values fixed by the Provincial and City
the donee is a stranger ? Assessors. [Sec. 102, in relation to Sec. 88 (B) both of
the NIRC of 1997]
SUGGESTED ANSWER: When the
donee or beneficiary is a stranger, the tax payable
by the donor shall be 30% of the net gifts. 7. A died leaving as his only heirs,
his surviving spouse B, and three minor
2. For purposes of the children, X, Y and Z. Since B does not
donors tax who is a stranger ? want to participate in the distribution of the
SUGGESTED ANSWER: A stranger is a is estate, she renounced her hereditary share
person who is not a: in the estate.
a. Brother, sister (whether by whole or a. Is the renunciation subject to
half-blood), spouse, ancestor and lineal donors tax ? Explain.
descendant; or SUGGESTED ANSWER: No. The general
b. Relative by consanguinity in the renunciation by an heir, including the surviving
collateral line within the fourth degree of spouse, as in the case B, of her share in the
relationship. [Sec. 99 (B), NIRC of 1997] hereditary estate left by the decedent is not
NOTES AND COMMENTS: All relatives by subject to donors tax. (4th par., Sec. 11, Rev.
affinity, irrespective of the degree, are considered Regs. No. 2-2003)
as strangers. This is so because the general renunciation
by B was not specifically and categorically done in
3. What is the tax base for favor of identified heir/s to the exclusion or
donations ? disadvantage of the other co-heirs in the
SUGGESTED ANSWER: The net gifts hereditary estate.
made during the calendar year. [Sec. 99 (A), NIRC of b. Supposing that instead of a
1997] general renunciation, B renounced her
hereditary share in As estate to X who is a
4. For purposes of the donors special child, would your answer be the
tax, what is meant by net gifts ? same ? Explain.
SUGGESTED ANSWER: The net SUGGESTED ANSWER: My answer
economic benefit from the transfer that accrues to would be different. The renunciation in favor of X
the donee. Accordingly, if a mortgaged property is would be subject to donors tax.
transferred as a gift, but imposing upon the donee This is so because the renunciation was
the obligation to pay the mortgage liability, then specifically and categorically done in favor of X
the net gift is measured by deducting from the fair and identified heir to the exclusion or
market value of the property the amount of the disadvantage of Y and Z, the other co-heirs in the
mortgage assumed. (last par., Sec. 11, Rev. hereditary estate. (4th par., Sec. 11, Rev. Regs. No.
Regs.No.2-2003) 2-2003)

5. How are gifts of personal 8. Give some donations that

property to be valued for donors tax
are exempt from donors tax.
purposes ? SUGGESTED ANSWER:
SUGGESTED ANSWER: The market value a. The first P100,000.00 net donation
of the personal property at the time of the gift shall during a calendar year is exempt from donors tax
 35
[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 non-
residents to or for the use of the National
Government or any entity created by any of its
agencies which is not conducted for profit, or
to any political subdivisions of the said
Government;
f. Gifts made by residents or non
residents in favor of an educational and/or
charitable, religious, cultural or social welfare
corporation, institution, foundation, trust or
philanthropic organization or research institution
or organization: Provided, however, That not
more than thirty percent (30%) of said gifts shall
be used by such donee for administration
purposes. [Sec. 101 (A), NIRC of 1997,
numbering and arrangement supplied]
g. Gifts made by non-resident aliens
outside of the Philippines to Philippine residents
are exempt from donors taxes because taxation is
basically territorial. The transaction, which should
have been subject to tax was made by non-
resident aliens and took place outside of the
Philippines.
9. What is the concept of
donation or gift splitting ? Illustrate.
SUGGESTED ANSWER: Donation or gift
splitting is spreading the gift over numerous
calendar years in order to avail of lower donors
taxes.
In 2008 Leon was thinking of donating a
P200,000.00 to Miklos, his first cousin. The
P200,000.00 is the totality of the net gifts for 2008.
If he donated the P200,000.00 in 2008 the first
P100,000 would be exempt and the remaining
P50,000.00 would be subject to donors tax
If Leon spreads the P200,000 donation
over two (2) calendar years, donating
P100,000.00 on December 30, 2008 and the
remaining P100,000.00 on January 1, 2009 the
transaction would be exempt from donors tax.
This is so even if the donation is separated only
by two days because the basis is the calendar
year. Leon would be enjoying the exemption for
the first P100,000.00 net gifts for each calendar
year.
10. A, who is engaged in
the car buy and sell business sold to B
P7 million Jaguar for only P4 million. The
proper VAT on the sale was paid. If you are
the BIR examiner assigned to review the
sale, would you issue a tax assessment on
the transaction ? Explain your answer
briefly.
SUGGESTED ANSWER: Donors taxes
would be due on the insufficiency of consideration.
Where property, other than real property
that has been subjected to the final capital gains
tax, is transferred for less than an adequate and
full consideration in money or moneys worth, then
the amount by which the fair market value of the
property at the time of the execution of the
Contract to Sell or execution of the Deed of Sale
which is not preceded by a Contract to Sell
exceeded the value of the agreed or actual
consideration or selling price shall be deemed a
gift, and shall be included in computing the
amount of gifts made during the calendar year.
(5th par., Sec. 11, Rev. Regs. No. 2-2003)
VALUE-ADDED TAXES (VAT)
WARNING !!! Approximately 10% of the
total questions asked in the Bar Examination are
sourced from VAT and its concepts. This area is
probably the most difficult area to forecast because
there are no statistically perceived patterns. The
author has retained the Stars System for VAT.
Considering the limited period of time, the reader is
advised to focus on areas marked with stars and
just browse the unmarked areas.
1. Value-added tax (VAT) is a
tax which is imposed only on the increase in the
worth, merit or importance of goods, properties or
services, and not on the total value of the goods
or services being sold or rendered.
2. Nature of VAT. VAT is an
indirect tax that may be shifted or passed on to
the buyer, transferee or lessee of the goods,
properties or services. As such, it should be
understood not in the context of the person or
entity that is primarily, directly liable for its
payment, but in terms of its nature as a tax on
consumption. [Commissioner of Internal Revenue v.
Seagate Technology (Philippines), G. R. No. 153866,
February 11, 2005 citing various authorities}
 36
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]
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. 16-2005,Sec. 4.105-1,
paraphrasing supplied)
8. Various VAT methods and
systems.
a. Cost deduction method. This is a
single-stage tax which is payable only by the
original sellers. (Abakada Guro Party List (etc.) v.
Ermita, etc., et al., G. R. No. 168056, September 1,
2005 and companion cases) This was subsequently
modified and a mixture of cost deduction method
and tax credit method was used to determine the
value-added tax payable. (Ibid.)
b. Tax credit method. This method
relies on invoices, an entity can credit against or
subtract from the VAT charged on its sales or
outputs the VAT paid on its purchases, inputs and
imports. [Commissioner of Internal Revenue v.
Seagate Technology (Philippines), G. R. No.
153866, February 11, 2005]
If at the end of a taxable period, the output
taxes charged by a seller are equal to the input
taxes passed on by the suppliers, no payment is
required. It is when the output taxes exceed the
input taxes that the excess has to be paid.
If however, the input taxes exceed the
output taxes, the excess shall be carried over to
the succeeding quarter or quarters. Should the
input taxes result from zero-rated or effectively
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.)
 37
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 cases,
on the motion for reconsideration)
11. Output tax is the value-
added tax due on the sale or lease or taxable
goods, properties or services by any VAT-
registered person.
12. Input tax is the value-added
tax due on or paid by a VAT-registered person on
importation of good or local purchases of goods or
services, including lease or use of properties, in
the course of his trade or business. (Rev. Regs.
No. 4.110-1, 1st par.)
13. Included in the input tax.
a. the transitional input tax and
b. the presumptive input tax xxx.
It includes
c. input taxes which can be directly
attributed to transactions subject to the VAT plus a
ratable portion of any input tax which cannot be
directly attributed to either the taxable or exempt
activity. (Rev. Regs. No. 4.110-1, 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 VAT-registered persons
upon exceeding the minimum turnover of
P1,500,000.00 in any 12-month period, or who
voluntarily register even if their turnover does not
exceed P1,500,000.00 (except franchise grantees
of radio and television broadcasting whose
threshold is P10,000,000.00) shall be entitled to a
transitional input tax on the inventory on hand as
of the effectivity of their VAT registration, on the
following:
a. goods purchased for resale in their
present condition;
b. materials purchased for further
processing, but which have not yet undergone
processing;
c. goods which have been
manufactured by the taxpayer;
d. goods in process for sale; or
e. goods and supplies for use in the
course of the taxpayers trade or business as a
VAT-registered person. [Rev. Regs. No. 16-2005,
Sec.4.111-1, (a), 1st par., arrangement and numbering
supplied]
15. Concept of presumptive input
tax credits. Persons or firms engaged in the
processing of sardines, mackerel, and milk, and in
manufacturing refined sugar, cooking oil and
packed noodle-based instant meals, shall be
allowed a presumptive input tax, creditable
against the output tax, equivalent to four percent
(4%) of the gross value in money of their
purchases of primary agricultural products which
are used as inputs to their production.
As used in this paragraph, the term
processing shall mean pasteurization, canning
and activities which through physical or chemical
process alter the exterior texture or form or inner
substance of a product in such a manner as to
prepare it for special use to which it could not
have been put in its original form or condition.
[Rev. Regs. No. 16-2005, Sec.4.111-1, (b)]
16. The VAT registration fee does
NOT violate religious freedom. The VAT
registration fee imposed on non-VAT enterprises
which includes among others, religious sects
which sells and distributes religious literature is
not violative of religious freedom, although a fixed
amount is not imposed for the exercise of a
privilege but only for the purpose of defraying part
of the cost of registration.
The registration fee is thus more of an
administrative fee, one not imposed on the
exercise of a privilege, much less a constitutional
right. (Tolentino v. Secretary of Finance, et al., and
companion cases, 235 SCRA 630)
17. Interpretation of the term In
the Course of Trade or Business as used
in the VAT system. The term "doing business"
or course of business conveys the idea of
business being done, not from time to time, but all
the time. It does not include isolated transactions.
 38
(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 in its
wholly-owned subsidiary the National
Marine Corporation (NMC). The NDC
decided to sell in one lot its NMC shares
and five (5) of its ships, which are 3,700
DWT Tween-Decker, "Kloeckner" type
vessels. The vessels were constructed for
the NDC between 1981 and 1984, then
initially leased to Luzon Stevedoring
Company, also its wholly-owned
subsidiary. Subsequently, the vessels
were transferred and leased, on a
bareboat basis, to the NMC. The NMC
shares and the vessels were offered for
public bidding. Among the stipulated
terms and conditions for the public
auction was that the winning bidder was
to pay "a value added tax of 10% on the
value of the vessels." Magsaysay Lines,
Inc., offered to buy the shares and 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 Value Added
Tax (VAT), the tax is imposed on sales,
barter, or exchange or goods and
services. The VAT is also imposed on
certain transactions deemed sales
which include:
a. Transfer, use or
consumption not in the course of business or
properties originally intended for sale or for use in
the course of business. xxx
b. Distribution or transfer to:
1) Shareholders or investors as
share in the profits of the VAT- registered
person; xxx or
2) Creditors in payment of debt
or obligation
c. Consignment of goods if actual
sale is not made within sixty (60) days following
the date such goods were consigned. Consigned
goods returned by the consignee within the 60-
day period are not deemed sold.
d. Retirement from or cessation of
business, with respect to all goods on hand,
1) whether capital goods, stock-
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.
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
 39
properties primarily for sale to customers or held the sale shall be exempt from VAT only if the
for lease in the ordinary course of trade or aggregate value of the lots do not exceed
business of the seller shall be subject to VAT. P1,500,000.00. Adjacent residential lots, although
(Rev. Regs. No. 16-2005, Sec. 4.106-3, 1st par.) covered by separate titles and/or separate tax
Thus, capital transactions of individuals are declarations, when sold or disposed of to one and
not subject to VAT. Only real estate dealers are the same buyer, whether covered by one or
subject to VAT. separate Deed of Conveyance, shall be presumed
as a sale of one residential lot. [Rev. Regs. No.
22. On 4.109-1 (B), (p), paraphrasing and numbering
September 4, 2009, XYZ, Inc., a domestic supplied]
corporation engaged in the real estate
business, sold a building for 24. VAT on services and lease of
P10,000,000.00. Is the sale subject to the properties.
value-added tax (VAT)? If so, how much? a. There shall be levied, assessed,
Explain. and collected,
SUGGESTED ANSWER: Yes. 12% on the b. a value-added tax equivalent to
gross selling price because the sale was made in twelve percent (12%) of gross receipts
the ordinary course of trade of business of X, a c. derived from the sale or exchange of
domestic corporation engaged in the real estate services,
business. 1) including the use or lease of
properties. [NIRC of 1997, Sec. 108 (A), as
amended by R.A. No. 9337, arrangement and
23. The following sales of numbering supplied]
real properties are exempt from VAT,
namely: 25. Sale or exchange of services,
a. Sale of real properties not primarily defined. The term sale or exchange of
held for sale to customers or held for lease in the services means the performance of all kinds of
ordinary course of trade or business; services in the Philippines for others for a fee,
b. Sale of real properties utilized for remuneration or consideration, whether in kind or
low-cost housing as defined by RA No. 7279, in cash, including those performed or rendered by
otherwise known as the Urban and Development the following:
Housing Act of 1992 and other related laws, such a. construction and
as RA No. 7835 and RA No. 8763. service contractors;
xxx xxx xxx b. stock, real estate, commercial,
c. Sale of real properties utilized for customs and immigration brokers;
socialized housing as defined under RA No. 7279,
and other related laws wherein the price ceiling c. lessors of property, whether personal
per unit is P225,000.00 or as may from time to or real; d.
time be determined by the HUDCC and the NEDA persons engaged in warehousing services
and other related laws. e. lessors or
xxx xxx xxx distributors of cinematographic films;
d. Sale of residential lot valued at One f. persons engaged in milling,
Million Five Hundred Thousand Pesos processing, manufacturing or repacking goods for
(P1,500,000.00) and below, or house & lot and others;
other residential dwellings valued at Two Million g. proprietors, operators or
Give Hundred Thousand Pesos (P2,500,000.00) keepers of hotels, motels, rest-houses, pension
and below where the instrument of houses, inns, resorts; theaters, and movie
sale/transfer/disposition was executed on or after houses; h. proprietors or
November 1, 2005, provided, That not later than operators of restaurants, refreshment parlors,
January 31, 2009 and every three (3) years cafes and other eating places, including clubs and
thereafter, the amounts stated herein shall be caterers; i. dealers in
adjusted to its present value using the Consumer securities;
Price Index, as published by the National j. lending investors;
Statistics Office (NSO); provided, further, that k.
such adjustment shall be published through transportation contractors on their transport of
revenue regulations to be issued not later than goods or cargoes, including persons who
March 31 of each year. transport goods or cargoes for hire and other
If two or more adjacent residential lots are domestic common carriers by land relative to their
sold or disposed in favor of one buyer, for the transport of goods or cargoes;
purpose of utilizing the lots as one residential lot, l.
 40
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 included in the phrase
sale or exchange of services.
a. The lease or the use of or the right
or privilege to use any copyright, patent, design or
model, plan, secret formula or process, goodwill,
trademark, trade brand or other like property or
right;
b. The lease or the use of, or the
right to use any industrial, commercial or scientific
equipment;
c. The supply of scientific, technical,
industrial or commercial knowledge or information;
d. The supply of any assistance that is
ancillary and subsidiary to and is furnished as a
means of enabling the application or enjoyment of
any such property, or right as is mentioned in
subparagraph (2) hereof or any such knowledge
or information as is mentioned in subparagraph
(3) hereof; or
e. The supply of services by a non-
resident person or his employee in connection
with the use of property or rights belonging to, or
the installation or operation of any brand,
machinery or other apparatus purchased from
such non-resident person;
f. 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;
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 VAT-registered
person is a taxable transaction for VAT purposes
but the sale does not result in any output tax.
However, the input tax on the purchases of
goods, properties or services related to such zero-
rated sale shall be available as tax credit or refund
in accordance with Rev. Regulations No. 16-2005.
(Rev. Regs. No. 16-2005, 1st par.)
28. Concept of VAT zero-
rating. The tax rate is set at zero. When applied
to the tax base, such rate obviously results in no
tax chargeable against the purchaser. The seller
of such transactions charges no output tax, but
can claim a refund or a tax credit certificate for the
VAT previously charged by suppliers.
[Commissioner of Internal Revenue v. Seagate
Technology (Philippines), G. R. No. 153866,
February 11, 2005]
Under a zero-rating scheme, the sale or
exchange of a particular service is completely
freed from the VAT, because the seller is entitled
to recover, by way of a refund or as an input tax
credit, the tax that is included in the cost of
purchases attributable to the sale or exchange.
The tax paid or withheld is not deducted from the
tax base. (Commissioner, of Internal Revenue v.
American Express International, Inc. (Philippine
Branch), G. R. No. 152609, June 29, 2005 citing
various cases)
29. Situs of taxation of zero-rated
VAT services such as facilitating the
collection of receivables from credit card
members situated in the Philippines and
payment to service establishments in the
Philippines. The place where the service is
rendered determines the jurisdiction to impose
the VAT
Performed in the Philippines, the service is
necessarily subject to its jurisdiction for the State
necessarily has to have a substantial connection
to it in order to enforce a zero rate. The place of
payment is immaterial much less is the place
where the output of the service will be further or
ultimately used.
This is so because the law neither makes a
qualification nor adds a condition in determining
the tax situs of a zero-rated service.
(Commissioner of Internal Revenue v. American
 41
Express International, Inc. (Philipppine Branch), G. R.
No. 152609, June 29, 2005)
30. Destination principle
under the VAT System. As a general rule, the
VAT system uses the destination principle as a
basis for the jurisdictional reach of the tax.
Goods and services are taxed only in the
country where they are consumed. Thus, exports
are zero-rated, while imports are taxed.
This is also known as the Cross Border
Doctrine.
31. Exception to the
destination principle. The law clearly
provides for an exception to the destination
principle; that is, for a zero percent VAT rate for
services that are performed in the Philippines,
"paid for in acceptable foreign currency and
accounted for in accordance with the rules and
regulations of the [BSP]."
32. Rationale for zero-rating
of exports. The Philippine VAT system adheres
to the Cross Border Doctrine, according to which,
no VAT shall be imposed to form part of the cost
of goods destined for consumption outside of the
territorial border of the taxing authority.
[Commissioner of Internal Revenue v. Toshiba
Information Equipment (Phils.), Inc., G. R.. No. 150154,
August 9, 2005] The Cross Border Doctrine is also
known as the destination principle.
Hence, actual or
constructive export of goods and services from
the Philippines to a foreign country must be zero-
rated for VAT; while, those destined for use or
consumption within the Philippines shall be
imposed the twelve percent (12%) VAT.
33. Zero-rated sale
distinguished from exempt transactions:
a. A zero-rated sale is a taxable
transaction but does not result in an output tax
WHILE an exempt transaction is not subject to the
output tax.
b. The input tax on the purchases of a
VAT registered person who has zero-rated sales
may be allowed as tax credits or refunded WHILE
the seller in an exempt transaction is not entitled
to any input tax on his purchases despite the
issuance of a VAT invoice or receipt.
c. Persons engaged in transactions
which are zero rated being subject to VAT are
required to register WHILE registration is optional
for VAT-exempt persons.
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. 16-2005, Sec. 4.106-5,
2nd par., paraphrasing supplied)
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,
July 21, 2006 citing various authorities)
37. Ecozone, defined. An
ECOZONE or a Special Economic Zone has been
described as [S]elected areas with highly
developed or which have the potential to be
developed into agro-industrial, industrial, tourist,
recreational, commercial, banking, investment and
financial centers whose metes and bounds are
fixed or delimited by Presidential Proclamations.
An ECOZONE may contain any or all of the
following: industrial estates (IEs), export
processing zones (EPZs), free trade zones and
tourist/recreational centers. The national
territory of the Philippines outside of the
proclaimed borders of the ECOZONE shall be
referred to as the Customs Territory. [Commissioner
of Internal Revenue v. Toshiba Information Equipment
(Phils.), Inc., G. R.. No. 150154, August 9, 2005]
38. Zero-rated sale of service,
defined. A zero-rated sale of service (by a VAT-
registered person) is a taxable transaction for VAT
 42
purposes, but shall not result in any output tax.
However, the input tax on purchases of goods,
properties or services related to such zero-rated
sale shall be available as tax credit or refund in
accordance with Rev. Regs. No. 16-2005. [Rev.
Regs. No. 16-2005, Sec. Sec. 4.108-5 (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-
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 zero-
rating are ultra vires and invalid. The VAT
system uses the destination principle which posits
that the goods and services are taxed only in the
country where they are consumed,
However, the law itself provides for clear
exceptions under which the supply of services
shall be zero-rated, among which are the
following:
a. The service is performed in the
Philippines;
b. The services are within the
categories provided for under the Tax Code; and
c. It is paid for in acceptable foreign
currency of the Bangko Sentral ng Pilipinas.
American Express renders assistance to its
foreign clients by receiving the bills of service
establishments located in the country and
forwarding them to their clients abroad. The
services are performed or successfully completed
upon send to its foreign clients the drafts and bills
it has gathered from service establishments here,
Its services, having been performed in the
Philippines are therefore also consumed in the
Philippines. Thus, its services are exempt from
the destination principle and are zero-rated.
The BIR could not change the law.
[Commissioner, of Internal Revenue v. American
Express International, Inc. (Philippine Branch), G. R.
No. 152609, June 29, 2005]
41. A foreign Consortium
composed of BWSC-Denmark, Mitsui
Engineering and Shipbuilding Ltd., and
Mitsui and Co., Ltd., which entered into a
contract with NAPOCOR for the operation
and maintenance of two power barges
appointed BWSC-Denmark as its
coordination manager. BWSCMI was
established as the subcontractor to
perform the actual work in the Philippines.
The Consortium paid BWSCMI in
acceptable foreign exchange and
accounted for in accordance with the
rules and regulations of the BSP.
Through a February 14, 1995 ruling
the BIR declared that BWSCMI may
choose to register as a VAT persons
subject to VAT at zero rate. For 1996, it
filed the proper VAT returns showing zero
rating. On December 29, 1997, believing
that it is covered by Rev. Regs. 5-96, dated
February 20, 1996, BWSCMI paid 10%
output VAT for the period April-December
1996, through the Voluntary Assessment
Program (VAP).
On January 7, 1999, BWSCMI was
able to obtain a Ruling from the BIR
reconfirming that it is subject to VAT at
zero-rating. On this basis, BWSCMI
applied for a refund of the output VAT it
paid.
a. Is BWSCMI subject to the 10%
VAT or is it zero rated ?
SUGGESTED ANSWER: Yes. BWSCMI is
not zero rated and is subject to the 10% VAT. It is
rendering service for the Consortium which is not
doing business in the Philippines. Zero-rating
finds application only where the recipient of the
services are other persons doing business outside
of the Philippines. BWSCMI provides services to
the Consortium which by virtue of its contract with
NAPOCOR is doing business within the
Philippines. (Commissioner of Internal Revenue v.
Burmeister and Wain Scandinavian Contractor
Mindanao, Inc., G. R. No. 153205, January 22,
2007)
 43
b. Could it obtain a refund of the
VAT it paid through the VAP ? Explain.
SUGGESTED ANSWER: Yes. BWSCMI is
entitled to refund of the 10% output VAT it paid the
based on the non-retroactivity of the prejudicial
revocation of the BIR Rulings which held that its
services are subject to 0% VAT and which
BWSCMI invoked in applying for refund of the
output VAT. (Commissioner of Internal Revenue v.
Burmeister and Wain Scandinavian Contractor
Mindanao, Inc., supra)
NOTES AND COMMENTS:
a. Do not confuse the BWSCMI
case with the American Express case.
American Express International, Inc. (Philippine
Branch)] is a VAT-registered person that facilitates
the collection and payment of receivables
belonging to its non-resident foreign client
[American Express International, Inc. (Hongkong
Branch)], for which it gets paid in acceptable
foreign currency inwardly remitted and accounted
for in accordance with BSP rules and regulations.
(Commissioner of Internal Revenue v. Burmeister
and Wain Scandinavian Contractor Mindanao, Inc.,
G. R. No. 153205, January 22, 2007)
42. What are VAT-Exempt
transactions ? SUGGESTED ANSWER:
The sale of goods or properties and/or
services and the use or lease of properties
that is
b. not subject to VAT (output tax) and
c. the seller is not allowed any tax
credit on VAT (input tax) purchases.
The person making the exempt sale of
goods, properties or services shall not bill any
output tax to his customers because the said
transaction is not subject to VAT. [Rev. Regs. No.
16-2005, Sec. 4.109-1 (A), arrangement and numbering
supplied]
43. VAT-exempt transactions
distinguished from VAT-exempt entities.
a. An exempt transaction, on the one
hand, involves goods or services which, by their
nature, are specifically listed in and expressly
exempted from the VAT under the Tax Code,
without regard to the tax status VAT-exempt or
not of the party to the transaction.
An exempt party, on the other hand, is a
person or entity granted VAT exemption under the
Tax Code, a special law or an international
agreement to which the Philippines is a signatory,
and by virtue of which its taxable transactions
become exempt from VAT. [Commissioner of
Internal Revenue v. Toshiba Information Equipment
(Phils.), Inc., G. R. No. 150154, August 9, 2005]
b. An exempt transaction shall not be
the subject of any billing for output VAT but it shall
not also be allowed any input tax credits WHILE
an exempt party being zero-rated is allowed to
claim input tax credits.
44. Transactions are exempt from
VAT. (Subject to the election by a VAT-registered
person not to be subject to the value-added tax),
the following shall be exempt from VAT:
(A) Sale or importation of agricultural and
marine food products in their original state,
livestock and poultry of a kind generally used as,
or yielding or producing foods for human
consumption; and breeding stock and genetic
materials therefor.
Livestock shall include cows, bulls and
calves, pigs, sheep, goats and rabbits. Poultry
shall include fowls, ducks, geese and turkey,
Livestock or poultry does not include fighting
cocks, race horses, zoo animals and other
animals generally considered as pets.
Marine food products shall include fish and
crustaceans, such as, but not limited to, eels,
trout, lobster, shrimps, prawns, oysters, mussels
and clams.
Meat, fruit, fish, vegetables and other
agricultural and marine food Products classified
under this paragraph shall be considered in their
original state even if they have undergone the
simple processes of preparation or preservation
for the market, such as freezing, drying, salting,
broiling, roasting, smoking or stripping, including
those using advanced technological means of
packaging, such as shrink wrapping in plastics,
vacuum packing, tetra-pack, and other similar
packaging methods. Polished and/or husked rice,
corn grits, raw cane sugar and molasses, ordinary
salt, and copra shall be considered in their original
state.
Sugar whose content of sucrose by weight,
in the dry state, has a polarimeter reading of
99.5o and above are presumed to be refined
sugar.
Cane sugar produced from the following
shall be presumed, for internal revenue purposes,
to be refined sugar:
(1) product of a refining process,
(2) products of a sugar refinery, or
(3) product of a production line of a
sugar mill accredited by the BIR to be producing
sugar with polarimeter reading of 99.5o and
above, and for which the quedanissued therefor,
and verified by the Sugar Regulatory
Administration, identifies the same to be of a
polarimeter reading of 99.5o and above.
Bagasse is not included in the exemption
provided for under this section.
(B) Sale or importation of fertilizers;
seeds, seedlings and fingerlings; fish, prawn,
livestock and poultry feeds, including ingredients,
whether locally produced or imported, used in the
 44
manufacture of finished feeds (except specialty
feeds for race horses, fighting cocks, aquarium
fish, zoo animals and other animals generally
considered as pets);
Specialty feeds refers to non-agricultural
feeds or food for race horses, fighting cocks,
aquarium fish, zoo animals and other animals
generally considered as pets.
(C) Importation of personal and
household effects belonging to the residents of
the Philippines returning from abroad and
nonresident citizens coming to resettle in the
Philippines: Provided, That such goods are
exempt from customs duties under the Tariff and
Customs Code of the Philippines;
(D) Importation of professional
instruments and implements, wearing apparel,
domestic animals, and personal household effects
(except any vehicle, vessel, aircraft, machinery,
other goods for use in the manufacture and
merchandise of any kind in commercial quantity)
belonging to persons coming to settle in the
Philippines, for their own use and not for sale,
barter or exchange, accompanying such persons,
or arriving within ninety (90) days before or after
their arrival, upon the production of evidence
satisfactory to the Commissioner of Internal
Revenue, that such persons are actually coming
to settle in the Philippines and that the change of
residence is bona fide;
(E) Services subject to percentage tax
under Title V of the Tax Code, as enumerated
below:
(1) Sale or lease of goods or
properties or the performance of services
of non-VAT-registered persons, other than
the transactions mentioned in paragraphs
(A) to (U) of Sec. 109 (1) of the Tax Code,
the annual sales and/or receipts of which
does not exceed the amount of One
Million Five Hundred thousand Pesos
(P1,500,000.00), Provided, That not later
than January 31, 2009 and every three (3)
years thereafter, the amount herein stated
shall be adjusted to its present value
using the Consumer Price Index, as
published by the National Statistics Office
(NSO). (Sec. 116, Tax Code)
(2) Services rendered by
domestic common carriers by land for the
transport of passengers and keepers of
garages. (Sec. 117)
(3) Services rendered by
international air/shipping carriers. (Sec.
118)
(4) Service rendered by franchise
grantees of radio and/or television
broadcasting whose annual gross receipts
of the preceding year do not exceed Ten
Million Pesos (P10,000,000.00) and by
franchises of gas and water utilities.
(Sec. 119)
(5) Service rendered for overseas
dispatch message or conversation
originating from the Philippines. (Sc. 120)
(6) Services rendered by any
person, company or corporation (except
purely cooperative companies or
associations ) doing life insurance
business of any sort in the Philippines.
(Sec. 123)
(7) Services rendered by fire,
marine or miscellaneous insurance
agents of foreign insurance companies.
(Sec. 124)
(8) Services of proprietors,
lessees or operators of cockpits,
cabarets, night or day clubs, boxing
exhibitions professional basketball
games, jai-Alai and race tracks. (Sec.
125). and
(9) Receipts on sale, barter or
exchange of shares of stock listed and
traded through the local stock exchange
or through initial public offering. (Sec.
127)
(F) Services by agricultural contract
growers and milling for others of palay into rice,
corn into grits and sugar cane into raw sugar;
Agricultural contract growers refers to
those persons producing for others poultry,
livestock or other agricultural and marine food
products in their original state.
(G) Medical, dental, hospital and
veterinary services except those rendered by
professionals;
Laboratory services are exempted. If the
hospital or clinic operates a pharmacy or drug
store, the sale of drugs and medicine is subject to
VAT.
(H) Educational services rendered by
private educational institutions, duly accredited by
the Department of Education (DEPED), the
Commission on Higher Education (CHED), the
Technical Education And Skills Development
Authority (TESDA) and those rendered by
government educational institutions;
Educational services shall refer to
academic, technical or vocational education
provided by private educational institutions duly
accredited by the DepED, the CHED and TESDA
and those rendered by government educational
institutions and it does not include seminars, 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;
 45
(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, non-
electric and non-credit cooperatives duly
registered with the Cooperative Development
Authority: Provided, That the share capital
contribution of each member does not exceed
Fifteen thousand pesos (P15,000) and regardless
of the aggregate capital and net surplus ratably
distributed among the members;
Importation by non-agricultural, non-electric
and non-credit cooperatives of machineries and
equipment, including spare parts thereof, to be
used by them are subject to VAT.
(O) Export sales by persons who are not
VAT-registered;
(P) Sale of real properties not primarily
held for sale to customers or held for lease in the
ordinary course of trade or business, or real
property utilized for low-cost and socialized
housing as defined by Republic Act No. 7279,
otherwise known as the Urban Development and
Housing Act of 1992, and other related laws, such
as RA No. 7835 and RA No. 8765, residential lot
valued at One million five hundred thousand
pesos (P 1,500,000) and below, house and lot,
and other residential dwellings valued at Two
million five hundred thousand pesos (P 2,500,000)
and below: Provided, That not later than January
31, 2009 and every three (3) years thereafter, the
amounts herein stated shall be adjusted to their
present values using the Consumer Price Index,
as published by the National Statistics Office
(NSO);
(Q) Lease of a residential unit with a
monthly rental not exceeding Ten thousand pesos
(P 10,000) Provided, That not later than January
31, 2009 and every three (3) years thereafter, the
amount herein stated shall be adjusted to its
present value using the Consumer Price Index as
published by the National Statistics Office (NSO);
(R) Sale, importation, printing or
publication of books and any newspaper,
magazine, review or bulletin which appears at
regular intervals with fixed prices for subscription
and sale and which is not devoted principally to
the publication of paid advertisements;
(S) Sale, importation or lease of
passenger or cargo vessels and aircraft, including
engine, equipment and spare parts thereof for
domestic or international transport operations;
Provided, that the exemption from VAT on the
importation and local purchase of passenger
and/or cargo vessels shall be limited to those of
one hundred fifty (150) tons and above, including
engine and spare parts of said vessels; Provided,
further, that the vessels be imported shall comply
with the age limit requirement, at the time of
acquisition counted from the date of the vessels
original commissioning, as follows: (i) for
passenger and/or cargo vessels, the age limit is
fifteen years (15) years old, (ii) for tankers, the
age limit is ten (10) years old, and (iii) For 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 quasi-banking
functions, and other non-bank financial
intermediaries; and
(V) Sale or lease of goods or
properties or the performance of services other
than the transactions mentioned in the preceding
paragraphs, the gross annual sales and/or
receipts do not exceed the amount of One million
five hundred thousand pesos (P1,500,000):
Provided, That not later than January 31, 2009
and every three (3) years thereafter, the amount
herein stated shall be adjusted to its present value
using the Consumer Price Index as published by
the National Statistics Office (NSO).
 46
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. 16-2005,
Sec. 4.109-1 (B), words in parentheses supplied]
45. Tax to be paid by persons
exempt from VAT.
a. Any person, whose sales or receipts
are exempt under Sec. 109 (1) (V) of the Tax
Code,
(V) Sale or lease of goods or
properties or the performance of services
other than the transactions mentioned in
the preceding paragraphs, the gross
annual sales and/or receipts do not
exceed the amount of One million five
hundred thousand pesos (P1,500,000):
Provided, That not later than January 31,
2009 and every three (3) years thereafter,
the amount herein stated shall be
adjusted to its present value using the
Consumer Price Index as published by
the National Statistics Office (NSO), from
the payment of VAT and
b. who is not a VAT-registered person
c. shall pay a tax equivalent to three
percent (3%) of his gross monthly sales or
receipts;
Provided, that cooperatives shall be exempt
from the three (3%) gross receipts tax herein
imposed. (Rev. Regs. No. 16-2005, Sec. 4.116-1,
arrangement, numbering and words in italics supplied)
RETURNS AND WITHHOLDING
1. Income tax returns being public
documents, until controverted by competent
evidence, are competent evidence, are prima facie
correct with respect to the entries therein. (Ropali
Trading v. NLRC, et al., 296 SCRA 309, 317)
2. Individuals required to file an
income tax return.
a. Every Filipino citizen residing in the
Philippines;
b. Every Filipino citizen residing outside
the Philippines on his income from sources within
the Philippines;
c. Every alien residing in the Philippines
on income derived from sources within the
Philippines; and
d. Every nonresident alien engaged in
trade or business or in the exercise of profession in
the Philippines. [Sec. 51 (A) (1), NIRC of 1997]
3. Married individuals who are
earning purely compensation income
allowed to file separate returns.
4. Married individuals, whether
citizens, resident or non-resident aliens,
who do not derive income purely from
compensation shall file a consolidated
return for the taxable year to include the
income of both spouses, but where it is
impracticable for the spouses to file one return,
each spouse may file a separate return of income
but the returns so filed shall be consolidated by the
Bureau for purposes of verification. [Section 51
(D) of the NIRC of 1997]
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. [2nd
to the last par., Sec. 24 (A) (2), NIRC of 1997 as
amended by Rep. Act No. 9504]
6. Individuals who are not
required to file an income tax return.
a. An individual whose gross income
does not exceed his total personal and additional
exemptions for dependents, Provided, That a
citizen of the Philippines and any alien individual
engaged in business or practice of profession
within the Philippines shall file an income tax return
regardless of the amount of gross income [Sec. 51
(A) (2), NIRC of 1997]
b. An individual with respect to pure
compensation income, derived from such sources
within the Philippines, the income tax on which
has been correctly withheld: Provided, That an
individual deriving compensation concurrently
from two or more employers at any time during
the taxable year shall file an income tax return
 47
[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. A withholding agent is explicitly
made personally liable under the Tax Code
for the payment of the tax required to be
withheld, in order to compel the withholding agent
to withhold the tax under any and all
circumstances. In effect, the responsibility for the
collection of the tax as well as the payment thereof
is concentrated upon the person over whom the
Government has jurisdiction. (Filipinas Synthetic
Fiber Corporation v. Court of Appeals, et al., G.R. Nos.
118498 & 124377, October 12, 1999) The system
facilitates tax collection and reduces tax evasion.
15. The two (2) types of withholding
at source are the 1) final withholding tax;
and 2) creditable withholding tax.
16. Under the final withholding tax
system the amount of income tax withheld
by the withholding agent is constituted as
a full and final payment of the income due
from the payee on the said income . [1st
sentence, 1st par., Sec. 2.57 (A), Rev. Regs. No. 2-98]
The liability for payment of the tax rests
primarily on the payor or the withholding agent..
Thus, in case of his failure to withhold the tax or in
case of under withholding, the deficiency tax shall
be collected from the payor withholding agent. The
payee is not required to file an income tax return
for the particular income.
17. Under the creditable
withholding tax system, taxes withheld on
certain income payments are intended to
equal or at least approximate the tax due
from the payee on the said income. The
income recipient is still required to file an income
tax return and/or pay the difference between the
 48
tax withheld and the tax due on the income. [1 and st
2nd sentences, Sec. 257(B), Rev. Regs. No. 2-98]
18. The two kinds of creditable
withholding taxes are (a) taxes withheld on
income payments covered by the expanded
withholding tax; and (b) taxes withheld on
compensation income.
19. Payments to the following are
exempt from the requirement of
withholding or when no withholding taxes
required:
a. National Government and its
instrumentalities including provincial, city, or
municipal governments;
b. Persons enjoying exemption from
payment of income taxes pursuant to the
provisions of any law, general or special, such as
but not limited to the following:
1) Sales of real property by a
corporation which is registered with and
certified by the HLURB or HUDCC as
engaged in socialized housing project where
the selling price of the house and lot or only
the lot does not exceed P180,000.00 in
Metro Manila and other highly urbanized
areas and P150,000.00 in other areas or
such adjusted amount of selling price for
socialized housing as may later be
determined and adopted by the HLURB;
2) Corporations registered with the
Board of Investments and enjoying
exemptions from income under the Omnibus
Investment Code of 1997;
3) Corporations exempt from
income tax under Sec. 30, of the Tax Code,
like the SSS, GSIS, the PCSO, etc.
However, income payments arising from any
activity which is conducted for profit or
income derived from real or personal
property shall be subject to a withholding
tax. (Sec. 57.5, Rev. Regs. No. 2-98)
20. For tax amnesty purposes, the
withholding agent is not a taxpayer. He is
made to pay the tax where he fails to withhold as a
penalty and not because the tax is due from him.
(Commissioner of Internal Revenue v. Court of Appeals,
et al., G.R. No. 108576, January 20, 1999, the Anscor
case)
PENALTIES, INTERESTS AND
SURCHARGES
1. Surtaxes or surcharges, also known
as the civil penalties, are the amounts imposed in
addition to the tax required.
They are in the nature of penalties and shall
be collected at the same time, in the same manner,
and as part of the tax. [Sec.248 (A), NIRC of 1997]
2. What are the two (2) kinds of
civil penalties ?
SUGGESTED ANSWER:
a. the 25% surcharge for late filing or
late payment [Sec. 248 (A), NIRC of 1997] (also
known as the delinquency surcharge), and
b. the 50% willful neglect or fraud
surcharge. [Sec. 248 (B), Ibid.]
3. Define deficiency income tax.
SUGGESTED ANSWER: Deficiency
income tax is the amount by which the tax imposed
under the NIRC of 1997 exceeds the amount
shown as the tax due by the taxpayer upon his
return. [Sec. 56 (B) (1), NIRC of 1997]
4. Deficiency interest, defined.
The interest assessed and collected on any unpaid
amount of tax at the rate of 20% per annum or
such higher rate as may be prescribed by
regulations, from the date prescribed for payment
until the amount is fully paid. [Sec. 249 (A) (B),
NIRC of 1997]
5. Delinquency interest, defined.
The interest assessed and collected on the unpaid
amount until fully paid where there is failure on the
part of the taxpayer to pay the amount die on any
return required to be filed; or the amount of the tax
due for which no return is required; or a deficiency
tax, or any surcharge or interest thereon, on the
date appearing in the notice and demand by the
Commissioner of Internal Revenue. [Sec.249 (c),
NIRC of 1997]
6. After resolving the issues the
BIR Commissioner reduced the
assessment. Was it proper to impose
delinquency 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
 49
Government to be paid as a penalty in cases of a
compromise.
8. As a result of divergent rulings
on whether it is subject to tax or not, the
taxpayer was not able to pay his taxes on
time. Imposed surcharges and interests
for such delay, the taxpayer not invokes
good faith with the BIR countering by
saying that good faith is not a valid
defense for violation of a special law.
Furthermore, the BIR further raises the
defense that the government is not bound
by the errors of its agents. Who is
correct ?
SUGGESTED ANSWER: The taxpayer is
correct. The settled rule is that good faith and
honest belief that one is not subject to tax on the
basis of previous interpretation of government
agencies tasked to implement the tax, are sufficient
justification to delete the imposition of surcharges.
(Michel J. Lhuillier Pawnshop, Inc. v. Commissioner of
Internal Revenue, G. R. No. 166786, September 11,
2006)
REPUBLIC ACT NO. 1125,
CREATING THE COURT OF TAX
APPEALS INCLUDING
JURISDICTION OF THE CTA, AS
AMENDED
COURT OF TAX APPEALS, IN
GENERAL
1. Discuss the role of the
judiciary in taxation. SUGGESTED
ANSWER: The role of the judiciary is to be the
sympathetic or vigilant court which would check
injustices or abuses of the legislative and
administrative agents of the State in their exercise
of the power of taxation.
2. What is the nature and
composition of the Court of Tax Appeals ?
SUGGESTED ANSWER: The Court of Tax
Appeals is the special tax court created under
Republic Act No. 1125, as amended, and is
composed of a Presiding Justice and eight (8)
Associate 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 of the Court
of Tax Appeals.
a. Exclusive appellate jurisdiction to
review by appeal, as herein provided:
1. Decisions of the Commissioner of
Internal Revenue in cases involving disputed
assessments, refunds of internal revenue taxes,
fees or other charges, penalties, in relation thereto,
or other matters arising under the National Internal
Revenue Code or other laws administered by the
Bureau of Internal Revenue; (DIVISION)
2. Inaction by the Commissioner of
Internal Revenue in cases involving disputed
assessments, refunds or internal revenue taxes,
fees or other charges, penalties in relation thereto,
or other matter arising under the National Internal
Revenue Code or other laws administered by the
Bureau of Internal Revenue, where the National
Internal Revenue Code provides a specific period
of action, in which case the inaction shall be
deemed a denial; (The inaction on refunds in two
years from the time tax was paid. Thus, if the
prescriptive period of two years is about to expire,
the taxpayer should interpose a petition for review
with the CTA DIVISION)
3. Decisions, orders or resolutions of the
Regional Trial Courts in local tax cases originally
decided or resolved by them in the exercise of their
original or appellate jurisdiction; (If original
DIVISION; if appellate EN BANC)
4. Decisions of the Commissioner of
Customs in cases involving liability for customs
duties, fees or other money charges, seizure,
detention or release of property affected, fines,
forfeitures or other penalties in relation thereto, or
other matters arising under the Customs Law or
other laws administered by the Bureau of Customs;
(DIVISION)
 50
5. Decisions of the Central Board of
Assessment Appeals in the exercise of its appellate
jurisdiction over cases involving the assessment
and taxation of real property originally decided by
the provincial or city board of assessment appeals;
(EN BANC)
6. Decisions of the Secretary of Finance
on customs cases elevated to him automatically for
review from decisions of the Commissioner of
Customs which are adverse to the Government
under Section 2315 of the Tariff and Customs
Code; (This has reference to forfeiture cases
where the decision is to release the seized articles
DIVISION)
7. Decisions of the Secretary of Trade
and Industry, in case of nonagricultural product,
commodity or article, and the Secretary of
Agriculture in the case of agricultural product,
commodity or article, involving dumping and
countervailing duties under Section 301 and 302,
respectively, of the Tariff and Customs Code, and
safeguard measures under Republic Act No. 8800,
where either party may appeal the decision to
impose or not to impose said duties. (DIVISION)
b. Jurisdiction over cases involving
criminal offenses as herein provided:
1. Exclusive original jurisdiction over
all criminal cases arising from violations of the
National Internal Revenue Code or Tariff and
Customs Code and other laws administered by the
Bureau of Internal Revenue or the Bureau of
Customs: Provided, however, That offenses or
felonies mentioned in this paragraph where the
principal amount of taxes and fees, exclusive of
charges and penalties claimed, is less than One
million pesos (P1,000,000.00) or where there is no
specified amount claimed shall be tried by the
regular Courts and the jurisdiction of the CTA shall
be appellate. Any provision of law or the Rules of
Court to the contrary notwithstanding, the criminal
action and the corresponding civil action for the
recovery of civil liability for taxes and penalties shall
at all times be simultaneously instituted with, and
jointly determined in the same proceeding by the
CTA, the filing of the criminal action being deemed
to necessarily carry with it the filing of the civil
action, and no right to reserve the filing of such civil
action separately from the civil action will be
recognized.
2. Exclusive appellate jurisdiction in
criminal offenses:
a) Over appeals from the
judgments, resolutions or orders of the Regional
Trial Courts in tax cases originally decided by them,
in their respective territorial jurisdiction.
b) Over petitions for review of the
judgments, resolutions or orders of the Regional
Trial Courts in the exercise of their appellate
jurisdiction over tax cases originally decided
by the Metropolitan Trial Courts, Municipal Trial
Courts and Municipal Circuit Trial Courts in their
respective jurisdiction.
c. Jurisdiction over tax collection
cases:
1. Exclusive original jurisdiction in tax
collection cases involving final and executory
assessments for taxes, fees, charges and
penalties: Provided, however, That collection cases
where the principal amount of taxes and fees,
exclusive of charges and penalties, claimed is less
than One million pesos (P1,000,000) shall be tried
by the proper Municipal Trial Court, Metropolitan
Trial Court and Regional Trial Court.
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
 51
courts. Accordingly, doctrines, principles, rules,
and precedents laid down in jurisprudence by this
Court as regards petitions for review and appeals
in courts of general jurisdiction should likewise
bind the CTA, and it cannot depart therefrom.
(Santos v. People, et al, G. R. No. 173176, August 26,
2008)
5. It is the Regional Trial
Court that has jurisdiction to rule upon the
constitutionality of a tax law or a regulation
issued by the taxing authorities. Where
what is assailed is the validity or constitutionality
of a law, or a rule or regulation issued by the
administrative agency in the performance of its
quasi-legislative function, the regular courts have
jurisdiction to pass upon the same. The
determination of whether a specific rule or set of
rules issued by an administrative agency
contravenes the law or the constitution is within
the jurisdiction of the regular courts.
Indeed, the Constitution vests the power
of judicial review or the power to declare a law,
treaty, international or executive agreement,
presidential decree, order, instruction, ordinance,
or regulation in the courts, including the regional
trial courts. This is within the scope of judicial
power, which includes the authority of the courts
to determine in an appropriate action the validity
of the acts of the political departments. Judicial
power includes the duty of the courts of justice to
settle actual controversies involving rights which
are legally demandable and enforceable, and to
determine whether or not there has been a grave
abuse of discretion amounting to lack or excess of
jurisdiction on the part of any branch or
instrumentality of the Government. (British
American Tobacco v. Camacho et al., G. R. No.
163583, August 20, 2008 with an intervenor)
NOTES AND COMMENTS: The above
doctrine supersedes Asia International
Auctioneers, Inc., etc et al., .v. Parayno, Jr., etc.,,
et al., G. R. No. 103445, December 18, 2007 which
ruled that it is the Court of Tax Appeals that has
jurisdiction relative to matters involving the
constitutionality of regulations issued by the BIR.
The reason was that this falls under the concept of
decisions of the BIR Commissioner on other
matter arising under the provisions of laws
administered by the Commission. Issuance of
revenue regulations are authorized under the
NIRC.
British American Tobacco reversed Asia
International Auctioneers upon the concept of the
judiciarys expanded power.
6. Instances where the Court of
Tax Appeals would have jurisdiction even if
there is no decision of the Commissioner
of Customs:
a. Decisions of the Secretary of Trade
and Industry or the Secretary of Agriculture in 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 INTERNAL
REVENUE TAXES
1. Outline of tax remedies of a
taxpayer and the government relative to
ASSESSMENT of internal revenue taxes.
a. The taxpayer files his tax return.
b. A Letter of Authority is issued
authorizing BIR examiner to audit or examine the
tax return and determines whether the full and
complete taxes have been paid.
c. If the examiner is satisfied that the tax
return is truly reflective of the taxable transaction
and all taxes have been paid, the process ends.
However, if the examiner is not satisfied that the
tax return is truly reflective of the taxable
transaction and that the taxes have not been fully
paid, a Notice of Informal Conference is issued
inviting the taxpayer to explain why he should not
be subject to additional taxes.
d. If the taxpayer attends the informal
conference and the examiner is satisfied with the
explanation of the taxpayer, the process is again
ended.
If the taxpayer ignores the invitation to the
informal conference, or if the examiner is not
satisfied with taxpayers explanation,, and he
believes that proper taxes should be assessed, the
Commissioner of Internal Revenue or his duly
authorized representative shall then notify the
taxpayer of the findings in the form of a pre-
assessment notice. The pre-assessment notice
requires the taxpayer to explain within fifteen (15)
days from receipt why no notice of assessment and
letter of demand for additional taxes should be
directed to him.
e. If the Commissioner is satisfied with
the explanation of the taxpayer, then the process is
again ended.
If the taxpayer ignores the pre-assessment
notice by not responding or his explanations are
 52
not accepted by the Commissioner, then a notice of
assessment and a letter of demand is issued.
The notice of assessment must be issued
by the Commissioner to the taxpayer within a
period of three (3) years from the time the tax
return was filed or should have been filed
whichever is the later of the two events. Where the
taxpayer did not file a tax return or where the tax
return filed is false or fraudulent, then the
Commissioner has a period of ten (10) years from
discovery of the failure to file a tax return or from
discovery of the fraud within which to issue an
assessment notice. The running of the above
prescriptive periods may however be suspended
under certain instances.
The notice of assessment must be issued
within the prescriptive period and must contain the
facts, law and jurisprudence relied upon by the
Commissioner. Otherwise it would not be valid.
f. The taxpayer should then file an
administrative protest by filing a request for
reconsideration or reinvestigation within thirty (30)
days from receipt of the assessment notice.
The taxpayer could not immediately
interpose an appeal to the Court of Tax Appeals
because there is no decision yet of the
Commissioner that could be the subject of a
review.
To be valid the administrative protest must
be filed within the prescriptive period, must show
the error of the Bureau of Internal Revenue and the
correct computations supported by a statement of
facts, and the law and jurisprudence relied upon by
the taxpayer. There is no need to pay under
protest. If the protest was not seasonably filed the
assessment becomes final and collectible and the
Bureau of Internal Revenue could use its
administrative and judicial remedies in collecting
the tax.
g. Within sixty (60) days from filing of the
protest, all relevant supporting documents shall be
submitted, otherwise the assessment shall become
final and collectible and the BIR could use its
administrative and judicial remedies to collect the
tax.
Once an assessment has become final
and collectible, not even the BIR Commissioner
could change the same. Thus, the taxpayer could
not pay the tax, then apply for a refund, and if
denied appeal the same to the Court of Tax
Appeals.
h. If the protest is denied in whole or in
part, or is not acted upon within one hundred eighty
(180) days from the submission of documents, the
taxpayer adversely affected by the decision or
inaction may appeal to the Court of Tax Appeals
within thirty (30) days from receipt of the adverse
decision, or from the lapse of the one hundred
eighty (180-) day period, with an application for the
issuance of a writ of preliminary injunction to enjoin
the BIR from collecting the tax subject of the
appeal.
If the taxpayer fails to so appeal, the
denial of the Commissioner or the inaction of the
Commissioner would result to the notice of
assessment becoming final and collectible and the
BIR could then utilize its administrative and judicial
remedies to collect the tax.
i. A decision of a division of the Court
of Tax Appeals adverse to the taxpayer or the
government may be the subject of a motion for
reconsideration or new trial, a denial of which is
appealable to the Court of Tax Appeals en banc by
means of a petition for review.
The Court of Tax Appeals, has a period of
twelve (12) months from submission of the case for
decision within which to decide.
j. If the decision of the Court of Tax
Appeals en banc affirms the denial of the protest by
the Commissioner or the assessment in case of
failure by the Commissioner to decide the taxpayer
must file a petition for review on certiorari with the
Supreme Court within fifteen (15) days from notice
of the judgment on questions of law. An extension
of thirty (30) days may for justifiable reasons be
granted. If the taxpayer does not so appeal, the
decision of the Court of Tax Appeals would become
final and this has the effect of making the
assessment also final and collectible. The BIR
could then use its administrative and judicial
remedies to collect the tax.
2. The word assessment when
used in connection with taxation, may have
more than one meaning. More commonly the
word assessment means the official valuation of a
taxpayers property for purpose of taxation. The
above definition of assessment finds application
under tariff and customs taxation as well as local
government taxation.
For real property taxation, there may be a
special meaning to the burdens that are
imposed upon real properties that have been
benefited by a public works expenditure of a
local government. It is sometimes called a
special assessment or a special levy.
(Commissioner of Internal Revenue v. Pascor Realty and
Development 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)
 53
4. Self-assessed tax, defined. A absence of accounting records of a taxpayer, his
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-you-file
system of taxation under which the taxpayer
computes his own tax liability, prepares the return,
and pays the tax as he files the return. The pay-as-
you-file system is a self-assessing tax return.
Internal revenue taxes are self-assessing.
(Dissent of J. Carpio in Philippine National Oil Company
v. Court of Appeals, et al., G. R. No. 109976, April 26,
2005 and companion case)
A clear example of a self-assessed tax is the
annual income tax, which the taxpayer himself
computes and pays without the intervention of any
assessment by the BIR. The annual income tax
becomes due and payable without need of any
prior assessment by the BIR. The BIR may or may
not investigate or audit the annual income tax
return filed by the taxpayer. The taxpayers liability
for the income tax does not depend on whether or
not the BIR conducts such subsequent
investigation or audit.
However, if the taxing authority is first
required to investigate, and after such investigation
to issue the tax assessment that creates the tax
liability, then the tax is no longer self-assessed.
(Ibid.)
5. Sec. 6 (B) of the NIRC of 1997
allows the BIR to make or amend a tax
return from his own knowledge or obtained
through testimony or otherwise. Thus, the
Commissioner of Internal Revenue investigates
any circumstance which led him to believe that the
taxpayer had taxable income larger than that
reported. Necessarily, this inquiry would have to be
outside of the books because they supported the
return as filed. He may take the sworn testimony of
the taxpayer, he may take the testimony of third
parties; he may examine and subpoena, if
necessary, traders and brokers accounts and
books and the taxpayers books of accounts. The
Commissioner is not bound to follow any set of
patterns. The existence of unreported income may
be shown by any particular proof that is available in
the circumstances of the particular situation.
(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
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)
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
 54
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 pre-assessment 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
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)
 55
14. Unreasonable investigation
contemplates cases where the period for
assessment extends indefinitely because
this deprives the taxpayer of the assurance that it
will not longer be subjected to further investigation
for taxes after the expiration of a reasonable period
of time. (Philippine Journalists, Inc. v. Commissioner of
Internal Revenue, G. R. No. 162852, December 16, 2004
with note to see Republic v. Ablaza, 108 Phil. 1105. 1108)
Laws on prescription should be liberally
construed in favor of the taxpayer. Reason: for the
purpose of safeguarding taxpayers from an
unreasonable examination, investigation or
assessment, our tax laws provide a statute of
limitation on the collection of taxes. Thus, the law
on prescription, being a remedial measure, should
be liberally construed in order to afford such
protection, As a corollary, the exceptions to the law
on prescription should perforce be strictly
construed. [Philippine Journalists, Inc. v. Commissioner
of Internal Revenue, G. R. No. 162852, December 16,
2004 citing Commissioner of Internal Revenue v. B.F.
Goodrich Phils, Inc (now Sime Darby International Tire
Co., Inc.),., et al., G.R. No. 104171, February 24, 1999,
303 SCRA 546]
The prescriptive period was precisely
intended to give the taxpayers peace of mind.
(Commissioner of Internal Revenue v. B.F. Goodrich
Phils., Inc., et al., G.R. No. 104171, February 24, 1999)
15. A jeopardy assessment is a
delinquency tax assessment which was assessed
without the benefit of complete or partial audit by
an authorized revenue officer, who has reason to
believe that the assessment and collection of a
deficiency tax will be jeopardized by delay because
of the taxpayers failure to comply with the audit
and investigation requirements to present his
books of accounts and/or pertinent records, or to
substantiate all or any of the deductions,
exemptions, or credits claimed in his return. [Sec.
3.1 (a), Rev. Regs. No. 6-2000)
Jeopardy assessment is an indication of the
doubtful validity of the assessment, hence it may
be subject to a compromise. [Sec. 3.1 (a), Rev.
Regs. No. 6-2000]
16. Requisites for Formal
Letter of Demand and Assessment Notice.
The formal letter of demand and assessment
notice shall be issued by the Commissioner or his
duly authorized representative. The letter of
demand calling for payment of the taxpayers
deficiency tax or taxes shall state the facts, the
law, rules and regulations, or jurisprudence on
which the assessment is based, otherwise, the
formal letter of demand and assessment notice
shall be void. The same shall be sent to the
taxpayer only by registered mail or by personal
delivery.
17. What are the requirements
for the validity of a formal letter of demand
and assessment notice ?
SUGGESTED ANSWER:
a. There must have been previously
issued a pre-assessment notice until excepted;
b. It must have been issued prior to the
prescriptive period; and
c. The letter of demand calling for
payment of the taxpayers deficiency tax or taxes
shall state the facts, the law, rules and regulations,
or jurisprudence on which the assessment is
based, otherwise, the formal letter of demand and
assessment notice shall be void. (Sec. 3.1.4, Rev.
Regs. No. 12-99)
18. What are the reasons for
presumption of correctness of
assessments ?
SUGGESTED ANSWER:
a. Lifeblood theory
b. Presumption of regularity
(Commissioner of Internal Revenue v. Hantex Trading
Co., Inc., G, R. No. 136975, March 31, 2005) in the
performance of public functions. (Commissioner of
Internal Revenue v. Tuazon, Inc., 173 SCRA 397)
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
 56
determination of the Commissioner contained in a
deficiency notice disappears. [Commissioner of
Internal Revenue, supra citing a U.S. Court of Appeals
ruling, in Clark and Clark v. Commissioner of Internal
Revenue, 266 F. 2d 698 (1959)] Hence, the
determination by the CTA must rest on all the
evidence introduced and its ultimate determination
must find support in credible evidence.
[Commissioner of Internal Revenue, supra]
20. What are the instances
that suspends the running of the
prescriptive periods (Statute of
Limitations) within which to make an
assessment and the beginning of distraint
or levy or of a proceeding in court for the
collection, in respect of any tax
deficiencies?
SUGGESTED ANSWER:
a. When the Commissioner is prohibited
from making the assessment, or beginning
distraint, or levy or proceeding in court and for sixty
(60) days thereafter;
b. When the taxpayer requests for and is
granted a reinvestigation by the commissioner;
c. When the taxpayer could not be
located in the address given by him in the return
filed upon which the tax is being assessed or
collected;
d. When the warrant of distraint and levy
is duly served upon the taxpayer, his authorized
representative, or a member of his household with
sufficient discretion, and no property could be
located; and
e. When the taxpayer is out of the
Philippines.
NOTES AND COMMENTS:
The holding in Commissioner of Internal
Revenue v. Court of Appeals, et al., G.R. No.
115712, February 25, 1999 (Carnation case) that
the waiver of the period for assessment must be in
writing and have the written consent of the BIR
Commissioner is still doctrinal because of the
provisions of Sec. 223, NIRC of 1997 which
provides for the suspension of the prescriptive
period:
21. Under RMO No. 20-90,
which implements Sections 203 and 222
(b), the following procedures should be
followed for a valid waiver of the
prescriptive period for an assessment:
a. The waiver must be in the
proper form; b. The
waiver shall be signed by the taxpayer himself or
his duly authorized representative. In the case of
a corporation, the waiver must be signed by any
of its responsible officials.
Soon after the waiver is signed by the
taxpayer, the Commissioner of Internal Revenue
or the revenue official authorized by him, as
hereinafter provided, shall sign the waiver
indicating that the Bureau has accepted and
agreed to the waiver. The date of such
acceptance by the Bureau should be
indicated. Both the date of execution by the
taxpayer and date of acceptance by the Bureau
should be before the expiration of the period of
prescription or before the lapse of the period
agreed upon in case a subsequent agreement is
executed. c. The following
revenue officials are authorized to sign the waiver.
A. In the
National Office
xxxx
3.
Commissioner
For 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, 228-229)
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
 57
be strictly followed. A waiver of the statute of
limitations under the NIRC, to a certain extent
being a derogation of the taxpayers right to
security against prolonged and unscrupulous
investigations, must be carefully and strictly
construed. The waiver of the statute of limitations
does not mean that the taxpayer relinquishes the
right to invoke prescription unequivocally,
particularly where the language of the document is
equivocal.
Thus a waiver becomes unlimited in time,
and invalid, because it did not specify a definite
date, agreed upon between the BIR and the
taxpayer, within which the former may assess and
collect taxes. It also would have no binding effect
on the taxpayer if there was no consent by the
Commissioner. On this basis, no implied consent
can be presumed, nor can it be contended that the
concurrence to such waiver is a mere formality.
(Commissioner of Internal Revenue v. FMF
Development Corporation, G. R. No. 167765, June 30,
2008 citing Philippine Journalists, Inc. v. Commissioner
of Internal Revenue G.R. No. 162852, December 16,
2004, 447 SCRA 214, 229 in turn citing Id. at 229, citing
Commissioner of Internal Revenue v. Court of Appeals,
G.R. No. 115712, February 25, 1999, 303 SCRA 614,
620-622.)
23. BIR cannot rely on its
invocation of the rule that the government
cannot be estopped by the mistakes of its
revenue officers in the enforcement of RMO
No. 20-90 because the law on prescription should
be interpreted in a way conducive to bringing about
the beneficent purpose of affording protection to the
taxpayer within the contemplation of the
Commission which recommended the approval of
the law. To the Government, its tax officers are
obliged to act promptly in the making of assessment
so that taxpayers, after the lapse of the period of
prescription, would have a feeling of security against
unscrupulous tax agents who will always try to find
an excuse to inspect the books of taxpayers, not to
determine the latters real liability, but to take
advantage of a possible opportunity to harass even
law-abiding businessmen. Without such legal
defense, taxpayers would be open season to
harassment by unscrupulous tax agents.
[Commissioner of Internal Revenue v. FMF
Development Corporation, G. R. No. 167765, June 30,
2008 citing Republic of the Phils. v. Ablaza, 108 Phil.
1105, 1108 (1960)]
24. The signatures of both the
Commissioner and the taxpayer, are
required for a waiver of the prescriptive
period, thus a unilateral waiver on the part of the
taxpayer does not suspend the prescriptive period.
[Commissioner of Internal Revenue v. Court of Appeals,
et al., G.R. No. 115712, February 25, 1999 (Carnation
case)]
47. The act of requesting a
reinvestigation alone does not suspend the
running of the prescriptive period. The
request for reinvestigation must be
granted by the CIR. The Supreme Court
declared that the burden of proof that the request
for reinvestigation had been actually granted shall
be on the Commissioner of Internal Revenue.
Such grant may be expressed in its
communications with the taxpayer or implied from
the action of the Commissioner or his authorized
representative in response to the request for
reinvestigation. [Bank of Philippine Islands (Formerly
Far East Bank and Trust Company) v. Commissioner of
Internal Revenue, G. R. No. 174942, March 7, 2008]
PROTESTING INTERNAL REVENUE
TAX ASSESSMENTS
1. What is the presumption that flows
from a taxpayers failure to protest an
assessment ?
SUGGESTED ANSWER: Tax
assessments by tax examiners are presumed
correct and made in good faith. The taxpayer has
the duty to prove otherwise. In the absence of
proof of any irregularities in the performance of
duties, an assessment duly made by a Bureau of
Internal Revenue examiner and approved by his
superior officers will not be disturbed. All
presumptions are in favor of the correctness of tax
assessments. (Commissioner of Internal Revenue v.
Bank of Philippine Islands., G, R. No. 134062, April 17,
2007 citing Sy Po v. Court of Appeals, G. R. No. L-
81446, 18 August 1988, 164 SCRA 524, 530, citations
omitted)
2. What are the two ways of
protesting an assessment notice for an
internal revenue tax ? Alternatively, what
are the two types of protests ? Explain
briefly.
SUGGESTED ANSWER:
a. Request for reconsideration which
refers to a plea for re-evaluation of an assessment
on the basis of existing records without need of
additional evidence. It may involve both a question
of fact or of law or both.
b. Request for reinvestigation which
refers to a plea for re-evaluation of an assessment
on the basis of newly-discovered evidence or
additional evidence that a taxpayer intends to
present in the investigation. It may also involve a
question of fact or law or both. (Commissioner of
Internal Revenue v. Philippine Global Communication,
 58
Inc., G. R. No. 167146, October 31, 2006 citing Rev.
Regs. No. 12-85)
3. What is that type of protest that
suspends the running of the statute of
limitations for the beginning of distraint or
levy or a proceeding in court for
collection ? Why ?
SUGGESTED ANSWER: It is that type of
protest when the taxpayer requests for a
reinvestigation which is granted by the
Commissioner (Sec. 223, NIRC of 1997), that
suspends the running of the statute of limitations
for collection of the tax. (Commissioner of Internal
Revenue v. Philippine Global Communication, Inc., G. R.
No. 167146, October 31, 2006 citing Sec. 271, now Sec.
223, NIRC of 1997) When a taxpayer demands a
reinvestigation, the time employed in
reinvestigation should be deducted from the total
period of limitation. [Commissioner of Internal
Revenue, supra citing Republic v. Lopez, 117 Phil. 575,
578; 7 SCRA 566, 568-569 (1963)]
Undoubtedly, a reinvestigation, which entails
the reception and evaluation of additional evidence,
will take more time than a reconsideration of a tax
assessment which will be limited to the evidence
already at hand; this justifies why the former can
suspend the running of the statute of limitations on
collection of the assessed tax, while the latter
cannot. (Commissioner of Internal Revenue v.
Philippine Global Communication, Inc., G. R. No.
167146, October 31, 2006 citing Bank of Philippine
Islands v. Commissioner of Internal Revenue, G. R. No.
139736, 17 October 2005, 473 SCRA 205, 230-231)
4. What are the requirements for
the validity of a taxpayers protest ?
SUGGESTED ANSWER:
a. It must be filed within the
reglementary period of thirty (30) days from receipt
of the notice of assessment.
b. The taxpayer must not only show the
errors of the Bureau of Internal Revenue but also
the correct computation through
1) A statement of the facts, the
applicable law, rules and regulations, or
jurisprudence on which the taxpayers
protest is based,
2) If there are several issues
involved in the disputed assessment and the
taxpayer fails to state the facts, the
applicable law, rules and regulations, or
jurisprudence in support of his protest
against some of the several issues on which
the assessment is based, the same shall be
considered undisputed issue or issues, in
which case, the taxpayer shall be required to
pay the corresponding deficiency tax or
taxes attributable thereto. (Sec. 3.1.5, Rev.
Regs. 12-99)
c. Within sixty (60) days from filing of the
protest, the taxpayer shall submit all relevant
supporting documents. [4th par., Sec. 228 (e), NIRC of
1997]
5. Relevant supporting
documents, defined. The term relevant
supporting documents should be understood as
those documents necessary to support the legal
basis in disputing a tax assessment as
determined by the taxpayer. The BIR can only
inform the taxpayer to submit additional
documents.
The BIR cannot demand what type of
supporting documents should be submitted.
Otherwise, a taxpayer will be at the mercy of the
BIR, which may require the production of
documents that a taxpayer cannot submit.
(Commissioner of Internal Revenue v. First Express
Pawnshop Company, Inc., G. R. 172045-46, June 16, 2009)
JUDICIAL REMEDIES INVOLVING
PROTESTED ASSESSMENTS
1.Acts of BIR Commissioner
that may be considered as denial of a
protest which serve as basis for appeal to
the Court of Tax Appeals.
a. Filing by the BIR of a civil suit for
collection of the deficiency tax is considered a
denial of the request for reconsideration.
(Commissioner of Internal Revenue v. Union Shipping
Corporation, 185 SCRA 547)
b. An indication to the taxpayer by the
Commissioner in clear and unequivocal language
of his final denial not the issuance of the warrant of
distraint and levy. What is the subject of the appeal
is the final decision not the warrant of distraint.
(Ibid.)
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
 59
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 has a period of 30 days
from the expiration of the 180 day period within
which to appeal to the Court of Tax Appeals. (last
par., Sec. 228 (e), NIRC of 1997; Commissioner of
Internal Revenue v. Isabela Cultural Corporation, G.R.
No. 135210, July 11, 2001)
b. Where the Commissioner has not acted
on an application for refund or credit and the two
year period from the time of payment is about to
expire, the taxpayer has to file his appeal with the
Court of Tax Appeals before the expiration of two
years from the time the tax was paid.
It is disheartening enough to a taxpayer to
be kept waiting for an indefinite period for the
ruling,. It would make matters more exasperating
for the taxpayer if the doors of justice would be
closed for such a relief until after the
Commissioner, would have, at his personal
convenience, given his go signal. (Commissioner of
Customs, et al, v. Court of Tax Appeals, et al., G.R. No.
82618, March 16, 1989, unrep.)
5. The characteristic of a BIR
denial of a protest such as would enable
the taxpayer to appeal the same to the
Court of Tax Appeals. The Commissioner of
Internal Revenue should always indicate to the
taxpayer in clear and unequivocal language
whenever his action on an assessment questioned
by a taxpayer constitutes his final determination on
the disputed assessment.
On the basis of his statement indubitably
showing that the Commissioners communicated
action is his final decision on the contested
assessment, the aggrieved taxpayer would then be
able to take recourse to the tax court at the
opportune time. Without needless difficulty, the
taxpayer would be able to determine when his right
to appeal to the tax court accrues. (Commissioner of
Internal Revenue v. Bank of the Philippines Islands, G. R.
No. 134062, April 17, 2007)
COLLECTION OF INTERNAL REVENUE
TAXES
1. General rule: Collection of
taxes is imprescriptible. While this may be so,
statutes may provide for periods of prescription,
2. Why is the collection of taxes
imprescriptible ?
SUGGESTED ANSWER:
a. As a general rule, revenue laws are
not intended to be liberally construed, and
exemptions are not given retroactive application,
considering that taxes are the lifeblood of the
government and in Holmes memorable metaphor,
the price we pay for civilization, tax laws must be
faithfully and strictly implemented. (Commissioner of
 60
Internal Revenue v. Acosta, etc.,G. R. No. 154068,
August 3, 2007) However, statutes may provide for
prescriptive periods for the collection of particular kinds
of taxes.
b. Tax laws, unlike remedial laws, are
not to be applied retroactively. Revenue laws are
substantive laws and their application must not be
equated with remedial laws. (Acosta, supra)
3. What is the prescriptive period
for collecting internal revenue taxes ?
SUGGESTED ANSWER: There are four (4)
prescriptive periods for the collection of an internal
revenue tax:
a. Collection upon a false or fraudulent
return or no return without assessment. In case of
a false or fraudulent return with the intent to evade
tax or of failure to file a return, a proceeding in
court for the collection of such tax may be filed
without assessment, at any time within ten (10)
years after the discovery of the falsity, fraud or
omission. [Sec. 222 (a), NIRC of 1997]
b. Collection upon a false or fraudulent
return or no return with assessment. Any internal
revenue tax which has been assessed (because
the return is false or fraudulent with intent to evade
tax or of failure to fail a return), within a period of
ten (10) years from discovery of the falsity, fraud or
omission may be collected by distraint or levy
or by a proceeding in court within five (5) years
following the assessment of the tax. [Sec. 222
(c), in relation to Sec. 222 (a) NIRC of 1997, emphasis
supplied]
c. Collection upon an extended
assessment. Where a tax has been assessed with
the period agreed upon between the Commissioner
and the taxpayer in writing (which should initially be
within three (3) years from the time the return was
filed or should have been filed), or any extensions
before the expiration of the period agreed upon, the
tax may be collected by distraint or levy or by
a proceeding in court within the period agreed
upon in writing before the expiration of the five
(5) year period. The period so agreed upon may
be extended by subsequent written agreements
made before the expiration of the period previously
agreed upon. [Sec. 222 (d), in relation to Secs. 222
(b) and 203, NIRC of 1997, emphasis supplied]
d. Collection upon a return that is not
false or fraudulent, or where the assessment is not
an extended assessment. Except as provided in
Section 222, internal revenue taxes shall be
assessed within three (3) years after the last day
prescribed by law for the filing of the return, and no
proceeding in court without assessment for the
collection of such taxes shall be begun after
the expiration of such period; Provided, That in
case where a return is filed beyond the period
prescribed by law, the three (3) year period shall be
computed from the day the return was filed. For
purposes of this Section, a return filed before the
last day prescribed by law for the filing thereof shall
be considered filed on such last day. (Sec. 203,
NIRC of 1997, emphasis supplied)
When the BIR validly issues an assessment
within the three (3)-year period, it has another
three (3) years within which to collect the tax due
by distraint, levy, or court proceeding. The
assessment of the tax is deemed made and the
three (3)-year period for collection of the assessed
tax begins to run on the date the assessment
notice had been released, mailed or sent to the
taxpayer. [Bank of Philippine Islands (Formerly Far
East Bank and Trust Company) v. Commissioner of
Internal Revenue, G. R. No. 174942, March 7, 2008
citing BPI v. Commissioner of Internal Revenue, G.R.
No. 139736, 17 October 2005, 473 SCRA 205, 222-
223]
NOTES AND COMMENTS:
a. Both the former Sec. 269, NIRC of
1977 and Sec.222 of NIRC of 1997 do not refer
to a regular return. It is clear that in enacting
Sec. 222, entitled Exceptions as to the period of
limitation of assessment and collection of taxes,
the NIRC of 1997 has eliminated sub-paragraph c
of the former Sec. 269 of the NIRC, also entitled
Exceptions as to the period of limitation of
assessment and collection of taxes. Said Sec.
269 (c), reads Any internal revenue tax which has
been assessed within the period of limitation
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 ?
 61
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 Internal Revenue, G. R. No. 138485,
September 10, 2001)
5. What tax cases may be the
subject of a compromise ?
SUGGESTED ANSWER: The following
cases may, upon taxpayers compliance with the
basis for compromise, be the subject matter of
compromise settlement:
a. Delinquent accounts;
b. Cases under administrative protest
after issuance of the Final Assessment Notice to
the taxpayer which are still pending in the Regional
Offices, Revenue District Offices, Legal Service,
Large Taxpayer Service (LTS), Collection Service,
Enforcement Service and other offices in the
National Office;
c. Civil tax cases being disputed before
the courts;
d. Collection cases filed in courts;
e. Criminal violations, other than those
already filed in court, or those involving criminal tax
fraud. (Sec. 2, Rev. Regs. No. 30-2002)
6. What tax cases could not be
the subject of compromise ?
SUGGESTED ANSWER:
a. Withholding tax cases unless the
applicant-taxpayer invokes provisions of law that
cast doubt on the taxpayers obligation to withhold.;
b. Criminal tax fraud cases, confirmed as
such by the Commissioner of Internal Revenue or
his duly authorized representative;
c. Criminal violations already filed in
court;
d. Delinquent accounts with duly
approved schedule of installment payments;
e. Cases where final reports of
reinvestigation or reconsideration have been
issued resulting to reduction in the original
assessment and the taxpayer is agreeable to such
decision by signing the required agreement form
for the purpose. On the other hand, other
protested cases shall be handled by the Regional
Evaluation Board (REB) or the National Evaluation
Board (NEB) on a case to case basis;
f. Cases which become final and
executory after final judgment of a court where
compromise is requested on the ground of doubtful
validity of the assessment; and
g. Estate tax cases where compromise
is requested on the ground of financial incapacity of
the taxpayer. (Sec. 2, Rev. Regs. No. 30-2002)
7. When may the Commissioner
of Internal Revenue compromise the
payment of any internal revenue tax ?
Alternatively, what are the grounds for a
compromise, and what are the amounts for
which a compromise may be entered into ?
SUGGESTED ANSWER:
a. A reasonable doubt as to the validity
of the claim against the taxpayer exists provided
that the minimum compromise entered into is
equivalent to forty percent (40%) of the basic tax;
or
b. The financial position of the taxpayer
demonstrates a clear inability to pay the assessed
tax provided that the minimum compromise
entered into is equivalent to ten percent (10%) of
the basic assessed tax
In the above instances the Commissioner is
allowed to enter into a compromise only if the basic
tax involved does not exceed One million pesos
(P1,000,000.00), and the settlement offered is not
less than the prescribed percentages. [Sec. 204 (A),
NIRC of 1997]
In instances where the Commissioner is not
authorized, the compromise shall be subject to the
approval of the Evaluation Board composed of the
Commissioner and the four (4) Deputy
Commissioners.
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 of Tax Appeals
may issue an order suspending the collection of a
tax.
10. As a general rule, No court
shall have the authority to grant an
injunction to restrain the collection of any
national internal revenue tax, fee or
charge. (Sec. 218, NIRC)
No appeal taken to the CTA from the
decision of the Commissioner of Internal Revenue
or the Commissioner of Customs or the Regional
Trial Court, provincial, city or municipal treasurer or
 62
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 the procedure for
suspension of collection of taxes ?
SUGGESTED ANSWER: Where the
collection of the amount of the taxpayers liability,
sought by means of a demand for payment, by
levy, distraint or sale of property of the taxpayer,
or by whatever means, as provided under existing
laws, may jeopardize the interest of the
government or the taxpayer, an interested party
may file a motion for the suspension of the
collection of the tax liability (Sec. 1, Rule 10,
RRCTA effective December 15, 2005) with the Court
of Tax Appeals.
The motion for suspension of the collection
of the tax may be filed together with the petition
for review or with the answer, or in a separate
motion filed by the interested party at any stage of
the proceedings. (Sec. 3, Rule 10, RRCTA effective
December 15, 2005)
REFUND OF INTERNAL REVENUE
TAXES
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 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
 63
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 56. What are the reasons for requiring
b. within thirty (30) days from receipt of the filing of an administrative application for
the denial by the Commissioner of the application refund or credit with the BSUGGESTED
for refund or credit. (Sec. 11, R.A. No. 1125) 8. Why is it necessary to file an
administrative claim for refund with the
5. The two (2) year period BIR, before filing a case with the Court of
and the thirty (30) day period should be Tax Appeals ?
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 a. a.
return not on the date when the taxes were paid To afford the Commissioner an opportunity to
on a quarterly basis. (Philippine Bank of correct his errors or that of subordinate officers.
(Gonzales v. Court of Tax Appeals, et al., 14 SCRA79)
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 indebeti 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. b. To notify the Government that such
The BIR received something when there [was] no taxes have been questioned and the notice should
right to demand it, and thus, it has the obligation be borne in mind in estimating the revenue
to return it. [State Land Investment Corporation available for expenditures.
v. Commissioner of Internal Revenue, G. R. No.
171956, January 18, 2008citing Citibank, N. A. v.
Court of Appeals and Commissioner of Internal
Revenue, G.R. No. 107434, October 10, 1997,
280 SCRA 459, in turn citing Ramie Textiles, Inc.
v. Mathay, Sr., 89 SCRA 586 (1979)]. It is an
ancient principle that no one, not even the state,
shall enrich oneself at the expense of another.
Indeed, simple justice requires the speedy refund
of the wrongly held taxes. (Ibid.)
 64
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:
SUGGESTED ANSWER: Yes. The failure to first
file a written claim for refund or credit is not fatal to
a petition for review involving a disputed
assessment where an assessment was disputed
but the protest was
denied by the Bureau of Internal Revenue.
To hold that the taxpayer has now lost the right to
appeal from the ruling on the disputed assessment
and require him to file a claim for a refund of the
taxes paid as a condition precedent to his right to
appeal, would in effect require of him to go through
a useless and needless ceremony that would only
delay the disposition of the case, for the
Commissioner would certainly disallow the claim
for refund in the same way as he disallowed the
protest against the assessment. The law, should
not be interpreted as to result in absurdities. (vda.
de San Agustin., etc., v. Commissioner of Internal
Revenue, G.R. No. 138485, September 10, 2001 citing
Roman Catholic Archbishop of Cebu v. Collector of
Internal Revenue, 4 SCRA 279) NOTE:
Reconciliation between above two numbers (8
and 9). An application for refund or credit under
Sec. 229 of the NIRC of 1997 is required where the
case filed before the CTA is a refund case, which is
not premised upon a disputed assessment. There
is no need for a prior application for refund or
credit, if the refund is merely a consequence of the
resolution of the BIRs denial of a protested
assessment.
Who could apply for a tax refund or
credit ?
 65
10. Who could apply for a refund
or credit ?
SUGGESTED ANSWER: The person who
paid the tax may apply for a refund or credit.
A withholding tax agent may also apply for
a refund. In a sense, he is also a taxpayer
because the tax may be collected from him if he
does not withhold.
11. What is the nature of the
taxpayers remedy of either to ask for a
refund of excess tax payments or to apply
the same in payment of succeeding taxable
periods taxes ?
SUGGESTED ANSWER: Sec. 69 of the
1977 NIRC (now Sec. 76 of the NIRC of 1997)
provides that any excess of the total quarterly
payments over the actual income tax computed in
the adjustment or final corporate income tax return,
shall either (a) be refunded to the corporation, or
(b) may be credited against the estimated quarterly
income tax liabilities for the quarters of the
succeeding taxable year. To ease the
administration of tax collection, these remedies are
in the alternative and the choice of one precludes
the other. Since the Bank has chosen the tax
credit approach it cannot anymore avail of the tax
refund. (Philippine Bank of Communications v.
Commissioner of Internal Revenue, et al., G.R. No.
112024, January 28, 1999)
NOTES AND COMMENTS:
a. The choice, is given to the
taxpayer, whether to claim for refund under
Sec. 76 or have its excess taxes applied as tax
credit for the succeeding taxable year, such
election is not final. Prior verification and approval
by the Commissioner of Internal Revenue is
required. The availment of the remedy of tax credit
is not absolute and mandatory. It does not confer
an absolute right on the part of the taxpayer to avail
of the tax credit scheme if it so chooses. Neither
does it impose a duty on the part of the
government to sit back and allow an important
facet of tax collection to be at the sole control and
discretion of the taxpayer. (Paseo Realty &
Development Corporation v. Court of Appeals, et
al., G. R. No. 119286, October 13, 2004)
12. What is the irrevocability
rule in claims for refund and what is the
rationale behind this ?
SUGGESTED ANSWER: A corporation
entitled to a tax credit or refund of the excess
estimated quarterly income taxes paid has two
options: (1) to carry over the excess credit or (2)
to apply for the issuance of a tax credit certificate
or to claim a cash refund. If the option to carry
over the excess credit is exercised, the same shall
be irrevocable for that taxable period.
In exercising its option, the corporation
must signify in its annual corporate adjustment
return (by marking the option box provided in the
BIR form) its intention either to carry over the
excess credit or to claim a refund. To facilitate tax
collection, these remedies are in the alternative
and the choice of one precludes the other. [Systra
Philippines, Inc., v. Commissioner of Internal Revenue,
G. R. No. 176290, September 21, 2007 citing Philippine
Bank of Communications v. Commissioner of Internal
Revenue, 361 Phil. 916 (1999)]
This is known as the irrevocability rule
and is embodied in the last sentence of Section
76 of the Tax Code. The phrase such option shall
be considered irrevocable for that taxable period
means that the option to carry over the excess tax
credits of a particular taxable year can no longer
be revoked.
The rule prevents a taxpayer from claiming
twice the excess quarterly taxes paid: (1) as
automatic credit against taxes for the taxable
quarters of the succeeding years for which no tax
credit certificate has been issued and (2) as a tax
credit either for which a tax credit certificate will be
issued or which will be claimed for cash refund.
(Systra Philippines, Inc., supra citing De Leon, Hector,
THE NATIONAL INTERNAL REVENUE CODE,
Seventh Edition, 2000, p. 430)
13. In the year 2000 Systra derived
excess tax credits and exercised the
option to carry them over as tax credits
for the next taxable year. However, the tax
due for the next taxable year is lower than
excess tax credits. It now applies for a
refund of the unapplied tax credits. May
its refund be granted ? If the refund is
denied, does Systra lose the unapplied
tax credits ? Explain briefly your answer.
SUGGESTED ANSWER: Systras claim
for refund should be denied. Once the carry over
option was made, actually or constructively, it
became forever irrevocable regardless of whether
the excess tax credits were actually or fully
utilized Under Section 76 of the Tax Code, a claim
for refund of such excess credits can no longer be
made. The excess credits will only be applied
against income tax due for the taxable quarters of
the succeeding taxable years.
Despite the denial of its claim for refund,
Systra does not lose the unapplied tax credits.
The amount will not be forfeited in favor of the
government but will remain in the taxpayers
account. Petitioner may claim and carry it over in
the succeeding taxable years, creditable against
future income tax liabilities until fully utilized.
(Systra Philippines, Inc., v. Commissioner of Internal
Revenue, G. R. No. 176290, September 21, 2007 citing
Philam Asset Management, Inc. v. Commissioner of
Internal Revenue, G.R. Nos. 156637/162004, 14
December 2005, 477 SCRA 761)
 66
Supposing in the above problem that
Systra permanent ceased operations, what
happens to the unapplied credits ?
SUGGESTED ANSWER: Where, the
corporation permanently ceases its operations
before full utilization of the tax credits it opted to
carry over, it may then be allowed to claim the
refund of the remaining tax credits. In such a
case, the remaining tax credits can no longer be
carried over and the irrevocability rule ceases to
apply. Cessante ratione legis, cessat ipse lex.
(Footnote no. 23, Systra Philippines, Inc., v.
Commissioner of Internal Revenue, G. R. No.
176290, September 21, 2007)
NOTES AND COMMENTS: The holding in
State Land Investment Corporation v.
Commissioner of Internal Revenue, G. R. No.
171956, January 18, 2008 that the taxpayer is
entitled to a refund because during the
succeeding year there was no tax due against
which the excess tax credits may be applied is not
doctrinal. This is so because it interpreted the
provisions of then Sec. 69 of the NIRC, which did
not provide for the irrevocability rule now
contained in Sec. 76 of the NIRC of 1997.
14. A simultaneous filing of the
application with the BIR for refund/credit
and the institution of the court suit with the
CTA is allowed. There is no need to wait for a
BIR denial. REASONS:
a. The positive requirement of Section 230
NIRC (now Sec. 229, NIRC of 1997);
b. The doctrine that delay of the
Commissioner in rendering decision does not
extend the peremptory period fixed by the statute;
c. The law fixed the same period two
years for filing a claim for refund with the
Commissioner under Sec. 204, par. 3, NIRC (now
Sec. 204 [C], NIRC of 1997), and for filing suit in
court under Sec. 230, NIRC (now Sec. 229, NIRC
of 1997), unlike in protests of assessments under
Sec. 229 (now Sec. 228, NIRC of 1997), which
fixed the period (thirty days from receipt of
decision) for appealing to the court, thus clearly
implying that the prior decision of the
Commissioner is necessary to take cognizance of
the case. (Commissioner of Internal Revenue v. Bank
of Philippine Islands, etc. et al., CA-G.R. SP No. 34102,
September 9, 1994; Gibbs v. Collector of Internal
Revenue, et al., 107 Phil, 232; Johnston Lumber Co. v.
CTA, 101 Phil. 151)
15. The grant of a refund is
founded on the assumption that the tax
return is valid, i.e. that the facts stated therein
are true and correct. (Commissioner of Internal
Revenue v. Court of Tax Appeals, G. R. No.
106611, July 21, 1994, 234 SCRA 348) Without the
tax return it would be virtually impossible to
determine whether the proper taxes have been
assessed and paid. After all, it is axiomatic that a
claimant has the burden of proof to establish the
factual basis of his or her claim for tax credit or
refund. Tax refunds, like tax exemptions, are
construed strictly against the taxpayer. (Paseo
Realty & Development Corporation v. Court of Appeals,
et al., G. R. No. 119286, October 13, 2004)
However, in BPI-Family Savings Bank v.
Court of Appeals, 386 Phil. 719; 326 SCRA 641
(2000), refund was granted, despite the failure to
present the tax return, because other evidence was
presented to prove that the overpaid taxes were
not applied. (Ibid.)
16. Discuss the difference
between tax refund and tax credit..
SUGGESTED ANSWER: There are
unmistakable formal and practical differences
between the two modes. Formally, a tax refund
requires a physical return of the sum erroneously
paid by the taxpayer, while a tax credit involves the
application of the reimbursable amount against any
sum that may be due and collectible from the
taxpayer.
On the practical side, the taxpayer to whom
the tax is refunded would have the option, among
others, to invest for profit the returned sum, an
option not proximately available if the taxpayer
chooses instead to receive a tax credit.
(Commissioner of Customs v. Philippine Phosphate
Fertilizer Corporation, G. R. No. 144440, September 1,
2004)
NOTES AND COMMENTS: It may be that
there is no essential difference between a tax
refund and a tax credit since both are moves of
recovering taxes erroneously or illegally paid to the
government. (Commissioner of Customs v. Philippine
Phosphate Fertilizer Corporation, G. R. No. 144440,
September 1, 2004)
17. A bank-trustee of employee
trusts filed an application for the refund of
taxes withheld on the interest incomes of
the investments made of the funds of the
employees trusts. Instead of presenting
separate accounts for interest incomes
made of these investments, the 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
 67
(which is so because incomes of employees
trusts are tax exempt), but also the correct
amount that should be refunded.
Tax refunds partake of the nature of tax
exemptions and are thus construed strictissimi
juris against the person or entity claiming the
exemption. The burden in proving the amount to
be refunded necessarily falls on the bank-trustee,
and there is an apparent failure to do so.
A necessary consequence of the special
exemption enjoyed alone by employees trusts
would be a necessary segregation in the
accounting of such income, interest or otherwise,
earned from those trusts from that earned by the
other clients of the bank-trustee. (Far East Bank
and Trust Company, etc., v. Commissioner, etc.,
et al., G.R. No. 138919, May 2, 2006) The
amounts that are the exempt earnings of the
employees trust has not been shown as they
have been commingled with the interest income of
the other clients of the bank-trustee.
18. CTA Circular No. 1-95 clearly
requires that photocopies of the receipts
or invoices must be pre-marked and
submitted to the CTA to verify the
correctness of the summary listing and
the CPA certification. CTA Circular No. 1-95,
issued on 25 January 1995, reads:
1. The party who desires to introduce
as evidence such voluminous documents must
present: (a) Summary containing the total
amount/s of the tax account or tax paid for the
period involved and a chronological or numerical
list of the numbers, dates and amounts covered
by the invoices or receipts; and (b) a Certification
of an independent Certified Public Accountant
attesting to the correctness of the contents of the
summary after making an examination and
evaluation of the voluminous receipts and
invoices. Such summary and certification must
properly be identified by a competent witness from
the accounting firm.
2. The method of individual presentation of
each and every receipt or invoice or other
documents for marking, identification and
comparison with the originals thereof need not be
done before the Court or the Commissioner
anymore after the introduction of the summary
and CPA certification. It is enough that the
receipts, invoices and other documents
covering the said accounts or payments must
be pre-marked by the party concerned and
submitted to the Court in order to be made
accessible to the adverse party whenever
he/she desires to check and verify the
correctness of the summary and CPA
certification. However, the originals of the said
receipts, invoices or documents should be ready
for verification and comparison in case doubt on
the authenticity of the particular documents
presented is raised during the hearing of the
case. (Emphasis supplied)
19. Manila Electric Company a
grantee of a legislative franchise under
Act No. 484, as amended by Republic Act
No. 4159 and Presidential Decree No. 551,1
[3]
had been paying a 2% franchise tax
based on its gross receipts, in lieu of all
other taxes and assessments of whatever
nature. Upon the effectivity of Executive
Order No. 72 on February 10, 1987,
however, respondent became subject to
the payment of regular corporate income
tax.
For the last quarter ending December 31,
1987, respondent filed on April 15, 1988 its
tentative income tax reflecting a
refundable amount of P101,897,741, but
only P77,931,812 was applied as tax credit
for the succeeding taxable year 1988.
Acting on a yearly routinary Letter
of Authority No. 0018064 NA dated June
27, 1988 issued by petitioner, directing the
investigation of tax liabilities of
respondent for taxable year 1987, an
investigation was conducted by Revenue
Officer Frederick Capitan which showed
that respondent was liable for 1.
deficiency income tax in the amount of
P2,340,902.52; and 2. deficiency franchise
tax in the amount of P2,838,335.84.
On April 17, 1989, respondent filed
an amended final corporate Income Tax
Return ending December 31, 1988
reflecting a refundable amount of
P107,649,729.
Respondent thus filed on March 30,
1990 a letter-claim for refund or credit in
the amount of P107,649,729 representing
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.
1
 68
The Court of Tax Appeals granted
the P107,649,729 claim for refund, or in
the alternative for the BIR to issue a tax
credit. Is the Court of Tax Appeals correct
?
SUGGESTED ANSWER: Yes. Section 69
of the National Internal Revenue Code of 1986,
now Sec. 76 provides, if the sum of the quarterly
tax payments made during a taxable year is not
equal to the total tax due on the entire taxable
income of that year as shown in its final
adjustment return, the corporation has the option
to either: (a) pay the excess tax still due, or (b) be
refunded the excess amount paid. The returns
submitted are merely pre-audited which consist
mainly of checking mathematical accuracy of the
figures in the return. After such checking, the
purpose of which being to insure prompt action
on corporate annual income tax returns showing
refundable amounts arising from overpaid
quarterly income taxes, (Revenue Memorandum
Order No. 32-76 dated June 11, 1976) the refund
or tax credit is granted. (Commissioner of Internal
Revenue v. Manila Electric Company, G. R. No.
121666, October 10, 2007)
TARIFF AND CUSTOMS LAWS
ORGANIZATION AND FUNCTIONS OF
THE BUREAU OF INTERNAL REVENUE
TARIFF AND CUSTOMS CODE
1. When does importation begin,
and why is it important to know whether
importation has already begun or not ?
SUGGESTED ANSWER: Importation
begins when the conveying vessel or aircraft enters
the jurisdiction of the Philippines with intention to
unlade therein. (Sec. 1202, TCCP)
The jurisdiction of the Bureau of Customs to
enforce the provisions of the TCCP including
seizure and forfeiture also begins from the
beginning of importation. Thus, the Bureau of
Customs obtains jurisdiction over imported articles
only after importation has begun.
2. When is importation
deemed terminated and why is it important
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
 69
like product. [Sec. 301 (s) (5), TCC, as amended by
Rep. Act No. 8752, Anti-Dumping Act of 1999]
8. When is the anti-dumping duty
imposed ?
SUGGESTED ANSWER: The anti-dumping
duty is imposed
a. Where a product, commodity or article of
commerce is exported into the Philippines at a
price less than its normal value when destined for
domestic consumption in the exporting country,
b. and such exportation is causing or is
threatening to cause material injury to a domestic
industry, or materially retards the establishment of
a domestic industry producing the like product.
[Sec. 301 (a), TCC, as amended by Rep. Act No. 8752,
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 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 anti-
dumping duty or any special customs duty without
the favorable recommendation of the Tariff
Commission.
12. In the determination of whether
to impose the anti-dumping duty, the Tariff
Commission, may consider among others,
the effect of imposing an anti-dumping
duty on the welfare of the consumers
and/or the general public, and other related
local industries. (Sec. 301 (a), TCC, as amended
by Rep. Act No. 8752, Anti-Dumping Act of 1999)
13. The amount of anti-dumping duty
that may be imposed is the difference
between the export price and the normal
value of such product, commodity or
article. (Sec. 301 (s) (1), TCC, as amended by Rep.
Act No. 8752, Anti-Dumping Act of 1999)
The anti-dumping duty shall be equal to the
margin of dumping on such product, commodity or
article thereafter imported to the Philippines under
similar circumstances, in addition to ordinary
duties, taxes and charges imposed by law on the
imported product, commodity or article.
14. What are countervailing duties
and when are they imposed ?
SUGGESTED ANSWER: Countervailing
duties are additional customs duties imposed on
any product, commodity or article of commerce
which is granted directly or indirectly by the
government in the country of origin or exportation,
any kind or form of specific subsidy upon the
production, manufacture or exportation of such
product commodity or article, and the importation of
such subsidized product, commodity, or article has
caused or threatens to cause material injury to a
domestic industry or has materially retarded the
growth or prevents the establishment of a domestic
industry. (Sec. 302, TCCP as amended by Section
1, R.A. No. 8751)
15. The imposing authority for the
countervailing duties is the Secretary of
Trade and Industry in the case of 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 anti-dumping
duty remains the prerogative of the Tariff
Commission. (Sec. 301 (a), TCC, as amended by Rep.
Act No. 8752, Anti-Dumping Act of 1999)
16. The countervailing duty is
equivalent to the value of the specific
subsidy.
17. Marking duties are the additional
customs duties imposed on foreign articles (or its
containers if the article itself cannot be marked),
not marked in any official language in the
Philippines, in a conspicuous place as legibly,
indelibly and permanently in such manner as to
indicate to an ultimate purchaser in the Philippines
the name of the country of origin.
 70
18. The Commissioner of Customs
imposes the marking duty.
19. The marking duty is equivalent to
five percent (5%) ad valorem.
20. A discriminatory duty is a new
and additional customs duty imposed upon articles
wholly or in part the growth or product of, or
imported in a vessel, of any foreign country which
imposes, directly or indirectly, upon the disposition
or transportation in transit through or re-exportation
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 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.
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:
a. Transaction value of identical goods
b. Transaction value of similar goods
c. Deductive method
d. Computed method
e. Fallback method
27. How and to whom should
claims for refund of customs duties be
made ?
SUGGESTED ANSWER: All claims for
refund of duties shall be made in writing and
forwarded to the Collector of Customs to whom
such duties are paid, who upon receipt of such
claim, shall verify the same by the records of his
Office, and if found to be correct and in accordance
with law, shall certify the same to the
Commissioner of Customs with his
recommendation together with all necessary
papers and documents. Upon receipt by the
Commissioner of such certified claim he shall
cause the same to be paid if found correct. (Sec.
1708, TCC)
28. What is mean by the term
entry in Customs Law ?
SUGGESTED ANSWER: It has a triple
meaning.
a. the documents filed at the Customs
house;
b. the submission and acceptance of
the documents; and
c. Customs declaration forms or
customs entry forms required to be accomplished
 71
by passengers of incoming vessels or passenger
planes as envisaged under Sec. 2505 of the
TCCP (Failure to declare baggage). (Jardeleza v.
People, G.R. No. 165265, February 6, 2006)
29. A flight stewardess arrived from
Singapore. Upon her arrival she was
asked whether she has anything to
declare. She answered none, and she
submitted her Customs Baggage
Declaration Form which she
accomplished and signed with nothing or
written on the space for items to be
declared. When her hanger bag was
examined some pieces of jewelry were
found concealed within the lining of said
bag.
She was then convicted of violating
of Sec. 3601 of the Tariff and Customs
Code for unlawful importation which
penalizes any person who shall
fraudulently import or bring into the
Philippines any article contrary to law.
She now appeals claiming that lower
court erred n convicting her under Sec.
3601 when the facts alleged both in the
information and those shown by the
prosecution constitute the offense under
Sec. 2505 Failure to Declare Baggage, of
which she was acquitted. Is she correct ?
SUGGESTED ANSWER: No. Sec. 3601
does not define a crime. It merely provides, inter
alia, the administrative remedies which can be
resorted to by the Bureau of Customs when seizing
dutiable articles found the baggage of any person
arriving in the Philippines which is not included in
the accomplished baggage declaration submitted
to the customs authorities, and the administrative
penalties that such person must pay for the release
of such goods if not imported contrary to law.
Such administrative penalties are
independent of the criminal liability for smuggling
that may be imposed under Sec. 3601, and other
provisions of the TCC which can only be
determined after the appropriate criminal
proceedings, prescinding from the outcome in any
administrative case that may have been filed and
disposed of by the customs authorities.
Indeed the second paragraph of Sec. 2505
provides that nothing shall prevent the bringing of a
criminal action against the offender for smuggling
under Section 3601. (Jardeleza v. People, G. R.
No. 165265, February 6, 2006)
30. Payment is not a defense in
smuggling. When upon trial for violation of this
section, the defendant is shown to have
possession of the article in question, possession
shall be deemed sufficient evidence to authorize
conviction, unless the defendant shall explain the
possession to the satisfaction of the court:
Provided, however, That payment of the tax due
after apprehension shall not constitute a valid
defense in any prosecution under this section.
(last par., Sec. 3601, TCC)
31. How is smuggling committed ?
SUGGESTED ANSWER: Smuggling is
committed by any person who:
a. fraudulently imports or brings into the
country any article contrary to law;
b. assists in so doing any article
contrary to law; or
c. receives, conceals, buys, sells or in
any manner facilitates the transportation,
concealment or sale of such goods after
importation, knowing the same to have been
imported contrary to law. (Jardeleza v. People,
G.R. No. 165265, February 6, 2006 citing
Rodriguez v. Court of Appeals, G. R. No. 115218,
September 18, 1995, 248 SCRA 288, 296)
NOTES AND COMMENTS:
a. Importation consists of bringing an
article into the country from the outside.
Importation begins when the conveying vessel or
aircraft enters the jurisdiction of the Philippines
with intention to unload therein.
b. When unlawful importation is
complete. In the absence of a bona fide intent to
make entry and pay duties when the prohibited
article enters the Philippine territory. Importation
is complete when the taxable, dutiable commodity
is brought within the limits of the port of entry.
Entry through a custom house is not the essence
of the act. (Jardeleza v. People, G.R. No.
165265, February 6, 2006)
32. The Collector of Customs
sitting in seizure and forfeiture
proceedings has exclusive jurisdiction to
hear and determine all questions touching
on the seizure and forfeiture of dutiable
goods. RTCs are precluded from
assuming cognizance over such matters
even through petitions of certiorari,
prohibition or mandamus. (The Bureau of
Customs, et al., v. Ogario, et al., G.R. No. 138081,
March 20, 2000)
What is the rationale for this
doctrine ?
SUGGESTED ANSWER:
a. Regional Trial Courts have no
jurisdiction to replevin a property which is subject to
seizure and forfeiture proceedings for violation of
the Tariff and Customs Code otherwise, actions for
forfeiture of property for violation of the Customs
laws could easily be undermined by the simple
 72
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 over the vessel. Would
the suit prosper?
SUGGESTED ANSWER: No. His remedy
was not with the RTC but with the CTA, as issues
of ownership of goods in the custody of customs
officials are within the power of the CTA to
determine.
The Collector of Customs has exclusive
jurisdiction over seizure and forfeiture
proceedings and trial courts are precluded from
assuming cognizance over such matters even
through petitions for certiorari, prohibition or
mandamus. (Commissioner of Customs v. Court
of Appeals, et al., G. R. Nos. 111202-05, January
31, 2006)
34. The customs authorities do not
have to prove to the satisfaction of the
court that the articles on board a vessel
were imported from abroad or are intended
to be shipped abroad before they may
exercise the power to effect customs
searches, seizures, or arrests provided by
law and continue with the administrative
hearings. (The Bureau of Customs, et al., v.
Ogario, et al., G.R. No. 138081, March 20, 2000)
35. The Tariff and Customs Code allows
the Bureau of Customs to resort to the
administrative remedy of seizure, such as
by enforcing the tax lien on the imported
article when the imported articles could be
found and be subject to seizure and
forfeiture.
36. The Tariff and Customs Code allows
the Bureau of Customs to resort to the
judicial remedy of filing an action in court
when the imported articles could not
anymore be found.
37. Section 2301 of the TCCP
states that seized articles may not be
released under bond if there is prima facie
evidence of fraud in their importation.
Commissioner of Customs v. Court of Tax
Appeals, et al., G. R. No. 171516-17, February
13, 2009
Section 2301. Warrant for Detention of
Property-Cash Bond. Upon making any seizure,
the Commissioner shall issue a warrant for the
detention of the property; and if the owner or
importer desires to secure the release of the
property for legitimate use, the Collector shall,
with the approval of the Commissioner of
Customs, surrender it upon the filing of a cash
bond, in an amount fixed by him, conditioned
upon the payment of the appraised value of the
article and/or any fine, expenses and costs which
may be adjudged in the case: Provided, That
such importation shall not be released under
any bond when there is prima facie evidence
of fraud in the importation of the article:
Provided, further, That articles the importation of
which is prohibited by law shall not be released
under any circumstances whatsoever: Provided,
finally, That nothing in this section shall be
construed as relieving the owner or importer from
any criminal liability which may arise from any
violation of law committed in connection with the
importation of the article. (emphasis supplied)
 73
38. Instances where there is no
right of redemption of seized and forfeited
articles:
a. There is fraud;
b. The importation is absolutely
prohibited, or
c. The release of the property would be
contrary to law. (Transglobe International, Inc. v. Court
of Appeals, et al., G.R. No. 126634, January 25, 1999)
39. In Aznar v. Court of Tax Appeals, 58
SCRA 519, reiterated in Farolan, Jr. v. Court of Tax
appeals, et al., 217 SCRA 298, the Supreme Court
clarified that the fraud contemplated by law
must be actual and not constructive. It must
be intentional, consisting of deception, willfully and
deliberately done or resorted to in order to induce
another to give up some right.
40. Requisites for forfeiture of
imported goods:
a. Wrongful making by the owner,
importer, exporter or consignee of any declaration
or affidavit, or the wrongful making or delivery by
the same person of any invoice, letter or paper all
touching on the importation or exportation of
merchandise.
b. the falsity of such declaration,
affidavit, invoice, letter or paper; and
c. an intention on the part of the
importer/consignee to evade the payment of the
duties due. (Republic, etc., v. The Court of
Appeals, et al., G.R. No. 139050, October 2, 2001)
41. On January 7, 1989, the vessel
M/V Star Ace, coming from Singapore
laden with cargo, entered the Port of San
Fernando, La Union for needed repairs.
When the Bureau of Customs later became
suspicious that the vessels real purpose
in docking was to smuggle cargo into the
country, seizure proceedings were
instituted and subsequently two Warrants
of Seizure and Detention were issued for
the vessel and its cargo.
Cesar does not own the vessel or any
of its cargo but claimed a preferred
maritime lien. Cesar then brought several
cases in the RTC to enforce his lien.
Would these suits prosper ?
SUGGESTED ANSWER: No. The Bureau
of Customs having first obtained possession of the
vessel and its goods has obtained jurisdiction to
the exclusion of the trial courts.
When Cesar has impleaded the vessel as a
defendant to enforce his alleged maritime lien, in
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.
 74
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 in originally securing the TCCs; and the
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 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
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
 75
case before the CTA. Records do not show that
Shell ever availed of this remedy.
Alternatively, as held in Shell v. Republic of
the Philippines, G.R. No. 161953, March 6, 2008,
547 SCRA 701, the appropriate forum for Shell
under the circumstances of this case should be at
the collection cases before the RTC where Shell
can put up the fact of its payment as a defense.
(Pilipinas Shell Petroleum Corporation v.
Commissioner of Customs, G. R. No. 176380,
June 18, 2009)
48. A case becomes ripe for
filing with the Regional Trial Court (RTC),
as a collection matter after the finality of
the Commissioner of Customs
assessment. (Pilipinas Shell Petroleum
Corporation v. Commissioner of Customs, G. R. No.
176380, June 18, 2009 citing Shell v. Republic of the
Philippines, G.R. No. 161953, March 6, 2008, 547
SCRA 701)
The assessment has long been final, and
this recognition of finality removes all perceived
hindrances, based on this case, to the
continuation of the collection suits.
A suit for the collection of internal revenue
taxes, where the assessment has already become
final and executory, the action to collect is akin to
an action to enforce the judgment. No inquiry can
be made therein as to the merits of the
In light of the conclusion that the present
case does not involve a decision of the
Commissioner of Customs on a matter brought to
him as a tax protest, Atty. Valeras lack of authority
to issue the collection letters and to institute the
collection suits is irrelevant. For this same
reason, the injunction against Atty. Valera cannot
be invoked to enjoin the collection of unpaid taxes
due from Shell. (Pilipinas Shell Petroleum
Corporation v. Commissioner of Customs, supra)
LOCAL GOVERNMENT TAXATION
1. The fundamental principles of
local taxation are:
a. Uniformity;
b. Taxes, fees, charges and other
impositions shall be equitable and based on ability
to pay, for public purposes, not unjust, excessive,
oppressive or confiscatory, not contrary to law,
public policy, national economic policy or in
restraint of trade;
c. The levy and collection shall not be let
to any private person;
d. Inures solely to the local government
unit levying the tax;
e. The progressivity principle must be
observed.
2. A law which deprives local
government units of their power to tax
would be unconstitutional. The constitution
has delegated to local governments the power to
levy taxes, fees and other charges. This
constitutional delegation may only be removed by a
constitutional amendment.
3. Under the now prevailing
Constitution, where there is neither a grant
nor prohibition by statute, the taxing power
of local governments must be deemed to
exist although Congress may provide
statutory limitations and guidelines in order
to safeguard the viability and self-sufficiency of
local government units by directly granting them
general and broad tax powers. (City Government
of San Pablo, Laguna, et al., v. Reyes, et al., G.R.
No. 127708, March 25, 1999)
4. The Local Government Code
explicitly authorizes provinces and cities,
notwithstanding any exemption granted
by any law or other special law to impose
a tax on businesses enjoying a franchise.
Indicative of the legislative intent to carry out the
constitutional mandate of vesting broad tax powers
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
 76
companion case, April 28, 2004 citing National
Power Corporation v. City of Cabanatuan, G. R.
No. 149110, April 9, 2003)
7. The fundamental law did not
intend the direct grant to local government
units to be absolute and unconditional, the
constitutional objective obviously is to ensure that,
while local government units are being
strengthened and made more autonomous, the
legislature must still see to it that:
a. the taxpayer will not be over-
burdened or saddled with multiple and
unreasonable impositions;
b. each local government unit will have
its fair share of available resources;
c. the resources of the national
government will be unduly disturbed; and
d. local taxation will be fair, uniform and
just. (Manila Electric Company v. Province of
Laguna, et al., G.R. No. 131359, May 5, 1999)
8. Taxing power of the local
government is limited. The taxing power of
local governments is limited in the sense that
Congress can enact legislation granting tax
exemptions.
While the system of local government
taxation has changed with the onset of the 1987
Constitution, the power of local government units
to tax is still limited.
While the power to tax by local
governments may be exercised by local legislative
bodies, no longer merely be virtue of a valid
delegation as before, but pursuant to direct
authority conferred by Section 5, Article X of the
Constitution, the basic doctrine on local taxation
remains essentially the same, the power to tax is
[still] primarily vested in the Congress. (Quezon
City, et al., v. ABS-CBN Broadcasting Corporation, G.
R. No. 166408, October 6, 2008 citing City Government
of Quezon City, et al. v. Bayan Telecommunications,
Inc., G.R. No. 162015, March 6, 2006, 484 SCRA 169
in turn referring to Mactan Cebu International Airport
Authority, v. Marcos, G.R. No. 120082, September 11,
1996, 261 SCRA 667, 680)
9. Further amplification by
Bernas of the local governments power to
tax. What is the effect of Section 5 on the fiscal
position of municipal corporations? Section 5
does not change the doctrine that municipal
corporations do not possess inherent powers of
taxation. What it does is to confer municipal
corporations a general power to levy taxes and
otherwise create sources of revenue. They no
longer have to wait for a statutory grant of these
powers. The power of the legislative authority
relative to the fiscal powers of local governments
has been reduced to the authority to impose
limitations on municipal powers. Moreover, these
limitations must be consistent with the basic
policy of local autonomy. The important legal
effect of Section 5 is thus to reverse the principle
that doubts are resolved against municipal
corporations. Henceforth, in interpreting statutory
provisions on municipal fiscal powers, doubts will
be resolved in favor of municipal corporations. It
is understood, however, that taxes imposed by
local government must be for a public purpose,
uniform within a locality, must not be confiscatory,
and must be within the jurisdiction of the local unit
to pass. (Quezon City, et al., v. ABS-CBN
Broadcasting Corporation, G. R. No. 166408, October
6, 2008 citing City Government of Quezon City, et al. v.
Bayan Telecommunications, Inc., G.R. No. 162015,
March 6, 2006, 484 SCRA 169)
10. Reconciliation of the local
governments authority to tax and the
Congressional general taxing power.
Congress has the inherent power to tax, which includes
the power to grant tax exemptions. On the other hand,
the power of local governments, such as provinces and
cities for example Quezon City, to tax is prescribed by
Section 151 in relation to Section 137 of the LGC which
expressly provides that notwithstanding any exemption
granted by any law or other special law, the City or a
province may impose a franchise tax. It must be noted
that Section 137 of the LGC does not prohibit grant of
future exemptions.
The Supreme Court in a series of cases
has sustained the power of Congress to grant tax
exemptions over and above the power of the local
governments delegated power to tax. (Quezon
City, et al., v. ABS-CBN Broadcasting Corporation, G.
R. No. 166408, October 6, 2008 citing City Government
of Quezon City, et al. v. Bayan Telecommunications,
Inc., G.R. No. 162015, March 6, 2006, 484 SCRA 16)
Indeed, the grant of taxing powers to local
government units under the Constitution and the
LGC does not affect the power of Congress to
grant exemptions to certain persons, pursuant to a
declared national policy. The legal effect of the
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.
 77
c. Tax base: Reasonable classification
by the sanggunian.
d. Exception: Payment to one province
or city no longer subject to any other national or
local tax, license or fee for the practice of such
profession in any part of the Philippine
professionals exclusively employed in the
government.
e. Date of payment: or on before
January 31 or engaging in the profession.
f. Place of payment: Province or city
where the professional practices his profession or
where he maintains his principal office in case he
practices his profession in several places.
12. Requirements: Any
individual or corporation employing a person
subject to professional tax shall require payment by
that person of the tax on his profession before
employment and annually thereafter.
Any person subject to the professional tax
shall write in deeds, receipts, prescriptions, reports,
books of account, plans and designs, surveys and
maps, as the case may be, the number of the
official receipt issued to him.
Exemption: Professionals exclusively
employed in the government shall be exempt from
payment. (Sec. 139, LGC)
NOTE: For the purpose of collecting the tax,
the provincial or city treasurer or his duly
authorized representative shall require from such
professionals their current annual registration cards
issued by competent authority before accepting
payment of their professional tax for the current
year. The PRC shall likewise require the
professionals presentation of proof of payment
before registration of professionals or renewal of
their licenses. (last par., Art. 228, Rules and
Regulations Implementing the Local Government
Code of 1991)
13. Who are the professionals
who, if they are in practice of their
profession, are subject to professional tax
? power of municipalities and cities to impose a
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
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
 78
business tax on manufacturers, etc. of liquors,
distilled spirits, wines, and any other article of
commerce, pursuant to Section 143(a) of the
LGC, said municipality or city may no longer
subject the same manufacturers, etc. to a
business tax under Section 143(h) of the same
Code. Section 143(h) may be imposed only on
businesses that are subject to excise tax, VAT, or
percentage tax under the NIRC, and that are not
otherwise specified in preceding paragraphs.
In the same way, businesses such as
respondents, already subject to a local business
tax under Section 14 of Tax Ordinance No. 7794
[which is based on Section 143(a) of the LGC],
can no longer be made liable for local business
tax under Section 21 of the same Tax Ordinance
[which is based on Section 143(h) of the LGC].
(The City of Manila, et al., v. Coca-Cola Bottlers
Philippines, Inc., G. R. No. 181845, August 4,
2009)
REAL PROPERTY TAXATION
1. The fundamental principles of
real property taxation are:
a. Appraisal at current and fair market
value;
b. Classification for assessment on the
basis of actual use;
c. Assessment on the basis of uniform
classification;
d. Appraisal, assessment, levy and
collection shall not be let to a private person;
e. Appraisal and assessment shall be
equitable.
NOTES AND COMMENTS: Real properties
shall be appraised at the current and fair market
value prevailing in the locality where the property is
situated and classified for assessment purposes on
the basis of its actual use. (Allied Banking
Corporation, etc., v. Quezon City Government, et al., G.
R. No. 154126, October 11, 2005)
2. The reasonable market value is
determined by the assessor in the form of
a schedule of fair market values.
The schedule is then enacted by the local
sanggunian.
3. Fair market value is the price at
which a property may be sold by a seller
who is not compelled to sell and bought by
a buyer who is not compelled to buy, taking
into consideration all uses to which the property is
adopted and might in reason be applied.
The criterion established by the statute
contemplates a hypothetical sale. Hence, the
buyers need not be actual and existing purchasers.
(Allied Banking Corporation, etc., v. Quezon City
Government, et al., G. R. No. 154126, October 11,
2005 )
NOTES AND COMMENTS: In fixing the
value of real property, assessors have to consider
all the circumstances and elements of value and
must exercise prudent discretion in reaching
conclusions. (Allied Banking Corporation, etc., v.
Quezon City Government, et al., G. R. No. 154126,
October 11, 2005)
Preparation of fair market values:
a. The city or municipal assessor shall
prepare a schedule of fair market values for the
different classes of real property situated in their
respective Local Government Units for the
enactment of an ordinance by the sanggunian
concerned; and
b. The schedule of fair market values shall
be published in a newspaper of general circulation
in the province, city or municipality concerned or
the posting in the provincial capitol or other places
as required by law. (Lopez v. City of Manila, et al.,
G.R. No. 127139, February 19, 1999)
Proposed fair market values of real
property in a local government unit as well as
the ordinance containing the schedule must be
published in full for three (3) consecutive days in
a newspaper of local circulation, where available,
within ten (10) days of its approval, and posted in
at lease two (2) prominent places in the provincial
capitol, city, municipal or barangay hall for a
minimum of three (3) consecutive weeks.
(Figuerres v. Court of Appeals, et al,. G.R. No.
119172, March 25, 1999)
4. Approaches in estimating the
fair market value of real property for real
property tax purposes ?
a. Sales Analysis Approach. The sales
price paid in actual market transactions is
considered by taking into account valid sales data
accumulated from among the Registrar of Deeds,
notaries public, appraisers, brokers, dealers, bank
officials, and various sources stated under the
Local Government Code.
b. Income Capitalization Approach. The
value of an income-producing property is no more
than the return derived from it. An analysis of the
income produced is necessary in order to estimate
the sum which might be invested in the purchase of
the property.
c. Reproduction cost approach is a
formal approach used exclusively n appraising
man-made improvements such as buildings and
other structures, based on such data as materials
and labor costs to reproduce a new replica of the
improvement.
The assessor uses any or all of these
approaches in analyzing the data gathered to arrive
at the estimated fair market value to be included in
 79
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 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
 80
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 taxpayer to adduce evidence to
show that no public hearings ever took place.
(Reyes, et al., v. Court of Appeals, et al., G.R. No.
118233, December 10, 1999) Public hearings are
required to be conducted prior to the enactment of
an ordinance imposing real property taxes.
(Figuerres v. Court of Appeals, et al., G.R. No. 119172,
March 25, 1999)
10. The concurrent and
simultaneous remedies afforded local
government units in enforcing collection of
real property taxes:
a. Distraint of personal property;
b. Sale of delinquent real property, and
c. Collection of real property tax through
ordinary court action.
11. Notice and publication, as well
as the legal requirements for a tax
delinquency sale, are mandatory, and the
failure to comply therewith can invalidate the sale.
The prescribed notices must be sent to comply with
the requirements of due process. (De Knecht, et al,.
v. Court of Appeals; De Knecht, et al., v. Honorable
Sayo, 290 SCRA 223,236)
12. The reason behind the notice
requirement is that tax sales are
administrative proceedings which are in
personam in nature. (Puzon v. Abellera, 169
SCRA 789, 795; De Asis v. I.A.C., 169 SCRA 314)
13. FELS Energy, Inc., had a
contract to supply NPC with the electricity
generated by FELS power barges. The
contract also stated that NPC shall be
responsible for all real estate taxes and
assessments. FELS then received an
assessment of real property taxes on its
power barges from the Provincial Assessor
of Batangas. If filed a motion for
reconsideration with the Provincial
Assessor.
a. Upon denial, FELS elevated the
matter to the Local Board of Assessment
Appeals (LBAA), where it raised the
following issues:
1) Since NPC is tax-exempt
then FELs should also be tax-exempt
because of its contract with NPC.
2) The power barges are not
real property subject to real property
taxes.
 81
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 on a piece of land and which tend directly
to meet the needs of said industry or work.
b. The Treasurer is correct. The
procedure do not allow a motion for reconsideration
to be filed with the Provincial Assessor.
To allow the procedure would indeed invite
corruption in the system of appraisal and
assessment. it conveniently courts a graft-prone
situation where values of real property ay be
initially set unreasonably high, and then
subsequently reduced upon the request of a
property owner. In 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
 82
with the administrative procedure for obtaining a
refund of real property taxes, as provided under the
Local Government Code. (Allied Banking
Corporation, etc., v. Quezon City Government, et al., G.
R. No. 154126, September 15, 2006)
NOTES AND COMMENTS: In the above
Allied Banking case, the Supreme Court provided
for the starting date of computing the two-year
prescriptive period within which to file the claim with
the Treasurer, which is from finality of the Decision.
The procedure to be followed is that shown below.
19. Procedure for refund of real
property taxes based on validity of the tax
measure or solutio indebeti.
a. Payment under protest not required,
claim must be directed to the local treasurer, within
two (2) years from the date the taxpayer is entitled
to such reduction or readjustment, who must
decide within sixty (60) days from receipt.
b. The denial by the local treasurer of
the protest would fall within the Regional Trial
Courts original jurisdiction, the review being the
initial judicial cognizance of the matter. Despite the
language of Section 195 of the Local Government
Code which states that the remedy of the taxpayer
whose protest is denied by the local treasurer is to
appeal with the court of competent jurisdiction,
labeling the said review as an exercise of appellate
jurisdiction is inappropriate since the denial of the
protest is not the judgment or order of a lower
court, but of a local government official. (Yamane ,
etc. v. BA Lepanto Condominium Corporation, G.
R. No. 154993, October 25, 2005)
c. The decision of the Regional Trial
Court should be appealed by means of a petition
for review directed to the Court of Tax Appeals
(Division).
d. The decision of the Court of Tax
Appeals (Division) may be the subject of a review
by the Court of Tax Appeals (en banc).
e. The decision of the Court of Tax
Appeals (en banc) may be the subject of a petition
for review on certiorari on pure questions of law
directed to the Supreme Court.
20. Charitable institutions,
churches and parsonages or convents
appurtenant thereto, mosques, non-profit
cemeteries, and all lands, buildings and
improvements that are actually, directly
and exclusively used for religious,
charitable or educational purposes are
exempt from taxation. [Sec.28 (3) Article VI, 1987
Constitution]
21. The constitutional tax
exemptions refer only to real property that
are actually, directly and exclusively used for
religious, charitable or educational purposes, and
that the only constitutionally recognized exemption
from taxation of revenues are those earned by non-
profit, non-stock educational institutions which are
actually, directly and exclusively used for
educational purposes. (Commissioner of Internal
Revenue v. Court of Appeals, et al., 298 SCRA 83)
The constitutional tax exemption covers
property taxes only. What is exempted is not the
institution itself, those exempted from real estate
taxes are lands, buildings and improvements
actually, directly and exclusively used for religious,
charitable or educational purposes. (Lung Center
of the Philippines v. Quezon City, et al., etc., G. R.
No. 144104, June 29, 2004)
22. The 1935 Constitution stated
that the lands, buildings, and
improvements are used exclusively but
the present Constitution requires that the
lands, buildings and improvements are
actually, directly and exclusively used.
The change should not be ignored. Reliance on
past decisions would have sufficed were the words
actually as well as :directly are not added. There
must be proof therefore of the actual and direct use
to be exempt from taxation. (Lung Center of the
Philippines v. Quezon City, et al., etc., G. R. No. 144104,
June 29, 2004)
23. The actual, direct and
exclusive use of the property for
charitable purposes is the direct and
immediate and actual application of the
property itself to the purposes for which the
charitable institution is organized. It is not the use
of the income from the real property that is
determinative of whether the property is used for
tax-exempt purposes.
If real property is used for one or more
commercial purposes, it is not exclusively used for
the exempted purpose but is subject to taxation,.
The words dominant use or principal use cannot
be substituted for the words used exclusively
without doing violence to the Constitution and the
law. Solely is synonymous with exclusively. (Lung
Center of the Philippines v. Quezon City, et al., etc., G. R.
No. 144104, June 29, 2004)
24. Portions of the land of a
charitable institution, such as a hospital,
leased to private entities as well as those
parts of the hospital leased to private
individuals are not exempt from real
property taxes. On the other hand, the portion
of the land occupied by the hospital and portions of
the hospital used for its patients, whether paying or
non-paying, are exempt from real property taxes.
 83
(Lung Center of the Philippines v. Quezon City, et
al., etc., G. R. No. 144104, June 29, 2004)
25. As a general principle, a
charitable institution does not lose its
character as such and its exemption from
taxes simply because it derives income
from paying patients, whether out-patient,
or 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. (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
 84
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-manager-operator of the project is the
actual user of its machineries and equipment.
BPPCs ownership and use of the machineries
and equipment are actual, direct, and immediate,
while NAPOCORs is contingent and, at this stage
of the BOT Agreement, not sufficient to support its
claim for tax exemption. (National Power
Corporation v. Central Board of Assessment Appeals,
et al., G, R. No. 171470, January 30, 2009)