PM Reyes Taxation (Unified PDF (2013-2016) )

PM REYES BAR REVIEWER ON TAXATION I
(Based on the 2013 Bar Syllabus and Updated with Recent BIR Issuances and the
Latest Supreme Court and CTA Jurisprudence as of January 31, 2013)
This is the first installment of my two-part reviewer on

taxation. This covers two topics: (1) General It is the power by which the sovereign raises
Principles of Taxation; and (2) Income Tax. It is a revenue to defray the expenses of government. It is
consolidated and updated version of my reviewers in
a way of apportioning the cost of government among
Tax 1 and Taxation Law Review. This reviewer is
based on notes from Atty. Montero and Assoc. Dean
those who in some measure are privileged to enjoy
Gruba and the books and reviewers of Atty. its benefits and must bear its burden.
Mamalateo and Atty. Domondon. I also added some
stuff from Atty. Mickey Ingles’ reviewer and Justice ---------------------------------------------------------------
Dimaampao. References have also been made to the B. Nature of Taxation
2013 Bedan Red Book and the 2012 UP Tax Reviewer.
---------------------------------------------------------------
Further, I added the recent and relevant revenue
regulations and other BIR issuances (especially those Q: What is the nature of the power of
issued in 2012) and the latest SC and CTA taxation?
jurisprudence (as of January 31, 2013). Most of the
digests were sourced from Du Baladad and The nature of the power of taxation is two-fold. It is
Associates (BDB Law) and from Baniqued & both an inherent power and a legislative power.
Baniqued. The reviewer will make reference to codal
provisions. Thus, I recommend that you read this with
a copy of the NIRC and other Laws Codal (2012 1. An inherent power
edition) by Atty. Sacadalan-Casasola
The power of taxation is inherent in the State,
Possessors may reproduce and distribute my being an attribute of sovereignty. The power to
reviewer provided my name remains clearly tax is an incident of sovereignty and is unlimited in
associated with my work and no alterations in the its range, acknowledging in its very nature no limits,
form and content of my reviewer are made. If you find so that security against abuse is to be found only in
this reviewer useful, please share it to others.
the responsibility of the legislature which imposes
May this reviewer prove useful to you. If it does,
the tax on the constituency who are to pay it
please share it to others. Happy studying! M ACTAN CEBU INTERNATIONAL AIRPORT AUTHORITY
VS. M ARCOS [261 SCRA 667]. This is so because the
--------------------------------------------------------------------------- very existence of the State is dependent on taxes.
TABLE OF CONTENTS
--------------------------------------------------------------------------- 2. Legislative in character
I. General Principles of Taxation .................... 1 The power of taxation is essentially a legislative

II. NIRC function. Taxation is an attribute of sovereignty. It is
A. Income Tax .............................................. 45 the strongest of all powers of the government. There
is a presumption in favor of legislative determination.
---------------------------------------------------------- Public policy decrees that since upon the prompt
I. GENERAL PRINCIPLES OF TAXATION collection of revenue depends the very existence of
government itself, whatever determination shall be
---------------------------------------------------------- arrived at by the legislature should not be interfered
with, unless there be a clear violation of some
--------------------------------------------------------------- constitutional inhibition. [SARASOLA VS. TRINIDAD [40
A. Definition and Concept of Taxation PHIL. 252]
---------------------------------------------------------------
It is a legislative power because it involves the
Q: Define taxation promulgation of rules. The Constitution has
allocated to the legislative department the
Taxation is the inherent power of the sovereign enactment of law
exercised through the legislature to impose burdens
upon subjects and objects within its jurisdiction for
the purpose of raising revenues to carry out the
legitimate objects of government.
It is the mode of raising revenue for public purposes.
PIERRE MARTIN DE LEON REYES Page 1 of 158

Ateneo Law Batch 2013 Last Updated: 30 July 2013(v3)
Q: May the legislature enact a law to raise ---------------------------------------------------------------

revenues even in the absence of a D. Power of Taxation compared with other
constitutional provision granting the said powers
body the power to tax? ---------------------------------------------------------------
Yes. The power to tax can be exercised by the Q: Differentiate the power of taxation from
government even if the Constitution is entirely silent police power and the power of eminent
on the subject. There is no need for a constitutional domain.
grant for the State to exercise this power. The power
to tax is inherent in the State, being an attribute of
See table below.
sovereignty. This is so because the State can
neither exist nor endure without taxes.
TAXATION EMINENT POLICE
It must be noted that Constitutional provisions
DOMAIN POWER
relating to the power of taxation do not operate as
grants of power to the Government, but instead
Authorit Only by the May be Only by
merely constitute as limitations upon a power which
y who government exercised by government
would otherwise be practically without limit
exercise or its (1) or its political
s the political government subdivisions
Q: Why is the power to tax considered inherent
power subdivisions or political
in sovereignty?
subdivisions
OR (2)
It is considered inherent in a sovereign State
granted to
because it is a necessary attribute of sovereignty.
public utilities
Without this power, no sovereign State can exist nor
endure. The power to tax proceeds upon the theory
that the existence of a government is a necessity. Purpose The property The property The use of
No sovereign State can continue to exist without the is taken for is taken for the property
means to pay its expenses, and, for those means, it the support public use is regulated
has the right to compel all citizens and properly of the and must be for promoting
within its limits to contribute; hence, the emergence government compensated the general
of the power to tax. welfare and
is not
compensable
---------------------------------------------------------------
C. Characteristics of Taxation Persons Operates on Operates on Operates on
--------------------------------------------------------------- affected a community an individual a community
or class of as owner of a or class of
Note: This should properly refer to Characteristics or individuals particular individuals
Elements of a Tax, not Characteristics of Taxation. In the
property
event the question is asked, answer as if the question
refers to characteristics of a tax. See Chapter 1, K.
Characteristic of Tax. With reservations, however, as to Effect The money There is a There is no
the source, the 2013 Beda tax reviewer enumerates as contributed transfer of transfer of
characteristic of taxation the following: (1) Comprehensive becomes the right to title. At most,
(2) Unlimited (3) Plenary and (4) Supreme. It is submitted part of the property there is
that the proper answer would make reference to the public funds restraint on
inherent limitations to the power of taxation. Atty. the injurious
Domondon states that the inherent limitations on the use of
power of taxation is also known as the elements, tenets or
property
characteristics of taxation.
Benefits It is He receives The person

received assumed the market affected
that the value of the receives

individual property indirect

receives the taken from benefits as 1. Revenue purposes: The basic purpose of
equivalent him may arise taxation is to raise revenues.
of the tax in from the 2. Sumptuary or regulatory purpose: The
the form of maintenance secondary purpose of taxation is to promote
protection of a healthy the general welfare and to protect the
and benefits economic health, safety or morals of inhabitants
he receives standard of
from the society Q: What are non-revenue (or sumptuary)
government objectives of taxation?
Amount Generally, No amount Amount 1. Taxation can strengthen anemic enterprises;
of there is no imposed but imposed 2. Taxes may be increased in period of
impositi limit on the rather the should not be prosperity to curb spending power and halt
on amount of owner is paid more than inflation and lowered in periods of slump to
tax that may the market sufficient to expand business and ward off depression
be imposed value of cover license 3. Taxes on imports may be increased to
property and protect local industries
taken necessary 4. Taxes on imported goods may be used as a
expenses bargaining tool by a country by setting trarrif
rates first at a relatively high level before
Relation Subject to Inferior to the Relatively trade negotiations
ship to certain impairment of free from 5. Taxes can discourage certain business (e.g.
Constitu constitutiona obligations of constitutional tobacco and alcohol)
tion l limitations; contracts limitations; it 6. Taxes can also minimize inequity
including the prohibition; is superior to
impairment government the Some cases illustrating the non-revenue or
of obligation cannot impairment of sumptuary objectives of taxation:
of contracts expropriate contract
property provision In PHILIPPINE COCONUT PRODUCERS FEDERATION VS.
which under PCGG [178 SCRA 236], the Supreme Court held
a contract it that the coconut industry is one of the major
had industries supporting the national economy. It is
previously therefore, the State’s concern to make it a strong
bound itself and secure source not only of the livelihood of a
to purchase significant segment of the population but also of
export earnings the sustained growth of which is one
of the imperatives of economic stability.
---------------------------------------------------------------
D. Purposes of taxation In PHILIPPINE HEALTH CARE PROVIDERS VS. CIR
1. Revenue-raising [554 SCRA 411], the Supreme Court, on the issue
2. Non-revenue/special or regulatory of whether Health maintenance organizations
--------------------------------------------------------------- (HMOs) were exempt from Documentary Stamp Tax
(DST), held that it is not the purpose of the
government to throttle private business. On the
Q: What are the purposes of taxation?1 contrary, the government ought to encourage private
_________________________________________ enterprise. HMOs, just like any concern organized
1
Atty. Mamalateo enumerated six purposes or objectives of
taxation, namely: (1) Revenue; (2) Regulatory; (3) Promotion of
General Welfare; (4) Reduction of social inequity; (5) Encourage protectionism. Note: It is submitted that items (3) to (6) can be
economic growth by granting incentives and exemptions; and (6) considered subsumed under the regulatory purpose.

for a lawful economic activity have a right to maintain The distinction made by the Supreme Court in
a legitimate business. Hence, HMOs should not be PROGRESSIVE DEVELOPMENT CORPORATION V.
arbitrarily and unjustly included in the DST QUEZON CITY [172 SCRA 629] is particularly
coverage. instructive. The Court stated that: If the generating of
revenue is the primary purpose and regulation is
In TIO VS. VIDEOGRAM REGULATORY BOARD [151 merely incidental, the imposition is a tax; but if the
SCRA 208], the Supreme Court held that the levy of regulation is the primary purpose, the fact that
30% tax on videogram operators was imposed incidentally revenue is also obtained does not make
primarily to answer the need for regulating the video the imposition a tax
industry, particularly rampant film piracy and flagrant
violation of intellectual property rights. Thus, a (regulatory) fee is imposed for purposes of
regulation (in exercise of police power) while a tax is
Q: May a tax be validly imposed in the imposed for revenue generation purpose (the power
exercise of police power and not of the of taxation).
power to tax?
Q: When an exaction is imposed to
Yes. The power of taxation may be used as an discourage certain businesses, is the
implement of police power of the State with the end exaction a tax?
in view of regulating a particular activity.
No, it is a regulatory fee. In COMPANIA GENERAL DE
Note: Some authors and jurisprudence still refer to the TABACOS DE FILIPINAS V. CITY OF M ANILA [8 SCRA
imposition levied for the purpose of regulation as a tax. 367], the Supreme Court held that the municipal
This is inaccurate and adds to confusion. The proper term, license fees for the privilege to engage in the
as used by the Supreme Court in numerous decisions business of selling liquor or alcoholic beverages
should be “regulatory fee” or “fee”. In earlier cases, they were imposed for regulatory purposes as such
were referred to as “license fees.” It is submitted that the
use of the term “tax” should only be used to refer to an
products are potentially harmful to public health and
imposition for the purposes of revenue while the term “fee” morals.
is used for an imposition for purposes of regulation. As
you will see later, the distinction between a “tax” and a Q: When an exaction is imposed to provide
“fee” is relevant as certain inherent and constitutional means for the rehabilitation and stabilization
limitations apply only to one and no to the other. It is also of a threatened industry, is the exaction a
important for purposes of tax exemptions.
tax?
Q: How do you determine if an imposition is No. Jurisprudence provides that such exactions are
a tax or a (regulatory) fee? considered regulatory fees in light of their purpose.
In determining whether an imposition is a tax or a Some cases:

regulatory fee, one must inquire into the following:
In OSMENA V. ORBOS [220 SCRA 703], in
1. The purpose of the imposition determining whether the taxes collected for the Oil
2. The amount of the exaction Price Stabilization Fund are taxes or regulatory fees,
3. The designation the Supreme Court stated that while the funds were
referred to as taxes, they were exacted not under
Note: The criteria is based on Atty. Montero’s lecture. This the power of taxation, but in the exercise of the
is particularly useful in analyzing whether an imposition is police power of the State. The main objective was
a tax or a fee.
not revenue but to stabilize the price of oil and
petroleum products.
The purpose of the imposition .
In REPUBLIC V. BACOLOD-MURCIA MILLING [17 SCRA
Q: How do you distinguish a tax from a 632], in determining whether the levy for the
regulatory fee in terms of its purpose? Philippine Sugar Institute Fund is a fee or a tax, the
Supreme Court held that such levy was not so much

an exercise of the power of taxation but an exercise Q: Should universal charges (for electricity
of the police power to aid and support the sugar end-users) be considered a tax or a fee?
industry.
Universal charges are regulatory fees. In GEROCHI V.
Q: When the exaction is imposed to make a DOE [G.R. NO. 159796, JULY 17, 2007], in
private company viable, is it a fee or a tax? determining whether the Universal Charge imposed
on electricity end-users by distributors is a tax, the
The exaction should be considered a tax. In Supreme Court held in the negative and stated that
PLANTERS PRODUCT V. FERTIPHIL CORPORATION [548 the universal charge is a regulatory fee levied to
SCRA 485], an Letter of Instruction was issue ensure the viability of the country’s electric power
imposing a capital recovery component on the industry
domestic sales of all fertilizer grades and such
exaction shall be collected until adequate capital The amount of the exaction
was raised to make Planters Product, a private
company, viable. The Supreme Court held that the Q: How do you distinguish a tax from a
levy was invalid for not serving a public purpose as regulatory fee in terms of the amount of the
the ultimate beneficiary was a private company. exaction?
Hence, the primary purpose was for revenue
generation. If the amount levied is too high and/or if the amount
levied is not related to costs of regulation, the
Q: Are royalty fees (on a per liter basis) exaction should be considered a tax as it is levied
imposed on the movement of petroleum fuel for revenue purposes.
to and from special economic zones a tax or Some cases:
a fee?
In VILLEGAS V. HIU CHIONG TSAI PAO HO [86 SCRA
The royalty fees imposed on the movement of 270], in determining whether the exaction of P50.00
petroleum fuel are regulatory fees. As held in from aliens securing an employment permit (from the
CHEVRON PHILIPPINES V. BCDA [SEPTEMBER 15, Mayor of Manila) is a fee or a tax, the Supreme
2010], the royalty fees were exacted on a per liter Court held that the amount was too excessive and
basis because the higher the volume of fuel entering that there was no logic or justification in the exaction
the special economic zone, the greater the extent from aliens who have been cleared for employment.
and frequency of supervision and inspection The Court opined that it was obvious that the
required to ensure safety, security and order within purpose of the exaction is to raise money under the
the zone. guise of regulation.
Q: Should margin fees be considered a tax In PLANTERS PRODUCT V. FERTIPHIL CORPORATION

or a fee? [548 SCRA 485], the Supreme Court held that the
amount collected from the imposition on the
Margin fees are regulatory fees. In ESSO STANDARD domestic sales of fertilizer grades was too excessive
EASTERN V. CIR [175 SCRA 149], the company to serve a mere regulatory purpose.
sought to deduct the margin fees it paid from its
gross income. The Supreme Court held that the In AMERICAN M AIL LINE V. CITY OF BASILAN [2 SCRA
margin fees cannot be deducted as they are not 309], the Supreme Court stated that for fees to be
taxes. Margin fees are imposed to curb excessive regulatory in nature, the same must be no more than
demand upon the international reserves in order to sufficient to cover the actual cost of inspection or
stabilize the currency. It is applied to strengthen the examination.
country’s international reserves and is not imposed
for revenue purposes. Hence, as they are not taxes,
they cannot be considered as a deductible business
expense.

the effect that motor vehicle registrations fees are

ANGELES UNIVERSITY V. CITY OF ANGELES [G.R. regulatory fees.
189999, JUNE 27, 2012],
The Designation
DOCTRINE: (1) A charge which bears no relation at all to
the cost of inspection and regulation may be held to be a Q: Does designation matter in determining
tax rather than an exercise of the police power. whether an exaction is a fee or a tax?
(2) The fact that revenue is incidentally raised does not No. In Victorias Milling Co. vs. CIR [22 SCRA 13],
make the imposition a tax.
the Supreme Court stated that the designation given
FACTS: Angeles University Foundation (AUF), a non- by the authorities does not decide whether the
stock, non-profit educational institution, filed with the City imposition is properly a tax or a fee.
of Angeles a building permit for the construction of the
building of the AUF Medical Center. The City Treasurer Note: It is submitted that the purpose of the exaction is the
assessed AUF a Building Permit Assessment. AUF argues primary factor to consider. In GEROCHI V. DOE [527 SCRA
that it is exempt from the payment of the building permit 696], the Supreme Court stated the conservative and
fees (because it is a tax). The City argues that they are not pivotal distinction between the power of taxation and
exempt (because it is a regulatory fee). police power rests in the purpose for which the charge is
made.
HELD: The building permit fees are regulatory fees. A
charge of a fixed sum which bears no relation at all to the Q: Can an exaction be considered both a tax
cost of inspection and regulation may be held to be a tax and a regulatory fee?
rather than an exercise of the police power. In this case,
AUF failed to demonstrate that the building fees were
There two views.
arbitrarily determined or unrelated to the activity being
regulated. Neither has AUF adduced evidence to show
that the rates of building permit fees imposed and FIRST VIEW: No, simply because they are levied for
collected by the respondents were unreasonable or in different purposes. The power to regulate as an
excess of the cost of regulation and inspection. While it is exercise of police power does not include the power
conceded that the revenue from the building fees is to impose fees for revenue purposes (G.A.
generated for the benefit of LGUs, the fact that the CUUNJIENG V. PATSTONE [42 PHIL 818]; AMERICAN
revenue is incidentally raised does not make the M AIL LINE V. CITY OF BASILAN [2 SCRA 309])
imposition a tax.
SECOND VIEW: Yes. An exaction can be
considered both a tax and a regulatory fee through a
Q: Can an imposition which, at first, was combined exercise of police power and the power of
regulatory in nature be considered a “tax” taxation. This view finds support in the case of
because of the substantial increase in the PCGG V. COJUANGCO [G.R. NO. 147062-64,
amount collected? DECEMBER 14, 2001] where the Supreme Court held
that the coco levy funds were raised through the
Yes. In PAL V. EDU [164 SCRA 320], in determining State’s police and taxing powers.
whether the motor vehicle registration fees (MVRF) Note: It is submitted that the first view is the more
were taxes or fees, the Supreme Court held that acceptable view as it is consistent with the distinctions
while the MVRFs were originally intended for made between a “tax” and a “fee.” Thus, the rule should
regulation, as motor vehicles became absolute be plain and simple: If the imposition is for revenue
necessities and vehicular traffic exploded in number, purposes, it is a tax and it is in the exercise of the power to
tax; if it is for regulatory purposes, it is a fee and it is in the
the registration of vehicles because a convenient exercise of police power.
way of raising revenues. Thus, their nature has
become that of taxes notwithstanding the fact one- Q: May the power of taxation be used as an
fifth or less of the amount collected is set aside for
implement of the power of eminent domain?
operating expenses of the agency administering the
program.
Yes. In CIR VS. CENTRAL LUZON DRUG CORPORATION
Note: This case reversed the doctrine previously held in [456 SCRA 413], the Supreme Court stated that the
REPUBLIC V. PHILIPPINE RABBIT BUS LINES [32 SCRA 211] to taxation power can be used as an implement for the

exercise of the power of eminent domain. It noted asserted that the substantiation requirements for
that the tax credit granted to private establishments claiming the input VAT were impractical and
giving senior citizen discounts can be deemed as incapable of implementation as in order to claim
their just compensation for private property taken by input VAT, the name, address and TIN of the toll
the State for public use. way user must be indicated in the VAT receipt or
invoice. In addition, the rounding off of the toll rate
--------------------------------------------------------------- and putting the excess collection in an escrow is
F. Principles of a sound tax system illegal while the giving of the change to meet the
1. Fiscal Adequacy exact toll rate would be a logistical nightmare. The
2. Administrative Feasibility Supreme Court held that while administrative
3. Theoretical Justice feasibility is a canon of a sound tax system, the
non-observance thereof will not render a tax
---------------------------------------------------------------
imposition invalid except to the extent that
specific constitutional or statutory limitations
Q: What the basic principles of a sound tax are impaired.
system?
Note: J. Dimaampao is of the view that if the tax law runs
The basic principles are the following: contrary to the principle of theoretical justice, such
violation will render the law unconstitutional considering
1. Fiscal Adequacy – The source of government that under the Constitution, the rule of taxation should be
revenue must be sufficient to meet uniform and equitable. It is submitted that this should be
qualified. As to a violation of the principle of theoretical
governmental expenditures and other public justice on the basis of uniformity, I submit that it would
needs amount to a violation of the Constitution, specifically the
2. Theoretical Justice – a good tax system must equal protection clause. However, as to a violation of the
be based on the taxpayer’s ability to pay principle of theoretical justice on the basis of equity, it is
3. Administrative feasibility – taxes should be submitted that such would not be constitutionally infirm.
capable of being effectively enforced. The basis of this view can be found in the case of
TOLENTINO VS. SECRETARY OF FINANCE [249 SCRA 628]
In CHAVEZ V. ONGPIN [186 SCRA 331] , at issue was which held that the system of taxation need not be always
the validity of the increase, via an Executive Order, progressive.
of the property values for purposes of real property
taxes. The Supreme Court held that such was valid. ---------------------------------------------------------------
One of the justifications was based on fiscal G. Theory and Basis of Taxation
adequacy. The Court stated that fiscal adequacy 1. Lifeblood Theory
requires that the sources of revenue must be 2. Necessity Theory
adequate to meet government expenditures. To 3. Benefits-Protection Theory (Symbiotic
continue collecting at valuations arrived at several relationship)
years ago is not in consonance with a sound tax 4. Jurisdiction over subject and objects
system. ---------------------------------------------------------------
Note: The basic principles of a sound tax system are also
known as the Canons of Taxation.
Note: As explained by Atty. Domondon, the theory of
taxation and the basis or rationale for taxation are two
different concepts. The theory of taxation explains why
there is a need to impose taxes while the basis or
Q: Will a violation of the abovementioned rationale for taxation explains the reason why a State may
principles render a tax law unconstitutional? impose taxes. The theory of taxation refers to the lifeblood
theory (and the necessity theory which is but an extension
of the lifeblood theory). The basis or rationale of taxation
It depends. This was settled in the case of DIAZ V. refers to (1) the symbiotic relationship and (2) jurisdiction
SEC. OF FINANCE [JULY 19, 2011]. One of the by the state over persons and property within its territory.
grounds raised in assailing the validity of the
imposition of VAT on the collection of toll way
operators was that it violated the principle of
administrative feasibility. Particularly, the petitioner

--------------------------------------------------------------- In PHILIPPINE GUARANTY V. CIR [13 SCRA 775], the

1. Lifeblood Theory Supreme Court stated that the requirement that the
--------------------------------------------------------------- withholding agent should withhold the
tax before addressing a query to the Commissioner
Q: What is the lifeblood theory? of Internal Revenue is not without meaning for it is in
keeping with the general operation of our tax laws:
As stated in the case of CIR vs. Algue [158 SCRA payment precedes defense. Likewise, validity of a
9], the existence of government is a necessity; it tax cannot be assailed until after the taxpayer has
cannot exist nor endure without the means to pay its paid the tax under protest. By questioning a tax’s
expenses; and for those means, the government has legality without first paying it, a taxpayer, in collusion
the right to compel all its citizens and property within with BIR officials, can unduly delay, if not totally
its limits to contribute in the form of taxes. evade, the payment of such tax.
Taxes are the lifeblood of the government and so In CIR v. CTA [234 SCRA 348], the Supreme Court
should be collected without unnecessary hindrance. held that government cannot and must not be
On the other hand, such collection should be made stopped in matters involving taxes as “they are the
in accordance with law as any arbitrariness will lifeblood of the nation through which the government
negate the very reason for government itself. It is agencies continue to operate and with which the
therefore necessary to reconcile the apparently State effects its functions for the welfare of its
conflicting interests of the authorities and the constituents.
taxpayers so that the real purpose of taxation, which
is the promotion of the common good, may be In PHILIPPINE NATIONAL OIL COMPANY VS. CA [457
achieved. CIR vs. Algue [158 SCRA 9] SCRA 32], the Supreme Court held that the
Government cannot be estopped from collecting
The lifeblood theory states that an assessment of a taxes by the mistake, negligence, or omission of its
tax is enforceable despite it being contested agents. Upon taxation depends the Government’s
because of the urgency to collect taxes, this being ability to serve the people for whose benefit the
the government’s primary source of revenue. CIR v. taxes are collected. Neglect or omission of
Cebu Portland [156 SCRA 535] government officials entrusted to collect taxes
should not be allowed to bring harm or detriment to
the people.
The lifeblood theory can be manifested in
the following cases: In SEC. OF FINANCE VS. ORO M AURA SHIPPING LINES
[593 SCRA 14], the Supreme Court opined that
1. The prohibition against set-off of taxes [see assuming further that MARINA merely committed a
Section 204(C), NIRC] mistake in approving the vessel’s proposed cost and
2. The prohibition against the issuance of an that the Collector of the Port of Manila similarly
injunction to restrain the collection of taxes erred, we reiterate the legal principle that estoppel
3. Presumption of correctness of assessments generally finds no application against the State when
it acts to rectify mistakes, errors, irregularities, or
Illustrative cases: illegal acts of its officials and agents irrespective of
rank. The rule holds true even if the rectification
In CIR v. Cebu Portland [156 SCRA 535], the prejudices parties who had meanwhile received
taxpayer argued that that the deficiency assessment benefits.
cannot be enforced because it is still being
contested. The Supreme Court held that this
argument loses sight of the urgency of the need to Q: What is the exception to the prohibition
collect taxes as the lifeblood of the government. If on the issuance of an injunction to restrain
the payment of taxes could be postponed by simply the collection of taxes?
questioning heir validity, the machinery of the state
would grind to a halt and all government functions An injunction may be issued to restrain the collection
would be paralyzed. of taxes “when in the opinion of the Court the
collection may jeopardize the interest of the

Government and/or the taxpayer, the Court at any support between the State and its inhabitants. In
stage of the proceeding may suspend the said return for his contribution, the taxpayer receives the
collection and require the taxpayer either to deposit general advantages and protection which the
the amount claimed or to file a surety bond for not government affords the taxpayer and his property.
more than double the amount with the Court.” (See In CIR VS. ALGUE [158 SCRA 9], the Supreme Court
Section 11, RA 1125, as amended by RA 9282). stated that taxes are what we pay for civilized
society. Hence, despite the natural reluctance to
Note: It must be noted, however, that the CTA cannot surrender part of one’s hard-earned income, every
issue a writ of injunction to restrain the collection of taxes person who is able must contribute his share in the
in the exercise of its original jurisdiction. It can only issue running of the government and the latter, for its part,
such a writ of injunction in its appellate jurisdiction. The is expected to respond in the form of tangible and
Supreme Court held in CIR vs. J.C. Yuseco [G.R. No. L-
12518, October 28, 1961] that nowhere does the law vest
intangible benefits intended to improve the lives of
in the CTA original jurisdiction to issue writs of prohibition the people and enhance their moral and material
or injunction independently of, and apart from, an values. This symbiotic relationship is the rationale of
appealed case. The writ of prohibition or injunction that it taxation and should dispel the erroneous notion that
may issue to suspend the collection of taxes, is merely it is an arbitrary method of exaction by those in the
ancillary to and in furtherance of its appellate jurisdiction. seat of power
Taxes being the chief source of revenue for the ---------------------------------------------------------------
government to keep it running, must be paid immediately
and without delay. A taxpayer who feels aggrieved by a
4. Jurisdiction over subjects and objects
decision of a revenue officer and appeals to the CTA must ---------------------------------------------------------------
pay the tax assessed, except if the CTA opines that
collection would jeopardize the interest of the Government Q: Explain the jurisdiction of the State over
and/or taxpayer, it could suspend the collection and persons and property within its territory as a
require the taxpayer to deposit the amount claimed or to
file a bond. basis or rationale of taxation.
--------------------------------------------------------------- Jurisdiction is a reason why citizens must provide

2. Necessity Theory support to the state so the latter could continue to
give protection. It is the country, state or sovereign
---------------------------------------------------------------
that gives protection that has the right to demand the
payment of taxes with which to finance activities so it
Q: What is the necessity theory? could continue to give protection. The basis or
rationale of taxation is also used to explain why
As stated in the case of PHILIPPINE GUARANTY V. CIR taxation is basically territorial in character because it
[13 SCRA 775], taxation is a necessary burden to is only within the territorial boundaries of the taxing
preserve the States sovereignty and a means to give authority where tax laws may be enforced. This is so
the citizenry an army to resist aggression, a navy to because it is only within the confines of its territory
defend its shores from invasion, a corps of civil that a country, state or sovereign may give
servants to serve, public improvements for the protection.
enjoyment of the citizenry, and those which come
within the State’s territory and facilities and
protection which a government is supposed to Q: Discuss the meaning and implications of
provide the following statement: the power to tax
involves the power to destroy.
--------------------------------------------------------------- Taxation is a destructive power which interferes with
3. Benefits-Protection theory (Symbiotic the personal and property rights of the people and
relationship) takes from them a portion of their property for
--------------------------------------------------------------- support of the government. Therefore it should be
exercised with caution to minimize injury to the
Q: What is the benefits-protection theory? proprietary rights of a taxpayer. It must be exercised
fairly, equally and uniformly, lest the tax collector kill
According to this principle, the basis of taxation is the "hen that lays the golden egg". And, in order to
found in the reciprocal duties of protection and maintain the general public's trust and confidence in

the Government this power must be used justly and be imposed retroactively if the law expressly
not treacherously. ROXAS VS. CTA [23 SCRA 276]; provides and if it will not amount to a denial of due
REYES V. ALMANZOR [196 SCRA 322]; CIR V. TOKYO process.
SHIPPING [244 SCRA 332]
Hence, in resolving the issue of whether a statute
Q: Justice Marshall said that “the power to favorable to a taxpayer-heir can be given retroactive
tax involves the power to destroy.” On the effect, the Supreme Court held in LORENZO VS.
other hand, Justice Holmes stated later that POSADAS [64 PHIL. 353] that inheritance taxation is
“the power to tax is not the power to destroy governed by the statute in force at the time of the
death of the decedent, unless the language of the
while the court sits.” Reconcile the
statute clearly demands or expresses that it shall
apparently inconsistent statements. have a retroactive effect which is not the case. And
such Revenue laws are not to be classed penal
The two statements can be reconciled on three laws, so even if favorable, should not be given
levels. First, the imposition of a valid tax could not retroactive effect.
be judicially restrained merely because it would
prejudice the taxpayer’s property. Second, an illegal ---------------------------------------------------------------
tax could be judicially declared invalid and should
2. Imprescriptibility
not work to prejudice a taxpayer’s property. Third, J.
Marshall’s view refers to a valid tax while J. Holmes ---------------------------------------------------------------
view refers to an invalid tax.
Q: Are taxes imprescriptible?
---------------------------------------------------------------
As a general rule, taxes are imprescriptible.
H. Doctrines in Taxation
However, as an exception, the tax law may provide
1. Prospectivity of tax laws otherwise. In particular, the NIRC and LGC provides
2. Imprescriptibility for prescriptive periods for assessment and
3. Double Taxation collection of taxes.
4. Escape from Taxation
5. Exemption from Taxation Q: What is the rationale behind providing for
6. Compensation and Set-off a statute of limitations in the collection of
7. Compromise taxes?
8. Tax Amnesty
9. Construction and Interpretation As held in the case of REPUBLIC VS. ABLAZA [108
--------------------------------------------------------------- PHIL 1105, 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
1. Prospectivity of tax laws 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
Q: Are tax statutes prospective in its against unscrupulous tax agents who will always find
application? an excuse to inspect the books of taxpayers, not to
determine the latter's real liability, but to take
Yes. As held in CEBU PORTLAND V. COLLECTOR [G.R. advantage of every opportunity to molest peaceful,
NO. 18649, FEBRUARY 27, 1965], the general rule law-abiding citizens.
under the Civil Code that laws shall have
prospective application applies to tax laws. In CIR V. B.F. GOODRICH PHILS [FEBRUARY 24, 1999],
the Supreme Court noted that our tax laws provides
Q: Can tax statutes be applied retroactively? for a statute of limitations in the collection of taxes
for the purpose of safeguarding taxpayers from any
Yes. While, as a general rule, taxes must only be unreasonable examination, investigation or
imposed prospectively, taxes, as an exception, may assessment.

Q: Is double taxation prohibited under the

Q: How should said statute of limitations in Constitution?
taxation be construed?
It depends. The Constitution does not prohibit the
The law on prescription being a remedial measure imposition of double taxation in the broad sense.
should be liberally construed in order to afford However, if double taxation amounts to a direct
protection. On the other hand, the exceptions to the double taxation, then it becomes legally
law on prescription should be strictly construed. objectionable for being oppressive and inequitable. It
Thus, in the case of CIR VS. PHILIPPINE NATIONAL violates the equal protection and uniformity clauses
BANK [G.R. No. 161997, October 25, 2005], the of the Constitution.
Court held that even if the 2-year prescriptive period
for a claim for tax refund has already lapsed, the Q: What are the elements of (direct) double
same may be suspended for equity and special taxation?
circumstances.
There is direct double taxation if the two taxes are
--------------------------------------------------------------- imposed:
3. Double Taxation
a) Strict sense 1. On the same subject matter
b) Broad sense 2. For the same purpose
c) Constitutionality of double taxation 3. By the same taxing authority
d) Modes of eliminating double taxation 4. Within the same jurisdiction
5. During the same taxing period
---------------------------------------------------------------
6. The taxes must be of the same kind or character
PEPSI-COLA BOTTLING COMPANY V. MUN. OF
Q: What is double taxation? TANAUAN [69 SCRA 460]
Double taxation is defined as taxing the same
Q: Bank A’s gross receipts from passive
property twice when it should be taxed but once. It
has also been defined as taxing the same person income is subject to 20% final withholding
twice by the same jurisdiction over the same thing. It tax. At the same time, the total gross receipt
is sometimes known as “duplicate taxation.” of Bank A is subject to 5% gross receipts
tax (GRT). Is the imposition of the FWT and
Q: What are the two types of double GRT a form of double taxation?
taxation?
No. First, the taxes herein are imposed on two
Double taxation may be direct (strict sense) or different subject matters. The subject matter of the
indirect (broad sense). FWT is the passive income generated in the form of
interest on deposits and yield on deposit substitutes,
In the strict sense, double taxation means direct while the subject matter of the GRT is the privilege
double taxation. This means that the same property of engaging in the business of banking. Second,
is taxed twice when it should be taxed only once and although both taxes are national in scope because
that both taxes are imposed on the same subject they are imposed by the same taxing authority -- the
matter for the same purpose, by the same taxing national government under the Tax Code -- and
authority within the same jurisdiction during the operate within the same Philippine jurisdiction for the
same taxing period and covering the same kind of same purpose of raising revenues, the taxing
tax. periods they affect are different. The FWT is
deducted and withheld as soon as the income is
In the broad sense, double taxation means indirect earned, and is paid after every calendar quarter in
double taxation. Double taxation is indirect where which it is earned. On the other hand, the GRT is
some elements of direct double taxation are absent. neither deducted nor withheld, but is paid only after
It applies to all cases in which there are two or more every taxable quarter in which it is earned. Third,
pecuniary impositions. these two taxes are of different kinds or
characters. The FWT is an income tax subject to

withholding, while the GRT is a percentage tax not

subject to withholding. Hence, there is no double Q: A municipality imposed a storage fee for
taxation. (see CIR VS. SOLIDBANK CORP [416 SCRA the storage of copra within its jurisdiction. A
436]; CHINA BANKING CORP VS. CA [403 SCRA 634]) multinational company doing business in
the Philippines stored copra in its
Q: Under the Tax Code, Bank A is subject to warehouse located in the municipality and
1% reserve deficiency tax if it incurs reserve was thus assessed the storage fee. The
deficiencies. Under the General Banking MNC argues that it was already being taxed
Law, Bank A must 1/10 of 1% for incurring for the manufacture of copra so there was
reserve deficiencies. Is there double double taxation. Decide.
taxation?
There is no double taxation. In PROCTER & GAMBLE
No. One is a penalty; the other is a tax. The V. MUNICIPALITY OF JAGNA [94 SCRA 894], the
payment of 1/10 of 1% for incurring reserve Supreme Court stated that there is double taxation
deficiencies is clearly a penalty as the primary when the same person is taxed twice by the same
purpose is regulation; while the payment of 1% for jurisdiction for the same thing. A tax on products is
the same violation is a tax for the generation of different from a tax on the privilege of storing copra
income which is the primary purpose for this in a bodega situated within the territorial jurisdiction
instance. (REPUBLIC BANK VS. CTA [213 SCRA 266]) of the municipality. Furthermore, in the former, the
taxing authority is the national government while in
Q: A City passed an ordinance imposing the latter; the taxing authority is the local
license tax on persons engaged in the government.
business of operating tenement houses. Is
there double taxation given that buildings Q: A municipality enacted two ordinances.
pay real estate taxes and also income taxes The first levies and collects from soft drinks
besides the tenement tax imposed by the producers a tax for every bottle corked
ordinance? while the second levies and collects on soft
drinks produced and manufactured within
No. In order to constitute double taxation in the its territorial jurisdiction. Is there double
objectionable or prohibited sense the same property taxation?
must be taxed twice when it should be taxed but
once; both taxes must be imposed on the same Yes. All the elements of double taxation are present.
property or subject-matter, for the same purpose, by However, it must be noted, that while the factual
the same State, Government, or taxing authority, milieu provided is similar to the case of PEPSI COLA
within the same jurisdiction or taxing district, during V. MUNICIPALITY OF T ANUAN [69 SCRA 460],
the same taxing period, and they must be the same Supreme Court ruled that there was no double
kind or character of tax.” It has been shown that a taxation in the said case because the second
real estate tax and the tenement tax imposed by the ordinance repealed the first ordinance. Otherwise,
ordinance, although imposed by the same taxing there would have been double taxation.
authority, are not of the same kind or character.
Furthermore, while it is true that they are taxable as Q: A city passed two ordinances. The first
real estate dealers (income tax) and still taxable
ordinance imposed a tax on the privilege of
under the ordinance, the argument against double
taxation may not be invoked. The same tax may be selling liquor while the second ordinance
imposed by the national government as well as by imposed a tax on the sales of liquor. Is there
the local government. There is nothing inherently double taxation?
obnoxious in the exaction of license fees or taxes
with respect to the same occupation, calling or No. In COMPANIA GENERAL DE TABACOS V. CITY OF
activity by both the State and a political subdivision M ANILA [8 SCRA 367], the Supreme Court held that
thereof. (VILLANUEVA V. CITY OF ILOILO [26 SCRA both a license fee and a tax may be imposed on the
578]) same business and occupation and such as not a
violation of the rule against double taxation. The

impositions are of a different character. The first is a SCRA 442], the Supreme Court stated that the NIRC
license fee for the privilege of engaging in the sale of levies a tax on all quarry resources whether
liquor in the exercise of police power while the other extracted from public or private land. Thus, the local
is imposed for revenue purposes based on the sales government unit cannot impose taxes on quarry
made. resources as they are already taxed under the
NIRC. However, by express provision in the Local
Q: Company A, engaged in the manufacture Government Code, the LGU may levy on quarry
of tobacco, is subject to the payment of resources extracted from public land.
tobacco inspection fees aside from other
taxes it pays to the national government. Is Q: What are the modes of elimination double
there double taxation? taxation?
No. Tobacco Inspection fees are undoubtedly The usual methods of avoiding the occurrence of
National Internal Revenue taxes, they being one of double taxation are:
the miscellaneous taxes provided for under the Tax
Code. The Code specifically provides for the 1. Allowing reciprocal exemption either by law
collection and manner of payment of the said or by treaty
inspection fees. Tobacco inspection fees are levied 2. Allowance of tax credit for foreign taxes paid
and collected for purposes of regulation and control. 3. Allowance of deduction for foreign taxes
Tobacco inspection fees are of a different kind and paid; and
character from other taxes imposed. (LA SUERTE VS. 4. Reduction of the Philippine tax rate
CTA [134 SCRA 36])
---------------------------------------------------------------
Q: A city ordinance imposed a license fee 4. Escape from Taxation
on any person, firm, entity or corporation a) Shifting of tax burden
doing business in the City. A contends that b) Tax Avoidance
the ordinance constitutes double taxation as c) Tax Evasion
he already pays taxes imposed by the ---------------------------------------------------------------
national government. Is A correct?
---------------------------------------------------------------
No. It has been expressly affirmed by the Supreme a) Shifting of tax burden
Court that such an argument against double taxation ---------------------------------------------------------------
may not be invoked where one tax is imposed by the
state and the other is imposed by the city, it being Q: What is meant by “shifting the tax
widely recognized that there is nothing inherently burden”?
obnoxious in the requirement that license fees or
taxes be exacted with respect to the same Shifting of tax burden is the process by which the
occupation, calling or activity by both the state and burden of a tax is transferred from the statutory
the political subdivisions thereof. (CITY OF BAGUIO taxpayer or the one whom the tax was assessed or
VS. DE LEON [25 SCRA 938]) imposed to another without violating the law.
Q: A local government unit wishes to levy Q: What is the meaning of impact and
excise taxes on quarry resources found incidence of taxation?
within its jurisdiction. The national
government argues that it may not do so as Impact of taxation and incidence of taxation are two
such articles are already taxed by the NIRC. different concepts.
Decide.
Impact of taxation (liability) is the point on which a
The local government unit may levy a tax on quarry tax is originally imposed while incidence of taxation
resources extracted from public lands but not from (burden) is that point on which the tax burden finally
private lands. In PROVINCE OF BULACAN V. CA [299 rests or settles down.

In the refund of indirect taxes, the statutory taxpayer

Q: Enumerate the ways of shifting the tax is the proper party who can claim the refund (SILKAIR
burden and define each. VS. CIR [FEBRUARY 25, 2010])
1. Forward shifting - When the burden of the As held in the case of EXXONMOBIL V. CIR [G.R. NO.
tax is transferred from a factor of production 180909, JANUARY 19, 2011], in the case of indirect
through the factors of distribution until it taxes, it is the manufacturer of the goods who is
finally settles on the ultimate purchaser or entitled to claim any refund thereof. Indirect taxes
consumer. paid by the manufacturers or producers of the goods
2. Backward shifting – When the burden of cannot be refunded to the purchasers of the goods
the tax is transferred from the consumer or because the purchasers are not the taxpayers.
purchaser through the factors of distribution CONTEX CORPORATION VS. CIR [433 SCRA 577]
2
to the factors of production.
3. Onward shifting – When the tax is shifted The liability for the payment of the indirect tax lies
two or more times either forward only with the seller of the goods or services, not in
3 the buyer thereof. In indirect taxes, when the seller
or backward.
passes on the tax to his buyer, he, in effect, shifts
Q: What taxes can be shifted? the burden, not the liability to pay it, to the purchaser
as part of the price of goods sold or rendered. CIR v.
Only indirect taxes may be shifted. PLDT [478 SCRA 61]
Q: How do you determine if a tax is direct or

DIAGEO PHILIPPINES V. CIR [G.R. NO. 183553,
indirect?
NOVEMBER 12, 2012]
Direct taxes are taxes wherein the impact or liability DOCTRINE: The claimant for the refund of excise taxes
for the payment of the tax as well as the incidence or related to exported products shall be the same person
burden of the tax falls on the same person. On the who paid the taxes.
other hand, indirect tax are taxes wherein the
impact or the tax liability for the payment of the tax FACTS: Diageo Philippines, Inc. purchased raw alcohol
falls on one person but the incidence or burden from its supplier for use in the manufacture of its beverage
thereof can be shifted or passed to another. and liquor products. The supplier imported the raw alcohol
and paid the related excise taxes thereon before the same
were sold to the petitioner. The purchase price for the raw
In CIR v. PLDT [478 SCRA 61]), the Supreme Court
alcohol included, among others, the excise taxes paid by
distinguished direct taxes from indirect taxes by the supplier. Subsequently, petitioner exported its locally
stating that direct taxes are those that are extracted manufactured liquor products and received the
from the very person who, it is intended or desired, corresponding foreign currency proceeds of such export
should pay them while indirect taxes are those that sales. Petitioner then filed applications for tax refund/
are demanded, in the first instance, from, or are paid issuance of tax credit certificates corresponding to the
by, one person in the expectation and intention that excise taxes which its supplier paid but passed on to it as
he can shift the burden to someone else. part of the purchase price of the subject raw alcohol
invoking Section130(D) of the Tax Code.
Q: In the refund of indirect taxes, who is the HELD: The Court ruled that “the right to claim a refund or
proper party to claim the said refund? be credited with the excise taxes belongs to its supplier.”
Any excise tax paid thereon shall be credited or refunded”
requires that the claimant be the same person who paid
_________________________________________ the excise tax.
2
As an example, the purchaser may shift the tax to the producer
by purchasing only when the price is reduced.
3
As an example, the producer/manufacturer may pass the tax
burden to the retailer/seller of the goods who in turn will pass the
tax burden to the purchaser.

exempted from absorbing the burden of indirect

SILKAIR V. CIR [G.R. NO. 166482, JANUARY 25, taxation and it is the seller then that shall shoulder
2012] this burden. The tax exemption of the buyer cannot
be the basis of a claim for tax exemption of the
DOCTRINE: The proper party to question or seek a manufacturer (PHILIPPINE ACETYLENE V. CIR [20
refund of an indirect tax is the statutory taxpayer, the SCRA 1056])
person on whom the tax is imposed by law and who paid
the same even if he shifts the burden thereof to another. In PHILIPPINE ACETYLENE V. CIR [20 SCRA 1056],
Philippine Acetylene claimed an exception on the
FACTS: Petitioner filed an administrative claim for refund indirect taxes it paid for the oxygen and acetylene
on the excise taxes paid on the purchase of jet fuel from gases it sold to NPC. The Supreme Court ruled that
its supplier oil company for the period of July 1, 1998 to NPC is a tax-exempt entity and the said tax is due
December 31, 1998, which it alleged to have been from the manufacturer.
erroneously paid based on Section 135(a) and (b) of the
Tax Code of 1997. Due to inaction by respondent In CIR V. GOTAMCO [148 SCRA 36], at issue was
Commissioner, petitioner filed a Petition for Review with whether Gotamco & Sons should pay the
the Court of Tax Appeals. The CTA denied the petition contractor’s tax (an indirect tax) on gross receipts it
and ruled that while petitioner’s country indeed exempts
realized from the construction of the WHO building in
from excise taxes petroleum products sold to international
carriers, petitioner nevertheless failed to comply with the Manila. The Supreme Court ruled in the affirmative.
second requirement under Section 135 (a) of the 1997 Tax The Court opined that WHO, as a tax-exempt entity,
Code as it failed to prove that the jet fuel delivered by cannot be made liable for the indirect taxes.
Petron came from the latter’s bonded storage tank. Upon
the denial of the motion of reconsideration, petitioner In M ACEDA V. M ACARAIG [197 SCRA 771], the
elevated the case to the CA. The CA affirmed the denial Supreme Court ruled that the tax burden may not be
and ruled that petitioner is not the proper party to seek for shifted to the NPC, a tax-exempt entity, by the oil
the refund of the excise taxes paid. companies. As NPC is exempt from direct and
indirect taxation, it must be held exempted from
HELD: The Supreme Court held that excise taxes, which
apply to articles manufactured or produced in the absorbing the economic burden of taxation. Thus,
Philippines for domestic sale or consumption or for any the oil companies must absorb all or part of the
other disposition and to things imported into the economic burden of the taxes. Had not NPC been
Philippines, is basically an indirect tax. While the tax is exempt from indirect taxes, the oil companies could
directly levied upon the manufacturer/importer upon have shift the burden to NPC.
removal of the taxable goods from its place of production
or from the customs custody, the tax, in reality, is actually
passed on to the end consumer as part of the transfer CIR v. PILIPINAS SHELL [G.R. 188497, APRIL
value or selling price of the goods, sold, bartered or
exchanged. The proper party to question, or seek a refund 25, 2012]
of an indirect tax is the statutory taxpayer, the person on
whom the tax is imposed by law and who paid the same DOCTRINE: Oil companies are not exempt from the
even if he shifts the burden thereof to another. Petitioner, payment of excise tax on petroleum products
as the purchaser and end-consumer, ultimately bears the manufactured and sold by them to international carriers.
tax burden, but this does not transform its status into a
statutory taxpayer. FACTS: The taxpayer filed with the Large Taxpayers Audit
& Investigation Division II of the (BIR) the several formal
claims for refund or tax credit for various years. It filed
petitions for review since no action was taken by the BIR
on its claims. The CTA’s First Division ruled that the
Q: Can the seller claim an exemption on taxpayer is entitled to the refund of excise taxes in the
indirect taxes if it sold products to buyers reduced amount. It relied on a previous ruling rendered by
who, under the law, are tax-exempt entities? the CTA En Banc in a previous case involving the same
taxpayer, where the CTA also granted the taxpayer’s claim
No. The seller cannot claim an exemption or a for refund on the basis of excise tax exemption for
refund on the indirect taxes it paid for those goods petroleum products sold to international carriers of foreign
registry for their use or consumption outside the
sold or services rendered to an entity exempt from
Philippines. On appeal, the CTA En Banc upheld the ruling
indirect taxes. As a tax-exempt entity, the buyer is

of the First Division.

Citing its ruling in Philippine Acetylene, it held that a tax
HELD: The Supreme Court held that both the earlier exemption being enjoyed by the buyer cannot be the basis
amendment in the 1977 Tax Code and the present Sec. of a claim for tax exemption by the manufacturer or seller
135 of the 1997 NIRC did not exempt the oil companies of the goods for any tax due to it as the manufacturer or
from the payment of excise tax on petroleum products seller. The excise tax imposed on petroleum products
manufactured and sold by them to international carriers. under Sec. 148 is the direct liability of the manufacturer
who cannot thus invoke the excise tax exemption granted
Because an excise tax is a tax on the manufacturer and to its buyers who are international carriers.
not on the purchaser, and there being no express grant
under the NIRC of exemption from payment of excise tax
to local manufacturers of petroleum products sold to
Q: Distinguish indirect taxes from
international carriers, and absent any provision in the
Code authorizing the refund or crediting of such excise withholding taxes.
taxes paid, the Court holds that Sec. 135 (a) should be
construed as prohibiting the shifting of the burden of the See case digest below.
excise tax to the international carriers who buys petroleum
products from the local manufacturers. Said provision thus
merely allows the international carriers to purchase ASIA INTERNATIONAL AUCTIONEERS V. CIR [G.R.
petroleum products without the excise tax component as
an added cost in the price fixed by the manufacturers or
179115, SEPT. 26, 2012]
distributors/sellers. Consequently, the oil companies which
DOCTRINE: See held.
sold such petroleum products to international carriers are
not entitled to a refund of excise taxes previously paid on
FACTS: Asia International Auctioneers (AIA) received an
the goods.
assessment from the BIR for deficiency VAT. AIA availed
of the tax amnesty program under RA 9480. The BIR
The Supreme Court pointed out that the taxpayer’s failure
contends that AIA is disqualified under RA 9480 which,
to make a distinction on the exemption under Sections 134
among others, enumerates withholding agents as persons
and 135 of the Tax Code, apparently led it to mistakenly
to whom the tax amnesty shall not extend to. The BIR
assume that the tax exemption under Sec. 135 (a)
argues that AIA is a withholding agent.
“attaches to the goods themselves” such that the excise
tax should not have been paid in the first place. The
HELD: AIA is not a withholding agent. Indirect taxes, like
exemption found in Sec. 134 makes reference to the
VAT and excise tax, are different from withholding taxes.
nature and quality of the goods manufactured (domestic
To distinguish, in indirect taxes, the incidence of taxation
denatured alcohol) without regard to the tax status of the
falls on one person but the burden thereof can be shifted
buyer of the said goods while Sec. 135 deals with the tax
or passed on to another person, such as when the tax is
treatment of a specified article (petroleum products) in
imposed upon goods before reaching the consumer who
relation to its buyer or consumer.
ultimately pays for it. On the other hand, in case of
withholding taxes, the incidence and burden of taxation fall
Further, it held that Sec. 135 (a) in relation to the other
on the same entity, the statutory taxpayer. The burden of
provisions on excise tax and from the nature of indirect
taxation is not shifted to the withholding agent who merely
taxation, may only be construed as prohibiting the
collects, by withholding, the tax due from income
manufacturers-sellers of petroleum products from passing
payments to entities arising from certain transactions and
on the tax to international carriers by incorporating
remits the same to the government. Due to this
previously paid excise taxes into the selling price. In other
difference, the deficiency VAT cannot be “deemed” as
words, the taxpayer cannot shift the tax burden to
withholding taxes merely because they constitute indirect
international carriers who are allowed to purchase its
taxes. Moreover, records in this case support the
petroleum products without having to pay the added cost
conclusion that AIA was assessed not as a withholding
of the excise tax.
agent but, as the one directly liable for the said deficiency
taxes.
Furthermore, considering that the excise taxes attaches to
petroleum products “as soon as they are in existence as
such,” there can be no outright exemption from the
payment of excise tax on petroleum products sold to
international carriers. The sole basis then of the taxpayer’s
claim for refund is the express grant of excise tax
exemption in favor of international carriers under Sec.
135(a) for their purchases of locally manufactured
petroleum products.

--------------------------------------------------------------- This is only a case of tax avoidance. In DELPHER

b) Tax Avoidance TRADES CORPORATION V. INTERMEDIATE APPELLATE
c) Tax Evasion COURT [157 SCRA 349], the Supreme Court opined
--------------------------------------------------------------- that there was nothing wrong or objectionable about
the "estate planning" scheme resorted to by the
taxpayers. The legal right of a taxpayer to decrease
Q: What is the difference between tax
the amount of what otherwise could be his taxes or
avoidance and tax evasion? altogether avoid them, by means which the law
permits, cannot be doubted. In the said case, the
Tax avoidance and tax evasion are the two most taxpayers acquired 2,500 original unissued no par
common ways used by taxpayers in escaping from value shares of stocks of the corporation in
taxation. Tax avoidance is the tax saving device exchange for their properties. By virtue of this
within the means sanctioned by law. This method exchange, the taxpayers became stockholders of
should be used by the taxpayer in good faith and at the corporation by subscription. In effect, they
arms length. Tax evasion, on the other hand, is a changed the nature of their ownership from
scheme used outside of those lawful means and unincorporated to incorporated form by organizing
when availed of, it usually subjects the taxpayer to the corporation to take control of properties and at
further or additional civil or criminal liabilities. the same save on inheritance taxes.
4
Note: An example of tax avoidance is when a taxpayer

avails of deductions allowed by law. Q: ABC corporation sold its building to A,
who in turn, sold during the same day the
Q: What is the “substance over form” same property to XYZ Corporation. Is the
doctrine? scheme designed to avoid taxes or evade
taxes?
The doctrine provides that taxability is determined by
the reality of the transaction rather than the This is a case of tax evasion. In CIR VS. THE ESTATE
appearance which may be contrived. OF BENIGNO TODA, JR. [483 SCRA 293], the
Supreme Court held that the three factors in tax
Q: What are the three factors to be evasion were present. The two transfers were
tainted with fraud since the intermediary transfer
considered in determining if a scheme is
(from the corporation to a natural person) was
designed to evade taxes? prompted only by the desire to mitigate tax liabilities
and not for any business purpose.
The three factors to be considered are:
1. The end to be achieved (which is payment of Q: ABC Corporation owns the ABC building.
less taxes than that known by the taxpayer to be It sold the said building to A, a close
legally due or non-payment of a tax when it is business associate of ABC Corporation, on
shown that a tax is due); 30 August 1989. After a week, A sold the
2. An evil or deliberate state of mind; and same to XYZ Corporation. Is the scheme
3. A course of action which is unlawful. designed to avoid taxes or evade taxes?
Q: Husband and wife own a lot of real This is a case of tax evasion. The scheme sought to
estate. Upon advice of their lawyer, they make it appear that there were two sales of the
decided to organize a corporation to take
control of their properties. The husband and _________________________________________
wife were issued 2,500 original unissued no 4
If the properties were to be held by the spouses in the case, it
par value shares of stock in exchange for would be tied to the succession proceedings and the
their properties. Is the scheme designed to consequential payment of estate taxes when the owner dies. On
the other hand, a corporation does not die and can hold the
avoid taxes or evade taxes? property for a period of at least 50 years.

subject properties. It is obvious that the objective of 1. Where the President exercises his power
the sale to Z was to reduce the amount of tax to be under the flexible tariff clause to remove
paid especially that the transfer from Z to XYZ would existing protective tariff rates (see Section
then be subject to only 6% capital gains tax, and not 28(2), Article VI, 1987 Constitution)
the 30% corporate income tax. The intermediary 2. The local government may grant exemptions
transaction which was prompted more on the from the payment of local taxes without
mitigation of tax liabilities than for legitimate congressional approval consequent to its
business purpose constitutes one of tax evasion power to levy taxes, fees and other charges.
(CIR v. CA [327 Phil. 1]). (see Section 5, Article X, 1987
Constitution)
--------------------------------------------------------------- 3. Where the President enters into and ratify a
5. Exemption from taxation tax treaty granting certain exemptions
a) Meaning of exemption from taxation subject only to Senate occurrence.
b) Nature of tax exemption
Q: May tax exemptions exist by implication?
c) Kinds of tax exemption
d) Rationale/grounds for exemption No. In NDC v. CIR [151 SCRA 472], at issue was
e) Revocation of tax exemption whether the undertaking signed by the Secretary of
--------------------------------------------------------------- Finance in the promissory note can be considered
an exemption on taxes on the interest remitted. The
Note: Tax exemption of special entities under the Supreme Court ruled in the negative and opined that
Constitution shall be discussed under Chapter 1.I.2.a.(iv) tax exemptions cannot be merely implied but must
Prohibition against Taxation of religious, charitable entities
and educational entities, (v) Prohibition against taxation of
be categorically and unmistakably expressed.
non-stock, non-profit institutions, (xii) exemption from real
property taxes. ---------------------------------------------------------------
b) Nature of tax exemption
--------------------------------------------------------------- ---------------------------------------------------------------
a) Meaning of exemption from taxation
--------------------------------------------------------------- Q: What is the nature of tax exemptions?
Q: What is a tax exemption? Tax exemptions are:
A tax exemption is defined as a grant of immunity, 1. Mere personal privileges to the grantees;
express or implied, to particular persons or 2. Generally revocable by the government unless
corporations from the obligation to pay taxes. founded on contract which is protected by the
non-impairment clause;
Q: Who has the power to grant tax 3. Implies a waiver on the part of the Government
exemptions? of its right to collect what otherwise would be
due; and
Both the power to tax and to exempt certain persons 4. Not necessarily discriminatory so long as the
are vested in the legislature. In particular, ARTICLE exemption has a rational basis.
VI, SECTION 28 OF THE CONSTITUTION provides that
“No law granting any tax exemption shall be passed ---------------------------------------------------------------
without the concurrence of a majority of all the c) Kinds of tax exemptions
Members of the Congress.” ---------------------------------------------------------------
Q: Enumerate the instances where tax Q: What are the kinds of tax exemptions?
exemptions may be granted other than by
act of Congress: See table.

Q: What is the rationale behind tax

As to source exemptions?
Constitutional Exemption originates from Tax exemptions are given because:
the Constitution
Statutory Emanating from legislation 1. Public interest will be served by the exemption
Contractual Based on contractual allowed; and
stipulation 2. Such public benefit or interest is sufficient to
Treaty Based on treaty provisions offset the monetary loss entailed in the grant of
Ordinance Based on an ordinance the exemption
exempting payment of local
government taxes. Q: What are the grounds of tax exemption?
As to manner of creation
Tax exemption may be based on:
Express Expressly granted by organic 1. Contract;
or statute law 2. Some ground of public policy; and
Implied Whenever particular persons, 3. Treaty created on grounds of reciprocity or to
properties, or excises are lessen the rigors of international double or
deemed exempt as they fall multiple taxation
outside the scope of the
taxing provision.
Q: Can be there be a tax exemption on the
ground of equity?
As to scope of extent
No. The Supreme Court held in DAVAO GULF V. CIR
Total When certain persons,
[293 SCRA 76], that there is no tax exemption solely
property or transactions are
on the ground of equity.
exempted from all taxes
Partial When certain persons,
---------------------------------------------------------------
property or transactions are
exempted from certain taxes e) Revocation of tax exemption
---------------------------------------------------------------
As to object
Q: May a tax exemption be revoked?
Personal Those granted directly in
favor of such persons as are Yes. Since taxation is the rule and exemption
within the contemplation of therefrom is the exception, the exemption may be
the law granting the withdrawn at the pleasure of the taxing authority.
exemption
Impersonal Those granted directly in Hence, in MCIAA V. M ARCOS [261 SCRA 667], the
favor of a certain class of Supreme Court noted that Section 234 of the the
property Local Government Code unequivocally withdrew
exemptions from payments of real property taxes
--------------------------------------------------------------- granted to natural or juridical persons, including
government-owned and control corporations. Since
d) Rationale/grounds for exemption
MCIAA is a GOCC, it follows that its exemption
--------------------------------------------------------------- granted under a charter prior to the LGC has been
withdrawn.
Note: The rationale for exemption and the grounds for
exemption are two different things. The rationale asks the
In SMART V. CITY OF DAVAO [565 SCRA 237], the
question why tax exemptions are given while the grounds
tell us why the State can provide tax exemptions. Supreme Court noted that the “in lieu of all taxes”
clause in its charter has become functus officio with

the abolition of franchise tax on telecommunications amount equal or greater than the tax being collected
companies in accordance with the VAT law. (PHILEX MINING V. CIR [294 SCRA 687]).
in REPUBLIC V. CAGUIOA [536 SCRA 194] held that Taxes cannot be the subject of set-off because they
there is no vested right in a tax exemption and more are not in the nature of contracts between parties
so when the latest expression of legislative intent but grow out of a duty to, and, are positive acts, of
renders it continuance doubtful. In the said case, RA the Government, to the making and enforcing of
7227 granted private domestic corporations doing which, the personal consent of the taxpayer is not
business in the Subic SEZ tax exemptions on required (REPUBLIC V. M AMBULAO LUMBER [4 SCRA
importations of general merchandise. However, RA 622])
9334 withdrew the tax exemption on the
importations of cigars, cigarettes, distilled spirits, The erroneous payment of final withholding tax
fermented liquors and wines. cannot be used to offset or be treated as advance
tax payment, and cannot be used against the
In NITAFAN V. CIR [152 SCRA 284], the Supreme succeeding final withholding tax. COMMISSIONER OF
Court held that the salaries of members of the INTERNAL REVENUE VS. GOULDS PUMPS (PHILS.)
judiciary are subject to income tax as applied to all INCORPORATED, AUGUST 22, 2012
taxpayers. The payment of income tax by Justices
and Judges do not fall within the constitutional Note: In one case, DOMINGO V. GARLITOS [8 SCRA 443],
protection against decrease of their salaries during the Supreme Court allowed the set-off between taxes and
their continuance in office. debts. It opined that if the obligation to pay taxes and the
taxpayer’s claim against the government are both
overdue, demandable, as well as fully liquidated,
Q: Is there an exception to the above compensation takes place by operation of law and both
doctrine? obligations are extinguished to their concurrent amounts.
In the said case, the taxpayer who has been assessed
Yes. The exemption cannot be withdrawn if the municipal taxes was allowed to assign in favor of the
exception was granted to private parties based on municipality a final judgment obtained by him against the
material consideration of a mutual nature, which said municipality to cover the assessment. Atty.
then becomes contractual and thus covered by the Domondon reconciled the rulings of the Supreme Court in
non-impairment clause of the Constitution (MCIAA DOMINGO V. GARLITOS [8 SCRA 443] and FRANCIA V. IAC
[162 SCRA 753] by stating that in the former case, both
V. M ARCOS [261 SCRA 667]).
claims being overdue, demandable, and fully liquidated
while in the latter case, the claim against the government
--------------------------------------------------------------- was not overdue and demandable as it was already
6. Compensation and set-off settled. Atty. Domondon submits that when confronted
--------------------------------------------------------------- with a bar problem, we follow the doctrine laid down in
FRANCIA V. IAC [162 SCRA 753] unless the facts would
involve the (1) the application of the principle of solutio
Q: Can taxes be the subject of indebiti or (2) it involves local government taxes.
compensation between the government and
the taxpayer? Q: Is the civil concept of solutio indebiti
applicable to taxation?
No. As held in CALTEX VS. COA [208 SCRA 727],
taxes cannot be the subject of compensation Yes. In the case of FILINVEST DEVELOPMENT
because the government and taxpayer are not CORPORATION VS. CIR [529 SCRA 605], the Court
mutually creditors and debtors of each other. A claim held that in the field of taxation where the State
for taxes is not such a debt, demand, contract or exacts strict compliance upon its citizens, the State
judgment as is allowed to be set-off. (see FRANCIA V. must likewise deal with taxpayers with fairness and
IAC [162 SCRA 753]) honesty. Hence, under the principle of solutio
indebiti, the Government has to restore to petitioner
There can be no off-setting of taxes against the the sums representing erroneous payments of taxes.
claims that the taxpayer may have against the
government. A person cannot refuse to pay taxes on
the ground that the government owes him an

Q: What is the doctrine of equitable

recoupment? Q: What is a tax condonation/remission?
The doctrine provides that where the refund of a tax The condonation of a tax liability is equivalent and
illegally or erroneously collected or overpaid by a is in the nature of a tax exemption. Hence, it is a
taxpayer is barred by prescription, a tax presently grant of immunity, express or implied, to particular
being assessed against a taxpayer may be persons or corporations from the obligation to pay
recouped or set-off against the tax whose refund is taxes.
now barred by prescription. This doctrine is
inapplicable in the Philippines in light of the lifeblood ---------------------------------------------------------------
theory. (UST V. COLLECTOR [104 PHIL. 1062] 9. Construction and interpretation of:
a) Tax Laws
--------------------------------------------------------------- b) Tax Exemption and exclusion
7. Compromise c) Tax Rules and Regulations
--------------------------------------------------------------- d) Penal Provisions of Tax Laws
e) Non-retroactive application to taxpayers
Q: Can taxes be the subject of a ---------------------------------------------------------------
compromise?
Yes. Compromises are allowed and enforceable Q: What are the sources of tax laws?
when the subject matter thereof is not prohibited
from being compromised and the person entering The sources of tax laws are:
into it is duly authorized to do so. In fact, under
SECTION 204 OF THE TAX CODE, payment of internal 1. Constitution;
revenue taxes may be compromised on the grounds 2. NIRC as amended – RA 9648;
of (1) doubtful validity of the assessment or (2) 3. Tariff and Custom Code as amended – RA
financial incapacity. 8181;
4. Local Government Code;
--------------------------------------------------------------- 5. Local Tax Ordinance/City/Municipal Tax Code;
6. Tax Treaties/International Agreements;
8. Tax Amnesty
7. Presidential Decree/ Executive Order;
--------------------------------------------------------------- 8. Decisions of SC/CTA/CA; and
9. Revenue Rules and Regulations, Rulings
Q: What is a tax amnesty? implemented by the BIR
A tax amnesty is a general pardon or intentional
Q: What is the nature of tax laws?
overlooking by the State of its authority to impose
penalties on persons otherwise guilty of evasion or
1. Not political in character
violation of a revenue or tax. REPUBLIC V. IAC [196
2. Civil in nature, not subject to ex post facto
SCRA 335]
law prohibition
3. Not penal in character
Q: Distinguish a tax amnesty from a tax 4. Not retroactive in its application
exemption.
Q: Do tax laws continue in force even during
Tax Amnesty Tax Exemption
a period of enemy occupation?
immunity from all immunity from civil
criminal, civil and liability only Yes. In HILADO V. CIR [100 SCRA 288], the Supreme
administrative liabilities Court held that internal revenue laws are not
arising from nonpayment political in nature and as such were continued in
of taxes force during the period of enemy occupation and in
applies only to past tax has prospective effect actually enforced by the occupation
periods application. government. Income tax returns filed during such

period and income tax payments effected are and determine the classification of the imported article
considered valid and legal. before tariff may be imposed. Unfortunately, CMO 23-
2007 has already classified the article even before the
customs officer had the chance to examine it. In effect,
Q: Do rules and regulations issued by petitioner Commissioner of Customs diminished the
administrative or executive officers powers granted by the Tariff and Customs Code with
(implementing tax laws) have the force and regard to wheat importation when it no longer required the
effect of law customs officer’s prior examination and assessment of the
proper classification of the wheat. It is well-settled that
rules and regulations, which are the product of a
Yes. Rules and regulations issued by administrative
delegated power to create new and additional legal
or executive officers pursuant to the procedure or provisions that have the effect of law, should be within the
authority granted by law upon the administrative scope of the statutory authority granted by the legislature
agency have the force and effect, or partake of the to the administrative agency. It is required that the
nature of a statute and are just as binding as if they regulation be germane to the objects and purposes of the
have been written in the statute itself. As such, they law; and that it be not in contradiction to, but in conformity
have the force and effect of law and enjoy the with, the standards prescribed by law.
presumption of constitutionality and legality until they
are set aside with finality in an appropriate case by a
competent court (ABAKADA GURO PARTY LIST VS. ---------------------------------------------------------------
PURISIMA [562 SCRA 251]) a) Tax laws
---------------------------------------------------------------
COMMISSIONER OF CUSTOMS V. HYPERMIX FEEDS Q: State the rule on construction or
[G.R. NO. 179579, FEBRUARY 1, 2012] interpretation of tax laws?
DOCTRINE: Rule and regulations, which are the product
of a delegated power to create new and additional legal As a general rule, there is no need for statutory
provisions that have effect of law, should be within the construction if the tax law is clear. Where the law is
scope of the statutory authority granted by the legislature clear and unambiguous, the law must be taken as it
to the administrative agency. is devoid of judicial addition or subtraction.
FACTS: As an exception, if there is an ambiguity in the law,

statutory construction is but proper and tax laws
Petitioner issued Customs Memorandum Order (CMO)
shall be liberally interpreted in favor of the taxpayer
No. 27-2003 prescribing guidelines, for tariff purposes, in
the applicable to importation of wheat. Respondent filed a and strictly against the taxing authority.
Petition for Declaratory Relief with the Regional Trial Court
(RTC) of Las Pinas City. Petitioner filed a Motion to Q: What is the rationale behind the liberal
Dismiss and alleged that the RTC did not have jurisdiction construction or interpretation of tax
over the subject matter of the case because respondent statutes?
was asking for a judicial determination of the classification
of wheat, thus, action for declaratory relief is improper.
As held in the case of PHILIPPINE HEALTH CARE
HELD: The Supreme Court held that the determination of PROVIDERS V. CIR [554 SCRA 411], tax statutes are
whether a specific rule or set of rules issued by an strictly construed against the taxing authority
administrative agency contravenes the law or the because taxation is a destructive power which
constitution is within the jurisdiction of the regular courts. interferes with the personal and property rights of
Indeed, the Constitution vests the power of judicial review the people and takes from them a portion of their
or the power to declare a law, treaty, international or property for the support of the government.
executive agreement, presidential decree, order,
instruction, ordinance, or regulation in the courts, including
the regional trial courts. This is within the scope of judicial
Q: Is the construction of a tax statute by
power, which includes the authority of the courts to predecessors binding on the successors?
determine the validity of the acts of the political
departments. Also, Section 1403 of the Tariff and customs No. The construction of a statute by predecessors is
law mandates that the customs officer must first assess not binding on their successors if thereafter the latter

becomes satisfied that a different construction only an exemption from property taxes on the poles,
should be given. wires, and transformers.
---------------------------------------------------------------
b) Tax Exemption and exclusion Q: What is the “legislative grace” concept”?
---------------------------------------------------------------
The legislative grace concept provides that any tax
Q: How are tax exemptions construed and relief provided is the result of specific acts of
interpreted? Congress that must be applied and interpreted
strictly. In NDC V. CIR [151 SCRA 472], the
Tax exemptions should be strictly construed against Supreme Court ruled that the fact that the Secretary
the taxpayer. of Finance guaranteed the loans of the NDC cannot
be taken to mean that the payments of NDC to the
As held in the case of QUEZON CITY V. ABS-CBN Japanese creditors are exempt from withholding
[567 SCRA 495], statutes granting tax exemptions since the undertaking was not tantamount to a
are construed stricissimi juris against the taxpayer waiver of collection to taxes which must be express
and liberally in favor of the taxing authority. He who
claims an exemption from his share of common Q: Should the doctrine of strict
burden must justify his claim that the legislature interpretation of tax exemptions be applied
intended to exempt him by unmistakable terms. For first as a precondition to the application of
exemptions from taxation are not favored in law, nor the principle of tax exemption?
are they presumed.
Yes. Before applying the principles of tax exemption,
A tax exemption must be strictly construed against doctrine of strict interpretation must first be applied.
the one claiming the exemption because it is There must first be a determination who are covered
contrary to the lifeblood theory which is the by the tax statute before a determination of who are
underlying basis for taxes. exempted. In CIR V. CA & ADMU [271 SCRA 605],
the Supreme Court, before resolving the issue on
Taxation is the rule and exemption is the exception. whether the Institute of Philippine Culture (IPC) of
The burden of proof rests upon the party claiming the Ateneo De Manila University was an
the exemption to prove that it is in fact covered by independent contractor (and as such liable for
the exemption so claimed (CIR V. MITSUBISHI METAL contractor’s tax), noted that it is an error to apply the
[181 SCRA 215]). principle of tax exemption without first applying the
well-settled doctrine of strict interpretation in the
In LUZON STEVEDORING V. CTA [163 SCRA 647], in imposition of taxes. The Supreme Court found that
resolving the issue on whether “tugboats” are the IPC never sold its services for a fee to anyone or
embraced and included in the term “cargo vessel,” was ever engaged in a business apart from or
the Supreme Court ruled in the negative. Any claim independently from the academic purposes of the
for exemption from the tax statute should be strictly Ateneo. Thus, it is not an independent contractor.
construed against the taxpayer. Thus, tugboats
cannot be considered cargo vessels as they are not Q: What are the reasons for strictissimi juris
meant to carry and transport persons or goods by interpretation of tax laws?
themselves but are mainly for towing.
1. Lifeblood theory
In MERALCO V. VERA [67 SCRA 352], the issue to be 2. To minimize differential treatment and foster
resolved was whether MERALCO was exempt from impartiality, fairness and equality of
excise tax on its poles, wires, and transformers. The treatment among taxpayers
Supreme Court held that the “in lieu of all taxes” 3. Taxation is a high prerogative of sovereignty
provision is limited in scope to taxes “upon the whose relinquishment is never presumed
privileges, earnings, income, franchise and poles,
wires, transformers, and insulators of the grantee.”
Construing this provision strictly against MERALCO,
the Supreme Court held that the provision covers

Q: What the exceptions to the strictissimi Q: How are tax condonations construed?
juris interpretation of tax laws?
As held in SURIGAO CONSOLIDATED MINING VS. CIR [9
1. When the statute granting exemption SCRA 728], being in the nature of tax exemptions, it
provides for liberal construction thereof should be sustained only when expressed in explicit
2. In case of special taxes relating to special terms, and it cannot be extended beyond the plain
cases and affecting only special classes of meaning of those terms. Hence, it must construed
persons strictly against the grantee and liberally in favor of
3. If exemption refer to the public property the taxing authority.
4. In cases of exemptions granted to charitable
and educational institutions or their property ---------------------------------------------------------------
5. In cases of exemptions in favor of a c) Tax rules and regulations
government political subdivision or ---------------------------------------------------------------
instrumentality
Q: How are tax rules and regulations
Q: Is the rule of strict construction to tax construed?
exemptions applicable to government
political subdivisions and instrumentalities? As they have the force and effect of law, tax rules
and regulations are construed strictly against the
No. As held in the case of M ACEDA V. M ACARAIG [197 government and liberally in favor of the taxpayer.
SCRA 771], it is a recognized principle that the rule ---------------------------------------------------------------
on strict interpretation does not apply in the case of d) Penal provisions of tax laws
exemptions in favor of a government political ---------------------------------------------------------------
subdivision or instrumentality.
Q: How are penal provisions of tax laws
Q: Why is the rule of strict construction to
construed?
tax exemptions inapplicable to government
political subdivisions and instrumentalities? Penal provisions of tax laws are strictly construed
against the State and liberally in favor of the
The reason for the rule does not apply in the case of taxpayer.
exemptions running to the benefit of the government
itself or its agencies. In such case the practical effect
---------------------------------------------------------------
of an exemption is merely to reduce the amount of
money that has to be handled by government in the e) Non-retroactive application to taxpayers
course of its operations. For these reasons, ---------------------------------------------------------------
provisions granting exemptions to government
agencies may be construed liberally, in favor of non Q: Can BIR issuances be applied
tax liability of such agencies. (M ACEDA V. M ACARAIG retroactively?
[197 SCRA 771])
Yes. BIR issuances may be applied retroactively if
Q: How are tax amnesties construed? its application will not be prejudicial to the taxpayer.
(see Section 246, NIRC)
As held in the case of CIR V. M ARUBENI
CORPORATION [204 SCRA 377], a tax amnesty, Q: When will BIR issuances be not given
much like a tax exemption, is never favored nor retroactive application?
presumed in law. If granted, the terms of the
amnesty, like that of a tax exemption, must be As provided in SECTION 246 OF THE NIRC, rulings
construed strictly against the taxpayer and liberally and circulars, rules and regulations promulgated by
in favor of the taxing authority. the CIR would have no retroactive application if to
so apply them would be prejudicial to the
taxpayers

In CIR V. CA [267 SCRA 557], the taxpayer relied Q: Is the failure of a taxpayer to consult the
and implemented a computation by virtue of a BIR BIR before relying on a BIR Ruling imply
Ruling. The said issuance was later reversed in a bad faith on the part of the former?
subsequent BIR Ruling. The Supreme Court held
that the later BIR ruling cannot be given retroactive No. In CIR V. CA [267 SCRA 557], the Supreme
application as such would be prejudicial to the Court in resolving the argument that failure to
taxpayer. The same doctrine was applied in the case consult with the BIR amounted to bad faith opined
of ABS-CBN V. CTA [108 SCRA 143] with regard to that such failure does not imply bad faith especially
its reliance on a Memorandum Circular on the when the BIR Ruling relied upon was clear and
withholding of taxes on film rentals which was categorical leaving no room for interpretation.
revoked by a subsequent memorandum circular.
---------------------------------------------------------------
Q: When can BIR issuances be given I. Scope and Limitation of Taxation
retroactive application even if such would 1. Inherent Limitations
be prejudicial to taxpayers? 2. Constitutional Limitations
SECTION 246 OF THE NIRC provides for the following ---------------------------------------------------------------
exceptions:
Q: What is the scope of the legislature’s
1. Where the taxpayer deliberately misstates or taxing power?
omits material facts from his return or any
document required of him by the BIR; The legislative taxing power or discretion extends to
2. Where the facts subsequently gathered by the the following:
BIR are materially different from the facts on
which the ruling is based; or 1. nature (kind of tax to be collected);
3. Where the taxpayer acted in bad faith. 2. object (purpose for which the tax shall be
levied);
Jurisprudence also provides for another exception. 3. extent (amount or rate of tax to be collected);
In PBCOM V. CIR [302 SCRA 241], The Supreme 4. coverage (the persons, property or occupation to
Court opined that the non-retroactivity of rulings by be taxed);
the CIR is inapplicable where the nullity of the 5. apportionment of the tax (general or limited to a
issuance was declared by the Courts and not by the particular locality or partly general or partly
CIR. local);
6. method of collection; and
In BIR RULING NO. 370-2011 [OCTOBER 7, 2011] the 7. situs (place) of taxation.
issue was whether RCBC is liable to pay the final
withholding tax on interest income realized from the ---------------------------------------------------------------
5
purchase of PEAce Bonds. Relying upon previous 1. Inherent Limitations
BIR Rulings in 2001, RCBC paid no final tax upon a) Public purpose
the issuance of the bonds. However, the rulings b) Inherently legislative
were all reversed by a BIR Ruling in 2004. RCBC c) Territorial
invoked the non-retroactivity principle of BIR d) International comity
Rulings. The Supreme Court in resolving this matter e) Exemption of government entities,
stated that the non-retroactivity principle does not
agencies, and instrumentalities
apply when the ruling involved is null and void for
being contrary to the law, such as the previous ---------------------------------------------------------------
rulings on the PEACe bonds.
What are the inherent limitations on the
power to tax?
_________________________________________
5 The inherent limitations are those limitations which
Poverty Eradication and Alleviation Certificate (PEAce) Bond
exist despite the absence of an express
constitutional provision thereon.

rampant film piracy and flagrant violation of

The inherent limitations are: intellectual property rights.
1. Public purpose – the revenues collected from ---------------------------------------------------------------

taxation should be devoted to a public purpose. b) Inherently legislative
2. Inherently legislative or non-delegability of (i) General Rule
the taxing power – Only the legislature can (ii) Exceptions
exercise the power of taxes unless the same is (a) Delegation to local governments
delegated by the constitution or through a law
(b) Delegation to the President
which does not violate the constitution
3. Territoriality or situs of taxation – the taxing (c) Delegation to administrative agencies
power should be exercised only within the ---------------------------------------------------------------
territorial jurisdiction of the taxing authority
4. Principle of Comity – Comity is respect Q: Is the power to tax delegable?
accorded by nation to each others as co-equals.
As taxation is an act of sovereignty, such power As a general rule, the power to tax is purely
should be imposed upon equals out of respect. legislative and it cannot be delegated.
5. Tax exemption of the State
As exceptions, delegation is allowed in the
Note: The inherent limitations on the power of taxation is following cases:
also known as the elements, tenets or characteristics of
taxation. a. Delegation of tariff powers to the President
--------------------------------------------------------------- under the flexible tariff clause. (see Sec. 28(2),
a) Public purpose Article 6, 1987 Constitution)
---------------------------------------------------------------
b. When the delegation relates merely to
6
Q: What is meant by “public purpose” as an administrative implementation (see M ACEDA VS.
inherent limitation on the power to tax? M ACARAIG [197 SCRA 771])
The right of taxation can only be used in aid of a c. Delegation of emergency powers to the
public purpose. In PASCUAL V. SECRETARY OF PUBLIC President (see Section 23(2), Article VI, 1987
WORKS [110 SCRA 331], the Supreme Court Constitution)
explained that the right of the legislature to
appropriate public funds is correlative with its right to d. Delegation to the President to enter into
tax and as such the power of taxation may only be executive agreements and to ratify tax treaties
exercised for public purposes. In that case, the subject to the concurrence by the Senate
appropriation of public funds for the construction of
feeder roads on land owned by a private person is e. Delegation to the people at large
invalid for being made for other than a public
purpose. Q: Do local governments have the power to
tax?
The rule can also be seen in PEPSI COLA V.
MUNICIPALITY OF TANUAN [69 SCRA 460] where the Yes. The power to tax is no longer vested
Supreme Court held that one of the requisites for the exclusively on Congress. The local governments are
valid exercise of the power of tax is that the tax must now given direct authority to levy taxes, fees and
be for a public purpose. other charges pursuant to Section 5, Article X, of the
In TIO VS. VIDEOGRAM REGULATORY BOARD [151

SCRA 208], the Supreme Court held that the levy of _________________________________________
30% tax on videogram operators is for a public 6
The delegation to be valid must comply with the completeness
purpose. It was imposed primarily to answer the test and the existence of sufficiently determinate standards test.
need for regulating the video industry, particularly

1987 Constitution. NAPOCOR V. CITY OF A, who sold a parcel of land which he

CABANATUAN [G.R. NO. 149110, APRIL 9, 2003]. inherited, refused to pay and argued that
such tax can only be collected by the
Note: Previously, the power of taxation is National Government. On the other hand,
exclusively with the Legislature and that such is the Municipality argues that under the
merely delegated to local governments in respect of
Constitution, it has the power to create its
matters of local concern. PEPSI COLA V.
MUNICIPALITY OF TANUAN [69 SCRA 460]. Now, there own sources of revenue. Resolve the
is a direct grant of taxing power by the Constitution controversy.
to the local governments. Thus, the reference of the
2013 Bar Syllabus as delegation to local None of them is correct. In fact, the ordinance is
governments as an exception to the general rule that void. Under the Local Government Code, only
the power of taxation is inherently legislative is provinces and cities can impose a tax on the transfer
inaccurate. of ownership of real property. Municipalities are
prohibited from imposing said tax that provinces are
Q: Does the direct grant of taxing power to specifically authorized to levy.
the local governments mean that the
---------------------------------------------------------------
legislature may no longer provide
c) Territorial
limitations and guidelines to such power?
(i) Situs of Taxation
No. While the power to tax may be exercised by ---------------------------------------------------------------
local governments, no longer merely by virtue of a .
valid delegation as before, but pursuant to direct Q: Explain the territoriality rule as a
authority conferred by the Constitution, the basic limitation on the power of taxation.
doctrine on local taxation remains the same in that
the power to tax is primarily vested in Congress. However broad the power of taxation may be as to
QUEZON CITY V. ABS-CBN [G.R. NO. 166408, its character and no matter how searching it is in its
OCTOBER 6, 2008] extent, such power is necessarily limited only to
persons, property or businesses within its
It must be noted, further, that the power is not jurisdiction.
inherent in the local government unlike in the
national government. M ANILA ELECTRIC COMPANY VS. Thus, in ILOILO BOTTLERS INC. VS. CITY OF ILOILO
PROVINCE OF LAGUNA [306 SCRA 750]. A municipal [164 SCRA 607], the Supreme Court, on the issue of
corporation has no inherent right to impose taxes. Its whether a bottling company which sells soft drinks in
power to tax must always yield to a legislative act Iloilo City but operates its bottling plant in another is
which is superior having been passed by the state liable for the excise tax imposed by said City on the
itself which has the inherent power to tax. (see distribution, manufacture and bottling of soft drinks,
BASCO VS. PAGCOR [197 SCRA 52]) held that since truck sales were made in the City,
the acts or privileges of the company is within its
Q: May Congress abolish the power to tax of jurisdiction.
local governments?
In CIR V. M ARUBENI [204 SCRA 377], what was
7
No, Congress cannot abolish what is expressly involved was a contract on a turn-key basis which
granted by the fundamental law. The only authority the CIR sought to tax as an indivisible contract. The
conferred to Congress is to provide the guidelines Supreme Court held that the contract actually
and limitations on the local government’s exercise of involved two taxing jurisdictions. While the
the power to tax. _________________________________________
7
Q: The Municipality of XYZ passed an In a turn key contract, the contractor is entrusted to design,
construct, commission and handover the project to the employer
ordinance imposing a tax on the sale or in a completed state.
transfer of real property (local transfer tax).

construction and installation work were completed in Due to the variance in the concept of “domicile” for
the Philippines, some pieces of equipment and tax purposes and considering the multiple
supplies were completely designed and engineered relationships that may arise with respect to
in Japan. These services made and completed in intangible property and the use to which the property
Japan are not subject to contractor’s tax as they are may have been devoted, all of which may receive
rendered outside the taxing jurisdiction of the the protection of the laws of jurisdiction other than
Philippines. the domicile of the owner thereto, the same income
or intangible property may be subject to taxation in
In REAGAN V. CIR [30 SCRA 968], the Supreme several taxing jurisdictions.
Court held that bases under lease to the US under
the Military Bases Agreement remain part of Q: How do we address multiplicity of situs
Philippine territory. It is not foreign territory for of taxation?
purposes of income tax legislation. The power to tax
has been preserved except for those matters where
an appropriate exemption was provided for. The taxing jurisdiction may:
1. provide for exemptions or allowance of

Q: What are the exceptions to the deduction or tax credit for foreign taxes; and/or
territoriality rule? 2. enter into tax treaties with other States.
1. Where tax laws operate outside territorial ---------------------------------------------------------------

jurisdiction (i.e. taxation of resident citizens (b) Situs of Income tax
on their incomes derived from abroad)
(1) From sources within the Philippines
2. Where tax laws do not operate within the
territorial jurisdiction of the state (i.e. when (2) From sources without the Philippines
exempted by treaty obligations and when (3) Income partly within and partly without
exempted by international comity.) the Philippines
---------------------------------------------------------------
---------------------------------------------------------------
(i) Situs of Taxation Q: What is the situs of taxation of income?
(a) Meaning
(b) Situs of Income tax 1. From sources within the Philippines: all
(c) Situs of property taxes kinds of taxpayers are subject to income tax
on income derived from sources within the
(d) Situs of excise taxes
Philippines.
(e) Situs of business tax 2. From sources without the Philippines:
--------------------------------------------------------------- only Resident Citizens and Domestic
Corporations are liable to income tax on
Q: Define “situs of taxation.” income derived from sources without the
The situs of taxation is the place or authority that Philippines
has the right to impose and collect taxes. 3. Income partly within and partly without
the Philippines: Taxable income
Q: What are the basis or determinants of the attributable to sources within the Philippines
situs of taxation? may be determined by processes or
formulas of general apportionment
1. The symbiotic relationship prescribed by the Secretary of Finance.
2. Jurisdiction, state or political unit that gives
protection has the right to demand support Note: The general principles of income taxation under
Section 23 of the Tax Code is also known as the situs of
income taxation.
Q: What is the effect of multiplicity of situs
of taxation?

--------------------------------------------------------------- occupation is being conducted. This is so because

(c) Situs of property taxes that is the place which gives protection to the
(1) Taxes on real property business or occupation.
(2) Taxes on personal property
Q: What is the situs of estate and donor’s
---------------------------------------------------------------
taxes?
Q: What is the situs of taxes on real
property? Same rule applies to both.
For citizens, whether resident or non-resident,

The situs of taxes on real property is where the
and resident aliens: taxed on properties wherever
property is located (lex situs)
situated.
Q: What is the situs of taxes on personal For non-resident aliens: taxed on properties
property? situated in the Philippines.
If the personal property is tangible: where the ---------------------------------------------------------------
property is physically located although the owner (e) Situs of business taxes
resides in another jurisdiction
---------------------------------------------------------------
If the personal property is intangible: As a
Q: What is the situs of sales of real
general rule, the situs is the domicile of the owner
(mobilia sequuntur personam). The exceptions are property?
as follows:
The situs of sales of real property is where the real
1. where the intangible personal property has property is located
acquired a business situs in another
8
jurisdiction. Q: What is the situs of sales of personal
2. When the law provides for the situs of the property?
subject of the tax
--------------------------------------------------------------- The situs of sales of personal property is the place
(d) Situs of excise taxes where the sales are perfected and consummated
(1) Estate Tax
(2) Donor’s Tax
--------------------------------------------------------------- Q: What is the situs of VAT?
Note: Instead of “Situs of Excise taxes,” this should have The situs of VAT is the place where the transaction
been properly referred to as “Situs of transfer taxes.” is made. It is either where the property is sold and
While transfer taxes are considered “excise taxes,” note consumed or where the service is to be performed.
that VAT was placed under “Situs of Business taxes” when
in fact it is also an excise tax.
---------------------------------------------------------------
Q: What is the situs of excise taxes? d) International Comity
---------------------------------------------------------------
The situs of excise taxes is where the transaction
was performed. It is the place where the business or Q: Explain the principle of comity as a
_________________________________________ limitation on the power of taxation.
8
As an example, the tax imposed on gains from sale of shares of The property or income of a foreign state or
stock of a domestic corporation are treated as derived entirely government may not be the subject of taxation by
from sources within the Philippines regardless of where the said another.
shares are sold.

As held in TANADA V. ANGARA [272 SCRA 18], by

their voluntary act, nations may surrender some Q: Can local governments tax the national
aspects of their state power in exchange for greater government, its agencies, and
benefits granted or derived from a convention of instrumentalities?
pact. The underlying consideration in this partial
surrender of sovereignty is the reciprocal No. In MIAA v. CA [495 SCRA 591], the Supreme
commitment of the other contracting states in Court, in resolving the issue on whether the lands
granting the same privilege and immunities to the and buildings owned by the Manila International
Philippines, its officials and its citizens. The point is Airport Authority were subject to real property tax,
that a portion of sovereignty may be waived without ruled in the negative. The Supreme Court opined
violating the Constitution, based on the rationale that that since MIAA is not a GOCC but instead as
the Philippines "adopts the generally accepted government instrumentality vested with corporate
principles of international law as part of the law of powers or a government corporate entity, it is
the land and adheres to the policy of . . . cooperation exempt from real property tax. By express provision
and amity with all nations." of the Local Government Code, local governments
cannot levy taxes, fees or charges of any kind on the
Note that the principle of comity entails an exchange National Government, its agencies and
in benefits. Thus, in SEA-LAND SERVICE V. CA [357 instrumentalities.
SCRA 441], the Supreme Court ruled that the
hauling and transport of household goods and Furthermore, the said lands and buildings are
personal effects of U.S. military personnel were not property of the public dominion and therefore owned
tax exempt under the RP-US Military Bases by the State. They are devoted to public use. Thus,
Agreement as they do not directly contribute to the they cannot be auctioned as they are outside the
defense and security of the Philippines. commerce of man. However, the portions of the
property leased to private entities are subject to real
In CIR V. MITSUBISHI METAL CORP [181 SCRA 214], property tax.
the Supreme Court held that scrupulous care must
be taken when international comity is invoked on the ---------------------------------------------------------------
representation that funds involved in the loans are 2. Constitutional Limitations
those of a foreign government as we should avoid
a) Provisions directly affecting taxation
opening the floodgates to the violation of our tax
laws. ---------------------------------------------------------------
Q: What are the constitutional provisions
---------------------------------------------------------------
directly affecting taxation?
e) Exemption of government entities,
agencies, and instrumentalities The direct constitutional provisions on taxation are:
---------------------------------------------------------------
1. Non-imprisonment for non-payment of poll-
Q: Is the State subject to tax? tax (Article III, Sec. 20)
2. Uniformity, equitability and progressivity of
Generally, the State may not be subject to taxation. taxation (Article VI, Section 28, par. 1).
However, while this may be so, sovereignty being 3. Grant by Congress of authority to the
absolute and taxation being an act of high President to fix tariff rates, import and export
sovereignty, the State may tax itself including its quotas, etc (Article VI, Section 28, par. 2)
political subdivisions. 4. Tax exemption of properties actually,
directly, and exclusively used for religious,
Q: Are GOCCs subject to local government charitable and educational purposes (Article
taxes? VI, Section 28, par. 3)
5. Exemption from taxes of the revenues and
Yes. Exemptions of GOCCs from local government assets of educational institutions including
taxes have been withdrawn by the the Local grants, endowments, donations or
Government Code

contributions. (Article XVI, Section 4, par. Q: What is meant by “equitable”?

3)
6. President’s veto power on appropriation, Equitable means fair, just, reasonable and
revenue, tariff bills (Article VI, Section 27, proportionate to one’s ability to pay.
par. 2)
7. Non-impairment of the Supreme Court’s In ABAKADA GURO PARTY-LIST V. ERMITA [469 SCRA
jurisdiction in tax cases (Article VIII, Sec. 5, 1], the Supreme Court ruled that the 12% VAT
par. 2(b)) imposition was equitable as it imposes safeguards
8. Power of local governments to create its and limits in the form of VAT exemption granted to
own sources of revenue and to levy taxes gross sales below P1.5 million.
subject to Congressional limitations (Article
X, Section 6) In KAPATIRAN V. TAN [163 SCRA 372], the Supreme
9
9. Voting requirement in connection with the Court held that EO 278 is equitable as it is imposed
legislative grant of tax exemption (Article VI, only on sales of goods or services by persons
Section 28, par. 4) engaged in a business with an aggregate gross
10. The provision which mandates that money annual sales exceeding P200,000 while small corner
collected on a tax levied for a public purpose sari-sari stores are consequently exempt as well as
shall be paid out for such purpose only sales of farm and marine products.
(Article VI, Section 29, par. 3)
Q: Should the system of taxation be always
--------------------------------------------------------------- progressive?
(i) Prohibition against imprisonment for non-
payment of poll tax No. The Supreme Court in TOLENTINO VS.
--------------------------------------------------------------- SECRETARY OF FINANCE [249 SCRA 628] explained
that what Congress is required by the Constitution to
do is only to "evolve a progressive system of
Article III.
taxation." This is a directive to Congress, just like the
Section 20. No person shall be imprisoned for debt or
non-payment of a poll tax. directive to it to give priority to the enactment of laws
for the enhancement of human dignity and the
reduction of social, economic and political
--------------------------------------------------------------- inequalities or for the promotion of the right to
(ii) Uniformity and equality of taxation "quality education." These provisions are put in the
--------------------------------------------------------------- Constitution as moral incentives to legislation, not as
judicially enforceable rights. Thus, even if the VAT is
regressive because it is an indirect tax, it is not
Article VI. prohibited by the Constitution.
Section 28.
1. The rule of taxation shall be uniform and ---------------------------------------------------------------
equitable. The Congress shall evolve a (iii) Grant by Congress of authority to the
progressive system of taxation.
President to impose tariff rates
(xi) Flexible tariff clause
---------------------------------------------------------------
Q: What is meant by “uniformity”?
Uniformity requires that all subjects or objects of Article VI.

taxation similarly situated are to be treated alike or Section 28.
put on equal footing both in privileges and liabilities
(SISON V. ANCHETA [130 SCRA 654]; see also CIR V. _________________________________________
LINGAYEN GULF [164 SCRA 27]) 9
EO 278 imposing a 10% VAT on the value added by every seller
with aggregate gross annual sales of articles and/ or services
exceeding P200,000 to his purchase of goods and services

2. The Congress may, by law, authorize the 6. All lands, buildings, and improvements, actually,
President to fix within specified limits, and subject directly and exclusively used for religious,
to such limitations and restrictions as it may charitable or educational purposes.
impose, tariff rates, import and export quotas,
tonnage and wharfage dues, and other duties or
The exemption provided for under Article VI, Section
imposts within the framework of the national
development program of the Government. 28 pertains only to real property taxes (LLADOC V.
CIR [14 SCRA 292]).
---------------------------------------------------------------
Under Article XIV, Section 4(3), all revenues and
(iv) Prohibition against taxation or religious,
assets of non-stock, non-profit educational
charitable entities, and educational entities institutions used actually, directly, and exclusively for
(x) Exemption from real property taxes educational purposes shall be exempt from taxes
--------------------------------------------------------------- and duties.
Article VI. Q: What is meant by actual, direct, and

Section 28. exclusive use?
3. Charitable institutions, churches and personages
or convents appurtenant thereto, mosques, non- What is meant by actual, direct, and exclusive use of
profit cemeteries, and all lands, buildings, and the property for charitable institutions is the direct
improvements, actually, directly, and exclusively and immediate and actual application of the property
used for religious, charitable, or educational itself to the purpose for which the charitable
purposes shall be exempt from taxation.
institution is organized. LUNG CENTER OF THE
PHILIPPINES V. QUEZON CITY [433 SCRA 119]
--------------------------------------------------------------- Q: If a hospital also admits paying patients,
(v) Prohibition against taxation of non-stock, does it lose its character as a charitable
non-profit institutions institution?
---------------------------------------------------------------
No. In CIR V. BISHOP OF MISSIONARY DISTRICT [14
SCRA 991], the Supreme Court held that the
Article XIV.
admission of pay patients does not detract from the
Section 4.
3. All revenues and assets of non-stock, non-profit
charitable character of a hospital if its funds are
educational institutions used actually, directly, devoted exclusively to the maintenance of the
and exclusively for educational purposes shall be institution as a public charity (see also HERRERA V.
exempt from taxes and duties. Upon the QCBAA [3 SCRA 186])
dissolution or cessation of the corporate
existence of such institutions, their assets shall In LUNG CENTER OF THE PHILIPPINES V. QUEZON CITY
be disposed of in the manner provided by law [433 SCRA 119], the Supreme Court stated that, as
a general principle, a charitable institution does not
lose its character as such and its exemption from
Q: What are special entities that are granted
taxes simply because it derives income from paying
tax exemptions by the Constitution? patients , whether out-patient or confined in the
hospital or receives subsidies from the government,
Under Article VI, Section 28, the following are as long as the money received is devoted or used
exempt from real property taxes: altogether to the charitable object which it is
intended to achieve, and no money inures to the
1. Charitable institutions private benefit of the persons managing or operating
2. Churches the institution.
3. Parsonages or convents appurtenant thereto
4. Mosques Q: Does the phrase “actually, directly, and
5. Non-profit cemeteries; and exclusively used” mean that the exemption

shall only cover property actually charged parking fees on the lots beside its
indispensable to the institution? building. Can the CIR tax YMCA for such
income?
No. As held in HERRERA V. QCBAA [3 SCRA 186],
the exemption in favor of property used exclusively Yes. In CIR V. CA [298 SCRA 83], the Supreme
for charitable or educational purposes is not limited Court ruled that the income from the lease and
to property actually indispensable but extends to parking fees were not exempt. The last paragraph of
facilities which are incidental to or reasonably Section 27 of the NIRC clearly provides that profits
necessary for the accomplishment of its purposes. realized by exempt organizations (non-profit clubs)
from real property from whatever source and
Q: A hospital has a school for training wherever used are taxable. The Court noted that
nurses and midwifes. Substantial profit is while YMCA is exempt from real property taxes, it is
derived from the operation of the said not exempt from income tax on the rentals from its
school. Is the school exempt from taxes? property. Further, YMCA failed to prove that it was a
non-stock, non-profit educational institution under
As to the “lands, buildings, and improvements,” such Article XIV, Section 4(3) of the Constitution.
is beyond the taxing power of the State irrespective
of the substantial profits as “all lands, buildings and Q: The Philippine Lung Center leased
improvements used exclusively for religious, portions of its real property out for
charitable or educational purposes” are exempt from commercial purposes. Are these exempt
real property taxes. The school is a facility incidental from real property taxes?
or reasonably necessary for the accomplishment of
the purposes of the hospital as the students practice No. In LUNG CENTER OF THE PHILIPPINES V. QUEZON
therein. (see HERRERA V. QCBAA [3 SCRA 186]) CITY [433 SCRA 119], the Supreme Court held that
the hospital was not exempt from real property tax
As to the profits, it will be exempt from taxes if it on the portions of its property not actually, directly,
proves that it is within the coverage of Article XIV, and exclusively used for charitable purposes. Thus,
Section 4(3) which exempts all revenues and assets those leased out for commercial purposes are
of non-stock, non-profit educational institutions used subject to real property tax. Those used by the
actually, directly, and exclusively for educational hospital even if used for paying patients remain
purposes exempt from real property taxes.
Q: Is a vegetable garden and an unused

cemetery adjacent to a convent exempt from CIR V. ST. LUKES MEDICAL CENTER [SEPTEMBER
payment of real property taxes? 26, 2012]
Yes. As held in BISHOP OF SEGOVIA V. PROV. BOARD DOCTRINE: A proprietary non-profit hospital is subject
OF ILOCOS NORTE [51 SCRA 352], the exemption to 10% tax under Section 27(B) of the Tax Code.
from the payment of the land tax in favor of the
FACTS: St. Lukes Medical Center is a hospital organized as
convent includes not only the land actually occupied a non-stock and non-profit corporation. It admits both
by the building, but also the adjacent ground or paying and non-paying patients. The CIR claimed that St.
vegetable garden destined to the incidental use of Lukes was liable for income tax at 10% as provided under
10
the parish priest in his ordinary life. The unused Section 27(B) of the NIRC. St. Lukes argues that it is a
cemetery is also exempt as it is not used for non-stock, non-profit institution for charitable and social
commercial purposes and instead is used as a place
for those who participate in the religious festivities.
_________________________________________
Q: YMCA is a non-stock, non-profit 10
Section 27(B) provides that proprietary educational institutions
institution with religious, charitable and and hospitals which are non-profit shall pay a tax of ten percent
educational objectives. YMCA leased part of (10%) on their taxable income
its premises to small canteen owners and

welfare purposes exempt from income tax under Section charitable.” This is affirmed in the constitutional provision
11
30(E) and (G) of the NIRC. with regard to non-stock, non-profit educational
institutions. For their income to be exempt, their revenues
HELD: St. Lukes cannot claim full tax exemption under and assets must be used actually, directly, and exclusively
Section 30 because it has paying patients and this is for educational purposes. The rule now can be laid down
notwithstanding the fact that it is a non-profit hospital. For as follows: For the income of a non-stock, non-profit
Section 27(B) to apply, the hospital must be non-profit corporation to be totally exempt, it must be organized and
which means that no net income or asset accrues to or operated exclusively for educational or charitable
benefits any member or specific person and all the purposes. In such case, it will fall within the coverage of
activities of the hospital are non-profit. On the other hand, Section 30(E) and (G) of the Tax Code. However, if it
Section 30(E) and (G), while providing for an exemption is conducts for-profit activities, like the admission of paying
qualified by the last paragraph which, in turn, provides that patients, it will not be exempt with regard to that particular
activities conducted for profit shall be taxable. Section income. Section 27(B) will apply and the income will be
30(E) and (G) requires that an institution be operated taxed at the preferential rate of 10%.
exclusively for charitable purposes to be completely
exempt from income tax. In this case, however, St. Lukes RMC 67-2012 [October 31, 2012] was issued by the BIR
is not operated exclusively for charitable purposes insofar to implement this decision of the Supreme Court on all
as its revenues from paying patients are concerned. Such private non-profit hospitals and educational institutions
revenue is subject to income tax at 10% under Section starting from January 1, 1998.
27(B).
Q: Is the existence of paying patients
material to the real property tax exemption
Note: This case is very important because it reconciles the
following constitutional and statutory provisions: Section of the building, land and improvements of
28, Article VI (tax exemption of real property actually, St. Lukes?
directly, and exclusively used for religious, charitable or
educational purposes); Section 4(3) Article XIV (tax No. The lands, buildings, and improvements of St.
exemption of income of non-stock, non-profit educational Lukes remain exempt from real property taxes even
institutions used actually, directly, and exclusively for if it admits paying patients. This is consistent with
educational purposes); Section 27(B), Tax Code (10% the ruling in LUNG CENTER OF THE PHILIPPINES V.
preferential tax rate to income of proprietary educational
institutions); Section 30(E) and (G) (tax exemption of the
QUEZON CITY [433 SCRA 119] where the Supreme
income of non-stock non-profit corporations organized and Court held that a charitable institution does not lose
operated exclusively for charitable purposes.). its character as such and its exemption from real
property taxes simply because it derives income
With regard to taxation of real property, the doctrine laid from paying patients
down in LUNG CENTER OF THE PHILIPPINES V. QUEZON CITY
[433 SCRA 119] still holds. The lands, buildings, and Q: If St. Lukes were to lease to private
improvements actually, directly and exclusively used for
religious, charitable and educational purposes shall
persons portions of its property for profit, is
remain exempt from real property taxes even if there is, in the property and the profits exempt from
the case of a hospital, admission of paying patients. If the taxes?
hospital were to lease to private persons portions of its
property for profit, the real property will not be exempt The property will not be exempt from real property
from real property taxes. That’s for real property taxes. taxes and also the profits will not be exempt from
Income taxation is another thing. income tax. Pursuant to the ruling in LUNG CENTER
OF THE PHILIPPINES V. QUEZON CITY [433 SCRA 119],
With regard to income taxation, the statement of the Court
must be noted: “Non-profit does not necessarily mean those portions of real property not actually used for
_________________________________________ charitable purposes shall not be exempt from real
property taxes. Consistent with the ruling in CIR V.
11
Section 30(E), NIRC provides that a non-stock corporation or CA [298 SCRA 83], profits realized from real
association organized and operated exclusively for charitable property by exempt institutions from whatever
purposes is exempt from income tax while Section 30(G) provides source or wherever used are taxable.
that a civic league or organization not organized for profit but
operated exclusively for the promotion of social welfare is likewise
exempt. ---------------------------------------------------------------

(vi) Majority vote of Congress for grant of Section 27.

tax exemption 2. The President shall have the power to veto any
particular item or items in an appropriation,
--------------------------------------------------------------- revenue, or tariff bill, but the veto shall not affect
the item or items to which he does not object.
Article VI.
Section 28.
4. No law granting any tax exemption shall be
---------------------------------------------------------------
passed without the concurrence of a majority of (ix) Non-impairment of jurisdiction of the
all the Members of the Congress. Supreme Court
---------------------------------------------------------------
---------------------------------------------------------------
(vii) Prohibition on use of tax levied for a Article VIII.
Section 5. The Supreme Court shall have the following
special purpose powers:
--------------------------------------------------------------- 2. Review, revise, reverse, modify, or affirm on
appeal or certiorari, as the law or the Rules of
Court may provide, final judgments and orders of
Article VI. lower courts in:
Section 29. b. All cases involving the legality of any
3. All money collected on any tax levied for a tax, impost, assessment, or toll, or any
special purpose shall be treated as a special fund penalty imposed in relation thereto.
and paid out for such purpose only. If the
purpose for which a special fund was created has
been fulfilled or abandoned, the balance, if any,
shall be transferred to the general funds of the ---------------------------------------------------------------
Government. (x) Grant of power to the local government
units to create its own sources of revenue
In determining whether the creation of the OPSF ---------------------------------------------------------------
violate the above provision, the Supreme Court in
OSMENA VS. ORBOS [220 SCRA 703] opined that in
Article X.
order for the funds to fall under the prohibition, it
Section 5. Each local government unit shall have the
must be shown that they were collected as taxes – power to create its own sources of revenues and to levy
as a form of revenue. In this case, while the funds taxes, fees and charges subject to such guidelines and
were referred to as taxes, they were exacted not limitations as the Congress may provide, consistent with
under the power of taxation, but in the exercise of the basic policy of local autonomy. Such taxes, fees, and
the police power of the State. The main objective charges shall accrue exclusively to the local governments.
was not revenue but to stabilize the price of oil and
petroleum products. The OPSF is actually a special
fund. It is segregated from the general fund; and ---------------------------------------------------------------
while it is placed in what the law refers to as a “trust (xiii) No appropriation or use of public
liability account,” the fund nonetheless remains money for religious purposes
subject to the scrutiny and review of the COA. These ---------------------------------------------------------------
measures comply with the constitutional description
of a “special fund.”
Article VI.
Section 29.
---------------------------------------------------------------
2. No public money or property shall be
(viii) President’s veto power on appropriated, applied, paid, or employed, directly
appropriation, revenue, tariff bills or indirectly, for the use, benefit, or support of
--------------------------------------------------------------- any sect, church, denomination, sectarian
institution, or system of religion, or of any priest,
preacher, minister, other religious teacher, or
Article VI. dignitary as such, except when such priest,

preacher, minister, or dignitary is assigned to the Q: How does the principle of “uniformity”
armed forces, or to any penal institution, or relate to the equal protection clause?
government orphanage or leprosarium.
The test of uniformity is based on the requisites for a
valid classification under the equal protection clause.
--------------------------------------------------------------- As held in SISON V. ANCHETA [130 SCRA 654],
2. Constitutional Limitations uniformity of taxation is quite similar to the standard
a) Provisions indirectly affecting taxation of equal protection.
---------------------------------------------------------------
Under the equal protection clause, for a
Q: What are the general (indirect) classification to be valid, it must:
constitutional limitations on the taxing
1. Rest on substantial distinctions;
power? 2. Be germane to the purpose of the law;
3. Not be limited to existing conditions only; and
The general constitutional limitations are: 4. Apply equally to all members of the same class.
1. Due process (Article III, Section 1)
Q: Is there a violation of the uniformity of
2. Equal protection (Article III, Section 1)
3. Religious Freedom (Article III, Section 5) taxation or equal protection when the State
4. Non-Impairment of Contracts (Article gives preferential tax treatment to locators
(Article III, Section 10) inside special economic zones?
--------------------------------------------------------------- No. As held in TIU V. CA [301 SCRA 278], there are

(i) Due Process substantial differences between the big investors
(ii) Equal Protection who are being lured to establish and operate their
--------------------------------------------------------------- industries in the special economic zones and those
business operators outside the zones. One of these
is that the former bring in billion-peso investments
Article III. and thousands of new jobs. The Supreme Court also
Section 1. No person shall be deprived of life, liberty, or stated that the equal protection guarantee does not
property without due process of law, nor shall any person require territorial uniformity of laws.
be denied the equal protection of the laws.
Q: Should tax incentives be uniform for all
Q: How is the “due process” clause applied special economic zones?
to taxation?
Not necessarily. In JOHN HAY V. LIM [414 SCRA
356], at issue was the extension of benefits given to
In PEPSI-COLA BOTTLING COMPANY VS. MUNICIPALITY the Subic SEZ under RA 7227 to the John Hay SEZ
OF T ANAUAN, LEYTE [69 SCRA 460], the Supreme via a proclamation, the Supreme Court ruled that tax
Court held that taking of property without due exemptions must be strictly and expressly provided
process of law may not be passed over under the for and that the power to grant exemption is only
guise of taxing power, except when the latter is within Congress. The same rationale was used with
exercised lawfully as when: respect to locators in the Clark SEZ in the case of
COCONUT OIL REFINERS ASSOCIATION V. TORRES [465
1. the tax is for a public purpose; SCRA 48].
2. the rule on uniformity of taxation is observed;
3. either the person or property taxed is within the The implication of these two cases is that special
jurisdiction of the government levying the tax; economic zones can have different tax incentives.
and However, it must be noted that by virtue of RA 9400,
4. in the assessment and collection of taxes notice the same incentives have been granted to Clark,
and opportunity for hearing are provided John Hay, Poro Point and Morong SEZs.

Q: Does the Attrition Law (RA 9335), which Q: Does RR 17-99 (implementing RA 8240
gives incentives to BOR/BOC employees, but applying the higher tax rule on the
violate the equal protection clause? January 1, 2000 increase)13 violate the equal
protection clause?
No. In ABAKADA GURO PARTY-LIST V. PURISIMA [562
SCRA 251], the Supreme Court held that there was Yes. In CIR V. FORTUNE TOBACCO [SEPTEMBER 28,
no violation of the equal protection clause. The 2011], the Supreme Court ruled that the higher tax
equal protection clause recognizes a valid rule only applies on the transition period. To
classification, that is, a classification that has a implement the higher tax rule on the January 1,
reasonable foundation or rational basis and not 2000 increase would violate the rule of uniformity
arbitrary. The subject of the Attrition Law was since brands belonging to the same category would
revenue generation and collection of the BIR and be imposed with different tax rates.
BOC, thus, the incentives and sanctions should
logically pertain to them and not to other government Q: Does the adoption of a gross system of
agencies. This has been reiterated in the recent income taxation to compensation income
case of BOCEA V. TEVES [G.R. 181704, DEC. 6,
and a system of net income taxation as
2011].
regards professional and business income
Q: Does the classification freeze scheme12 violate the rule on uniformity?
under RA 9334 violate the equal protection
No. In SISON V. ANCHETA [130 SCRA 654], the
clause?
Supreme Court noted that taxpayers who are
No. In British American Tobacco v. Camacho
recipients of compensation income have practically
[562 SCRA 511], the Supreme Court held that the
no overhead expenses and thus, they should not be
classification freeze does not violate the equal
entitled to make deductions for income tax
protection clause as it passes the rational basis test
purposes. On the other hand, professionals and
and is meant to improve the efficiency and effectivity
businessmen have no uniformity in terms of costs or
of the tax administration over sin products while
expenses necessary to produce their income. Thus,
trying to balance the same with state interests. It
it would be unjust to disregard such disparities and
addresses the concerns in the simplification of tax
giving them all zero deductions and impose on all
administration of sin products, elimination of
the same tax rates.
potential areas for abuse and corruption in tax
collection, buoyant and stable revenue generation,
and ease of projection of revenues. Q: Does the rule on uniformity require
territorial uniformity?
No. As held in TIU V. CA [301 SCRA 278], the equal

protection guarantee does not require territorial
uniformity of laws. In VILLANUEVA V. CITY OF ILOILO
[26 SCRA 578], in determining whether the
imposition of a municipal license tax on tenement
houses violates the equal protection clause as such
taxes are not imposed in other cities, the Supreme
_________________________________________ _________________________________________
12 13
Under the classification freeze scheme, after a brand of RA 8240 which took effect January 1, 1997 provides for a shift
cigarette is classified based on its current net retail price, the from ad valorem taxes to specific taxes on cigarettes. The law
classification is frozen and only Congress can thereafter reclassify provided that (1) the specific tax due from any brand of cigarette
the same. Under this scheme, it would be possible that over time within 3 years shall not be lower than the tax due before the new
the net retail price of a previously classified brand would increase law (higher tax rule) and (2) the specific tax rate shall be
to a point that its net retail price pierces tha tax bracket to which it increased by 12% on January 1, 2000. In effect, what RR 17-99
was previously classified byt nonetheless it would still be subject did was to implement the higher tax rule for the January 1, 2000
to the excise tax rate under the lower tax bracket. increase.

Court ruled in the negative as the rule on uniformity thereof. The free exercise and enjoyment of religious
does not require taxes for the same purpose should profession and worship, without discrimination or
be imposed in different territorial subdivisions at the preference, shall forever be allowed. No religious test shall
same time. It is enough that the tax falls equally and be required for the exercise of civil or political rights.
impartially on all owners or operations of tenement
houses similarly classified or situated.
Q: A municipality passed an ordinance
The statement made by the Court in CIR V. which imposes a tax on the sale of bibles. Is
LINGAYEN GULF [164 SCRA 27] to the effect that “a the ordinance valid?
tax is uniform when it operates with the same force
and effect in every place where the subject of it is No. As held in AMERICAN BIBLE SOCIETY VS. CITY OF
found” should not be taken to mean that territorial M ANILA [101 SCRA 386], the municipal ordinances
uniformity is required. imposing a tax on the sale of bibles were declared
unconstitutional as it would impair the free exercise
Q: A municipal ordinance was passed and enjoyment of its religious profession and
worship, as well as its rights of dissemination of
imposing a tax on the sale of soft drinks or
religious beliefs.
carbonated beverages by
agents/consignees of dealers doing ---------------------------------------------------------------
business outside the municipality. Is there a (iv) Non-impairment of obligations of
violation of the equal protection clause? contracts
---------------------------------------------------------------
Yes. As held in PEPSI-COLA V. CITY OF BUTUAN [24
SCRA 789], under the said municipal ordinance,
sales of local dealers not acting for or on behalf of Article III.
merchants established outside the municipality Section 10. No law impairing the obligation of contracts
would be exempt from the tax while those acting as shall be passed.
agents and consignees of dealers outside the
municipality would have to pay the tax. The
Q: When can the non-impairment clause be
Supreme Court ruled that this was a violation of the rightly invoked against the withdrawal of a
uniformity required by the Constitution. tax exemption?
Q: A tax ordinance was passed expressly In PROVINCE OF MISAMIS ORIENTAL V. CAGAYAN

ELECTRIC [181 SCRA 38], the Supreme Court held
providing for the entity which shall be
that the non-impairment clause may be rightly
subject to tax. Is there a violation of the invoked against contractual tax exemptions.
equal protection clause? Contractual tax exemptions are those agreed by the
taxing authority in contracts, such as those
Yes. In ORMOC SUGAR V. TREASURER [22 SCRA contained in government bonds or debentures,
603], the Supreme Court held that a reasonable lawfully entered into by them under enabling laws in
classification should be in terms applicable to future which the government, acting in its private capacity,
conditions. The taxing ordinance should not be sheds its cloak of authority and waives its
singular and exclusive as to exclude any government immunity (see also MERALCO V.
subsequently established entity from the coverage of PROVINCE OF LAGUNA [306 SCRA 750])
the tax.
What constitutes an impairment of the obligation of
--------------------------------------------------------------- contract is the revocation of an exemption which is
(iii) Religious Freedom founded on a valuable consideration because it
--------------------------------------------------------------- takes the form and essence of a contract.
Article III. Q: Is a tax exemption embodied in a

Section 5. No law shall be made respecting an legislative franchise a contractual tax
establishment of religion, or prohibiting the free exercise

exemption (such that it impairs the Q: What are the characteristics or elements
obligations of contracts when revoked)? of a tax? (essential elements of a tax)
No. As held in PROVINCE OF MISAMIS ORIENTAL V. 1. Enforced contributions

CAGAYAN ELECTRIC [181 SCRA 38], a franchise does 2. Generally payable in money
not take the nature of a contractual tax exemption, 3. Proportional in character, since taxes are
which cannot be revoked without impairing the based on one’s ability to pay
obligations of contracts. It is a unilateral tax 4. Levied on persons, property, or exercise of a
exemption. A legislative franchise can be withdrawn right or privilege
through amendment or repeal. (see also CAGAYAN 5. Levied by the State having jurisdiction
ELECTRIC POWER V. CIR [138 SCRA 629]; LEALDA 6. Levied by the legislature
ELECTRIC V. CIR [7 SCRA 928].) 7. Levied for a public purpose
8. Paid at regular periods or intervals
---------------------------------------------------------------
J. Stages of taxation Q: Can stockholders be held personally
1. Levy liable for the unpaid taxes of a dissolved
2. Assessment and collection corporation?
3. Payment
No, a corporation is vested by the law with a
4. Refund
personality that is separate and distinct from those
--------------------------------------------------------------- of the persons composing it.
Q: Enumerate the three (3) stages or However, they may be held liable for the unpaid
aspects of taxation. Explain each. taxes:
a. If it appears that the corporate assets have
The three stages or aspects of taxation are: passed into their hands
b. When the stockholders have unpaid
1. Levy – This refers to the enactment of a law by subscriptions to the capital of the
Congress imposing a tax corporation (liable only to the extent of their
2. Assessment and collection – This is the act of unpaid subscriptions).
administration and implementation of the tax law ---------------------------------------------------------------
by the executive department through the L. Requisites of a Valid Tax
administrative agencies ---------------------------------------------------------------
3. Payment – This is the act of compliance by the
taxpayer including whatever remedies are
Q: What are the requisites of a valid tax?
available to him under the law
Note: Refund is one of the remedies of the taxpayer. It is

1. The tax should be within the jurisdiction of
not a separate stage of taxation. It is deemed included in the taxing authority
the stage of payment. 2. It must be for a public purpose
--------------------------------------------------------------- 3. The rule of taxation must be uniform
K. Definition, nature and characteristics of 4. It guarantees against injustice to individuals,
especially by way of notice and opportunity
taxes
to be heard be provided.
--------------------------------------------------------------- 5. It must not impinge on the inherent and
Constitutional limitations on the power of
Q: Define taxes. taxation.
Taxes are enforced proportional contributions from

persons and property, levied by the state by virtue of
its sovereignty for the support of the government
and for all its public needs.

--------------------------------------------------------------- by the private individuals or

M. Tax as distinguished from other forms of government entities
exactions
1. Tariff
2. Toll ---------------------------------------------------------------
3. License fee 3. License Fee
4. Special assessment ---------------------------------------------------------------
5. Debt
--------------------------------------------------------------- Q: Distinguish a tax from a license fee.
--------------------------------------------------------------- See table below.

1. Tariff
TAX LICENSE FEE
---------------------------------------------------------------
Purpose Imposed for Imposed for regulatory
revenue purposes
Q: Distinguish a tax from a tariff? purposes
A tax is an all embracing term to include various Basis Imposed under Imposed under the
kinds of enforced contributions imposed upon the power of police power of the
persons for the attainment of public purposes, while taxation State
a tariff should be understood to mean a kind of tax
imposed on articles which are traded internationally. Amount No limit as to Amount of license fee
the amount of that can be collected
--------------------------------------------------------------- tax is limited to the cost of
2. Toll the license and the
--------------------------------------------------------------- expenses of police
surveillance and
Q: Distinguish a tax from a toll. regulation
See table below. Time of Normally paid Normally paid before

payment after the start the commencement of
TAX TOLL of business the business
Definition Enforced Sum of money for
proportional the use of Effect of Failure to pay Failure to pay the
contributions something, a non- the tax does license fee makes the
from persons consideration which payment not make the business illegal
and property is paid for the use of business illegal
a property which is of
a public nature
As held in the case of PROGRESSIVE DEVELOPMENT
Basis A demand of A demand of CORPORATION VS. QUEZON CITY [172 SCRA 629], the
sovereignty proprietorship term "tax" frequently applies to all kinds of exactions
of monies which become public funds. It is often
Amount No limit as to Amount of toll loosely used to include levies for revenue as well as
the amount of depends upon the levies for regulatory purposes such that license fees
tax cost of construction are frequently called taxes although license fee is a
or maintenance of legal concept distinguishable from tax: a license fee
the public is imposed in the exercise of police power primarily
improvement used for purposes of regulation, while a tax is imposed
under the taxing power primarily for purposes of
Authority May be May be imposed by raising revenues (see also COMPANIA GENERAL DE
imposed only the government or

TABACOS DE FILIPINAS V. CITY OF M ANILA [8 SCRA be of sufficient amount to include the cost of
367]. ) licensing, regulating and surveillance.
Q: What is the importance of determining Q: Does the above rule apply to all types of
whether a particular imposition is a tax or a license fees?
license fee?
No. In the case of license fees for non-useful
It is necessary because some limitations apply only occupations, wider discretion in fixing the amount is
to one and not to the other, and for the reason that given to municipal corporations and the exaction
exemption from taxes may not include exemption may be very large without necessarily being a tax.
from license fees. This is so because municipal corporations are
Q: What are the three types of license fees? authorized to enact ordinances to provide for the
health and safety and promote the morality, peace
The three types of license fees are: and general welfare of its inhabitants. Thus, in the
case of PHYSICAL THERAPY ORGANIZATION OF THE
1. License for the regulation of useful occupation or PHILIPPINES V. MUNICIPAL BOARD OF THE CITY OF
enterprises M ANILA [101 PHIL. 1142], the Supreme Court found
2. License for the regulation or restriction of non- the imposed license fee as reasonable as the
useful occupation or enterprises practice of hygienic and aesthetic massage not as a
14
3. License for revenue only useful and beneficial occupation which will promote
and is conducive to public morals.
(See VICTORIAS MILLING CO. VS. CIR [22 SCRA 13])
---------------------------------------------------------------
Q: What is a license tax and how do you 4. Special Assessment
distinguish it from a license fee? ---------------------------------------------------------------
As explained by the Supreme Court in the case of
VICTORIAS MILLING CO. VS. CIR [22 SCRA 13], the Q: Distinguish a tax from a special
term "license tax" has not acquired a fixed meaning. assessment.
It is often "used indiscriminately to designate
impositions exacted for the exercise of various See table below.
privileges." It does not refer solely to a license for
regulation. In many instances, it refers to "revenue- TAX SPECIAL
raising exactions on privileges or activities." On the ASSESSMENT
other hand, license fees are commonly called taxes. Definition Enforced An enforced
But, legally speaking, license taxes are "for the proportional proportional
purpose of raising revenues," in contrast to license contribution from contribution from
fees which are imposed "in the exercise of police persons and owners of lands
power for purposes of regulation." property especially or
peculiarly benefited
Q: What should be the extent of the exaction by public
for it to be considered a license fee? improvements
As held in the case of G.A. CUUNJIENG V. PATSTONE Basis Based on Based wholly on
[42 PHIL 818], the amount of the exaction must only necessity benefits
Subject Levied on: Levied only on land

_________________________________________ (1) persons
(2) Property
14
This shouldn’t be a type of license fee. It is instead a license (3) Acts
tax.
Scope Has general It is exceptional

application both as to time and individuals

place
Prescription Prescriptive Civil Code
Person It is a personal Not a personal periods for governs the
Liable liability of the liability of the
tax are prescriptive
taxpayer person assessed;
his liability is determined period of debts
limited only to the under the
land involved NIRC
See THE APOSTOLIC PREFECT OF THE MOUNTAIN

Q: Distinguish a tax from a penalty.
PROVINCE V. TREASURER OF BAGUIO [71 PHIL. 547]
--------------------------------------------------------------- TAX PENALTY

5. Debt Definition Enforced Sanction imposed
--------------------------------------------------------------- proportional as punishment for
contributions violation of a law or
Q: Distinguish a tax from a debt. from persons acts deemed
and property injurious; violation
See table below. of tax laws may
give rise to
TAX DEBT imposition of
Basis Based on Based on penalty
law contract or
Purpose Intended to Designed to
judgment raise revenue regulate conduct
Effect of Taxpayer No
non- may be imprisonment Authority May be May be imposed by
payment imprisoned for failure to pay imposed only (1) Government; or
for his failure a debt by the (2) Private
to pay the government individuals or
tax entities
Mode of Generally May be payable

payment payable in in money, Q: Distinguish a tax from a subsidy?
money property and
services A subsidy is a legislative grant of money in aid of a
private enterprise deemed to promote a public
Assignability Not Can be welfare. It is not a tax although it may be necessary
assignable assigned to raise the money to pay the subsidy by means of a
tax.
Interest Does not Draws interest if
Q: Distinguish a tax from customs duties
draw interest stipulated or
and fees
unless delayed
delinquent Customs Duties and fees are those charged upon
commodities on their being imported in or exported
Authority Imposed by Can be from the country. Customs duties are taxes but a tax
public imposed by is a broader term to include not only customs duties
authority private but other taxes as well.

Q: Distinguish a tax from revenue power (e.g. real estate tax)
Revenue is a broad term that includes not only Excise or Taxes laid upon the
taxes but income from other sources as well. privilege tax manufacture, sale or
consumption of commodities
--------------------------------------------------------------- within the country; upon
N. Kinds of taxes licenses to pursue certain
1. As to object occupations and upon
a) Personal, capitation, or poll tax corporate privileges (e.g.
b) Property tax value-added tax)
c) Privilege tax
2. As to burden or incidence Q: What are the classes or kinds of tax
a) Direct according to who bears the burden?
b) Indirect
3. As to tax rates See table below.
a) Specific
b) Ad valorem Direct Taxes wherein both the tax
c) Mixed liability as well as the impact
4. As to purposes or burden of the tax falls on
a) General or fiscal the same person (e.g.
b) Special, regulatory, or sumptuary corporate and individual
5. As to scope or authority to impose income tax)
a) National – internal revenue taxes
Indirect Taxes wherein the tax liability
b) Local – real property tax, municipal falls on one person but the
tax burden thereof may be
6. As to graduation shifted or passed to another.
a) Progressive (e.g. value-added tax,
b) Regressive percentage taxes)
c) Proportionate
---------------------------------------------------------------
Q: Classify the taxes imposed under the Tax
Q: What are the classes or kinds of tax Code into direct and indirect taxes.
according to subject or object?
Income tax, estate tax and donor’s tax are
See table below. considered as direct taxes. On the other hand,
value-added tax, excise tax, other percentage tax
Personal, Taxes of a fixed amount upon and documentary stamp tax are indirect taxes.
capitation, or all persons of a certain class
poll tax within the jurisdiction of the
taxing power without regard Q: What are the classes or kinds of tax
to the amount of their according to the determination of amount or
property or the occupations of tax rates?
businesses in which they may
be engaged (e.g. community See table below.
tax)
Specific Tax which imposes a specific
Property Tax Taxes assessed on all sum by the head or number
property or all property of a or by some standard of
certain class within the weight or measurement and
jurisdiction of the taxing which requires no

assessment beyond a listing tax)

and classification of the
subjects to be taxed (e.g. Regressive Taxes imposed where the tax
taxes on distilled spirits) rate decreases as the tax
base increases.
Ad Valorem Tax upon the value of the
article or thing subject of Mixed The tax rates are partly
taxation (e.g. real estate tax) progressive and partly
regressive
Mixed A choice between ad valorem
or specific depending on the Proportionate The tax rates are fixed (in
condition attached amounts or in percentage) on
a flat tax base) (e.g. real
Q: What are the classes or kinds of tax estate tax)
according to purpose?
See table below.
General or fiscal Taxes levied for the general

or revenue or ordinary purposes of
Government (e.g. income tax,
value-added tax)
Special, Taxes levied for a special

regulatory, or purpose (e.g. protective
sumptuary tariffs, custom duties)
Q: What are the classes or kinds of tax

according to the scope or imposing
authority?
See table below.
National Taxes levied by the National

(internal Government (e.g. national
revenue taxes) internal revenue taxes)
Local (real Taxes levied by the local

property tax, governments subject to such
municipal tax) guidelines and limitations as
the Congress may provide
(e.g. real estate tax)
Q: What are the classes or kinds of tax

according to graduation?
See table below.
Progressive Taxes imposed where the tax

rate increases as the tax
base increases (e.g. income

--------------------------------------------------------- compensation, capital gains, passive income, or

II. NIRC other income subject to final withholding tax) or
(c) both global and schedular may be applied
---------------------------------------------------------- depending on the nature of the income realized
by the taxpayer during the year.
Note: This Chapter will include A. Income Tax, B. Estate
Tax, C. Donor’s Tax, E. Value-Added Tax and F. Tax
Remedies. Other percentages taxes, Excise taxes and The current method of taxation under the Tax Code
documentary stamp tax are not discussed as they are belongs to a system which is partly scheduler and
excluded from the bar coverage. partly global.
---------------------------------------------------------- Q: How do you distinguish “schedular

A. INCOME TAX treatment from “global treatment” as used
---------------------------------------------------------- in income taxation?
--------------------------------------------------------------- Under the schedular tax system, the various types of

income (i.e. compensation; business/professional
1. Income Tax Systems
income) are classified accordingly and are accorded
a) Global Tax System different tax treatments, in accordance with
b) Schedular Tax System schedules characterized by graduated tax rates.
c) Semi-schedular or semi-global tax Since these types of income are treated separately,
system the allowable deductions shall likewise vary for each
--------------------------------------------------------------- type of income.
Q: What are the kinds of income tax On the other hand, under the global tax system, all
systems? income received by the taxpayer are grouped
together, without any distinction as to type or nature
The types of income tax systems are as follows: of the income, and after deducting therefrom
expenses and other allowable deductions, are
1. Global Tax System – where the taxpayer is subjected to tax at a graduated or fixed rate (see
required to lump up all items of income earned TAN VS. DEL ROSARIO [OCTOBER 3, 1994]).
during a taxable period and pay under a single
set of income tax rates on these different items Note: The Philippines had adopted both the global system
of income. and the schedular system of taxation. The global system
can be found in the income taxation of corporations. The
Tax Code subjects them to either the regular corporate
Note: Simply put, one rate for all types of gross
income tax or minimum corporate income tax irrespective
income.
of the tax base. On the other hand, the schedular system
can be found in the income taxation of individuals where
2. Schedular Tax System – where there are the tax rates are progressive in character.
different tax treatments of different types of
income so that a separate tax return is required ---------------------------------------------------------------
to be filed for each type of income and the tax is 2. Features of the Philippine Income Tax
computed on a per return or per schedule basis.
Law
Note: Simply put, varying taxes are imposed on a) Direct tax
passive income. b) Progressive
c) Comprehensive
3. Semi-Schedular or Semi-Global Tax System d) Semi-schedular or semi-global tax
– where the tax system is either (a) global (e.g. system
taxpayer with compensation income not subject ---------------------------------------------------------------
to final withholding tax or business or
professional income or mixed income –
compensation and business or professional
income) or (b) schedular (e.g. taxpayer with

Q: What are the features of the Philippine 4. Types of Philippine Income Tax
Income Tax system? ---------------------------------------------------------------
The Philippine tax system is: Q: What are the types of Philippine Income
Tax (under Title II of the NIRC)?
1. Income tax is a direct tax because the tax
burden is borne by the income recipient The types of Income tax under Title II of the NIRC
upon whom the tax is imposed. are:
2. Income tax is a progressive tax since the 1. Graduated income tax on individuals
tax base increases as the tax rate increases. 2. Normal corporate income tax on corporations
3. The Philippines has adopted the most 3. Minimum corporate income tax on corporations
comprehensive system of imposing 4. Special income tax on certain corporations (e.g.
income tax by adopting the citizenship private educational institutions, FCDUs, and
principle, resident principle and the source international carriers)
principle. 5. Capital gains tax on sale or exchange of unlisted
4. The Philippines follows the semi-schedular shares of stock of a domestic corporation
or semi-global system of income taxation. classified as a capital asset
6. Capital gains tax on sale or exchange of real
--------------------------------------------------------------- property located in the Philippines and classified
3. Criteria in imposing Philippine income tax as a capital asset
a) Citizenship principle 7. Final withholding tax on certain passive
b) Residence principle investment incomes
c) Source principle 8. Fringe benefit tax
9. Branch profit remittance tax; and
---------------------------------------------------------------
10. Tax on improperly accumulated earnings.
Q: What are the criteria in imposing
---------------------------------------------------------------
Philippine income tax?
5. Taxable Period
1. Citizenship or nationality principle – A ---------------------------------------------------------------
citizen of the Philippines is subject to
Philippine income tax (a) on his worldwide Note: This is apparently misplaced in the Syllabus. For
better understanding of the concepts, I moved this to the
income, if he resides in the Philippines (b) discussion on Income right before Methods of Accounting.
only on his Philippine source income, if he
qualifies as a non-resident citizen where his
foreign-source income shall be tax-exempt. ---------------------------------------------------------------
2. Residence or domicile principle – An alien 6. Kinds of Taxpayers
is subject to Philippine income tax because ---------------------------------------------------------------
of his residence in the Philippines. A
resident alien is liable to pay Philippine Note: It is important to know the different kinds of
income tax only from his income from taxpayers in order to determine the following: (1) gross
income for tax purposes (2) exclusions from gross income;
Philippine sources but is tax-exempt from (3) exemptions; (4) deductions and (5) income tax rates.
foreign-source income
3. Source of income principle – An alien is The only two exceptions where knowing the taxpayer is
subject to Philippine income tax because he immaterial are where the transaction involves (1) sales of
derives income from sources within the shares of stock of a domestic corporation because it is
Philippines. Thus, a non-resident alien or subject to ½ of 1% of stock transaction tax or 5%/10%
non-resident foreign corporation is liable to capital gains tax on net capital gain whether the seller is
pay Philippine income tax on income from an individual, citizen or alien or a corporation, domestic or
sources within the Philippines foreign and (2) where the real property sold is a capital
asset located in the Philippines which is subject to 6%
capital gains tax.
---------------------------------------------------------------

Q: What are the kinds of income taxpayers?

Note: It is important to know the classification of Philippine
The kinds of income taxpayers under Title II of the citizens on whether they are resident citizens or non-
NIRC are: resident citizens to determine what incomes are subject to
tax in the Philippines. Resident citizens are taxable on all
income derived from sources within and without the
A. Individuals Philippines while non-resident citizens are taxable only on
1. Citizens (Section 24, NIRC) income derived from sources within the Philippines. (see
a. Resident Citizens Section 22, Tax Code)
b. Nonresident Citizens
2. Aliens Q: Who is a resident citizen?
a. Resident Aliens (Section 24, NIRC)
b. Nonresident Aliens (Section 25, A resident citizen is a citizen of the Philippines
NIRC) without the intention of transferring his physical
i. Engaged in trade or business in presence abroad whether to stay permanently or
the Philippines temporarily as an overseas contract worker.
ii. Not engaged in trade or
business in the Philippines Q: Who are citizens of the Philippines?
3. Estates and Trusts (Section 60, NIRC)
a. Revocable trust The following are considered citizens of the
b. Irrevocable trust Philippines:
B. Corporations
1. Domestic Corporations (Section 27, 1. Those who are citizens of the Philippines at
NIRC) the time of the adoption of the Constitution
2. Foreign Corporations (Section 28, 2. Those whose fathers or mothers are citizens
NIRC) of the Philippines
a. Resident foreign corporations 3. Those born before January 17, 1973 of
b. Nonresident foreign corporations Filipino mothers, who elect Philippine
3. Partnerships Citizenship upon reaching the age of
a. Taxable partnership (Section 73(D), majority; and
NIRC) 4. Those who are naturalized in accordance
b. Exempt partnership with law
i. General Professional
Partnership (Section 26, NIRC) Read Section 22(E), Tax Code
ii. Joint venture or consortium
undertaking construction activity
or engaged in petroleum Q: Who is a non-resident citizen?
operations with operating
contract with the government The term “non-resident citizen” means a citizen of
the Philippines:
Note: The depiction of the kinds of taxpayers in the 2013
Bar Syllabus is inaccurate. It is suggested that you classify 1. who establishes to the satisfaction of the
the taxpayers in the manner above. Commissioner the fact of his physical
presence abroad with intention to reside
--------------------------------------------------------------- therein
a) Individual Taxpayers 2. who leaves the Philippines during the
--------------------------------------------------------------- taxable year to reside abroad either as an
immigrant or for employment on a
permanent basis
---------------------------------------------------------------
3. one who works and derives income from
(i) Citizens abroad and whose employment thereat
(a) Resident citizens requires him to be physically present
(b) Non-resident citizens abroad most of the time during the taxable
--------------------------------------------------------------- year.

4. who has been previously considered a non- Ruling 33-00 [September 5, 2000], however, the CIR
resident citizen and who arrives in the held that for overseas contract workers, the time spent
Philippines at any time during the taxable abroad is not material as all that is required is for the
year to reside permanently in the Philippines worker’s employment contract to pass through and be
registered with the POEA.
with respect to his income derived from
sources abroad
Q: If a natural-born Philippine citizen who
[See Section 22(E), NIRC] became a citizen of the United States is later
on granted Philippine dual citizenship under
Note that Section 2, RR No. 01-79 [January 8, RA 9225, is he required to pay taxes for
1979] enumerates who are deemed “non-resident income earned in the United States?
citizens:”
No. In BIR Ruling DA-095-05 [March 29, 2005], the
1. Immigrant – one who leaves the Philippines CIR held that such a person would be a non-resident
to reside abroad as an immigrant for which a citizen, and hence, will not be required to pay
foreign visa has been secured Philippine tax for income earned in the United
2. Permanent employee – one who leaves the States.
Philippines to reside abroad for employment
on a more or less permanent basis ---------------------------------------------------------------
3. Contract worker – one who leaves the (ii) Aliens
Philippines on account of a contract of (a) Resident Aliens
employment which is renew from time to (b) Non-resident Aliens
time under such circumstance as to require
(1) Engaged in trade or business
him to be physically present abroad most of
the time (not less than 183 days) (2) Not engaged in trade or business
---------------------------------------------------------------
Q: Should a non-resident citizen file an
Note: It is important to know the classification of alien
income tax return or information return taxpayers to know (1) the tax rates to be imposed on their
covering his income earned abroad? income derived from sources within the Philippines and (2)
allowable exemptions and deductions.
No. Previously, under RR No. 01-79, non-resident
citizens were required to do so. In RR No. 9-99, non- As to (1): Tax rates – A non-resident alien not engaged in
resident citizens were required to file an information trade or business within the Philippines is subject to a flat
return. However, under RR 05-01 [July 31, 2001], tax of 25% on income within the Philippines. (see Section
25(B), Tax Code). A resident alien is or non-resident alien
non-resident citizens are no longer required to file engaged in trade or business is subject to the graduated
the same on their income derived from sources income tax rates (see Section 23, Tax Code)
outside the Philippines.
As to (2): Deductions – Resident aliens can avail of
Q: What is meant by the phrase “most of the deductions while non-resident aliens not engaged in trade
time” as used in determining whether a or business cannot avail of deductions.
citizen who derives income from abroad and Exemptions – Resident aliens are allowed personal and
is physically present abroad is a non- additional exemptions while non-resident aliens engaged
resident? in trade or business in the Philippines are entitled to
personal exemptions only by way of reciprocity and not to
RR No. 01-79 states that to be physically present additional exemptions.
abroad most of the time during the taxable year, a
contract worker must have been outside the Read Section 22(F) and (G), Tax Code
Philippines for not less than 183 days during such
taxable year. Q: Who is a resident alien?
Note: As can be seen from the wording of RR No. 01-79, A resident alien is an individual whose residence is
“most of the time” applies to a contract worker. In BIR within the Philippines and who is not a citizen

RR 2 provides that an alien who has acquired

Q: How is the residency of an alien residence in the Philippines retains his status as a
determined? resident until he abandons the same and actually
departs from the Philippines. An intention to
An alien is considered a non-resident if he stays change his residence does not change his status as
here for a definite short period of time. a resident alien to that of a nonresident alien.
An alien will be considered a resident if the stay here Q: Who is a non-resident alien?
is either:
A non-resident alien is an individual:
1. definite and extended;
2. indefinite 1. whose residence is not within the Philippines; and
2. who is not a citizen thereof
An alien actually present in the Philippines who is
not a mere transient or sojourner is a resident of the Note: Determination is by his intention with regard to the
Philippines for purposes of the income tax. length and nature of his stay (see Section 5, RR 2).
Again, remember, that an alien is considered a non-
resident if he stays here for a definite short period of
In GARRISON V. CA [JULY 19, 1990], in resolving the time.
contention of US nationals that they cannot be
considered resident aliens as they intend to go back
Q: What are two kinds of non-resident
to the US on termination of their employment in the
Philippines, the Supreme Court held that what the aliens?
law requires is merely physical or bodily presence in
a given place for a period of time, not the intention to 1. Engaged in trade, business, or the practice
make it a permanent place of abode. of a profession in the Philippines
2. Not engaged in trade business, trade or
The Supreme Court further held that, as laid clearly exercise of a profession within the
in RR No. 2, whether an alien is a transient or not is Philippines
determined by his intentions with regard to the
length and nature of his stay. A mere floating Read Section 25(A)(1), Tax Code
intention indefinite as to time, to return to another
country is not sufficient to constitute him as a Q: How do you determine if a non-resident
transient. If he lives in the Philippines and has no alien is engaged in trade or business?
15
definite intention as to his stay, he is a resident.
One who comes to the Philippines for a definite Once a taxpayer is determined to be a non-resident
purpose, which in its nature may be promptly alien, the test to determine whether the alien is a
16
accomplished, is a transient. But if his purpose is non-resident alien engaged in trade or business is
of such a nature that an extended stay may be whether his total aggregate stay for a taxable year
necessary for its accomplishment, and to that end exceeds 180 days.
the alien makes the Philippines his temporary home,
he becomes a resident, although he intends to ---------------------------------------------------------------
17
return to his domicile abroad. (iii) Special class of individual employees
(a) Minimum wage earner
Q: When is the residence of an alien ---------------------------------------------------------------
considered lost?
Section 22(GG) and (HH), Tax Code
_________________________________________
Note: This is not a kind of taxpayer. A minimum wage
15
In other words, stay is indefinite. worker is actually a resident citizen only that it is exempt
16
In other words, the stay is for a definite short period of time. from income tax.
17
In other words, the stay is definite but extended.

Q: Is the income of minimum wage earners Read Section 61, Tax Code
subject to the graduated income tax rates?
Q: To whom shall the income of a trust be
No. Minimum wage earners shall be exempt from taxable to?
the payment of income tax on their taxable income.
Further, their holiday pay, overtime pay, night shift If the trust instrument is irrevocable, the income
differential pay, and hazard pay received by them shall be taxable to the fiduciary. If the trust
shall likewise be exempt from income tax (see 21
instrument is revocable, the income shall be
Section 24, Tax Code as amended by RA 9504) taxable to the grantor.
--------------------------------------------------------------- Q: Is the tax imposed on trusts applicable to

e) Estates18 and trusts19 all trusts?
---------------------------------------------------------------
No. If the trust were an employee’s trust which
Note: This is discussed first because they should be forms part of an employer’s pension, stock or profit-
properly treated as individuals as their taxable income is sharing plan that complies with the requirements of
computed in the same manner and on the same basis as tax exemption under Section 60(B) the NIRC, its
in the case of an individual (see Section 61, Tax Code)
income would be exempt from income tax.
Q: Define estate for purposes of income ---------------------------------------------------------------
taxation. (b) Corporations
The Tax Code does not provide a definition.
---------------------------------------------------------------
However, Atty. Domondon suggests that the word
“estate” refers to the mass of properties and assets Read Section 22(B), Tax Code
left behind by the deceased. The income that is
subject to income taxation is the “income received ---------------------------------------------------------------
by estates of deceased persons during the period of (i) Domestic Corporations
administration or settlement of the estate.” (see (ii) Foreign Corporations
20
Section 60, Tax Code) (a) Resident foreign corporations
(b) Non-resident foreign corporations
Q. How are the incomes of estates and ---------------------------------------------------------------
trusts taxed?
Read Section 22(C), (D), (H) and (I), Tax
The taxable income of estates and trusts is
computed in the same manner and on the same Code
basis as in the case of an individual subject to
Note: It is important to know the classification of Philippine
certain exceptions
citizens on whether they are domestic corporations or
foreign corporations to determine what incomes are
subject to tax in the Philippines. A domestic corporation is
_________________________________________
_________________________________________
18
An estate is created by operation of law, when an individual
21
dies, leaving properties to his compulsory or other heirs. The trust instrument is “revocable” where at any time the
19
A trust is a legal arrangement whereby the owner of the power to revest in the grantor title to any part of the corpus of the
property (the trustor) transfers ownership to a person (the trustee) trust is vested:
who is to hold and control the property according to the owner’s a. in the grantor, either alone or in conjunction with any
instructions, for the benefit of a designated person(s) (the person not having a substantial adverse interest in the
beneficiary). Legal title to the trust property is vested in the trustee disposition of such part of the corpus or the income
while equitable title belongs to the beneficiary. therefrom
20
To illustrate by way of example: A died leaving a condo unit b. in any person not having a substantial adverse interest in
which he rents out. The rentals that would accrue prior to the the disposition of such part of the corpus or the income
settlement of A’s estate would be subject to income tax. therefrom, the income of such part of the trust.

taxed on its income from sources within and without the tax of 10%. ABC argues that following the
Philippines, but a foreign corporation is taxed only on its principal-agent relationship theory, ABC is a
income from sources within the Philippines.
resident foreign corporation subject only to
It is important to know the kinds of foreign corporations for the 10 % intercorporate final tax on
income taxation purposes to determine the allowable dividends received from a domestic
deductions. While a resident foreign corporation is taxable corporation. Is ABC correct?
on income solely from sources within the Philippines, it is
permitted to deductions from gross income but only to the
extent connected with income earned in the Philippines.
No. The general rule that a foreign corporation is the
On the other hand, non-resident foreign corporations same juridical entity as its branch office in the
cannot avail of deductions. (see N.V. REEDERIJ Philippines cannot apply here. This rule is based on
“AMSTERDAM” VS. CIR [JUNE 23, 1988]) the premise that the business of the foreign
corporation is conducted through its branch office,
Q: Enumerate the kinds of corporate following the principal agent relationship theory. It is
taxpayers and define each. understood that the branch becomes its agent here.
So that when the foreign corporation transacts
A corporation is itself a taxpaying entity and business in the Philippines independently of its
speaking generally, for purposes of income tax, branch, the principal-agent relationship is set aside.
corporations are classified into (a) domestic The transaction becomes one of the foreign
corporations and (b) foreign corporations. corporation, not of the branch. Consequently, the
Foreign corporations are further classified into (1) taxpayer is the foreign corporation, not the branch or
resident foreign corporations and (2) non- the resident foreign corporation. Corollarily, if the
resident foreign corporations. business transaction is conducted through the
branch office, the latter becomes the taxpayer, and
For definitions, see table below. not the foreign corporation. (see M ARUBENI
CORPORATION VS. CIR [SEPTEMBER 14, 1989]).
Domestic one created or organized in the
corporation Philippines or under its laws. Q: XYZ is a foreign shipping company. It
Foreign one created or organized under does not have a branch office in the
Corporation the laws of a foreign country. Philippines and it made only two calls in
Resident foreign a foreign corporation engaged in
Corporation trade or business within the
Philippine ports. What kind of foreign
Philippines or having an office or corporation is XYZ?
place of business therein.
Non-resident a foreign corporation not XYZ is a foreign corporation not authorized or
foreign engaged in trade or business licensed to do business in the Philippines. In order
corporation within the Philippines and not that a foreign corporation may be considered
having any office or place of engaged in trade or business, its business
business therein. transactions must be continuous. A casual
business activity in the Philippines by a foreign
Q: ABC Corporation, a foreign corporation corporation does not amount to engaging in
in Japan and licensed to do engage in trade or business in the Philippines for income
business in the Philippines (hence, a tax purposes. Accordingly, its taxable income for
resident foreign corporation) has equity purposes of our income tax law consists of its gross
investments in XYZ Company, a domestic income from all sources within the Philippines. (see
corporation. XYZ declared and paid cash N.V. REEDERIJ “AMSTERDAM” VS. CIR [JUNE 23,
dividends to ABC. XYZ directly remitted the 1988])
cash dividends to ABC’s head office in
Japan (hence, a non-resident foreign
corporation) net not only of the 10% final
dividend tax but also of the withheld 15%
profit remittance tax based on the remittable
amount after deducting the final withholding

--------------------------------------------------------------- 1. covered by a special license as contractor by the

(iii) Joint venture and consortium22 PCAB; and
--------------------------------------------------------------- 2. construction project is certified by the
appropriate government office as a foreign
Q: Are joint ventures taxable? financed/internationally-funded project and that
international bidding is allowed under the
Generally, yes. However, a joint venture or bilateral agreement between the Philippine
consortium undertaking construction projects or government; and foreign/international financing
engaged in petroleum operations with an institution.
operating contract with the government are not
liable for income tax. Q: Two local contractors entered into a joint
development agreement to construct a
Q: What are the requirements in order for a residential subdivision. One local contractor
joint venture formed for construction shall contribute the parcel of land while the
purposes be not liable for income tax? other shall contribute the construction and
development of the parcel of land into a
In RR No. 010-12 [JUNE 1, 2012], a joint venture or subdivision. Each shall receive an allocation
consortium formed for the purpose of undertaking of saleable house and lot units from the
construction projects which is not considered as a project. Is the joint venture liable for income
taxable corporation should be: tax?
1. For the undertaking of a construction project; No. In BIR Ruling No. 108-2010 [October 19,
2. Should involve joining or pooling of resources by 23
2010], involving a joint venture between Avida and
licensed local contractors, licensed by the Aurora, the CIR held that the joint development
Philippine Contractors Accreditation Board agreement between the two is not subject to income
(PCAB) of the DTI; tax because joint ventures formed by local
3. The local contractors are engaged in contractors for construction purposes are deemed
construction business; as not falling under the definition of a taxable
4. The joint venture itself must likewise be duly corporation.
licensed as such by the PCAB
---------------------------------------------------------------
Absent one of the requirements, the joint venture
c) Partnerships24
formed for construction purposes shall be
considered a taxable corporation. f) Co-ownerships
---------------------------------------------------------------
Q: May joint ventures involving foreign
Note: Co-ownerships have been included in this
contractors be treated as a non-taxable discussion because in most cases, the Court has been
corporation? asked to determine whether there exists a taxable
(unregistered) partnership and not a mere co-ownership.
Yes, provided that the member foreign contractor is:
_________________________________________
_________________________________________
23
It is also important to note in this BIR Ruling that the CIR held
22
The requisites of a joint venture are as follows: that the allocation of saleable units does not constitute as a
1. Contribution by each party taxable event as no income is actually realized by Avida or
2. Profits are shared among the parties Aurora.
24
3. There is joint right of mutual control over the subject By the contract of partnership, two or more persons bind
matter themselves to contribute money, property or industry to a
4. There is a single business transaction rather than a common fund with the intention of dividing the profits among
general or continuous transaction. themselves (see Article 1767, Civil Code)

income tax. Is the co-ownership taxable as a

Q: Is a partnership liable for income tax? corporation?
Yes. The term “corporations” includes partnerships, No. A co-ownership who own properties which
no matter how created or organized. produce income should not automatically be
considered partners of an unregistered partnership,
Q: What are the kinds of partnerships under or a corporation, within the purview of the income
the Tax Code? tax law. The essential elements of a partnership are
two, namely: (a) an agreement to contribute money,
1. Taxable partnerships – these are business property or industry to a common fund; and (b) intent
partnerships or partnerships which are to divide the profits among the contracting
organized for the purpose of engaging in parties. Here, there is no evidence that petitioners
trade or business. They are subject to entered into an agreement to contribute money,
income tax as if they were corporations property or industry to a common fund, and that they
whether or not registered with the SEC as a intended to divide the profits among themselves.
partnership The sharing of returns does not in itself establish a
2. Exempt partnerships – these are partnership whether or not the persons sharing
partnerships not considered as taxable therein have a joint or common right or interest in
entities for income tax purposes i.e. General the property. There must be a clear intent to form a
Professional Partnerships). partnership, the existence of a juridical personality
different from the individual partners, and the
Q: How do you determine if a partnership is freedom of each party to transfer or assign the
taxable? (elements of a taxable partnership) whole property. (see OBILLOS v. CIR [OCTOBER 29,
1985] and PASCUAL V. CIR [OCTOBER 18, 1988]).
1. An intent to form the same
2. Generally participating in both profits and Q: A group of insurance companies in the
losses Philippines decided to form a pool and
3. Such a community of interest, as far as third entered into a reinsurance treaty with a non-
persons are concerned as enables each resident reinsurance company. Is such a
party to make contract, manage he business pool subject to corporate taxes and
and dispose of the whole property. withholding taxes on dividends paid to the
non-resident reinsurance company?
Q: Is a co-ownership taxable as a
corporation? Yes. Where several local insurance ceding
companies enter into a Pool Agreement or an
No. The common ownership of property does not by association that would handle all the insurance
itself create a partnership between the owners, businesses covered under their quota-share
though they may use it for purposes of making reinsurance treaty and surplus reinsurance
gains. Article 1769(3) of the Civil Code provides treaty with a non-resident foreign reinsurance
that “the sharing of gross returns does not by itself company, the resulting pool having a common fund,
establish a partnership whether or not the persons and functions through an executive board and its
sharing them have a joint or common right or interest work is indispensable, beneficial and economically
in any property from which the returns are derived. useful to the business of the ceding companies and
the foreign firm, such circumstances indicate a
Q: A and B, co-owners, bought 3 parcels of partnership or an association taxable as a
land in one transaction and bought 2 more corporation (see AFISCO INSURANCE CORPORATION
parcels of land in another. They decided to VS. CIR [JANUARY 25, 1999])
sell the 3 parcels to C and the 2 parcels to D.
They realized a net profit gain and paid CGT. Q: A and B inherited properties. They did
CIR assessed them for deficiency corporate not partition the same and instead invested
them to a common fund and divide the

profits therefrom. Should they be classified income of which is derived from engaging in any
as an unregistered partnership subject to trade or business.
corporate income tax?
Q: Is a GPP liable for income tax?
Yes. The income from inherited properties may be
considered as individual income of the respective No. A GPP is not considered a taxable entity for
heirs only as long as the inheritance or estate is not income tax purposes. Section 26 of the NIRC
distributed, or, at least, partitioned. But the moment provides that persons engaging in business as
their respective known shares are used as part of partners in a GPP shall be liable for income tax only
the common assets of heirs to be used in making in their separate and individual capacities computed
profits, it is but proper that the income from such on their respective distributive shares of the
shares should be considered as part of the taxable partnership profit.
income of an unregistered partnership. (see ONA V.
CIR [M AY 25, 1972]). Q: Distinguish between a GPP and an
ordinary business partnership.
Note: Thus, we make a distinction. Before the partition of
property, the income of the co-ownership arising from the A general professional partnership, unlike an
death of a decedent is not subject to income tax, if the ordinary business partnership (which is treated as a
activities of the co-owners are limited to the preservation corporation for income tax purposes and so subject
of the property and the collection of the income therefrom.
However, after partition, should the co-owners invest the
to the corporate income tax), is not itself an income
income of the co-ownership in any income-producing taxpayer. The income tax is imposed not on the
properties, they would be constituting themselves into an professional partnership, which is tax exempt, but on
unregistered partnership which is consequently subject to the partners themselves in their individual capacity
income tax as a corporation. computed on their distributive shares of partnership
profits (see CARAG, CABALLES, JAMORA AND SOMERA
Q: A and B bought 3 parcels of land in 1976 LAW OFFICES VS. DEL ROSARIO [OCTOBER 3, 1994])
and 2 parcels of land in 1977. In 1988 they
sold the first three to Z and the other two ---------------------------------------------------------------
were sold to Y in 1989. A and B realized a 7. Income Taxation
net profit from the sale and they individually a) Definition
paid he corresponding capital gains tax. The b) Nature
CIR assessed them for deficiency income c) General Principles
tax arguing that they formed an ---------------------------------------------------------------
unregistered partnership. Is the contention
of the CIR correct? Q: Define Income tax.
No. Isolated transactions by two or more persons do Income tax is a tax on all yearly profits arising from
not warrant their being considered as an property, professions, trades and offices.
unregistered partnership. They will instead be
considered as mere co-owners; no corporate income In CONWI V. CTA [AUGUST 31, 1992], the Supreme
tax is due on mere co-ownerships. Court defined income tax as an amount of money
coming to a person or corporation within a specified
--------------------------------------------------------------- time, whether as payment for services, interest, or
profit from investment.
d) General Professional Partnerships (GPP)
---------------------------------------------------------------
Q: What is the nature of income tax?
Q: What is a GPP? An income tax is an excise tax and not a tax on
property. It is levied upon the privilege of receiving
General professional partnership (GPP) are income or profit.
partnerships formed by persons for the sole purpose
of exercising their common profession, no part of the

As stated by the Supreme Court in REPUBLIC OF THE ---------------------------------------------------------------

PHILIPPINES VS. M ANILA ELECTRIC COMPANY 8. Income
[NOVEMBER 15, 2002], income tax is imposed on an a) Definition
individual or entity as a form of excise tax or a tax on b) Nature
the privilege of earning income. In exchange for the
c) When Income is taxable
protection extended by the State to the taxpayer, the
government collects taxes as a source of revenue to d) Tests in determining whether income is
finance its activities. earned for tax purposes
---------------------------------------------------------------
Q: What are the general principles of income
Note: The outline provided in the 2013 Syllabus on
taxation? Income was not well thought of. This is how the discussion
is going to be: First, I will discuss the (a) Definition and (b)
Note: We will discuss this again and in more detail and Nature of Income. Second, I will discuss (c) when income
with cases when we discuss situs of income taxation and is taxable (excluding methods of accounting) and (d) tests
source of income rules under Part 9 (Gross Income) of in determining whether income is earned for tax purposes.
Chapter 2 of the Syllabus. Third, I will discuss taxable income (not in the Syllabus),
taxable periods (recall that I said earlier that I would move
Under Section 23, Title II, Tax Code, the general the discussion here in Income), and then (iv) methods of
principles are: accounting.
Resident Citizen taxable on all income derived from ---------------------------------------------------------------

sources within and outside the a) Definition
Philippines
b) Nature
Non-Resident taxable only on income derived from ---------------------------------------------------------------
Citizen sources within the Philippines
[By definition of a non-resident Q: Define income for tax purposes.
citizen, this applies to an overseas
contract worker (a citizen working Income means the gain derived from capital, from
and deriving income from abroad)]
labor, or from both combined, including profits
Alien (whether taxable only on income derived from
gained from dealings in property or as well as any
resident or non- sources within the Philippines asset clearly realized whether earned or not.
resident)
Income may be defined as the amount of money
Domestic taxable on all income derived from coming to a person or corporation within a specified
corporation sources within and outside the time, whether as payment for services, interest or
Philippines profit from investment.
Foreign taxable only on income derived from It refers to all wealth which flows into the taxpayer
corporation sources within the Philippines other than as a mere return on capital. (RR No.2)
(This applies whether the foreign
corporation is engaged or not in
Thus, as stated in FISHER V. TRINIDAD [OCTOBER 30,
trade or business in the Philippines) 1922], mere advance in the value of property or a
corporation in no sense constitutes the income
Note: Simply put, only resident citizens and domestic specified in the law. Such advance constitutes and
corporations are taxable on their worldwide income (both can be treated merely as an increase in capital.
income inside and outside the Philippines) while the other
types of individual and corporate taxpayers (i.e. non- Q: What is the nature of income?
resident citizen, non-resident alien, foreign corporation)
are taxable only on income derived from sources within
the Philippines.
Income is that flow of services rendered by that
capital by the payment of money from it or any other
benefit rendered by a fund of capital in relation to
such fund through a period of time. Income is the

“fruit” of capital or labor severed from the “tree.” (see However, stock dividends constitute as income if a
M ADRIGAL VS. RAFFERTY [AUGUST 7, 1918]). corporation redeems stock issued so as to make a
25
distribution. This is essentially equivalent to the
Q: What is the difference between income distribution of a taxable dividend the amount so
and capital? distributed in the redemption considered as taxable
income. (see COMMISSIONER VS. M ANNING [AUGUST
Income is distinct from capital. Income means all the 7, 1975])
wealth which flows into the taxpayer other than a
mere return on capital while capital is a fund or Q: Is money received as exemplary
property existing at one distinct point in time while damages (punitive damages) income?
income denotes a flow of wealth during a definite
period of time. Income is gain derived and severed Yes. In COMMISSIONER V. GLENSHAW GLASS CO. [348
from capital. (see CHAMBER OF REAL ESTATE AND U.S. 426], Glenshaw Co was engaged in a
BUILDER’S ASSOCIATION, INC. V. ROMULO [M ARCH 9, protracted litigation with Hartford-Empire Co where
2010]). the former demanded exemplary damages for fraud
and treble damages for injury to its business by
Income as contrasted with capital or property is to reason of the latter’s violation of federal antitrust
be the test. The essential difference between capital laws. The parties settled. Glenshaw did not report
and income is that capital is a fund; income is a flow. the money received as damages from the settlement
A fund of property existing at an instant of time is in its income tax return. The Commissioner
called capital. A flow of services rendered by that assessed Glenshaw for the deficiency. Glenshaw
capital by the payment of money from it or any other contended that punitive damages, as windfalls
benefit rendered by a fund of capital in relation to flowing from culpable conduct of third parties are not
such fund through a period of time is called an taxable income. The US Supreme Court held that
income. Capital is wealth, while income is the money received as damages must be reported as
service of wealth. A tax on income is not a tax on they constitute income. The mere fact that such
property. "Income," as here used, can be defined as payments were extracted from wrongdoers cannot
"profits or gains." (see M ADRIGAL VS. RAFFERTY detract from their character as taxable income. The
[AUGUST 7, 1918]). Court also stated that punitive damages cannot be
classified as gifts.
Q: Are stock dividends income or capital?
Q: Is money received as compensatory
Generally, stock dividends represent capital and do damages income?
not constitute as income to its recipient. Mere
issuance thereof is not yet subject to income tax as Yes. In MURPHY V. IRS [493 F.3d 170], the US Court
they are nothing but an enrichment through increase of Appeals (District of Columbia), held that the
in value of capital investment. Such are considered amount received as compensatory damages on for
unrealized gain and cannot be subjected to income emotional distress and loss of reputation constitutes
tax until that gain has been realized. taxable income.
As explained by the Supreme Court in FISHER V. Note: It must be noted, however, that in the Murphy case,
TRINIDAD [OCTOBER 30, 1922], when a corporation what was involved was physical injuries. Note under our
issues stock dividends, it shows that the Tax Code, amounts received as compensation for
corporation’s accumulated profits have been personal injuries are excluded from gross income and
capitalized, instead of distributed to the stockholders hence, not taxable. Thus, we must make a distinction. If
it’s non-physical injuries like mental anguish, the damages
or retained as surplus available for distribution. The are included in gross income and hence taxable but if it’s
stockholder receives nothing out of the corporate _________________________________________
assets for his separate use and benefit but a
representation of his increased interest in the capital 25
The exception to the rule that stock dividends do not constitute
of the corporation. The capital still belongs to the income shall be discussed more extensively later. Knowing that
corporation as there is no separation of interest. there is an exception will suffice for now.

physical injuries, it is excluded from gross income.

--------------------------------------------------------------- (see Section 52, RR No. 2)
c) When income is taxable
(i) Existence of income Q: Distinguish actual receipt from
(ii) Realization of income constructive receipt.
(a) Tests of realization
(b) Actual vis-à-vis constructive receipt Actual receipt may be actual or physical receipt
29
(iii) Recognition of income while constructive receipt occurs when money
--------------------------------------------------------------- consideration or its equivalent is placed at the
control of the person who rendered the service
Q: When is income taxable? (elements of a without restriction by the payor (see Section 4.108-
A, RR 16-2005).
taxable income)
Income, gain or profit is subject to income tax when Q: What is the constructive receipt
the following conditions are present: doctrine?
1. There is income, gain or profit (existence of The constructive receipt doctrine provides than an
26 item is treated as income when it is credited to the
income)
2. The income, gain or profit is not exempt from account of the taxpayer, or made unconditionally
27 available to the taxpayer; no physical possession is
income tax.
3. The income, gain or profit is received or realized required. (see Section 52, RR No. 2-40)
28
during the taxable year; (realization of
income) Income is received not only when it is actually
handed to a taxpayer but also when it is merely
Note: As to (1) – for tax purposes, income does not only constructively received by him. In LIMPAN
refer to the money a taxpayer receives but includes INVESTMENT V. CIR [JULY 26, 1966], the lessees
anything of value. opted to deposit their payments when the lessor
refused to accept the same in 1957. The lessor did
As to (2) – An income may have other elements but the not report these payments in his 1957 income tax
law may specifically exclude the same from income for tax return. The Supreme Court held that the failure to
purposes i.e. certain passive incomes excluded from
income as they are already subject to final taxes.
report the said rental income is unjustified as, when
the payments were deposited, the lessor was
As to (3) – Even if there is material gain, not excluded by deemed to have constructive received such rentals.
law, if the material gain is not yet realized by the taxpayer,
then there is no income to speak of. Q: When is income recognized?
Following the realization principle, income is

Q: When is income considered received for generally recognized when both the following
income tax purposes? conditions are met:
1. If actually or physically received by the 1. The earning process is complete or virtually

taxpayer (actual receipt) complete
2. If constructively received by the taxpayer 2. An exchange has taken place
(constructive receipt)
_________________________________________
26
As opposed to mere reimbursements or return on capital. _________________________________________
27
Examples of those exempt from income tax: de minimis
29
benefits and professional fees of GPPs. Examples of income constructively received: (1) deposits in
28
As opposed to the common examples of unrealized forex gains banks (2) interest coupons; (3) undistributed share of a partner in
or mere revaluation increments. the profits of a general partnership

(see M ANDARIN HOTELS V. CIR, CTA CASE NO, 5046, services they are plainly
M ARCH 24, 1997] compensation which is taxable
income COMMISSIONER V. LABUE
[351 US 243]
---------------------------------------------------------------
d) Tests in determining whether income is All Events Test Income is reportable when all
earned for tax purposes the events have occurred that
(i) Realization test fix the taxpayer’s right to
(ii) Claim of right doctrine or doctrine of receive the income and the
amount can be determined with
ownership, command or control reasonable accuracy. CIR V.
(iii) Economic benefit test, doctrine of ISABELA CULTURAL
proprietary interest CORPORATION, G.R. NO. 172231,
(iv) Severance test FEBRUARY 12, 2007
(v) All events test
Flow of Wealth Test The test of taxability is the
--------------------------------------------------------------- source (the property, activity or
service that produced the
Note: The enumeration is inaccurate in that realization income determins whether any
test and severance test is one and the same. Also it does gain was derviced from the
not include the Flow of Wealth Test. transaction COLLECTOR V.
ADMINISTRATRIX OF THE ESTATE
Q: Enumerate the different tests for income OF ECHARRI, G.R. NO. 45544,
determination and define each. APRIL 25, 1939.
Realization/Severance There is no taxable income until

test there is a separation from ---------------------------------------------------------------
capital of something of Taxable Periods
exchangeable value, thereby ---------------------------------------------------------------
supplying the realization or
transmutation which would
result in the receipt of income. Read Section 22(P) and (Q), Tax Code
Income is not deemed realized Q: What are the different taxable periods
until the fruit has been plucked provided for in the Tax Code?
from the tree EISNER V.
MACOMBER [252 US 426]
1. Calendar period or calendar year – is an
Claim of Right The power to dispose of income
accounting period which starts from January
Doctrine/Doctrine of is the equivalent of ownership 1 and ends on December 31
Ownership, of it. The exercise of that power 2. Fiscal period or fiscal year - is an
Command or Control to procure the payment of accounting period of 12 months ending on
income to another is the the last day of any month other than
enjoyment and hence the December 31.
realization of the income by him 3. Short period – is an accounting period
who exercises it. The dominant wherein income shall be computed on the
purpose of the revenue laws is
basis of a period less than 12 months.
the taxation of income to those
who earn or otherwise create
the right to receive it and enjoy Read Section 43, Tax Code
the benefit of it when paid
HELVERING V. HORST [311 U.S. Q: What is the general rule for computing
112]
the taxpayer’s taxable income?
Economic Benefits Where stock, options, shares of
Test/Doctrine of stock or other assets are The taxable income shall be computed upon the
Proprietary Interest transferred by an employer to basis of the taxpayer’s annual accounting period –
an employee to secure better fiscal year or calendar year as the case may be.

Q: Can a taxpayer change his accounting

Q: Can an individual compute his income on period?
the basis of a fiscal year?
Yes, but this applies only to corporate taxpayers. If
No. Individual taxpayers cannot use the fiscal the corporate taxpayer wishes to change his
period. They are required to use only the calendar accounting period from fiscal to calendar year, from
year. (RR 2-40). This would include Estates and calendar year to fiscal year, or from one fiscal year
Trusts and General Professional Partnerships to another, the net income shall, with the approval of
the CIR, be computed on the basis of such new
Q: Is a corporation required to use only the accounting period. (see Section 46, Tax Code)
calendar year?
---------------------------------------------------------------
No. As a general rule, income tax returns, whether (iv) Methods of accounting
individuals or for corporations, are required to be
(a) Cash method vis-à-vis accrual method
made and their income computed for each calendar
year. However, corporations may with the approval (b) Installment payment vis-à-vis deferred
of the CIR, file their returns and compute their payment vis-à-vis percentage completion (in
income on the basis of a fiscal year. (see Section long term contracts)
43, Tax Code). ---------------------------------------------------------------
Q: In what instances shall taxable income be Q: What are two main accounting methods
computed on the basis of calendar year? that may be used by taxpayers?
1. Taxpayer’s accounting period is other than The methods are:

fiscal year
2. Taxpayer has no annual accounting period 1. Cash Method – a method of accounting
3. Taxpayer does not keep books whereby all items of gross income received
4. Taxpayer is an individual during the year shall be accounted for in
5. Taxpayer is a general professional such taxable year and that only expenses
partnership actually paid shall be claimed as deductions
6. Taxpayer is an estate or a trust during the year
Q: In what instances shall taxable income be 2. Accrual Method – method of accounting for
computed on the basis of a short period? income in the period it is earned, regardless
of whether it has been received or not.
The general rule is that the taxable period is always Expenses are accounted for in the period
12 months. The exceptions (where a taxpayer may they are incurred and not in the period they
have a taxable period of less than 12 months) are: are paid.
1. Taxpayer, other than an individual, changes Note: Other methods would include (1) Installment
method; (2) Percentage of Completion Method and (3)
his accounting period from fiscal to calendar Crop year basis.
30
year or from calendar year to fiscal year or
from one fiscal year to another (Section 46,
Q: Distinguish cash method from accrual
Tax Code)
2. Taxpayer dies method of accounting.
3. Corporation is newly organized _________________________________________
4. Corporation is dissolved 30
Crop Year Basis is a method of accounting applicable only for
5. Tax period is terminated by the CIR by
farmers engaged in the production of crops which take more than
authority of law (Section 6(D), Tax Code) a year from the time of planting to the process of gathering and
disposal of the harvest. Expenses paid or incurred are deductible
Read Section 46, Tax Code in the year the gross income from the sale of the crops is realized.

initial payment, the income realized from the

In cash method, income is reported in the year discounting itself is still a separate taxable income in
payments are received while expenses are deducted the year it was converted into cash because it was
in the year paid. On the other hand, in accrual at this year that there was actual gain on the
method, income is reported in the year it is earned discounted notes.
while expenses are deducted in the year it is
incurred, regardless of receipt or disbursement of Q: Explain the percentage of completion
cash. method.
Q: Can a taxpayer use a combination of two Percentage of Completion Method is a method of

or more methods of accounting? accounting applicable in the case of a building,
installation or construction contract covering a period
No. The rule is that a taxpayer may use any one in excess of one year, whereby gross income
method of accounting but not a combination of two derived from such contract may be reported upon
or more methods of accounting for each type of the basis of percentage of completion. (see Section
business during the taxable year. The use of a 48, Tax Code)
hybrid method of accounting is not allowed (see
CONSOLIDATED MINES VS. CTA [AUGUST 29, 1974]) Q: Explain the deferred payment method.
Q: Explain the installment method Deferred payment method is a method of

accounting considered when payments are made at
Installment Method is a method of accounting a later date.
considered appropriate when collections of the
proceeds of sales and incomes extend over When the asset sold is an ordinary asset or a capital
relatively long periods of time and there is strong asset other than property subject to capital gains
possibility that full collection will not be paid. As tax, the income from deferred payment sale of
customers make installment payments, the seller property may be reported under the instalment
recognizes the gross profit on sale in proportion to method or deferred payment method.
the cash collected during the year. (see Section 49,
Tax Code) ---------------------------------------------------------------
9. Gross Income
Q: A sold lots to ABC Corp and was paid ---------------------------------------------------------------
less than 25%, the balance was covered by 4
checks. On the same day, the checks were Note: Previously, in Item 6 of Chapter 2 of the 2013 Bar
Syllabus, we looked into the types of taxpayers. In Item 8,
discounted (exchange for cash at an amount we determined when income is taxable. In this item, we
lower than face value) also ABC Corp. A determine what is included in gross income (because
reported as income for the year of the sale there are those already subject to final tax), what is
for the year of the sale only the cash amount excluded, what is deducted, and what exemptions can be
availed of.
received from sale and excluded the amount
received from the discounted checks. The In this part, I will focus more on the concepts, nature and
balance was reported as income only in the components of gross income, deductions, exclusions, and
next four years. A argues that initial exemptions. While I may provide certain tax rates on some
payment excludes evidence of sources of income, tax rate tables will be provided in
greater detail and for easier comprehension in the
indebtedness. Is A’s contention correct? discussion in Items 10-15 of Chapter 2 (NIRC) of the 2013
Syllabus on Taxation of the different kinds of taxpayers.
Yes. As held in BANAS V. CA [FEBRUARY 10, 2000], For now, let us understand the concepts.
The transaction remains to be an instalment (not
cash) sale as the law expressly excludes evidence At the end of the day, the whole point of knowing what
of indebtedness in the determination of how much constitutes gross income and what can be availed of as
was paid for the year. However, even if the proceeds deductions, exclusions, and exemptions is to know how
of discounted note is not considered as part of the much the taxpayer must pay. Two factual situations can

be inferred from most cases on income taxation. It’s either b) Concept of income from whatever source
the taxpayer overpaid and hence, he wants a refund or the derived
taxpayer underpaid and hence, the government assesses
him for deficiency taxes. This is why it is important to ---------------------------------------------------------------
understand the inclusions in gross income, deductions,
exclusions and exemptions because the controversy Q: Is the enumeration provided in Section
between the taxpayer and the government in most cases 32(A) exclusive?
would be in one of these areas.
No. Section 32(A) does not intend the enumeration
--------------------------------------------------------------- to be exclusive. It merely directs that the types of
9. Gross Income income listed therein be treated as income from
a) Definition sources within the Philippines (see CIR VS.
b) Concept of income from whatever source AMERICAN AIRLINES [DECEMBER 19, 1989]).
derived
c) Classification of income as to source Note: Note that the statutory definition contains the phrase
“all income derived from whatever source.” This indicates
--------------------------------------------------------------- that non-exclusive nature of the enumeration in Section
32(A).
Read Section 32(A), Tax Code
Q: What is meant by the phrase “all income
--------------------------------------------------------------- derived from whatever source"
a) Definition
--------------------------------------------------------------- The phrase “all income derived from whatever
source” encompasses all accessions to wealth,
clearly realized, and over which the taxpayers have
Q: Define gross income. (statutory
complete dominion. A gain constitutes taxable
inclusions of gross income) income when its recipient has such control over it
that as a practical matter, he derives readily
Except when otherwise provided, all income derived realizable economic value from it.
from whatever source, including, but not limited to,
the following items: Income from whatever sources refers to all income
not expressly excluded or exempted from the class
1. Compensation for services in whatever form of taxable income, irrespective of the voluntary or
paid, including, but not limited to fees, involuntary action of the taxpayer in producing the
salaries, wages, commissions and similar income GUTIERREZ V. CIR, CTA CASE NO. 65,
items; AUGUST 31, 1965]
2. Gross income derived from the conduct of
trade or business or the exercise of a Gains, money or otherwise derived from all other
profession; illegal source fall within the ambit of “income derived
3. Gains derived from dealings in property from whatever source” and is subject to income tax.
4. Interests
5. Rents Note: Income derived from whatever source will be
6. Royalties discussed in greater detail later.
7. Dividends
8. Annuities ---------------------------------------------------------------
9. Prizes and winnings c) Gross income vis-à-vis net income vis-à-
10. Pensions; and
vis taxable income
11. Partner’s distributive share from the net
income of the GPP ---------------------------------------------------------------
(see Section 32(A), NIRC) Read Section 31, Tax Code
---------------------------------------------------------------

Q: Distinguish gross income from net = Gross Income = Gross Income

income and taxable income Less: Deductions Less: Deductions
= Net Income = Taxable net income
Gross Income All income minus exclusions. (In Less: Personal and - x Tax Rate
other words, all income subject to Additional Exemptions = Tax Due
income tax) = Taxable net income
x Tax Rate
Taxable Income All pertinent items of gross income = Tax Due
less deductions and/or personal and
additional exemptions, if any,
authorized for such types of income
by this Code or other special laws
Note: Some minor matters: 1. Why do you stop at (2)
when it comes to corporations? Well, corporations
cannot avail of personal and additional exemptions. By
Net income This is gross income less the
their nature, personal and additional exemptions apply
allowable deductions.
only to natural persons.
2. Why don’t you follow the computation if the income

is subject to final tax or when the gross compensation
Note: To connect to concepts of gross income, taxable
income tax system applies? Well, there’s no need to go
income, net income, deductions, exclusions and
through the computation, because the law provides for a
exemptions together, one must have an idea on how a
“final” tax. It’s final already and you just have to pay it. No
taxpayer would go about computing how much income tax
deduction, no exclusions, nothing. As to gross
he is going to pay.
compensation income tax system, this applies in the case
of a non-resident alien not engaged in trade and business
Q: How do you determine the net income tax in the Philippines, he just has to pay a tax equal to 25% of
payable? such gross income. No deduction, no exclusions, nothing.
In all cases, other than when a final tax is imposed I hope that placed things into perspective and highlights
or when the gross compensation income tax system the importance and relationship of the concepts of gross
applies, the income tax is imposed on the net income, deductions, exclusions and exemptions.
taxable income computed as follows:
---------------------------------------------------------------
(1) All income minus exclusions equals gross d) Classification of income as to source
income; ---------------------------------------------------------------
(2) Gross income less allowable deductions
equals net income (in case of corporations, Q: What are the classifications of income as
this is already the taxable net income) to source?
(3) Net income less personal and additional
exemptions (when applicable) equals 1. Gross income and taxable income from
taxable net income sources within the Philippines
(4) Taxable net income times income tax rates 2. Gross income and taxable income from
(on the graduated basis or corporate tax rate sources without the Philippines
as the case may be) equals net income tax 3. Income partly within or partly without the
due Philippines
(5) Income tax less creditable withholding tax
and/or tax credit equals net income tax Note: I’ll discuss this in greater detail under (x)(e) Source
payable. Rules in determining income from within and without and
(f) Situs of Taxation of this Item in the Syllabus. Let’s know
To simplify: first the different incomes that would be considered part of
gross income and then we determine whether it is within
Individual Corporation or without. It’s pointless to determine the source of the
income if you don’t know if it’s actually income in the first
place. Again, the 2013 Bar Syllabus was not well thought
All Income All income of.
Less: Exclusions Less: Exclusions

2. Salaries
--------------------------------------------------------------- 3. Wages
(e) Sources of income subject to tax 4. Commissions; and
(i) Compensation Income 5. Similar items
(ii) Fringe benefits
(see Section 32(A)(1))
(iii) Professional Income
(iv) Income from business
Q: What are the items not included in
(v) Income from dealings in property
compensation income?
(vi) Passive investment income
(vii) Annuities, proceeds from life insurance 1. For agricultural labor paid entirely in
or other types of insurance products of the farm where the labor is
(viii) Prizes and Awards performed
(ix) Pensions, retirement benefit or 2. For domestic service in a private home
31
separation pay 3. For casual labor not in the course of the
32
(x) Income from any source whatever employer’s trade or business
--------------------------------------------------------------- 4. For services by a citizen or resident of the
Philippines for a foreign government or an
--------------------------------------------------------------- international organization.
(i) Compensation Income
---------------------------------------------------------------
Note: As to (2) – (a) A private home is the fixed place of
Read Section 78, Tax Code aboard of an individual or family. If the home is utilized
primarily for the purpose of supplying board or lodging to
Note: There are two components to compensation the public as a business enterprise, it ceases to be a
income: (1) the basic compensation income (which we will private home and remuneration paid for services
discuss here) and (2) fringe benefits which is specially performed therein is not exempted and should be included
treated by the Tax Code. in compensation income.
Q: Define compensation for income tax (b) The services of a household personnel furnished to an
employee (except rank and file employee) by an employer
purposes. shall be subject to fringe benefit tax.
Compensation means all remuneration for services As to (3) – (a) Any remuneration paid for casual labor
performed by an employee for his employer under and does not promote or advance the employer’s trade or
an employer-employee relationship unless business is not considered compensation income.
specifically excluded by the Tax Code. This includes However, any remuneration paid for casual labor but in the
the cash value of all remuneration paid in any course of the employer’s trade or business is considered
as compensation.
medium other than cash. (see Section 78, NIRC,
Section 2.78.3, RR No. 2-98). Compensation may
be paid in money, or in some medium other than Q: What is the test to determine whether an
money as for example, stocks, bonds, or other forms income is compensation or not?
of property.
The test is whether such income is received by
33
Q: What constitutes compensation for virtue of an employer-employee relationship.
services? _________________________________________
31
Compensation for services, under an employer- Casual labor means occasional, incidental or irregular.
32
This means that the labor does not promote or advance the
employee relationship, includes payments “in trade or business of the employer.
whatever form paid including but not limied to: 33
To determine the existence of an employer-employee
relationship, follow the four-fold test:
1. Fees

No. They are not included in compensation income.

Q: If the compensation is paid after In fact, they are excluded from gross income (see
separation, will it still form part of Section 32(B)(7)(e), Tax Code)
compensation income?
Q: Are GSIS, SSS, Medicare and other
Yes. Remuneration for services constitutes contributions included in compensation
compensation even if the employer-employee income?
relationship no longer exists at the time when
payment is made between the person in whose No. GSIS, SSS, Medicare and Pag-Ibig contributions
employ the services had been performed and the and union dues of individuals are not included in
individual who performed them (see Section compensation income as they are excluded from
2.78.1(A) RR No. 2-98] gross income (see Section 32(B)(7)(f), Tax Code)
34
Q: May compensation earners avail of Note: PERA contributions from an employer to an
deductions as to their compensation employee do not form part of his gross income (see RR
income? 17-2011 and RA 9505).
No. Section 34 expressly provides that no Q: If an employer pays the income taxes
deductions shall be allowed for taxpayers earning assessable against an employee, is the
compensation income arising from personal services payment by the employer taxable income on
rendered under an employer-employee relationship. the part of the employee?
The deductions are not necessary for the taxpayer
to earn the pure compensation income which arose Yes. In OLD COLONY TRUST CO. V. COMMISSIONER
out of an employer-employee relationship. [279 U.S. 716], the US Supreme Court held that the
payment of the tax by the employer was in
Q: Are living allowances treated as consideration of services rendered by the employee.
compensation income? The payment constituted income to the employee.
The Court also added that it cannot be argued that
A: Generally, living allowances should be treated as the payment was a gift. The payment for services,
income of the recipient. However, if any amount even though voluntary, was nevertheless
thereof is paid directly by the employer and paid for compensation for services rendered.
the convenience of the latter, the excess of what the
recipient employee would have ordinarily incurred Q: Are association dues, membership fees
for his own subsistence is not taxable income but a and other assessment charges collected by
business expense of the employer. This exemplifies a condominium corporation from its
the employer’s convenience rule (see COLLECTOR members and tenants subject to income
VS. HENDERSON [1 SCRA 649])
tax?
Q: Are 13th month pay and other benefits Yes. Such amounts form part of the gross income of
included in compensation income? the corporation. This is because the condominium
corporation furnishes its members and tenants with
benefits, advantages and privileges in return for
_________________________________________
34
"Personal Equity and Retirement Account (PERA)" refers to the
1. The employer has the power to control the employee voluntary retirement account established by and for the exclusive
with respect to the means and methods by which the use and benefit of the Contributor for the purpose of being
work is to be accomplished invested solely in PERA investment products in the Philippines.
2. Selection and management of the employee The Contributor shall retain the ownership, whether legal or
3. Power of dismissal beneficial, of funds placed therein, including all earnings of such
4. Payment of wages funds.

such payments. They constitute as income 10. Life or health insurance and other non-life
payments or compensation for beneficial services insurance premiums or similar amounts
provided to members and tenants. [RMC 65-2012] in excess of what the law allows.
Note: Pursuant to Section 18 of RA 9904 (Magna Carta Q: What is the rationale behind the
for Homeowners and Homeowners’ Association), the
association dues and income derived from rentals of the
Fringe Benefits Tax?
homeowner’s associations may be exempted from tax
subject to the following conditions: (a) The homeowners As a general rule, the income recipient is the person
association must be a duly constituted “Association” as liable to pay the income tax. In order to improve
defined under Section 3(b) of RA 9904; (b) The LGU collection of income on the compensation income of
having jurisdiction over the homeowners’ association must employees, the State requires the employer to
issue a certification identifying the basic services being withhold the tax upon payment of the compensation
rendered by the association and its lack of resources to income. However, it has been observed that many of
render such services; and (c) the association must present the fringe benefits paid by the employer to his
proof that the income and dues are used for the
cleanliness, security and other basic services need by
employees are not subjected to income tax and
members, including maintenance of the facilities in their withholding tax on compensation. To plug this
respective subdivisions and villages. (RMC 9-2013 loophole, RA 8424 was passed. It imposed a fringe
[January 29, 2013] benefits tax on the fringe benefits received by
--------------------------------------------------------------- supervisory and managerial employees. The law
(ii) Fringe benefits mandates that the employer shall assume the fringe
(a) Special treatment of fringe benefits benefits tax imposed on the taxable fringe benefits
35 36
of the managerial or supervisory employees, but
(b) Definition
allows the employer to deduct such fringe benefit tax
(c) Taxable and non-taxable fringe benefits as a business expense from its gross income.
--------------------------------------------------------------- However, the fringe benefits of rank-and-file
37
employees are treated as part of his compensation
Read Section 33, Tax Code income, which must be withheld and deducted by his
employer from the compensation income of the
Q: What is a fringe benefit? employee.
As defined by Section 33(B), the term “fringe What is a fringe benefit tax?
benefit” means any good, service or other benefit
furnished or granted in cash or in kind by an A fringe benefit tax is a final withholding tax (at
employer to an individual employee (except rank 32%) imposed on the grossed-up monetary value of
and file employees as defined herein) such as, but fringe benefit furnished or granted to the employee
not limited to, the following: except rank and file employees by the employer.
1. Housing; (see Section 33, Tax Code and RR 3-98 [JANUARY

2. Expense account; 1, 1998])
3. Vehicle of any kind;
4. Household personnel, such as maid, driver and
others; _________________________________________
5. Interest on loan at less than market rate to the 35
A managerial employee refers to one who is vested with
extent of the difference between the market rate powers or prerogatives to lay down and execute management
and actual rate granted; policies and/or to hire, transfer, suspend, lay-off, recall, discharge,
6. Membership fees, dues and other expenses assign or discipline employees
36
borne by the employer for the employee in social A supervisory employee is one who, in the interest of the
employer, effectively recommends such managerial actions if the
and athletic clubs or other similar organizations; exercise of such authority is not merely routinary or clerical in
7. Expenses for foreign travel; nature but requires the use of independent judgment.
37
8. Holiday and vacation expenses; A rank-and-file employee means all employees who are holding
9. Educational assistance to the employee or his neither managerial or supervisory position
dependents; and

subcontractors, the grossed-up value of the fringe benefit

If the recipient of the value of such fringe shall be determined by dividing the actual monetary value
the fringe benefit is benefit shall form part of of the fringe benefit by the difference between one
a rank and file compensation income hundred percent (100%) and under their respective rates
of income tax.
employee and the
benefit is not tax-
exempt Q: In what instances is the housing privilege
subject to fringe benefit tax?
if the recipient of the same shall not be
the fringe benefit is included in the compensation 1. Employer leases residential property and
not a rank-and-file income. A fringe benefit tax assigns the same for use by the employee
employee and the is levied upon the employer. 2. Employer owns a residential property on
benefit is not tax- installment basis and allows use by the
exempt employee
3. Employer purchases a residential property
Note: (1) The fringe benefits tax shall be treated as a final and transfers ownership to the employee
tax on the employee which shall be withheld and paid by 4. Employees provides a monthly fixed amount
the employer (see Section 2.33(A), RR 3-98). for the employee to pay his landlord
(2) On the taxation of fringe benefits – There is a Q: What housing privileges are not subject
difference in tax treatment between supervisory and
managerial employees on one hand and rank-and-file
to fringe benefit tax?
employees on the other. It can be argued that such
contravenes the fundamental principle that the income tax 1. Housing privilege of military officials of the
38
shall be imposed based on the taxpayer’s ability to pay. AFP
2. Housing unit which is situated inside or
Q: What is meant by “grossed-up monetary adjacent to the premises of a business or
value of the fringe benefit?” factory (it is considered adjacent if its
located within the maximum of 50 meters
As defined in RR 3-98 [JANUARY 1, 1998], the from the perimeter of the business
grossed-up monetary value of the fringe benefit premises)
represents the whole amount of income received by 3. Temporary housing for an employee who
the employee which includes the net amount of stays in a housing unit for three months or
money or net monetary value of property which has less
been received plus the amount of the fringe benefit
tax thereon otherwise due from the employee, but (see Section 2.33(D)(1), RR 3-98]
paid by the employer for and in behalf of his
employee. Q: Are expense accounts taxable fringe
benefits?
In essence, the purpose of getting the grossed-up
monetary value is to preserve the benefit to the General Rule: Expenses incurred by the employee
employer as a whole. but which are paid by his employer shall be treated
as taxable fringe benefits
Q: How is the grossed-up monetary value of
the fringe benefit determined? Exception: They are not taxable fringe benefits if
incurred or reasonably expected to be incurred by
It is determined by dividing the actual monetary
value of the fringe benefit by 68% (effective January _________________________________________
1, 2000.)
38
Why? Pursuant to the employer’s convenience rule, by
Note: The above determination is not absolute. In the providing the quarters, the government can avail of the services of
case of non-resident aliens not engaged in trade or soldiers anytime their services are desired.
business and alien and Filipino individuals employed in
RHQs, ROHQs of MNCs, OBUs and petroleum

the employee in the performance of his duties be taxable as fringe benefits (see Section 2.33(D),
subject to the following conditions – RR No. 3-98)
1. Expenditures are duly receipted for and in Q: Are interest on loans obtained by the
the name of the employer employee from the employer subject to
2. Expenditures do not partake of the nature of fringe benefit tax?
a personal expense attributable to the
employee Yes. If the employer lends money to his employee
free of interest or a rate lower than 12%, such
(see Section 2.33(D)(2)(a), RR 3-98) interest foregone by the employer or the difference
of the interest assumed by the employee and the
Note: Personal expenses of the employee paid or rate of 12% shall be treated as a taxable fringe
reimbursed by the employer to the employee shall be
treated as a taxable fringe benefit whether or not the same
benefit (see Section 2.33(D)(5)(a), RR No. 3-98)
are duly receipted for in the name of the employer
Q: Are membership fees, dues and other
Q: When is a motor vehicle privilege expenses in social and athletic clubs
considered a taxable fringe benefit? subject to fringe benefit tax?
1. Employer purchases vehicle in employee’s Yes. Membership fees, dues, and other expenses
name borne by the employer for his employee in social
2. Employer provides employee cash for and athletic clubs or other smiliar organizations shall
vehicle purchase be treated as taxable fringe benefits of the employee
3. Employer purchases car on installment in in full (see Section 2.33(D)(6), RR No. 3-98)
name of employee
4. Employer shoulders a portion of purchase Q: Are expenses for foreign travel by the
price employee subject to fringe benefits tax?
5. Employer owns and maintains a fleet of
motor vehicles for use of business and General Rule: Reasonable business expenses
employees which are paid for by the employer for the foreign
6. Employer leases and maintains a fleet of travel of his employee for the purpose of attending
motor vehicles for the use of the business business meetings or conventions shall not be
and employees. treated as taxable fringe benefits.
(see Section 2.33(D)(3), RR No. 3-98) Exception: In the absence of documentary evidence
showing that the travel abroad was in connection
Note: The use of an aircraft is not subject to fringe with business meetings or conventions, the expense
benefits tax but the use of yacht is subject to fringe benefit shall be treated as a taxable fringe benefit.
39
tax. (see Section 2.33(D)(3)(g) and (h), RR No. 3-98).
(see Section 2.33(D)(7), RR No. 3-98)
Q: Are household expenses of employees
subject to fringe benefits tax? Note: (1) Travelling expenses of family members of the
employee borne by the employer shall be subject to fringe
Yes. Expenses of the employee which are borne by benefits tax (see Section 2.33(D)(7)(c), RR No. 3-98)
the employer for household personnel such as
salaries of household help, personal driver of the (2) Holiday and vacation expenses treated of the
employee, or other similar personnel expenses shall employee borne by the employer shall be treated as
taxable fringe benefits. (see Section 2.33(D)(8), RR No.
_________________________________________ 3-98)
39
Don’t ask me why there’s a distinction. I can’t fathom why.
That’s what the law says!

Q: Is the cost of educational assistance to 4. Benefits given to the rank and file employees,
the employee or his dependents subject to whether granted under a collective bargaining
fringe benefit tax? agreement; and
5. De minimis benefits
General rule: Yes. The cost of educational
assistance to the employee and his dependents Note: Exemption from fringe benefit tax is not an
exemption from other income taxes unless such benefit is
borne by the employer shall be subject to fringe also stated expressly to be exempt from other income
benefits tax (see Section 2.33(D)(9)(a) and (b), RR taxes (refer to the exclusions). Section 2.23(C), RR No. 3-
No. 3-98) 98 provides that fringe benefits exempted from the
payment of the fringe benefits tax may however still form
Exceptions: part of the employee’s basic compensation income which
is subject to income tax.
1. Education of the employee is directly
connected with employer’s trade or business Q: What are de minimis benefits?
2. With a written contract that employee shall
remain employed with the employer for a As defined by RR 3-98 [MAY 21, 1998], de minimis
period of time mutually agreed upon by the benefits are benefits of relatively small value
parties offered or furnished by the employer to his/her
3. In case of dependents, the assistance was employees as a means of promoting the health,
provided through a competitive scheme goodwill, contentment, efficiency of his/her
under the scholarship program of the employees. These benefits are exempt from the
company employer. withholding tax on compensation income, and
consequently from income tax, regardless of
Q: Is the cost of life or health insurance paid whether or not the recipients of the benefits are
for by the employer subject to fringe benefit managerial or rank-and-file employees.
tax?
Q: What are deemed de minimis benefits?
The cost of life or health insurance and other non-life
insurance premiums borne by the employer for his As provided in RR No. 005-11 [March 16, 2011], as
employees shall be treated as taxable fringe benefits amended recently by RR No. 008-12 [M AY 11,
except: 2012], the following shall be considered de minimis
benefits not subject to income tax as well as
1. Contributions of the employer for the benefit withholding tax on compensation income of both
of the employee to the SSS, GSIS and other managerial and rank and file employees:
similar contributions
2. The cost of premiums borne by the 1. Monetized unused vacation leave credits of
employer for the group insurance of his private employees not exceeding ten (10) days
40
employees during the year;
2. Monetized value of vacation and sick leave
(see Section 2.33(D)(10), RRR No. 3-98) credits paid to government officials and
41
employees;
3. Medical cash allowance to dependents of
Q: Enumerate the non-taxable fringe employees, not exceeding P750 per employee
benefits. per semester or P125 per month;
42
1. Fringe benefits are required by the business or _________________________________________

for the convenience of the employer
40
2. Fringe benefits exempted by law This was included in RR 3-98 and in RR 8-00 [August 21, 2000]
3. Contributions of the employer for the benefit of but referred to employees in general. RR No. 005-11 [March 16,
2011] specifically provided “private” employees.
the employee to retirement, insurance, and 41
Introduced by RR 10-00 [December 14, 2000]
hospitalization benefit plans 42
Provided under RR 3-98 and RR 8-00 [August 21, 2000]

4. Rice subsidy of P1,500 or one (1) sack of 50 kg. ---------------------------------------------------------------

rice per month amounting to not more than (iii) Professional Income
43
P1,500; ---------------------------------------------------------------
5. Uniform and clothing allowance not exceeding
44
P5,000 per annum;
Q: Define professional income
6. Actual medical assistance, e.g. medical
allowance to cover medical and healthcare
needs, annual medical check-up, maternity Professional income refers to fees received by a
assistance, and routine consultations, not professional from the practice of his profession
exceeding P10,000 per annum;
45 provided that there is no employer-employee
7. Laundry allowance not exceeding P300 per relationship between him and his clients. It includes
month;
46 the fees derived from engaging in an endeavor
8. Employees achievement awards, e.g. for length requiring special training as a professional as a
of service or safety achievement, with an annual means of livelihood, which includes, but is not
monetary value not exceeding P10,000;
47 limited to, the fees of CPAs, doctors, lawyers,
9. Gifts given during Christmas and major engineers and the like (see RR No. 2-98)
anniversary celebrations not exceeding P5,000
per employee per annum;
48 Q: Distinguish professional income from
10. Daily meal allowance for overtime work and compensation income.
night/graveyard shift not exceeding 25% of the
49
basic minimum wage per region basis. The existence or absence of an employer-employee
relationship determines whether the income shall be
Q: Is the enumeration of de minimis benefits treated as compensation income or professional
exclusive? income. If there is an employer-employee
relationship, then it is considered compensation
Yes. As provided in RR No. 005-11 [March 16, income. Otherwise, it is considered professional
2011], all other benefits given by employers which income.
are not included in the enumeration shall not be
considered de minimis benefits, and, hence, shall be Note: Professional income shall be subject to creditable
subject to income tax as well as withholding tax on withholding tax on the rates prescribed under Section
2.57.2 of RR No. 2-98.
compensation income.
---------------------------------------------------------------
(iv) Income from business
_________________________________________ ---------------------------------------------------------------
43
Under RR 3-98, the amount was P350. RR 8-00 [August 21,
2000] increased this to P1,000 and added the alternative 1 sack
Q: What is business income?
of 50kg of rice. This was increased by RR 5-2008 [APRIL 17, 2008]
to P1,500.
44
Business income refers to gross income derived
RR 3-98 did not provide for an amount. RR 8-00 [August 21, from the conduct of trade or business or the exercise
2000] provided for an amount of P3,000. RR No. 005-11 [March
16, 2011] provided for an amount of P4,000. This was again of a profession.
increased by RR No. 008-12 [MAY 11, 2012] to P5,000.
45
RR 3-98 simply said “medical benefits” with no corresponding Note: Business income shall be subject to the graduated
amount. RR 8-00 [August 21, 2000] provided the amount of rates in the case of individuals and the corporate income
P10,000 as the ceiling. tax in the case of corporations.
46
RR 3-98 provided for an amount of P150. RR 8-00 [August 21,
2000] increased it to P300.
47
RR 3-98 provided for a ceiling of ½ month of the basic salary of ---------------------------------------------------------------
the employee. RR 8-00 [August 21, 2000] changed the ceiling (v) Income from dealings in property
amount to P10,000.
48
RR 3-98 did not provide for a ceiling amount. RR 8-00 [August (a) Types of properties
21, 2000] introduced the P5,000 ceiling.
49
(b) Types of gains from dealings in property
Introduced by RR 8-00 [August 21, 2000].
---------------------------------------------------------------

Q: What gains from dealings in property are

included in the “gross income”? (2) There is no rigid or fixed formula to determine with
finality whether property is a capital or ordinary asset.
Each case must rest upon its own peculiar facts and
Only gains derived from the sale or exchange of circumstances (see CALASANZ V. CIR [144 SCRA 664]
property considered as ordinary assets.
Q: What is the importance of knowing if an
Note: Thus, if what is sold is an ordinary asset, any gain
from the sale thereof shall form part of the ordinary income asset/income is capital or ordinary
which shall be subject either to graduated income tax
rates (if individual) or corporate income tax (if corporation). The tax treatment will vary depend on the nature of
On the other hand, if what is sold is a capital asset, it is the asset. For example, if real property is a capital
subject to capital gains tax. asset, the gain from the sale thereof shall be subject
to the final capital gains tax of 6%. If it is an ordinary
--------------------------------------------------------------- asset, any gain from the sale thereof shall form part
(a) Types of properties of the ordinary income which shall be subject either
(1) Ordinary Assets to graduated income tax rates (if an individual) or
(2) Capital Assets corporate income tax (if a corporation).
---------------------------------------------------------------
Q: A inherited from his father an agricultural
land. He had the land surveyed and
Read Section 39(A)(1), Tax Code
subdivided into lots. Improvements, such as
good roads, concrete gutters, drainage and
Q: What are ordinary assets?
lighting system, were introduced to make
1. Stock in trade of the taxpayer or other the lots saleable. Soon after, the lots were
property of a kind which would properly be sold to the public at a profit. The Revenue
included in the inventory of the taxpayer if examiner adjudged A as engaged in
on hand at the close of the taxable year business as real estate dealers and required
him to pay the real estate dealer’s tax and
2. Property held by the taxpayer primarily for assessed a deficiency income tax on profits
sale to customers in the ordinary course of derived from the sale of the lots based on
his trade or business the rates for ordinary income and not as
capital gains at capital gain rates. Is the
3. Property used in trade or business of a
Revenue Examiner correct?
character that is subject to allowance for
depreciation
Yes. The statutory definition of capital assets is
negative in nature. If the asset is not among the
4. Real property used in trade or business of
exceptions, it is a capital asset; conversely, assets
the taxpayer
falling within the exceptions are ordinary assets. And
necessarily, any gain resulting from the sale or
(see Section 39 Tax Code, and Section 132, RR 2)
exchange of an asset is a capital gain or an ordinary
gain depending on the kind of asset involved in the
Q: What are capital assets? transaction. In this case, the activities of A are
indistinguishable from those invariably employed by
The term capital assets means property held by the one engaged in the business of selling real estate.
taxpayer whether or not connected with his trade or One strong factor is the business element of
business, except those enumerated as ordinary development which is very much in evidence. A did
assets in Section 39. not sell the land in the condition in which he
acquired it. In the course of selling the subdivided
Note: (1) The statutory definition of capital assets is
lots, A engaged in the real estate business and
negative in nature. If the asset is not among the
exceptions, it is a capital asset; conversely, assets falling
accordingly, the gains from the sale of the lots are
within the exceptions are ordinary assets. ordinary income taxable in full (see CALASANZ VS.
COMMISSIONER [OCTOBER 9, 1986])

engaged n real estate business but without any

Q: Y inherited from his mother several tracts specification as to whether the property is capital or
of land. When his mother was still alive, ordinary. The CIR stated that it is necessary to first
these lands were subdivided into lots and determine the character of the real property being
leased. Y sold the leased lots to the sold.
occupants except for one lot which needed
If the real property is a land or building which is not
filling because of low elevation. Said lot was actually used in the business of the seller-
filled and subdivided into smaller lots and corporation and is treated as a capital asset, , then a
sold to the public. Y reported his income final tax of six percent (6%) shall be imposed on the
from the sales as long-term capital gains. gain presumed to have been realized on its sale,
The CIR denied this and ruled that Y was exchange or disposition of such land or building
engaged in the business of leasing the lots based on the gross selling price or fair market value,
and the subsequent sale are sales of real whichever is higher of such land and/or building.
property used in trade or business of the This rule applies, whether or not the seller-
taxpayer. Is the CIR correct? corporation is engaged in real estate business.
Yes. In this case, the properties should be regarded If the real property being sold is an ordinary asset,
as ordinary assets. When Y obtained by inheritance withholding tax rates shall apply. The rate of
the parcels in question, transferred to him was not withholding tax will depend on whether, first, the
merely the duty to respect the terms of any contract seller is exempt or taxable; second, whether the
thereon, but as well the correlative right to receive seller is habitually engaged in real estate business
and enjoy the fruits of the business and property or not; and third, if the seller is habitually engaged in
which the decedent had established and real estate business, the gross selling price.
maintained. Under the circumstances, Y’s sales of
the several lots forming part of his rental business Q: Is an equity investment a capital asset?
cannot be characterized as other than sales of
ordinary assets. The sales concluded on installment Yes. As ruled by the Supreme Court in CHINABANK V.
basis of the subdivided lots comprising the last lot do CA [JULY 19, 2000], an equity investment is
not deserve a different characterization for tax a capital, not ordinary, asset of the investor the sale
purposes. The following circumstances in or exchange of which results in either a capital gain
combination show unequivocally that the petitioner or a capital loss.
was, at the time material to this case, engaged in the
real estate business (see TUASON VS. LINGAD [JULY Q: Can an ordinary asset be converted to a
31, 1974]) capital asset?
Q: What is the tax consequence if the General Rule: No, the property is still an ordinary
property is sold by a seller-corporation asset (see Section 3(e), RR No. 7-2003)
engaged in real estate business?
Exceptions: Properties classified as ordinary assets
It depends. In BIR RULING 27-02 [JULY 15, 2002],
50 for being used in business by a taxpayer engaged in
the CIR was asked to rule on the tax consequences business other than real estate business are
of certain transactions involving a seller that is automatically converted into capital assets upon
showing of proof that the same have not been used
_________________________________________ in business for more than 2 years prior to the
consummation of the taxable transactions involving
50
This ruling also stated that registration with the HLURB or the properties. (BIR RULING NO. 142-2011; Sec.
HUDCC shall be sufficient for a seller/transferor to be considered 3(e), RR No. 7-2003)
as habitually engaged in the real estate business. If the
seller/transferor is not registered with HLURB or HUDCC, he/it
may prove that he/it is engaged in the real estate business by Note: The conversion from ordinary assets to capital
offering other satisfactory evidence assets is only allowed if the taxpayer is not engaged in the
real estate business.

Q: Can a capital asset be converted to an ordinary gains taxation (NELCO)

ordinary asset?
Deductions are usually Generally no deductions
Yes. While RR No. 7-2003 provides a rule that once allowed for ordinary are allowed from capital
an asset is ordinary, it cannot be converted to a gains gains
capital asset (subject to the two year waiting period),
jurisprudence has consistently held that a capital Ordinary gains are Capital gains are subject
asset may become an ordinary asset. CALASANZ V. subject to the graduated to final taxes
CIR [144 SCRA 664] rates or corporate
income tax rate as the
--------------------------------------------------------------- case may be
(b) Types of gains from dealings in property
Ordinary income is to be Income from capital
(1) Ordinary gain vis-à-vis capital gain included in the annual gains tax are not
(2) Actual gain vis-à-vis presumed gain income tax return included in the annual
(3) Long term capital gain vis-à-vis short- income tax return
term capital gain
(4) Net capital gain, net capital loss Q: Distinguish actual gain from presumed
--------------------------------------------------------------- gain
Read Section 22(Z), Section 39(A)(2), Tax Actual gain Presumed gain
Code
There is actual gain There is presumed gain
Q: Distinguish ordinary gain from capital whenever an individual whenever an individual
gain. or corporation sold sold real property treated
shares of stock treated as a capital asset
Ordinary Gain Capital Gain as a capital asset located in the Philippines
or a corporation sold
land/building treated as
any gain from the sale or The gains realized from
a capital asset located in
exchange of property the sale, exchange, or
the Philippines
which is not a capital other disposition of the
asset or property. properties of a taxpayer
classified as capital Actual gain arrived at by Presumed gain does not
assets. deducting the cost or consider the cost of the
adjusted basis of the property sold
property sold from the
Derived from property Derived from property
amount realized
used in trade or not used in trade or
business business whether or not
connected thereto Q: Distinguish long-term capital gain v.
short-term capital gain.
Ordinary gains are not Some types of capital
adjusted by the holding gains are adjusted by Short-term capital gain Long-term capital gain
period in Section 39(B) the holding period in
Section 39(B) If the capital asset has If the capital asset has
been held for not more been held for more than
Only ordinary losses Ordinary losses may be than 12 months 12 months
may be deduced from deducted from certain
ordinary gains types of capital gains
The concept of net The concept of net loss

operating loss carryover carryover applies to
(NOLCO) applies to capital gains taxation

Q: Distinguish net capital gain and net Q: What is the allowable extent of losses
capital loss from sales or exchanges of capitals assets?
(capital loss limitation rule)
Net capital gain Net capital loss
Losses from sales of exchanges of capital assets
means the excess of the means the excess of the shall be allowed to be deducted only to the extent of
gains from sales or losses from sales or the gains from such sales or exchanges.
exchanges of capital exchanges of capital
assets over the losses assets over the gains In CHINABANK V. CA [JULY 19, 2000], Chinabank
from such sales or from such sales or made a 53% equity investment in the First CBC
exchanges exchanges. Capital (Asia) Ltd, a Hong Kong subsidiary. First
CBC became insolvent. With BSP approval,
--------------------------------------------------------------- Chinabank wrote-off the investment in its ITR as a
(5) Computation of the amount of gain or bad debt or as an ordinary loss deductible from its
loss gross income. The BIR disallowed the deduction on
the basis that the debt was not worthless. The
---------------------------------------------------------------
Supreme Court ruled that the equity investment is
not indebtedness in the first place but rather capital,
Note: This involves Section 40 of the Tax Code
not an ordinary, asset. Shares of stock would
(Determination of Amount and Recognition of Gains or
Loss). I’ll discuss this after I complete the discussion on be ordinary assets only to a dealer in securities or a
Section 39 (Capital Gains and Losses) person engaged in the purchase and sale of, or an
active trader (for his own account) in, securities. In
--------------------------------------------------------------- the hands, however, of another who holds the
shares of stock by way of an investment, the shares
(6) Income tax treatment of capital loss to him would be capital assets. When the shares
(a) Capital loss limitation rule held by such investor become worthless, the loss is
(b) Net loss carry-over rule deemed to be a loss from the sale or exchange of
--------------------------------------------------------------- capital assets.
Read Section 39(B), (C), (D), Tax Code The Court further stated that assuming that the
equity investment of CBC has indeed become
Q: Is the capital gain from the sale or "worthless," the loss sustained is a capital, not an
exchange of a capital asset always taxable ordinary, loss. The rule thus is that capital loss can
be deducted only from capital gains. The capital loss
in full? (Holding period) sustained by CBC can only be deducted from capital
gains if any derived by it during the same taxable
No. In the case of a taxpayer other than a
51 year that the securities have become "worthless.
corporation, the following percentages of the gain
upon the sale or exchange of a capital asset shall be
Note: The exception (where the capital loss limitation rule
taken into account in computing net capital gain: will not apply) – If a bank or trust company incorporated
under the laws of the Philippines, a substantial part of
1. 100% if the capital asset has been held for not whose business is the receipt of deposits sells any bond,
more than 12 months debenture, note or certificate or other evidence of
2. 50% if the capital asset has been held for more indebtedness issued by an corporation with interest
than 12 months coupons or in registered form, any losss resulting from
such sale shall not be subject to the above limitations and
shall not be included in determining the applicability of
such limitation to other losses. See Section 39(C), Tax
_________________________________________ Code.
51
The holding period is material only if the capital asset is sold by
an individual. This does not apply to corporations.

Q: What is the net loss carry-over rule Read Section 24(D), Section 25(A)(3),
(NELCO)? Section 25(B), Section 27(D)(5), Tax Code
If any taxpayer, other than a corporation, sustains in Q: What is the rule on capital gains from
any taxable year a net capital loss, such loss (in an dispositions of real property?
amount not in excess of the net income for such
year) shall be treated in the succeeding taxable year The rate of 6% shall be imposed on capital gains
as a loss from the sale or exchange of a capital presumed to have been realized by the seller from
asset held for not more than twelve (12) months. the sale, exchange, or other disposition of real
properties located in the Philippines classified as
Note: The capital limitation rule applies to both individual capital assets, including lacto de retro sales and
and corporate taxpayers while NELCO only applies to other forms of conditional sales based on the gross
individuals and cannot be availed of by corporate
selling price or fair market value as determined
taxpayers.
by the CIR, whichever is higher.
Q: Distinguish Net Loss Carry-over (NELCO)
The tax base shall be the entire selling price.
from Net Operating Loss Carry-Over
(NOLCO). The capital gains tax must be paid within 30 days
following each sale or disposition. In case of
NELCO NOLCO installment sale, the return shall be filed within 30
days following the receipt of the first down payment
NELCO is a concept in NOLCO is a concept in
capital gains taxation ordinary income taxation and within 30 days following the subsequent
installment payments.
NELCO is enjoyed only by NOLCO is enjoyed by
individuals, not corporations corporations, not Q: What are the transactions covered by the
individuals capital gains tax?
May be availed of only May be availed over a 1. Sale
during the succeeding year period three years
2. Exchange; or
3. Other disposition, including pacto de retro
--------------------------------------------------------------- sales and other forms of conditional sales
(7) Dealings in real property situated in the Note: (1) The phrase “sale, exchange, or other
Philippines disposition” includes taking by the government through
(8) Dealings in shares of stock of Philippine expropriation GONZALES V. CTA [121 PHIL. 861]
corporations
--------------------------------------------------------------- Q: What is the basis of the 6% capital gains
tax?
Note: Again, to reiterate, whether it’s real property or
shares of stock that is the subject of the sale, if it is an Whichever is the higher of:
ordinary asset, it forms part of the ordinary income which
shall be subject either to graduated income tax rates (if
1. The gross selling price; or
individual) or corporate income tax (if corporation). On the
other hand, if it’s a capital asset, it is subject to capital 2. Current fair market value as determined
gains tax. below:
a. The FMV of real properties located
--------------------------------------------------------------- in each zone or area as determined
by the CIR after consultation with
(7) Dealings in real property situated in the competent appraisers both from the
Philippines private and public sectors
(9) Sale of principal residence b. The fair market value as shown in
--------------------------------------------------------------- the schedule of values of the
provincial and city assessors

4. The historical cost or adjusted basis of his

(see Section 24(D)(1) in relation to Section 6(E), old principal residence sold, exchanged
Tax Code) disposed shall be carried over to the cost
basis of his new principal residence
Q: What is the special rule for disposition of 5. If there is no full utilization of the proceeds of
real property made by an individual to the sale, exchange or disposition of his old principal
government? residence, he shall be liable for deficiency
54
capital gains tax of the utilized portion.
As provided in RR 8-98, in case of disposition of real
property made by an individual to the government or Note: The exemption applies to resident citizens and
aliens. This is logical because if they are not residents,
to any of its political subdivisions or agencies or to then there is no principal place of residence.
government-owned or controlled corporations, the
seller may elect to:
Q: Define “principal residence”
1. compute the tax on the gain derived from such
It is the dwelling house, where the husband or wife
sale under the normal income tax rates; or
or unmarried individual residence; actual occupancy
2. under a final capital gains tax of 6%.
is not interrupted or abandoned by temporary
absence
Q: What are the conditions for the
exemption of capital gains tax on the sale by Q: Who is liable to pay the capital gains tax?
a natural person of his principal residence?
The seller is liable to pay the capital gains tax. As
As provided in RR 13-99 [JULY 26, 1999], as provided in RR NO. 8-98 [AUGUST 25, 1998], the
52
amended by RR 14-2000 [NOVEMBER 20, 2000]: capital gains tax return will be filed by the seller
within 30 days following each sale or disposition of
1. The 6% capital gains tax due shall be deposited real property.
in an account with an authorized agent bank
under an Escrow Agreement. It can only be Q: Can the buyer pay the capital gains tax?
released upon showing that the proceeds have
been fully utilized within 18 months. Yes. The buyer can retain the amount for the capital
2. The proceeds from the sale, exchange or 55
gains tax and pay it upon authority of the seller, or
disposition must be fully utilized in acquiring the seller can pay the tax, depending on the
or constructing his new principal residence agreement of the parties.
within 18 calendar months from date of its
53
sale. Proof must be submitted.
Q: Is the payment of the capital gains tax a
3. The tax exemption may be availed of only
once every 10 years pre-requisite to the transfer of ownership to
the buyer?
_________________________________________
No. Payment of the capital gains tax, however, is not
52
RR 14-2000 added the escrow agreement requirement and a pre-requisite to the transfer of ownership to the
conditions relating thereto. buyer. The transfer of ownership takes effect upon
53
To ensure compliance, he must within 30 days from the lapse the signing and notarization of the deed of absolute
of the said period the required documents to prove full utilization. sale. (see CHUA V. CA [APRIL 9, 2003])
If he fails to submit the required documents within 30 days after
the lapse of the 18-month period, it shall be presumed that he did _________________________________________
not fully utilize the proceeds of the sale, exchange or disposition
54
of his old principal residence, and shall be assessed deficiency This is inclusive of 20% interest per annum, computed from the
capital gains tax. The escrow shall be applied in payment of this. 31st day after the date of sale or disposition of the said old
If the same is insufficient to cover the entire amount assessed, he principal residence.
55
shall remain liable for the remaining balance of the assessment. The buyer has more interest in having the capital gains tax paid
The excess of the deposit in escrow, if any, shall be returned to immediately since this is a pre-requisite to the issuance of a new
him. Torrens title in his name.

Note: In the next two questions, I will be discussing capital Note: (1) To summarize, no capital gains taxes if
gains taxation of foreclosed mortgaged real properties. foreclosed properties is redeemed. If there is non-
The relevant BIR issuances (RR 4-99) and relevant cases redemption, capital gains must be paid.
are outdated and do not reflect the changes introduced by
Section 47 of the General Banking Law. The most recent Q: ABC Company took out a loan from XYZ
case SUPREME TRANSLINER V. BPI FAMILY SAVINGS BANK
[FEBRUARY 23, 2011] involved a foreclosure sale which
bank and mortgaged one of its properties as
took place prior to the effectivity of the General Banking collateral. ABC was unable to pay so XYZ
Law. The updated BIR issuance on the matter is RMC 55- extrajudicially foreclosed the property and
2011 [November 10, 2011]. bought it. Before the expiration of the one-
year redemption period,57 the mortgagor
RMC 55-2011 provides that the 1-year period on the
foreclosed asset of natural persons and the period within notified the bank of its intention to redeem
which to pay CGT or CWT and DST on the foreclosure of the property. Is XYZ liable to pay the capital
Real Estate Mortgage shall be reckoned from the date of gains tax as a result of the foreclosure sale?
registration of the sale in the Office of the Register of
Deeds No. In foreclosure sale, there is no actual transfer of
the mortgaged real property until after the expiration
For juridical persons in an extrajudicial foreclosure,
Section 47 of the General Banking Law provides that its
of the one-year period and title is consolidated in the
right of redemption shall be until, but not after the name of the mortgagee in case of non-redemption.
registration of the certificate of sale with the Register of This is because before the period expires there is
Deeds, which in no case shall be more than 3 months yet no transfer of title and no profit or gain is realized
after foreclosure, whichever is earlier. (RMC No. 55-2011 by the mortgagor. SUPREME TRANSLINER V. BPI
[November 10, 2011]). The right of redemption shall be FAMILY SAVINGS BANK [FEBRUARY 23, 2011]
reckoned from the approval of the executive judge [CIR v.
UPCB [October 23, 2009]) Q: If title to property is transferred to one
spouse as a result of a court decision in an
Q: If a mortgagee foreclosed the mortgaged
annulment case, is the transfer subject to
property but the mortgagor exercises his
capital gains tax?
right of redemption within the applicable
period, will capital gains tax still be imposed No. In BIR Ruling DA-029-08 [JANUARY 23, 2008],
on the foreclosure sale? title to a house and lot was transferred to the
husband by virtue of a decision of the court
RR 4-99 [M ARCH 9, 1999] provides that in case the declaring his marriage with his wife null and void. In
mortgagor exercises his right of redemption within BIR Ruling DA 287-07 [M AY 8, 2007], title to a
one year from the issuance of the certificate of condominium unit was transferred to the wife as a
56
sale, no capital gains tax shall be imposed result of an agreement to distribute communal
because no capital gains has been derived by the property executed in the course of annulment
mortgagor and no sale or transfer of real property proceedings. In both BIR Rulings, the CIR held that
was realized. If the mortgagor does not exercise his the transfer of the title of the subject properties are
right of redemption, capital gains tax on the not subject to capital gains tax, as such transfers are
foreclosure sale shall become due. In such case, the equivalent to a conveyance but without monetary
capital gains tax due will be based on the bid price consideration, made in accordance with the Court's
of the highest bidder. Decision granting parties agreement for the
_________________________________________ distribution of communal property.
56
Note Section 47 of the General Banking Act, judicial persons
whose property is being sold pursuant to an extrajudicial
foreclosure shall have the right to redeem the property until, but _________________________________________
not after, the registration of the certificate of foreclosure sale with
57
the Register of Deeds which in no case shall be more than 3 The foreclosure sale in the case on which the question is based
months after foreclosure took place prior to the effectivity of the Act.

Q: Is the assignment and delivery of the Q: Who are liable for capital gains tax on
developed units to joint owners in a Build- shares of stock?
To-Own (BTO) scheme subject to capital
gains tax? 1. Individual taxpayer, whether citizen or alien
2. Corporate taxpayer, whether domestic or
In a BTO, the developer makes it appear that it foreign
merely manages the construction of the 3. Other taxpayers other than (1) and (2) such
condominium project, and that the funds as as estates, trusts, trust funds, and pension
contributed by the individual investors are pooled in funds,
a bank with the developer, as project manager,
receiving a project management fee, In that scheme, Q: Who are exempt from capital gains tax on
it is claimed that the assignment and delivery to the shares of stock?
individual investors of the developed units is not
taxable as it is merely a transfer of property held in 1. Dealer in securities
trust by the Trustee for the individual trustors. 2. Investors in shares of stock in a mutual fund
Previous BIR rulings have exempted the assignment company in connection with the gains
from capital gains tax. In In BIR RULING DA-455-07 realized by said investor upon redemption of
[AUGUST 17, 2007], the conveyance of the the said shares of stock
condominium units by the trustee to the individual 3. All other persons, whether natural or
trustors pursuant to the terms of the BTO contract juridical, who are specifically exempt from
and without consideration was held not subject to NIRC taxes under existing investment
capital gains tax. However, in RMC NO. 055-10 schemes and other special laws.
[JUNE 28, 2010], the CIR nullified all BIR Rulings
exempting the scheme from capital gains tax. Thus, Q: What is the rule on capital gains from
the present rule is that the assignment and delivery sales of shares of stock?
in BTO schemes are subject to capital gains tax.
Capital gains tax shall be imposed upon the net
--------------------------------------------------------------- capital gains realized during the taxable year from
(8) Dealings in shares of stock of Philippine the sale, barter, exchange or other disposition of
corporations shares of stock in a domestic corporation except
(a) Shares listed and traded in the stock shares, sold or disposed through the stock
exchange exchange.
(b) Shares not listed and traded in the stock
The final tax imposed shall be:
exchange
--------------------------------------------------------------- Capital gains not over P100,000 – 5%
Capital gains over P100,000 – 10%
Read Section 22(L), (T), (U), Section 24(C),
Section 25(A)(3), Section 25(B), Section The tax base shall only be the gain on the sale and
27(D), Section 28(A) and Section 28(B), Tax such sale will always be subject to capital gains tax
Code without any exemption.
The capital gains tax must be paid within 30 days

following each sale or disposition. In case of
Q: What are stocks classified as capital
installment sale, the return shall be filed within 30
assets? days following the receipt of the first down payment
and within 30 days following the subsequent
Stocks classified as capital assets mean all stocks installment payments.
and securities held by taxpayers other than dealers
in securities. (See RR 06-2008 [APRIL 22, 2008])

Note: This is how you construe the rate of capital gains

tax for shares of stock – The tax rate is 5% for a net REVENUE REGULATIONS NO. 16-2012
capital gain not exceeding P100,000 and 10% for any
excess. Tax Treatment of Sales, Barters, Exchanges or Other
Dispositions of Shares of Stock of Publicly-listed
Q: How do you determine the tax base of Companies Whose Public Ownership Levels Fall
disposition of stock? Below the Mandatory Minimum Public Ownership
(MPO) Level, Monitoring of these Companies and their
Stock Transactions, and Amending Revenue
Listed and FMV is the actual selling price
Regulations No. 06-08 for the Purpose
traded through
the PSE Revenue Regulations No. 16-2012 prescribes the tax
treatment of sales, barters, exchanges or other
Sales of stock FMV is the closing price on the dispositions of shares of stock of publicly-listed companies
listed but not day when the shares were sold, that are required to maintain the minimum public
traded through transferred, etc (if no sale was ownership (MPO) of ten percent (10%) of issued and
the PSE made on that day in the PSE, outstanding shares, or such percentage as may be
then the closing price on the prescribed by the Securities and Exchange Commission
(SEC) or Philippine Stock Exchange (PSE), whichever is
day nearest to the date of sale higher.
,transfer, or exchange of the
said shares The taxes to be imposed on sales, barters, exchanges and
other dispositions of shares of stocks of publicly-listed
Sales of stock The FMV is the book value of companies that do not comply with the MPO are:
not listed and the shares of stock as shown in
not traded the financial statements duly a. Transactions up to December 31, 2012 – stock
through the PSE certified by an independent transaction tax of one-half of one percent (1/2 of 1%) of
the gross selling price or gross value in money of the
CPA nearest to the date of sale.
shares of stock.
b. Transactions after December 31, 2012 – final tax of 5%

(See RR 06-2008 [APRIL 22, 2008]) on the net capital gain up to P100,000.00 and 10% of the
net capital gain in excess thereof, and documentary stamp
Note: That under RR 6-2013 [April 11, 2013], the FMV tax under Section 175 of the NIRC.
shall be determined using the Adjusted Net Asset Method.
All assets and liabilities are to be adjusted to fair market
values, and the net value thereof shall be the value of the
Q: What are exempted from capital gains tax
equity. on stock transactions?
Q: If the share of stock is traded through the 1. Gains derived by dealers in securities
stock exchange, what tax is applicable? 2. Gains from sales of stock to the extent invested
in new shares of stocks in banks, financial
A percentage tax of ½ of 1% is imposed on the intermediaries, and corporations organized
gross selling price of shares of stock if they are listed primarily to hold equities in banks
and sold, exchanged or transferred through the 3. All other gains which hare specifically exempt
facilities of the local stock exchange.(see Section from income tax under existing investment
127(A) and RR 06-2008 [APRIL 22, 2008]) incentives and other special laws.
However, even if traded through the stock Q: Is an assignment of deposits on stock

exchange, a sale of shares by companies not subscriptions subject to capital gains tax?
complying with the 10% minimum public float shall
be subject to capital gain tax (see RR 16-2012 Yes. The assignment of the deposits on stock
[November 7, 2012]) subscriptions results in a net gain. A tax on the profit
of sale on net capital gain is the very essence of the
net capital gains tax law. To hold otherwise will
ineluctably deprive the government of its due and

unduly set free from tax liability persons who profited (a) Meaning of merger, consolidation,
from said transactions (see COMPAGNIE FINANCIERE control
SUCRES ET DENREES VS. CIR [AUGUST 28, 2006]) securities
(b) Transfer of a controlled
Q: What is the effect of non-payment of corporation
capital gains tax on stock transactions? ---------------------------------------------------------------
As provided in Section 11 of RR 06-2008, no sale, Disclaimer: I would advise that you get a pack of tissue
exchange, transfer or similar transaction intended to and some pain relievers. You may experience headaches
convey ownership of, or title to any share of stock and nose bleeding in this part.
shall be registered in the books of the corporation
unless the receipts of payment of the tax herein ---------------------------------------------------------------
imposed is filed with and recorded by the stock (a) Cost or basis of the property sold
transfer agent or secretary of the corporation. (b) Cost or basis of the property exchanged
in corporate readjustment
RMC 37-2012 [AUGUST 3, 2012] clarified RR 06- ---------------------------------------------------------------
2008 in stating that a Certificate Authorizing
Registration [CAR] is still necessary before any Read Section 40(A), (B) (C)(5), Tax Code
transfer of shares of stock not traded in the Stock
Exchange may be transferred in the books of a
corporation. Q: How is gain from the sale or other
disposition of property computed?
---------------------------------------------------------------
The gain from the sale or other disposition of
(5) Computation of the amount of gain or
property shall be the excess of the amount realized
loss therefrom over the basis or adjusted basis for
--------------------------------------------------------------- determining gain.
Note: Section 40 (Determination of Amount and
Recognition of Gain or Loss) can be divided into two parts:
Q: How is loss from the sale or other
(1) Computation of Gain or Loss/Basis for Determining disposition of property computed?
Gain or Loss from Sale or Disposition of Property and the
more important topic (2) tax-free exchanges. The 2012 The loss shall be the excess of the basis or
Bar Syllabus broke down this topic. In the discussions adjusted basis for determining loss over the amount
below, I shall follow the said outline, to wit: realized.
--------------------------------------------------------------- Note: Amount realized is the sum of the money received

(a) Cost or basis of the property sold plus the fair market value of the property (other than
(b) Cost or basis of the property exchanged money received).
in corporate readjustment
(1) Merger Q: What is the cost or basis for determining
(2) Consolidation gain or loss from the sale or exchange of
(3) Transfer to a controlled corporation property
(tax-free
If the property is acquired by:
exchanges)
(c) Recognition of gain or loss in exchange Purchase The basis is the cost of the property
of property
(1) General rule Inheritance The FMV as of the date of acquisition
(a) Where no gain or loss shall be if the same was acquired
recognized Gift the basis shall be the same as if it
(2) Exceptions would be in the hands of the donor or
the last preceding owner by whom it

was not acquired by gift except if (a) Where no gain or loss shall be
such basis is greater than FMV of the recognized
property at the time of the gift then,
for purpose of determining loss, the (2) Exceptions
basis shall be such FMV (a) Meaning of merger, consolidation,
control, securities
For less than the basis of such property is the (b) Transfer of a controlled
an adequate amount paid by the transferee for the
consideration
corporation
property
in money or ---------------------------------------------------------------
money’s worth
Tax-free a. Shares of stock received by Read Section 40(C)(1) to (3), Tax Code
exchanges transferor – original basis less
the money received and fair Q: What is the general rule in the
market value of property
received, plus the amount recognition of gain or loss in an exchange
treated as dividend of the of property?
shareholder and the amount of
any gain that was recognized As a general rule, the entire amount of the gain or
on the exchange loss shall be recognized upon the sale or exchange
b. Property transferred in the of property. In other words, if there are gains, the
hands of the transferee – same gains shall be taxable. If there are losses, the losses
as it would be in the hands of
shall be allowed as deductions.
transferor increased by the
amount of the gain recognized
to the transferor on the transfer Note: The phrase “where no gain or loss is recognized”
means that if there is an exchange of property and there is
a gain, the resulting gain is not subject to tax. If there is a
Stocks and The basis of the substantially
loss, the loss could not be used as a deduction from gross
Securities identical stock so sold or disposed of,
income. This does not refer to the general rule because in
acquired in increased or decreased, as the case
the general rule the gain or loss is recognized. The phrase
Wash Sales may be, by the difference, if any,
appropriately refers to Section 40(C)(2) (merger or
between the price at which the stock
consolidation and transfer of a controlled corporation)
or securities was acquired and the
price at which such substantially
identical stock or securities were sold Q: What are the exceptions to the general
or otherwise disposed of. [see rule?
Section 143, RR 2]
1. No gains or loss recognized if in pursuance
of a plan of merger or consolidation where
To be entitled to the computation of the gain or loss there is an exchange solely in kind (see
from the sale of an investment of a non-resident Section 40(C)(2))
stockholder using a functional currency other than 2. Gains recognized but loss not recognized in
the Philippine peso, the following elements must be transactions between related parties (see
present, to wit: (1) such non-resident stockholder Section 36(B))
made the said investment in such functional 3. Gains recognized but loss not recognized
currency, and not in Philippine peso; and (2) the where the exchange is not solely in kind
investee company in the Philippines uses a (see Section 40(C)(3))
functional currency other than the Philippine peso for
its financial statements. CE PHILIPPINES LTD. VS. CIR, Note: No. 2 will be discussed in Part 6 (Items not
CTA EB 770 (CTA 7688), SEPTEMBER 20, 2012 deductible) of the Syllabus. In this part, I will focus on
Items 1 and 3.
---------------------------------------------------------------
(c) Recognition of gain or loss in exchange
of property
(1) General rule

Q: What are the instances where no gain or

loss is recognized (tax-free exchanges or 1. It must be undertaken for a bona fide
exchanges of property solely in kind) business purpose and not solely for
escaping the burden of taxation
No gain or loss shall be recognized if in pursuance 2. In determining if a bona fide transaction
of a plan of merger or consolidation: exists, the whole transaction or series of
transactions shall be treated as a single unit
1. A corporation which is a party to a merger or and every step of the transaction shall be
consolidation exchanges property solely for considered
stock in a corporation, which is a party to the 3. In determining if the property transferred
merger or consolidation (property for constitutes a substantial portion of the
stock) property of the transferor, property shall be
2. A shareholder exchanges stock in a taken to include cash assets.
corporation, which is a party to a merger or
consolidation solely for the stock of another Q: What is the basic consideration in
corporation also a party to a merger or determining whether a consolidation or
consolidation (stock for stock) merger is tax-free?
3. A security holder of a corporation, which is a
party to a merger or consolidation, The basic consideration is the purpose of the merger
exchanges his securities in such or consolidation. The merger or consolidation must
corporation, solely for stock or securities in be undertaken for a bona fide business purpose and
another corporation, a party to the merger or not for the purpose of escaping the burden of
consolidation (security for stock) taxation.
4. If property is transferred to a corporation by
a person in exchange for stock or unit of Q: A owns all the stock of ABC Corp. ABC
participation in such a corporation of which Corp. had 1,000 shares of XYZ Corp. A
as a result of such exchange, said person, formed a new corporation called DEF Corp.
alone or together with others, not exceeding A had ABC transfer all 1,000 XYZ shares to
four (4) persons gains control of said DEF. She then dissolved DEF and liquidated
corporation provided that stocks issued for
the assets (the XYZ shares). A then sold the
services shall not be considered as issued in
return for property. (estate planning or XYZ shares and paid the corresponding
transfer of a controlled corporation) CGT based on a lower cost basis. Is the
transfer valid?
Note: (1) An exchange solely in kind is an exchange of
property with property with no money involved. (2) Control No. As held in GREGORY V. HELVERING [293 US 465,
means ownership or stocks in a corporaion possessing at JANUARY 7, 1935], a transfer of assets by one
least 51% of the total voting power of all classes of stock corporation to another must have a business
entitled to vote purpose. Here, it was a mere device which followed
the form of a corporate reorganization to conceal its
Q: Define merger of consolidation in relation real character which was a transfer of stock of XYZ
to tax-free exchanges. shares to A.
Merger or consolidation shall be understood to mean Q: A, B, C were majority stockholders of

ABC Theatrical Co. They were also majority
1. the ordinary merger or consolidation; or
stockholders of XYZ Theatrical Co which
2. the acquisition by one corporation of all or
substantially all the properties of another was engaged in the same business. ABC
corporation solely for stock (de facto and XYZ agreed to merge. Under the
merger) agreement, all business, property, assets
and goodwill of ABC will be transferred to
For a transaction to be regarded as a merger or XYZ in exchange for XYZ stocks for each
consolidation under Section 40:

stock held in ABC. Is the exchange subject for he assets to be transferred. In effect, the transfer
to capital gains tax? takes the nature of a donation made by the
subsidiaries to their parent company contrary to
No. As held in CIR v. RUFINO [FEBRUARY 27, 1987], It what is contemplated in Section 40(C)(2) of the
is well established that where stocks for stocks were NIRC. Also, the intended merger has the effect of
exchanged, and distributed to the stockholders of dissolving and liquidating the subsidiaries without
the corporations, parties to the merger or payment of corresponding taxes. BIR RULING NO.
consolidation, pursuant to a plan of reorganization, 614-12 [NOVEMBER 9, 2012]
such exchange is exempt from capital gains tax. The
basic consideration, of course, is the purpose of the Q: Filinvest Development Corporation
merger, as this would determine whether the (FDC), a holding company, is the owner of
exchange of properties involved therein shall be 80% of the outstanding shares of Filinvest
subject or not to the capital gains tax. The criterion Alabang, Inc. (FAI) and 67.42% of the
laid down by the law is that the merger" must be outstanding shares of Filinvest Land, Inc.
undertaken for a bona fide business purpose and (FLI). FDC and FAI entered into a Deed of
not solely for the purpose of escaping the burden of Exchange with FLI whereby the former both
taxation." It is clear, in fact, that the purpose of the
transfer in favor of the latter parcels of land
merger was to continue the business of the Old
Corporation, whose corporate life was about to in exchange for shares of stock of FLI. The
expire, through the New Corporation to which all the CIR argues that the taxable gain should be
assets and obligations of the former had been recognized for the exchange as FDC’s
transferred. The exemption from the tax of the gain controlling interest in FLI was decreased as
derived from exchanges of stock solely for stock of a result of the exchange. Is the CIR’s
another corporation was intended to encourage contention correct?
corporations in pooling, combining or expanding
their resources conducive to the economic No. The Supreme Court in CIR V. FILINVEST
development of the country. The merger in question DEVELOPMENT CORPORATION (JULY 19, 2011] stated
involved a pooling of resources aimed at the that the requisites for the non-recognition of gain or
continuation and expansion of business and so loss of a transfer of property for shares of stock are
came under the letter and intendment of the NIRC as follows: (a) the transferee is a corporation; (b)
exempting from the capital gains tax exchanges of the transferee exchanges its shares of stock for
property. property/ies of the transferor; (c) the transfer is made
by a person, acting alone or together with others, not
Q: A Corp, a domestic corporation, entered exceeding four persons; and, (d) as a result of the
into a merger with its wholly-owned exchange the transferor, alone or together with
domestic subsidiaries B Corp and C Corp. A others, not exceeding four, gains control of the
Corp is the surviving corporation. Pursuant transferee. Rather than isolating FDC, the shares
to the merger, B Corp and C Corp will issued to FDC should be appreciated in combination
with the new shares issued to FAI. Together, FDC
transfer all their assets and liabilities to A
and FAI’s shares add to 70.99% of FLI’s shares.
Corp. However, since B Corp and C Corp are Since the term "control" is clearly defined as
wholly-owned by A Corp prior to the merger, "ownership of stocks in a corporation possessing at
A Corp will not longer issue any shares of least fifty-one percent of the total voting power of
stock in consideration of the assets and classes of stocks entitled to one vote, “ the
liabilities transferred. Is the merger between exchange of property for stocks between FDC-FAI
A Corp, B Corp, and C Corp considered a and FLI clearly qualify as a tax-free transaction.
tax free merger under Section 40(C)(2)?
Q: ABC is a domestic corporation.
No. The intended re-organization is an upstream Shareholders transferred their real property
merger between a parent company and its in exchange for more shares in the
subsidiaries where the parent company will not be corporation. In effect, they gained control of
issuing any shares ot the subsidiaries in exchange more than 51% of the shares of the

corporation entitled to vote. Is the exchange transfer to the Transferee of all the rights, privileges,
tax-exempt? and liabilities of the Transferor in the case of de
facto merger.
58
It depends. In BIR Ruling 274-87, the CIR ruled
that no gain or loss would be recognized if property Q: What are the similarities and differences
is transferred to a corporation by a person in between a de facto merger and a transfer of
exchange for stock in such a corporation of which as property for shares under Section 40(C)(2)
a result of such exchange, said person alone or of the Tax Code?
together with others, not exceeding four persons,
gains control of said corporation. The term "control" De facto merger is in procedure similar to a transfer
shall mean ownership of stocks in a corporation to a controlled corporation under the same Section
possessing at least 51% of the total voting power of 40(C)(2) of the Tax Code of 1997, except that at
all classes of stocks entitled to vote. In determining least 80% of the Transferor's assets, including cash,
the 51% stock ownership, only those persons who are transferred to the Transferee, with the element
transferred property for stock in the same of permanence and not merely momentary holding.
transaction may be counted up to a maximum of
five. However, a de facto merger and a transfer to a
controlled corporation are different in that, (1) the
Q: What is a de facto merger? Transferor in a de facto merger is a corporation,
while in a transfer to a controlled corporation, the
To constitute a de facto merger, the following Transferors may either be a corporation or an
elements must concur: individual, and (2) in a de facto merger, there is no
requirement that the transferor gains control (that is,
1. There must be a transfer of all or 51% of the total voting powers of all classes of
substantially all of the properties of the stocks of the Transferee entitled to vote) of the
transferor corporation solely for stock, Transferee as a prerequisite to enjoying the benefit
and of non-recognition of gain or loss. What is essential
2. It must be undertaken for a bona fide in a de facto merger is that the Transferee acquires
business purpose and not solely for the all or substantially all of the properties of the
purpose of escaping the burden of Transferor. (see RMC 1-02 [April 25, 2002])
taxation. (see RMC 1-02 [April 25, 2002])
Q: What are the administrative requirements
Q: What is meant by “substantially all”? in case of tax-free exchanges?
As provided by RR 2, "substantially all" means the 1. The parties who are applying for confirmation
acquisition by one corporation of at least 80% of the that the transaction is indeed a tax-free
assets, including cash, of another corporation, which exchange shall submit the following:
has the element of permanence and not merely
momentary holding a. A sworn certification on the basis of the
property to be transferred
Q: What are the differences between a de b. Certified true copies of the TCT and/or CCT
facto merger and a statutory (ordinary) of real properties transferred
merger? c. Certified true copies of the corresponding
latest Tax Declaration of the real properties
In a de facto merger, the Transferor is not to be transferred
automatically dissolved unlike in the case of a d. Certified true copies of the certificates of
statutory merger. Likewise, there is no automatic stocks evidencing shares of stocks to be
transferred
_________________________________________ e. Certified true copy of the inventory of other
58
property/ies to be transferred/
Note that in this BIR Ruling, there were 6 transferors,

2. The BIR shall issue a certification or ruling amount of the gain recognized not in excess
confirming that an exchange of property for of his proportionate share of the
shares complies with the requisites for it to be undistributed earnings and profits of the
tax-free. The certification or ruling shall contain corporation; the remainder, if any, shall be
the substituted basis of the properties. treated as capital gain.
3. The Certificate Authorizing Registration (CAR) 3. If the transferor corporation receives money
or Tax Clearance (TCL) shall be issued by the and/or property in addition to the stock, then:
RDO/Authorized Internal Revenue Officer on the
basis of the BIR certification or ruling a. If the corporation distributes it in
4. The information that the transaction is a tax-free pursuance of the plan of merger or
exchange and the substituted basis of the consolidation, no gain shall be
properties shall be annotated in the TCT and/or recognized
CCT. b. If the corporation does not distribute it,
5. The applicant/taxpayer shall pay the processing the gain, if any, but not the loss shall be
and certification fee of P5,000 for each recognized but not in an amount not in
application not involving more than 10 real excess of the sum of such money and
properties and/or certificates of stock. An the fair market value of the property so
additional P100 shall be paid for every TCT/CCT received.
and/or certificate of stock in excess of 10.
6. Every official, agent, or employee of the Registry Q: What is the effect of the assumption of
of Deeds and corporate secretary or the duly the transferee of the liabilities of the
authorized officer of the corporation who fails to transferor in addition to the transfer of
annotate the information shall be subject to a property?
penalty.
Section 40(C)(4) provides that if the taxpayer
Q: Is there a prescriptive period for rulings receives the stock as if it were the sole
issued in connection to tax-free exchanges? consideration, and, as part of the consideration,
another party to the exchange assumes a liability of
Yes. RMC 40-2012 [August 3, 2012] provides that the taxpayer or acquires property subject to a
rulings issued under Section 40 (C) (2) of the NIRC, liability, such assumption or acquisition shall not be
as amended, shall be valid only for ninety (90) days treated as money and/or property and shall not
counted from the date of receipt of the ruling by any prevent the exchange from being tax-free.
of the parties to the exchange transaction. The
properties and shares of stocks involved in the However, if the amount of liabilities assumed plus
transfer should be conveyed to the transferee/s and the amount of liabilities to which the property is
transferor/s, respectively, within this period. subjected to exceed the total adjusted basis of the
property, then such excess shall be considered
Read Section 40(C)(3) to (4), Tax Code either a capital gain or ordinary gain, as the case
may be.
Q: What is the effect if the tax-free exchange
is not solely in kind? Note: Take a walk and have a break muna!
1. If an individual, shareholder, security holder ---------------------------------------------------------------

or corporation receives money and/or (vi) Passive investment income
property in addition to the stock, the gain, (a) Interest Income
but not the loss, shall be recognized but in
(b) Dividend Income
amount not in excess of the sum of the
money and the fair market value of such (c) Royalty Income
other property received. (d) Rental Income
2. As to the shareholder, if the money and/or ---------------------------------------------------------------
property has the effect of a distribution of a
taxable dividend, there shall be taxed an Note: Earlier we discussed capital gains from dealings in
real property and shares of stock. These two along with

certain passive incomes are subject to final tax. The (4) Liquidating dividend
importance of knowing that an income is subject to final ---------------------------------------------------------------
tax is that it is no longer included in his gross income
reportable in the annual income tax return.
Q: What are dividends?
Q: Define passive income
The term “dividends” means any distribution made
Passive income is income derived from any activity by a corporation to its shareholders out of its
in which the taxpayer does not materially participate. earnings or profits and payable to its shareholders,
whether in money or in other property.
Q: What is the tax treatment of passive Note: To simplify matters – If the distribution is in money,
income? it is called a cash dividend. If it is in property, it is called a
property dividend. If it is in stock, it is called a stock
Passive income may be subject to: dividend. If it results from the distribution by a corporation
of all its property or assets in complete liquidation or
1. Schedular rates (e.g. dividend income dissolution, it is called a liquidating dividend.
received by a domestic corporation from a
foreign corporation) Q: When is dividend income subject to tax?
2. Final tax (e.g. interest income from foreign
currency bank deposits by a resident citizen) It is taxable at the time of their declaration by the
corporation, and not at the time of actual payment of
--------------------------------------------------------------- dividends, since dividend income is taxable whether
(a) Interest Income actually or constructively received.
---------------------------------------------------------------
Q: Are property dividends taxable?
Q: Define interest income Yes. As provided in Section 251, RR No. 2,
dividends paid in securities or other property (other
Interest income means the amount of than its own stock), in which the earnings of a
compensation paid for the use of money or corporation have been invested, are income to the
forbearance from such use. recipients to the amount of the full market value of
such property when receivable by individual
Q: What is the tax treatment of interest stockholders.
income?
Q: Are stock dividends subject to income
Interests received or credited to the account of the tax?
depositor or investors are included in their gross
income, unless they are exempt from tax or subject No. As discussed earlier, a stock dividend only
to a final tax. represents the transfer of surplus to capital account
and, as such, is not subject to income tax.
Note: This will be discussed in greater detail later in the
taxation of individual and corporate taxpayers as I tackle Q: What are the exceptions to the rule that
the new BIR issuance on the matter - REVENUE
MEMORANDUM CIRCULAR NO. 77-2012 (Clarifying certain stock dividends are not subject to income
provisions of RR 14-2012 on the proper tax treatment of tax?
interest income on financial instruments and other related
transactions) 1. Change in the stockholder’s equity, right or
interest in the net assets of the corporation
--------------------------------------------------------------- 2. Recipient is other than the shareholder
(b) Dividend Income 3. Cancellation or redemption of shares of sock
(1) Cash dividend 4. Distribution of treasury stocks
(2) Stock dividend 5. Dividends declared in the guise of treasury
stock dividend to avoid the effects of income
(3) Property dividend

taxation all previous rulings to that effect. The rule now is that they
6. Different classes of stocks were issued. are subject to income tax.
Stock dividends constitute as income if a corporation Q: What are disguised dividends?

redeems stock issued so as to make a distribution.
This is essentially equivalent to the distribution of a These are payments, usually for services, made in
taxable dividend the amount so distributed in the the form of dividends in order to evade the higher
redemption considered as taxable income. (see taxes imposed on gross income. They are not
COMMISSIONER VS. MANNING [AUGUST 7, 1975]) dividends in legal contemplation because they are
not return from investments. They are payment for
The redemption converts into money the stock services rendered and as such, they are taxable as
dividends which become a realized profit or gain and part of compensation income or income derived from
consequently, the stockholder's separate self-employment or exercise of a profession.
property. Profits derived from the capital invested
cannot escape income tax. As realized income, the ---------------------------------------------------------------
proceeds of the redeemed stock dividends can be (c) Royalty Income
reached by income taxation regardless of the
---------------------------------------------------------------
existence of any business purpose for the
redemption. (see CIR VS. CA [JANUARY 20, 1999])
Q: Define royalties.
As provided in Section 252, RR No. 2: A stock
dividend constitutes income if its gives the Royalties are any payment of any kind received as
shareholder an interest different from that which is consideration for the use of or right to use any
former stock holdings represented. A stock dividend patent, trademark, design or model, secret formula
does not constitute income if the new shares confer or process, industrial commercial or scientific
no different rights or interests that did the old. equipment, information concerning industrial,
commercial or scientific experience.
Q: Are liquidating dividends subject to
income tax? Q: What is the tax treatment of royalty
income?
Yes. Where a corporation distributes all of its
property or assets in complete liquidation or A sale of royalty on a regular basis for a
59
dissolution, the gain realized from the transaction consideration is considered an active business and
by the stockholder, whether individual or corporate, any gain therefrom shall be subject to the normal
60
is taxable income or a deductible loss, as the case corporate income tax (see RMC 77-2003). Where a
may be. person pays royalty to another for the use of its
intellectual property, such royalty is passive income
Note: Previously, the CIR has ruled in BIR RULING 039-02 of the owner and is therefore subject to final
[NOVEMBER 11, 2002] and other previous rulings that the withholding tax.
transfer by a liquidating corporation of its remaining assets
to its stockholders and the receipt of the shares
surrendered by the shareholder are not subject to income
---------------------------------------------------------------
tax. However, in BIR RULING 479-11 [DECEMBER 5, 2011], (d) Rental Income
the CIR reversed and set aside the above-cited ruling and (1) Lease of personal property
(2) Lease of real property
(a) Leasehold improvements by lessee
_________________________________________
(b) VAT added to rental/paid by the
59
There must be a bona fide plan of liquidation involving the lessee
transfer of all assets.
60
(c) Advance rental/long term lease
If the amount received by the stockholder in liquidation is less
than the cost or other basis of the stock, the loss in the
---------------------------------------------------------------
transaction is deductible.

Q: Define rental income Q: Are improvements made by lessees

taxable as income on the part of the lessor?
Rental income refers to the amount or
compensation paid for the use or enjoyment of a Yes, provided that such buildings or improvements
thing or a right and implies a fixed sum or property are not subject to the removal by the lessee. The
amounting to a fixed sum to be paid at a stated time lessor may either: (1) report the improvements as
for the use of the property. It includes all amount or income at the time when such improvements are
property received from the lease contract, whether completed based on its fair market value; or (2)
used in business or not. spread over the life of the lease the estimated
--------------------------------------------------------------- depreciate value of the improvements at termination
(1) Lease of personal property of the lease and report as income for each year of
--------------------------------------------------------------- the lease an aliquot part thereof (Section 49, RR
No. 2)
Q: What is the tax treatment of income
Q: Should the improvement be capable of
received from lease of personal property?
being separated from the land in order to be
Rental income on the lease of personal property considered a taxable gain?
located in the Philippines and paid to a non-resident
taxpayer shall be taxed as follows: No. The US Supreme Court in HELVERING V. BRUUN
[309 US 461] stated that it is not necessary to
recognition of taxable gain that the lessor be able to
Non-Resident Non-Resident
sever the improvement begetting the gain from his
foreign alien
original capital.
corporation
Vessel 4.5% 25%
Aircraft, 7.5% 25% Q: What is the tax treatment of VAT added to
machineries rental or VAT paid by the lessee?
and other
equipment Any additional amount paid, directly or indirectly, by
Other assets 32% 25% the lessee in consideration for the lease is
considered rental. Therefore, taxes paid by the
--------------------------------------------------------------- lessee on leased property are part of rental income
of the landlord.
(2) Lease of real property
(a) Leasehold improvements by lessee
Q: What is the tax treatment of advanced
(b) VAT added to rental/paid by the
rental paid by the lessee?
lessee
(c) Advance rental/long term lease
Prepaid or advance rental is taxable income to the
--------------------------------------------------------------- lessor in the year received, if so received under a
claim of right and without restriction as to its use,
Q: What is the tax treatment of income and regardless of method of accounting employed.
received from lease of real property? Security deposit applied to the rental of the terminal
month or period of contract must be recognized as
The lease of real property shall be considered as income at the time it is applied.
conduct of trade or business on the part of the
lessor, hence, the rental income therefrom shall be Note: If the security deposit is merely to ensure
considered as business income which shall be compliance with the contract (security deposit with
included in the computation of the year-end gross acceleration clause), it is not income to the lessor
income of the lessor, and not as a passive until the lessee violates any provision of the
investment income subject to withholding tax. contract.
---------------------------------------------------------------

(vii) Annuities, proceeds from life insurance

or other types of insurance Q: What is the tax treatment of separation
--------------------------------------------------------------- pay?
Q: What is an annuity for purposes of Separation pay may or may not be taxable
income taxation? depending on the voluntariness or involuntariness of
the cause of separation.
An annuity refers to the periodic installment
payments of income or pension by insurance Note: The taxability of pensions, retirement benefit
companies during the life of a person or for a or separation pay will be discussed later in
guaranteed fixed period of time, whichever is longer, Exclusions from Gross Income
in consideration of capital paid by him. The portion
of proceeds from insurance that represent a mere ---------------------------------------------------------------
return of the premiums is not taxable while the (x) Income from any source whatever
portion that represents the interests is taxable. (a) Forgiveness of indebtedness
(b) Recovery of accounts previously written
Note: The taxability of proceeds from life insurance and off
returns of premiums from annuity contracts will be
discussed later in Exclusions from Gross Income
(c) Receipt of tax refunds or credit
(d) Income from any source whatever
--------------------------------------------------------------- ---------------------------------------------------------------
(viii) Prizes and Awards
Q: What is meant by the phrase “all income
---------------------------------------------------------------
derived from whatever source"
Q: What are prizes and awards for purposes The phrase “all income derived from whatever
of income taxation? source” encompasses all accessions to wealth,
clearly realized, and over which the taxpayers have
It refers to the amount of money in cash or in kind complete dominion. A gain constitutes taxable
received by chance or through luck. Prizes and income when its recipient has such control over it
awards are generally taxable except if specifically that as a practical matter, he derives readily
mentioned under the exclusions from the realizable economic value from it.
computation of gross income
It includes all income not expressly excluded or
Note: The taxability of prizes and awards will be exempted from the class of taxable income,
discussed later in Exclusions from Gross Income and irrespective of the voluntary or involuntary action of
Taxation of Individual and Corporate Taxpayers the taxpayer in producing the income. GUTIERREZ V.
CIR [CTA CASE NO. 65, AUGUST 31, 1965]. The
--------------------------------------------------------------- source of the income may be legal or illegal.
(ix) Pensions, retirement benefit or
separation pay Q: May cancellation or forgiveness of
--------------------------------------------------------------- indebtedness amount to a gain subject to
income tax?
Q: What is pension for purposes of income
taxation? Yes. If, for example, an individual performs services
for a creditor, who, in consideration thereof cancels
It refers to the amount of money received in lump the debt, income to that amount is realized by the
sum or on staggered basis in consideration of debtor as compensation for his services. If, however,
services rendered given after an individual reaches a creditor merely desires to benefit a debtor and
the age or retirement. They are generally taxable to without any consideration therefor cancels the debt,
the extent of the amount received, except if there is the amount of the debt is a gift. If a corporation to
a BIR approved pension plan. which a stockholder is indebted forgives the debt,

the transaction has the effect of the payment of a to “gross income” in recognition of the intent of
dividend. (see Section 50, RR No. 2). Congress to tax all gains except those specifically
exempted.
Q: What is the Tax Benefit Rule in relation to
recovery of accounts previously written off? ---------------------------------------------------------------
(f) Situs of income taxation
Under the Tax Benefit Rule or Equitable Doctrine ---------------------------------------------------------------
of Tax Benefit, the recovery of amounts deducted in
previous years shall be included as part of the gross Note: The situs of income taxation refers to the
income in the year of recovery to the extent of the General Principles of Income Taxation. Just to
income tax benefit of said deduction. reiterate again – Only resident citizens and
domestic corporations are taxable on their
If in the year the taxpayer claimed deduction of bad worldwide income (both income inside and
debts written-off, he realized a reduction of the outside the Philippines) while the other types of
income tax due from him on account of said individual and corporate taxpayers (i.e. non-
deduction, his subsequent recovery thereof from his resident citizen, non-resident alien, foreign
debtor shall be treated as a receipt of realized corporation) are taxable only on income derived
taxable income. Conversely, if the said taxpayer did from sources within the Philippines.
not benefit from the deduction if the said bad debt
written-off, then his subsequent recovery shall be Now, that we know who are the taxpayers that can
treated as a mere recovery or a return of capital, be taxed on income within, without or both. Let us
hence, not treated as receipt of realized taxable discuss when is income considered within the
income. Philippines and without the Philippines.
Q: Should taxes previously claimed and ---------------------------------------------------------------

allowed as deductions but subsequently (e) Source rules in determining income from
refunded or granted as tax credit be within and without
considered part of gross income? (1) Interests
(2) Dividends
Yes. RMC No. 13-80 [April 10, 1980] provides if a (3) Rentals
taxpayer receives a tax credit certificate or refund for
(5) Royalties
erroneously paid tax which was claimed as a
deduction from his gross income that resulted in a (6) Sale of real property
lower net taxable income or a higher net operating (7) Sale of personal property
loss that was carried over to the succeeding taxable (8) Shares of stock of domestic corporation
year, he realizes taxable income that must be ---------------------------------------------------------------
included in his income tax return in the year of the
receipt. Q: What is meant by “source of income”?
Note: However, taxes which are not allowable as The source of an income is the property, activity or
deductions, when refunded or credited, are not service that produced the income. It is the physical
declarable for income tax purposes (income tax, source where the income came from. (see CIR VS.
estate tax, donor’s tax, and special assessments) BAIER-NICKEL [AUGUST 29, 2006]).
Q: Is an unlawful gain subject to income

tax?
Yes. In JAMES V. US [366 US 213], the Supreme

Court ruled that embezzled money constitutes gross
income. It opined that unlawful, as well, as lawful
gain are comprehended within the term “gross
income.” The Court has given a liberal construction

Q: What are the source of income rules in Services Income from services is sourced in
the Philippines? (Section 42, Title II, NIRC) the country where the services are
performed. (place of performance
of the service)
Interests The source of an interest payment is
the place of residence of the person Thus, it is income within the
obligated to make that payment Philippines if the service is
(residence-of-the-obligor/debtor performed in the Philippines. It is
rule). income without the Philippines if it is
performed abroad.
It is income within the Philippines if
the residence of the obligor is in the Rents and The rental income and royalty
Philippines. Royalties income derived from the use of
property has its source in the
It is income without the Philippines if country where the property is used
the residence of the obligor is or located. (location of the
abroad. property or interest in such
property)
Dividends Generally, a dividend has its source Thus, it is income within the
in the country where the corporation Philippines if rents and royalties are
paying the dividend is incorporated. derived from property located in the
(residence of the corporation Philippines
paying the dividend)
Sale of Income from the sale of real
Real property is sourced in the country
Thus, if the dividend is received from Property where the real property is located.
a domestic corporation, it is income (location of real property)
within the Philippines. If the dividend
is from the foreign corporation, it is Thus, it is income within the
income without the Philippines. Philippines if the real property is
located in the Philippines. It is
The exception to the general rule income without if the real property is
that dividends paid by a foreign located abroad.
corporation are from sources without
the Philippines is when a foreign Sale of
corporation derives 50 percent of its Personal It depends:
gross income from sources within Property
the Philippines for a three-year 1. Personal property produced
period ending with the close of its (in whole or in part) by the
taxable year preceding the taxpayer within the
declaration of its dividends Philippines and sold without
or produced (in whole or in
part) by the taxpayer without
and sold within the
Philippines – the income
shall be treated as derived
partly from sources within
and party from sources
without.
2. Purchase of personal
property within and its sale
without the Philippines, or

purchase of personal Philippines. Is the sale of the tickets taxable

property without and its sale as income from sources within the
within the Philippines - any Philippines?
income shall be treated as
derived entirely from Yes. For the source of income to be considered as
sources within the country coming from the Philippines, it is sufficient that the
in which sold. income is derived from activity within the Philippines.
3. Shares of stock in a In ABC’s case, the sale of tickets in the Philippines
domestic corporation – is the activity that produces the income. The tickets
gains from sale of shares of exchanged hands here in the country and the
stock of a domestic payments for fares were also made with Philippine
corporation are treated as currency. The site of the source of payments is the
derived entirely from Philippines. The absence of flight operations to and
sources within the from the Philippines is not determinative of the
Philippines regardless of source of income/site of income taxation for the test
where the said shares are of taxability is the “source.” (see CIR VS. JAPAN
sold. AIRLINES [MARCH 6, 1991]; CIR VS. BOAC [APRIL 30,
1987])
Q: In CIR v. MARUBENI [DECEMBER 18, 2001],61 Q: XYZ entered into reinsurance contracts
assuming that Marubeni was disqualified with foreign insurance companies not doing
from availing of the income tax amnesty, business in the Philippines. XYZ was to
would the income from the services cede portions of premiums underwritten in
rendered in connection with the turn-key the Philippines to the foreign corporations
projects constitute as income from in consideration for the assumption of risk.
Philippine sources? Is the cession of the premiums taxable as
income from sources within the
The answer is both yes and no. The answer is yes
Philippines?
with regard to those services performed in the
Philippines. The answer is, however, no with regard
Yes. “Sources” means the activity, property, or
to those services rendered in Japan. Such services
service giving rise to the income. The original
were rendered outside the taxing jurisdiction and
insurance undertakings took place in the Philippines.
thus constitute as income without the Philippines.
It is not required that the foreign corporation be
Marubeni, being a foreign corporation, is taxable
engaged in business in the Philippines. What is
only on income within the Philippines and, hence,
controlling is no the place of business, but the place
income from services rendered in the Philippines.
of activity that created the income. Thus, the income
is subject to income tax. (see PHILIPPINE GUARANTY
Q: ABC Airways is a foreign airline.62 While V. CIR [APRIL 30, 1965] and HOWDEN & CO. V. CIR
it did not carry passengers and/or cargo to [APRIL 14, 1965]).
or from the Philippines, ABC maintains a
general sales agent of its tickets in the
_________________________________________ Q: ABC, a domestic corporation, entered
into a “Management Service Agreement”
61
Remember that case I provided in General Principles. with XYZ, a non-resident foreign corporation
62
It is a resident foreign corporation. In order that a foreign under which the latter shall provide services
corporation may be regarded as doing business within a State,
there must be continuity of conduct and intention to establish a for ABC’s US branch and advice on ABC’s
continuous business, such as the appointment of a local agent, corporate structure, all performed abroad. Is
and not one of a temporary character. ABC maintained a general the compensation for services taxable as
sales agent and it was engaged in selling or issuing tickets, which
is considered the main lifeblood of an airline. income from sources within the
Philippines?

Yes. The services covered by the management has a licensed computer software program
service agreement fall under the meaning of that its customers in North Dakota use for
royalties. It is immaterial if the non-resident foreign checking Quill’s current inventories and for
corporation has no properties in the Philippines. The placing orders directly. North Dakota
test of taxability is the source and the source of an
attempted to impose a “use tax”65 on Quill.
income is that activity which produced the income. It
is not the presence of any property from which one Is Quill liable for the tax?
63
derives rentals and royalties that is controlling, but Yes. In QUILL CORP V. NORTH DAKOTA [504 US 298,
rather as expressed under the expanded meaning of M AY 26, 1992], the US Supreme Court ruled that
royalties, it includes “royalties for the supply of there must be physical presence in a state for the
scientific, technical, industrial, or commercial, corporation to be liable for sales and use taxes. It
knowledge or information; and the technical advice, applied its ruling in NATIONAL BELLAS HESS V.
assistance or services rendered in connection with DEPARTMENT OF REVENUE OF ILLINOIS [386 US 753]
the technical management and administration of any where it held that a seller whose only connection
scientific, industrial or commercial undertaking, with customers in the State is by common carrier or
venture, project or scheme. (see PHILAMLIFE V. CTA the mail lacked the requisite minimum contacts with
[CA-GR SP. NO. 31283, APRIL 25, 1995]). the State. Thus, such vendors are free from state-
imposed duties to collect sales and use taxes.
Nevertheless, the US Supreme Court opined that if
Q: A, a non-resident citizen, was engaged by
interstate commerce would be subject to intolerable
a domestic corporation as a commission or undesirable burdens because of this, Congress
agent. A will receive a sales commission on has the power to legislate make such vendors liable
all sales actually concluded. A argues that for sales and use taxes.
66
the income is not taxable as A does not

reside in the Philippines and that the place Q: Vodafone International Holdings (VIH), a
of payment of the income is outside the corporation in the Netherlands, acquired a
Philippines. Is A’s contention correct? controlling interest of CGP holdings, a
company in the Cayman Islands. By virtue
No. The source of an income is the property, of this controlling interest, VIH acquired a
activity or service that produced the income. 52% stake in Hutchinson Essar Limited
With respect of rendition of labor or personal
(HEL)67 in India from Hutchinson Telecom
service, as in the instant case, it is the place
where the labor or service is performed that International Limited (HTIL). Simply stated,
determines the source of income. There is VIH acquired control over CGP and its
therefore no merit in A’s interpretation which subsidiaries, including HEL. The Indian tax
equates source of income in labor or personal authorities contended that the transfer of
service with the residence of the payor or the place shares was subject to income tax. VIH
of payment of the income. (see CIR VS. BAIER- argues that the transfer of shares took place
64
NICKEL [AUGUST 29, 2006]) outside the Indian taxing jurisdiction, and,
Q: Quill Corp is an office supply retailer with
_________________________________________
no physical presence in North Dakota but it
65
A use tax is a type of excised tax levied in the United States
_________________________________________ upon otherwise "tax free" tangible personal property purchased by
a resident of the assessing state for use, storage or consumption
63
This confirms the acceptance of the Philippine taxing of goods in that state (not for resale), regardless of where the
jurisdiction of the rule that as to intangible property, the country of purchase took place.
66
use is the country that protects the owner of that property against Note that, as of this updated version, the BIR plans to impose a
its unauthorized use by other persons. sales tax on online retailers in the opinion that such sellers are no
64
Note that in this case, Baier-Nickel argued that the services different from merchants who sell their goods in physical stores. A
were done in Germany. However, she failed to prove hat such RR on the matter is forthcoming.
67
was the fact. Thus, the services were deemed performed in the HEL was an Indian joint venture between HTIL, a corporation in
Philippines, and, as such, is subject to income tax. Hong Kong, and Essar, an Indian corporation.

hence, is not taxable. Which contention is generated from “constructive” trading and
correct? commission income derived from brokering activities
of Philippine branches of foreign corporations
The contention of VIH was held to be correct. In engaged in trading activities. RAMO No. 01-95
VODAFONE INTERNATIONAL HOLDINGS B.V. V. UNION [March 21, 1995] expanded RAMO No. 1-86 to
OF INDIA (SUPREME COURT OF INDIA, CIVIL APPEAL NO. cover taxation of Philippine branches of foreign
68 corporations engaged in soliciting orders,
733 OF 2012, JANUARY 20, 2012), the Indian
Supreme Court ruled that VIH had no liability to purchases, service contracts, trading, construction
withhold tax as the transaction was between two and other activities.
non-residents with no taxable presence in India.
Under Section 9(1) of the Income Tax Act of India, Q: ABC, a multinational company, claimed
all income accruing or arising, whether directly or as deduction from gross income its share of
indirectly through transfer of capital assets situated the overhead expenses of its foreign head
69
in India shall be deemed to accrue or arise in India. office. Can these overhead expenses of the
The Supreme Court stated that the section clearly foreign head office be deducted from the
applied to a transfer of capital asset situated in India gross income of the Philippine branch?
and could not be expanded to cover indirect
transfers of capital assets or property situated in It depends. Either it can be deducted in full or partly.
India. The words “directly or indirectly” go with the Where an expense is clearly related to the
70
income and not with the transfer of a capital asset. production of Philippine-derived income or to
Philippine operations (e.g. salaries of Philippine
Q: Is the gross income of branches of personnel, rental of office building in the
foreign corporations generated from Philippines), that expense can be deducted from the
solicitation of orders from local importers gross income acquired in the Philippines without
where the branches merely relay to its head resorting to apportionment. However, where there
office abroad said purchase orders and are items included in the overhead expenses
where the head office is the entity which incurred by the parent company, all of which cannot
actually consummates the sale liable for be definitely allocated or identified with the
income tax? operations of the Philippine branch, the company
may claim as its deductible share a ratable part of
Yes. By virtue of RAMO No. 1-86 [April 25, 1986], such expenses based upon the ratio of the local
an income tax is imposed on the gross income branch's gross income to the total gross income,
worldwide, of the multinational corporation. (see
_________________________________________ COMMISSIONER VS. CTA & SMITH KLINE [JANUARY 17,
68 1984]; see also RAMO 4-86 [April 5, 1986])
It is also important to note, that in this case, the Indian Supreme
Court stated that, on the context of taxation of a holding company
structure, the corporate veil may be lifted only if it is established ---------------------------------------------------------------
that the transaction was a sham or there was abuse. In this case, (g) Exclusions from gross income
the shares of CGP were transferred only for a commercial benefit
and not with the object of tax evasion. The structure was in (1) Rationale for the exclusions
existence over a decade, it was not created or used as an (2) Taxpayers who may avail of the
instrument for tax avoidance, VIH was not a short-time investor
and it did not introduce any new practice to grant itself a
exclusions
“controlling interest.” (3) Exclusions distinguished from
69
The Indian taxing authorities argued that this was a “look- deductions and tax credit
through provision” a “look through” provision so that if there was a
transfer, of a capital asset, situated in India, it meant income from (4) Under the Constitution
capital gains accruing or arising outside India would be fictionally (5) Under the Tax Code
deemed to accrue or arise in India. (6) Under Special laws
70
The Indian Supreme Court also noted that the existence of the
Direct Tax Code Bill of 2010 which expressly stated that income ---------------------------------------------------------------
accuring even from indirect transfer of capital assets situated in
India would be deemed to accrue in India but this is not yet in
force.

Q: What are “exclusions?”

Pertain to the Pertains to computation
The term “exclusions” refers to items that are not computation of gross of taxable income
included in the determination of gross income income
because:
Exclusions are Deductions are
1. They represent return of capital or are not something received or something spent or paid
income, gain or profit (e.g. life insurance) earned by the taxpayer in earning gross income
2. They are subject to another kind of internal but which do not form
revenue tax (e.g. gifts, bequests, devices) part of gross income
3. They are income, gain or profits that are
expressly exempt from income tax under the Q: Distinguish exclusions from deductions
Constitution, tax treaty, Tax Code, or general or and tax credits.
special law. (e.g. PEZA)
Exclusions Deductions Tax Credits
---------------------------------------------------------------
(1) Rationale for the exclusions Amounts that Amounts Amounts
(2) Taxpayers who may avail of the are not subtracted from subtracted from
exclusions included in pertinent items the computed
(3) Exclusions distinguished from gross income of gross income tax in order to
in order to arrive at taxes
deductions and tax credit
arrive at payable
--------------------------------------------------------------- taxable income
upon which the
Q: What is the rationale for the exclusions? tax rate is
applied
Some receipts are excluded from gross income
because they are not income. Even if they are by Not income Part of income Are taxes that
definition income, the exclusions are not subject to are not
tax because of policy considerations such as to collected
avoid the effects of double taxation or to provide
incentives for certain socially desirable activities. ---------------------------------------------------------------
(4) Under the Constitution
Q: Who are the taxpayers who may avail of
(a) Income derived by the government or its
the exclusions?
political subdivisions from the exercise of
All taxpayers can avail of exclusions because any essential government function
excluded receipts are not considered as income for ---------------------------------------------------------------
tax purposes.
Note: There is no express provision in the Constitution
which provides that income derived by the State is
Q: Distinguish exclusions from gross excluded from gross income. On this point, the Syllabus is
income from deductions from gross income. wrong. It is an inherent limitation of the power of taxation
that the State be exempt from taxes. This part should have
Exclusions Deductions instead referred to non-stock, non-profit educational
institutions as there is an express provision for their
Flow of wealth to the Amounts which the law exemption from income tax.
taxpayer which is not allows to be subtracted
treated as part of gross from gross income in Q: What income is excluded from gross
income because it is order to arrive at net income by the Constitution?
exempted or it does not income
come within the The assets and revenues of a non-stock, non-
definition of income profit private educational institution used

directly, actually and exclusively for educational amounts are held by the insurer under an
purposes shall be exempt from income taxation. agreement to pay interest.
(see Section 4(3), Article XIV, 1987
Constitution) 2. Amounts received by the insured as return of
premiums paid under life insurance,
Note: Although not expressly provided for, endowment or annuity contracts, either during
remember that the State as a general rule is exempt the term or at the maturity of the contract or
from taxation. It is an inherent limitation. Thus, the upon the surrender thereof.
income of the State are generally excluded from 72
gross income. As to GOCCs – If they are performing 3. Gifts, bequests, and devises but not the
government functions, they are exempt unless income from such property; if the amount
expressly subject to tax; If they are performing received is on account of services rendered
proprietary functions, they are subject to tax unless whether constituting a demandable debt or not
expressly exempted. See discussions in General such as remuneratory donations or the use or
Principles and Exempt Corporations. opportunity or use of capital, the receipt is
income.
--------------------------------------------------------------- 4. Compensation for injuries or sickness
(5) Under the Tax Code whether by suit or agreement including amounts
(a) Proceeds from life insurance policies received through accident or health insurance or
(b) Return of premium paid under the Workmen’s compensation Act, but not
(c) Amounts received under life insurance, damages or compensation recovered for loss of
endowment, or annuity contracts profit in loss or damage to property which would
(d) Value of property acquired by gift, be taxable
bequest, devise or descent
(e) Amount received through accident or 5. Income exempt under treaty binding upon the
Government of the Philippines.
health insurance
(f) Income exempt under tax treaty 6. Certain retirement benefits, pensions,
(g) Retirement benefits, pensions, gratuities, gratuities, more particularly:
etc.
(h) Winnings, prizes, and awards, including a. Retirement benefits received under RA
those in sports competition 7641 and those received by officials and
--------------------------------------------------------------- employees of private firms, whether
individual or corporate, in accordance with a
73
Read Section 32(B), Tax Code reasonable private benefit plan maintained
by the employer provided:
Q: What are deemed excluded from (gross)
income under the Tax Code?
_________________________________________
As provided in Section 32(B), NIRC, the following
72
items shall not be included in gross income and shall They are instead subject to estate or gift taxes (see PIROVANO
VS. COMMISSIONER [JULY 31, 1965])
be exempt from income tax 73
Reasonable private benefit plan means a pension, gratuity,
71
stock bonus or profit-sharing plan maintained by an employer for
1. Proceeds of life insurance, payable upon the the benefit of some or all of his officials or employees, wherein
death of the insured to the heirs or beneficiaries, contributions are made by such employer for the officials or
but not the interest payments thereon if such employees, or both, for the purpose of distributing to such officials
and employees the earnings and principal of the fund thus
accumulated, and wherein its is provided in said plan that at no
_________________________________________ time shall any part of the corpus or income of the fund be used
for, or be diverted to, any purpose other than for the exclusive
71
It is considered as indemnity rather than income benefit of the said officials and employees.

i. that the retiring official or employee has from their passive investments in the
been in the service of the same Philippines
employer for at least ten (10) years and b. Income of the Philippine government
is not less than fifty (50) years of age at and its political subdivisions derived
the time of his retirement from public utilities or in the exercise of
essential governmental functions
ii. That the benefits granted shall be c. Prizes and awards made primarily in
availed of by an official or employee recognition of religious, charitable,
only once. scientific, educational, artistic, literary or
civic achievement but only if:
b. Any amount received by an official or i. The recipient was selected without
employee or by his heirs from the any action on his part to enter the
employer as a consequence of contest or proceedings; and
separation of such official or employee ii. The recipient is not required to
from the service of the employer render substantial future services as
because of death sickness or other a condition to receiving the prize or
physical disability or for any cause award
beyond the control of the said official or d. All prizes and wards granted to
employee. athletes in local and international sports
c. The provisions of any existing law to the competitions whether held in the
contrary notwithstanding, social Philippines or abroad.
security benefits, retirement e. Gross benefits received by officials
gratuities, pensions and other similar and employees of public and private
benefits received by resident or non- entities provided, however, that the
resident citizens of the Philippines or total exclusion shall not exceed P30,000
aliens who come to reside permanently which shall cover:
in the Philippines from foreign i. Benefits received by officials and
government agencies and other employees of the national and local
institutions, private or public. government pursuant to RA 6686
d. Payments of benefits due or to ii. Benefits received by employees
become due to any person (residing in pursuant to PD 851
the Philippines) under the laws of the iii. Benefits received by officials and
United States administered by the employees not covered by PD 851
United States Veterans Administration. iv. Other benefits such as productivity
e. Benefits received from or enjoyed incentives and Christmas bonus
under the Social Security System in provided that the ceiling of P30,000
accordance with the provisions of may be increased through the rules
Republic Act No. 8282. and regulations issued by the
f. Benefits received from the GSIS Secretary of Finance, upon
under Republic Act No. 8291, including recommendation of the
retirement gratuity received by Commissioner, after considering,
government officials and employees. among others, the effect on the
same of the inflation rate at the end
7. Miscellaneous items, likewise exempt, of the taxable year.
including: f. GSIS, SSS, Medicare and Pag-ibig
contributions and union dues of
a. Income of foreign governments or individuals
financing institutions owned, controlled g. Gains from the sale of bonds,
or enjoying refinancing from such debentures or other certificate of
foreign governments and of international indebtedness with a maturity of more
or regional financial institutions than 5 years
established by foreign governments h. Gains from the redemption of shares
of stock in a mutual fund company

that may result as the death of the insured

Also, under Section 33(C), NIRC, the following partner
fringe benefits are not taxable: 4. The recipient of the insurance proceeds is a
partnership in which the insured is a partner
1. Fringe benefits authorized and exempted from and the insurance was taken to compensate
tax under special laws; the partnership for any loss in come that
2. Contributions of the employer for the benefit of may result from the dissolution of the
the employee to retirement, insurance and partnership caused by the death of the
hospitalization plans; insured partner
3. Benefits given to rank and file employees, 5. The recipient of the life insurance proceeds
whether granted under a CBA or not; is a corporation which the insured was an
4. De minimis benefits. employee or officer. (see RR No. 2-40)
Note: As to 7(a) – A financing institution wholly-owned and Q: What is the tax treatment of the interests
controlled by a foreign government is exempt from income paid on life insurance proceeds?
tax and final withholding tax with respect to its income
derived from investments in T-bonds. GOVERNMENT OF
SINGAPORE INVESTMENT CORPORATION PTE LTD. VS. CI, CTA If the amounts of life insurance proceeds are held by
8030, SEPTEMBER 5, 2012 the insurer under an agreement to pay interest
thereon, the interest payments shall be included in
--------------------------------------------------------------- the gross income. (see Section 32(B)(1), Tax Code)
(a) Proceeds from life insurance policies Note: Rationale – The interests do not form part of the
--------------------------------------------------------------- indemnity but are earnings or income from the use of
capital which are taxable.
Q: What are the conditions for the exclusion
from gross income of life insurance Q: Is the concept of revocability or
proceeds? irrevocability in the designation of the
beneficiary relevant for purposes of
The proceeds of life insurance policies must be: exclusion?
1. Paid to the heirs or beneficiaries No. There is no need for the determination of the
2. Upon the death of the insured revocability or irrevocability in the designation of the
3. whether in a single sum or otherwise beneficiary for purposes of exclusion of the life
insurance proceeds from the gross estate. It is
Note: (1) Payment by reason other than death – material only in determining whether the proceeds
Payment for reasons other than death are subject to tax form part of the gross estate or not.
up to the extent of the excess of the premiums paid.
(2) Reason for the Exclusion – They partake more of ---------------------------------------------------------------

indemnity or compensation rather than gain to the (b) Return of premium paid
recipient (c) Amounts received under life insurance,
endowment, or annuity contracts
Q: In what instances are life insurance ---------------------------------------------------------------
proceeds not excluded from gross income?
Note: Items (b) and (c) refer to the same thing. In fact, that
1. Life insurance policy is used to secure a is Section 32(B)(2) which refers to amounts received by
money obligation insured as return of premium paid by him undr life
2. Life insurance policy was transferred for a insurance, endowment or annuity contracts.
valuable consideration
3. The recipient of the insurance proceeds is a
business partner of the deceased and the
insurance was taken to compensate the
partner-beneficiary for any loss in income

Q: What are the conditions for amounts It is excluded from gross income and hence not
received by insured as return of premiums subject to income tax. However, the income from the
be excluded from gross income? property acquired and transfers of divided interests
shall be included in gross income. (see Section
1. The amounts are received by the insured 32(B)(3), Tax Code).
74
2. Under a life insurance, endowment, or
annuity contract
75 Note: Rationale – The property is subject to donor’s or
estate taxes as the case may be. As to the income from
3. Either: the property, what is only excluded is the property itself
a. during the term or
b. at maturity of the term mentioned in
the contract or ---------------------------------------------------------------
c. upon surrender of the contract (e) Amount received through accident or
health insurance
(see Section 32(B)(2), Tax Code) ---------------------------------------------------------------
Note: The amount returned is not income but return of Q: What kinds of of compensation or
capital. They represent earnings which were previously damages for injuries or sickness are
taxed.
excluded from gross income?
Q: What is the tax treatment of proceeds
1. Amounts received through Accident or
received under endowment policies? Health Insurance or Workmen’s
Compensation Act as compensation for
1. If the insured dies, and the benificary recives personal injuries or sickness
the life insurance proceeds – not taxable 2. Amounts of any damages received whether
and excluded from gross income by suit or agreement on account of such
2. If the insured does not die and survives the injuries or sickness
designated period – the amount pertaining
to the premiums are excluded from gross Note: The above amounts are absolutely excluded from
income but the excess shall be considered gross income. Rationale – they are mere compensation
part of his gross income for injuries or sickness suffered and not income
--------------------------------------------------------------- Q: Is the compensation for unearned income

(d) Value of property acquired by gift, as a result of personal injuries or sickness
bequest, devise or descent excluded from gross income?
---------------------------------------------------------------
Yes. They are also excluded from gross income as
Q: What is the tax treatment of property they were not earned by the taxpayer as a result of
acquired by gift, bequest, devise or the personal injuries or sickness.
descent? Note: (1) Rationale – It is meant to restore the injured
party “whole as before the injury.” (2) Note that this is the
popular view. The other view is that it is not excluded
_________________________________________
because such damages merely replace the income which
74 would have been subjected to tax if earned.
An endowment is where the insurer agrees to pay a sum
certain to the insured if he outlives a designated period. If he dies
before that date, the proceeds are to be paid to the designated ---------------------------------------------------------------
beneficiary.
75
An annuity binds the debtor to pay an annual pension or
(f) Income exempt under tax treaty
income during the life of one or more determinate persons in ---------------------------------------------------------------
consideration of a capital consisting of money or other property
whose ownership is transferred to him at once with the burden of
the income (see Art. 2021, NCC)

Q: What is the reason for the exclusion of 3. the retiring official or employee is not less
income exempt under treaty? than fifty (50) years of age at the time of his
retirement; and
Although it is income, it is excluded from gross 4. the benefit had been availed of only once
income by reasons of public policy which recognizes 5. The retirement plan must be submitted to
the principles of reciprocity and comity among and approved by the BIR (see
States. INTERCONTINENTAL BROADCASTING
CORPORATION VS. AMARILLA [OCTOBER 29,
Q: A domestic corporation entered into a 2006])
loan and sales contract with a foreign
Q: An employer maintains an employees’
corporation where the latter shall extend a
trust to provide retirement, pension,
loan to the former and the former shall sell
disability benefits to its employees. The
to the latter all copper concentrates to be
trust made investments and earned
produced from the machine to be purchased
therefrom interest income. Is it proper to
using the loaned amount. The foreign
subject the interest income to withholding
corporation applied for the loan from one of
tax?
its government financing institutions. Is the
interest income from the loans automatically No. As held by the Supreme Court in CIR V. CA &
exempt from withholding tax? GCL RETIREMENT PLAN [M ARCH 23, 1992], said
retirement benefits received by officials and
No. As held in CIR V. MITSUBISHI METAL employees of private firms in accordance with a
CORPORATION [JANUARY 22, 1990], the burden of reasonable private benefit plan maintained by the
proof rests upon the party claiming an exemption to employer shall be exempt from all taxes
prove that it is in fact covered by the exemption. In
the said case, the Supreme Court found that the Q: What are the conditions in order that
foreign government financing institution had nothing
separation pay may be excluded from gross
to do with the sales and loans agreement. It is the
foreign corporation, not the foreign government income?
financing institution that is the sole creditor of the
domestic corporation 1. Amount received by an official, employee, or
by his heirs
2. From the employer
--------------------------------------------------------------- 3. As a consequence of separation of such
(g) Retirement benefits, pensions, gratuities, official or employee from the service of the
etc. employer
--------------------------------------------------------------- a. Because of death, sickness, or other
physical disability or
Q: What are the conditions to exempt b. For any cause beyond the control of
retirement benefits paid from an employer such official or employee , such as
maintained reasonable private retirement i. Retrenchment
plan from income tax? ii. Redundancy
iii. Cessation of business
For the retirement benefits to be exempt from
Note: In other words, the separation must be involuntary
income tax, the taxpayer is burdened to prove the in order for it to be excluded from gross income.
concurrence of the following elements:
1. a reasonable private benefit plan is

maintained by the employer; Q: A government employee, retired from
2. the retiring official or employee has been in service. Upon retirement, he received,
the service of the same employer for at least among other benefits, terminal leave pay
ten (10) years; which the CIR withheld a portion allegedly

representing income tax thereon. Is terminal 1. Made primary in recognition of religious,

leave pay considered part of gross income charitable, scientific, educational, artistic,
of the recipient? literary, or civic achievement
2. The recipient was selected without any
No. In COMMISSIONER OF INTERNAL REVENUE VS. CA action on his par to enter the contest or
& EFREN CASTANEDA [OCTOBER 17, 1991], the proceeding and
Supreme Court held that terminal leave pay received 3. The recipient is not required to render
by a government official or employee is not subject substantial future services as a condition to
to withholding (income) tax. The rationale behind the receiving the prize or award.
employee’s entitlement to an exemption from
withholding tax on his terminal leave is that Q: What are the requisites for the exclusion
commutation of leave credits, more commonly from gross income of prizes and awards in
known as terminal leave, is applied for by an officer sports competitions?
or employee who retires, resigns or is separated
from the service through no fault of his own. In the 1. The prizes and awards granted to athletes
exercise of sound personnel policy, the Government 2. In local and international sports tournaments
encourages unused leaves to be accumulated. and competitions
Terminal leave payments are given not only at the 3. Whether held in the Philippines or abroad
same time but also for the same policy 4. Sanctioned by their national sports
considerations governing retirement benefits. In fine, associations
not being part of the gross salary or income of a
government official or employee but a retirement ---------------------------------------------------------------
benefit, terminal leave pay is not subject to income (6) Under Special laws
tax. (see RE: REQUEST OF ATTY. BERNANDINO (a) Personal Equity and Retirement Account
ZIALCITA [OCTOBER 18, 1990]).
---------------------------------------------------------------
Q: Are contributions to SSS, GSIS, PHIC and Note: Special laws granting tax exemptions to
Pag-Ibig in excess of the mandatory corporations shall be discussed under Exempt
contributions subject to income tax? Corporations.
Yes. Previously, SSS, GSIS, PHIC and Pag-Ibig Q: Is income earned by a contributor from
contributions in excess of the mandatory the investments and reinvestments of his
contributions were considered exempt from income Personal Equity and Retirement Act (PERA)
tax. However, because it was deemed to have been assets subject to income tax?
abused and the excess contributions are being
made as a form of investment, RMC No. 027-11 No. As provided in RR No 017-11 [OCTOBER 27,
[JULY 1, 2011] now considers the excess 2011], implementing the tax provisions of RA 9505,
contributions as not excludible from gross income otherwise known as the Personal Equity and
and not exempt from income and withholding tax. Retirement Account (PERA) Act of 2008, investment
income of a contributor consisting of all income
--------------------------------------------------------------- earned from the investments and reinvestments of
(h) Winnings, prizes, and awards, including his PERA assets in the maximum amount allowed
those in sports competition shall be exempt from the following taxes as may be
--------------------------------------------------------------- applicable:
Q: What are the requisites to be met before 1. Final withholding tax on interest from any
prizes and awards are excluded from gross currency bank deposit, yield or any other
monetary benefit from deposit substitutes and
income?
from trust funds and similar arrangements,
including a depository bank under the EFCDS;
The prizes and awards are:

2. Capital gains tax on the sale, exchange, exemption for head of a

retirement or maturity of bonds, debentures or family.
other certificates of indebtedness;
3. 10% tax on cash and/or property dividends Q: What is the nature of deductions?
actually or constructively received from a
domestic corporation, including a mutual fund Deductions partake of the nature of tax exemptions.
company; Hence, they are likewise strictly construed against
4. Capital gains tax on the sale, barter, exchange, the taxpayer. CIR V. ISABELA CULTURAL
or other disposition of shares of stock in a CORPORATION [G.R. NO. 172231, FEBRUARY 12,
domestic corporation; 2007]
5. Regular income tax.
Q: What are the kinds of deductions?
---------------------------------------------------------------
(h) Deductions 1. The itemized deductions in Section 34(A) to
(1) General Rules J and (M) available to all kinds of taxpayers
(2) Return of Capital engaged in trade or business or practice of
76
(3) Itemized Deductions profession in the Philippines
(4) Optional Standard Deduction 2. The optional standard deduction in Section
(5) Personal and additional exemption 34(L) available to all kinds of taxpayers
engaged in trade or business or practice of a
(6) Items not deductible
profession in the Philippines
--------------------------------------------------------------- 3. The special deductions in Section 37 and 38
as well as in special laws
Q: What are deductions? 4. The personal and additional exemptions and
deductions in Section 35 for premium
Deductions are items or amounts authorized by law payments on health and/or hospitalization
to be subtracted from the pertinent items of gross insurance in Section 34(M) available both to
income to arrive at taxable income. individual taxpayers earning purely
compensation income and individual
Q: Distinguish a deduction from an taxpayers engaged in trade or business or
exemption practice of a profession
Deduction Exemption Note: As to (2) – In Atty. Mamalateo’s book, he still states

that OSD is available only to an individual taxpayer, other
It is a subtraction It is an immunity or than a nonresident alien. This no longer holds true in light
privilege, a freedom from of the amendment introduced by RA 9504. Domestic and
resident foreign corporations may now avail of OSD.
a charge or burden to
which others are
subjected to Q: Who can avail of the deductions provided
for under the law?
It is not a receipt but an It is generally a receipt
expenditure which is which is excluded from On compensation 1) Deductions for premium
permitted to be taxable income income of payments on health and/or
subtracted from income citizens, whether hospitalization insurance
to determine the amount resident or
subject to tax nonresident, and 2) Personal and additional
_________________________________________
It is a reduction of wealth A person exemption is
which helped earn the the theoretical personal 76
As it requires that they be engaged in a trade, or business, or
income subject to tax, family and living profession, this excludes citizens and alien residents earning
such as ordinary and expense of an individual, purely compensation income.
necessary expenses such as the personal

resident aliens exemptions personal and additional exemptions and premium

payments on health and hospitalization insurance.
On incomes 1) Itemized deductions or
(other than optional standard deduction ---------------------------------------------------------------
compensation (1) General Rules
income) of 2) Deductions for premium (a) Deductions must be paid or incurred
citizens, whether payments on health and/or in connection with the taxpayer’s trade,
resident or hospitalization insurance business or profession
nonresident, and (b) Deductions must be supported by
resident aliens 3) Personal and additional adequate receipts or invoices (except
exemptions
standard deduction)
On income of 1) Itemized deductions but not (c) Additional requirement relating to
non-resident allowed optional standard withholding
aliens engaged in deduction ---------------------------------------------------------------
trade, business,
or profession in 2) Deductions for premium Q: What are the general rules to be
the Philippines payments on health and/or observed regarding deductions?
hospitalization insurance
1. Deductions must be paid or incurred in
3) Personal and additional connection with the taxpayer’s trade,
exemptions subject to business or profession
reciprocity 2. Deductions must be supported by adequate
receipts or invoices
Non-resident Their income (whether 3. Additional requirement relating to
alien individuals compensation or other income) withholding
not engaged in is subject to tax on their gross
trade or business income. Hence, no deductions Read Section 34(K), Tax Code
in the Philippines or exemptions
Q: What are the general requisites before
Domestic 1) Itemized deductions or deductions are allowed?
Corporations and optional standard deduction
Resident foreign 1. There must be a specific provision of law
corporations allowing the deductions, since deductions do
not exist by implication
Non-resident Their income (whether 2. The requirements of deductibility must be
foreign compensation or other income) met
corporation is subject to tax on their gross 3. There must be proof of entitlement to the
income. Hence, no deductions deductions
or exemptions 4. The deductions must not have been waived
5. The withholding and payment of the tax
required must be shown
Note: In sum, all taxpayers except:
Note: Remember this! In fact, please memorize it as these
1. Nonresident aliens not engaged in trade or business; are the requisites common to all deductions. Each
and deduction would add some requisites in the enumeration.
2. Nonresident foreign corporations or those foreign So remember the general requisites!
corporations not engaged in trade or business in the
Philippines
However, with respect to itemized deductions, they cannot

be availed by citizens and resident aliens whose income is
purely compensation income. They are entitled only to

--------------------------------------------------------------- to sellers of inventory of goods.

(2) Return of Capital Their entire gross receipts are
(a) Sale of inventory of goods by treated as part of income.
manufacturers and dealers of properties
(b) Sale of stock in trade by a real estate ---------------------------------------------------------------
dealer and dealer in securities (3) Itemized Deductions
(c) Sale of services (a) Expenses
--------------------------------------------------------------- (b) Interest
(c) Taxes
Q: Discuss “return of capital” as a (d) Losses
deduction. (e) Bad Debts
(f) Depreciation
Income tax is levied only in income, which may be (g) Charitable and other contributions
gross income or net income; hence, the amount (h) Contributions to pension trusts
representing return of capital should be deducted (i) Deductions under special laws
from the proceeds from sales of assets and should ---------------------------------------------------------------
not be subject to income tax (see Section 65, RR
No. 2) Note: I will not be discussing Depletion and Research and
Development as they are not included in the 2013
Sale of inventory The amount received by the Syllabus.
of goods by seller consists of return of
manufacturers capital and gain from sale of Q: What are the allowable under the Tax
and dealers of goods or properties. That Code? (Itemized deductions)
properties portion of the receipt
representing return of capital is The allowable and itemized deductions include:
not subject to income tax.
Accordingly, cost of goods 1. Business Expenses (Expenses in
manufactured and sold (in the connection with taxpayer’s trade, business
case of manufacturers) or cost or profession)
of sales (in the case of 2. Interest on Indebtedness
dealers) is deducted from 3. Taxes in connection with taxpayer’s
gross sales to arrive at gross business, trade or profession [except
income. income taxes, estate and donor’s taxes,
special assessments, and foreign income
Sale of stock in They are not ordinarily allowed taxes (unless the taxpayer does not make
trade by a real to compute the amount use of the tax credit privilege)]
estate dealer and representing return of capital 4. Losses
dealer in through cost of sales. Rather, 5. Bad debts
securities they are required to deduct the 6. Depreciation
total cost specifically 7. Depletion
identifiable to the real property 8. Charitable and other contributions
or shares of stock sold or 9. Research and development expenditures
exchanged. The resulting gain 10. Contributions to pension trusts
or loss is subject to income
tax. Note: The Secretary of Finance may prescribe ceilings for
the allowable itemized deductions.
Sale of services Seller of services do not buy
and carry nor sell any stock in Read Section 34 last ¶, Tax Code
trade or inventory of property;
hence, they do not take or
assume any risk of loss similar

--------------------------------------------------------------- 7. The tax required to be withheld on the

(a) Expenses expense paid or payable is shown to have
(1) Requisites for deductibility been remitted to the BIR
(2) Salaries, wages and other forms of
compensation for personal services Q: What is meant by ordinary and necessary
actually rendered, including the grossed- expenses?
up monetary value of the fringe benefit
An expense is 'ordinary' when it connotes a
subjected to fringe benefit tax which tax
payment which is normal in relation to the business
should have been paid of the taxpayer and the surrounding circumstances.
(3) Travelling/transportation expenses
(4) Cost of materials An expense will be considered 'necessary' where
(5) Rentals and/or other payments for the expenditure is appropriate and helpful in the
use or possession of property development of the taxpayer's business
(6) Repairs and maintenance
(7) Expenses under lease agreements Q: What is meant by “paid or incurred
(8) Expenses for professionals during the taxable year?”
(9) Entertainment/Representation
expenses Paid or incurred during the taxable year means that
(10) Political campaign expenses the deduction shall be taken for the taxable year in
which paid or accrued or paid or incurred dependent
(11) Training expenses
on the accounting method in which net income is
--------------------------------------------------------------- computed
Read Section 34(A), Tax Code Q: ABC Corp failed to claim expenses for
professional services that accrued in past
Q: What are the requisites for deductibility years. May ABC Corp still claim these
of business expenses?77 expenses as deductions?
The requisites are: No. In COMMISSIONER OF INTERNAL REVENUE VS.
1. The expense must be ordinary and ISABELA CULTURAL CORPORATION (FEBRUARY 12,
necessary 2007), Isabela Corp failed to claim the expenses for
2. Paid or incurred during the taxable year professional services that accrued in 1984 and 1985
3. In carrying on the trade or business of the during the said years. Instead, it sought to claim
taxpayer them as deductions during the taxable year of 1986.
4. It must be supported by adequate invoices The Supreme Court held that one of the requisites
and receipts for the deductibility of a business expenses is that it
5. Must not be against law, morals, public must have been paid or incurred during the taxable
78
policy, or public order year. Hence, the professional fees should have been
6. It must be reasonable claimed as deductions during the years where they
were paid or incurred.
_________________________________________ Q: Discuss the substantiation rule.

77
This is the general rule which is to be followed for all business
It is required that before business or professional
expenses. The enumeration provided in certain business
expenses provide for additional requisites. expenses are allowed as deductions from gross
78
We said that illegal income will form part of gross income income, the taxpayer must satisfy the BIR that the
because the Code provides for “income from whatever source.” deductions being claimed are indeed ordinary and
However, one cannot deduct the illegal income from gross
necessary expenses incurred during the taxable
income. It is against law and public policy. Ninakaw mo na nga,
gusto mo pa ng deduction. Kapal ng face. year carrying on any trade or business. The
taxpayer shall substantiate the expense being

deducted with sufficient evidence such as official

receipts or other adequate records. No. A taxpayer is entitled to deduct the ordinary and
necessary expenses paid in carrying on his business
Note: The burden is on the taxpayer to prove from his gross income from whatever source.
entitlement to a claimed deduction.
Q: Are “advertising expenses” deductible
Q: What is the Cohan Principle? from gross income?
If there is a showing that expenses have been It depends on the nature of the advertising expense.
incurred but the exact amount thereof cannot be In COMMISSIONER OF INTERNAL REVENUE VS. GENERAL
ascertained due to the absence of documentary FOODS (PHILS.) INC. [APRIL 24, 2003], General Foods
evidence, it is the duty of the BIR to make an claimed as deductions its advertising expenses for
estimate of deduction that may be allowed in its product “Tang.” The CIR disallowed the deduction
computing the taxpayer’s taxable income bearing arguing that the advertising expenses are not
heavily against the taxpayer whose inexactitude is of business expenses but capital expenditures.
his own making. Cohan v. Commissioner [39 F. 2d
540, 2d Cir. 1930] The Supreme Court ruled in favor of the CIR.
Advertising is generally of two kinds: (1) advertising
Q: What are the types of business expenses to stimulate the current sale of merchandise or use
specifically included in the Tax Code as of services and (2) advertising designed to stimulate
deductions? the future sale of merchandise or use of services.
The second type involves expenditures incurred, in
As provided in Section 34(A)(1)(a), these are: whole or in part, to create or maintain some form of
goodwill for the taxpayer’s trade or business or for
1. Reasonable allowance for salaries or other the industry or profession of which the taxpayer is a
compensation for personal services member. If the expenditures are for the advertising
actually rendered to the taxpayer of the first kind, then, except as to the question of
2. Reasonable allowance for travel expenses the reasonableness of amount, there is no doubt
in the pursuit of trade, business or such expenditures are deductible as business
profession expenses. If, however, the expenditures are for
3. Reasonable allowance for rentals and or advertising of the second kind, then normally they
other payments required for the continued should be spread out over a reasonable period of
use or premium of the property for the time The protection of brand franchise is analogous
purpose of the trade or business and to to the maintenance of goodwill or title to one’s
which property the taxpayer has not taken or property. This is a capital expenditure which should
is not taking title or in which he has no be spread out over a reasonable period of time. This
79
equity. was akin to the acquisition of capital assets and
4. Reasonable allowance for entertainment, therefore expenses related thereto were not to be
amusement and recreation expenses considered as business expenses but as capital
provided that they are connected to the expenditures. The advertising expense incurred by
development and operation of the trade, General Foods fall under the second type.
business or profession and that it is not
contrary to law, morals, public policy or Q: ABC Corporation paid a PR firm to
public order. campaign for the sale of ABC’s additional
capital stock. Is the compensation paid to
Q: Is the enumeration of business expenses the PR firm deductible as a business
provided in the Tax Code exclusive? expense?
_________________________________________ No. In ATLAS CONSOLIDATED MINING & DEVELOPMENT
79 CORPORATION VS. COMMISSIONER OF INTERNAL
In the latter case, he may claim depreciation allowance
REVENUE (JANUARY 27, 1981), the Supreme Court
held that this is not deductible because it is a capital

expenditure. Expenses relating to the payments purely for the personal services actually
recapitalization and reorganization of the rendered.
corporation, promotion expenses and commission or
fees for the sale of stock reorganization are capital Q: What are some factors that may be
expenditures. considered in determining the
reasonableness of the compensation paid
Q: Are litigation expenses deductible as a for services?
business expense?
They are:
No. As held in ATLAS CONSOLIDATED MINING &
DEVELOPMENT CORPORATION VS. COMMISSIONER OF 1. The payment must be made in good faith
INTERNAL REVENUE (JANUARY 27, 1981), litigation 2. The character of the taxpayer’s business
expenses incurred in defense or protection of title 3. The volume and amount of its net earnings
are capital in nature and not deductible. 4. The locality in which the business is in
5. The type and extent of the services rendered
6. The salary policy of the corporation
Are police protection fees and gifts for an 7. The size of the particular business
exhibition for charitable purposes deductible as 8. The employee’s qualifications and business
a business expense? venture
9. The general economic conditions
No. In CALANOC VS. COLLECTOR OF INTERNAL
REVENUE [NOVEMBER 29, 1961], at issue in this case There is no fixed test in determining the
is the deductibility of the expenses incurred for reasonableness of a given bonus as compensation.
police protection and for gifts and parties in This depends on many factors and the situation
connection with the boxing and wrestling exhibition must be considered as a whole.
that Calanoc financed and promoted whose
proceeds would be given to the orphans and Q: Are salaries deductible?
destitute children of the Child Welfare Workers Club
of the Social Welfare Commission. The Supreme Yes provided that they comply with the following
Court held that the police protection fees were not requisites:
deductible as they are illegal since it was
consideration for the performance of functions 1. The salaries must be for personal services
required of policemen by law. As to the gifts and actually rendered
parties, they were deemed excessive considering 2. The salaries must be reasonable in amount.
that the purpose of the exhibition was for a
charitable cause. (see Section 70, RR No. 2)
--------------------------------------------------------------- Note: To determine if reasonable, you look at what is

2) Salaries, wages and other forms of ordinarily paid for such service in like enterprise in like
compensation for personal services circumstances (see Section 70, RR No. 2-40)
actually rendered, including the grossed-
up monetary value of the fringe benefit Q: Are bonuses to employees allowable
subjected to fringe benefit tax which tax deductions from gross income?
should have been paid
Yes provided that:
---------------------------------------------------------------
1. They are made in good faith
Q: What is the rule on the deductibility of 2. They are given for personal services actually
compensation payments? rendered
3. The bonus when added to salaries is
The test of deductibility in the case of compensation reasonable when measured by the amount
payments is whether they are reasonable and and quality of the services performed with

relation to the business of the particular the deductibility of bonuses is that they are given for
taxpayer. personal services actually rendered.
(see KUENZLE & STREIFF V. COLLECTOR [106 PHIL. Q: ABC Corporation claimed as deductions
355]; C.M. HOSKINS & CO., INC. VS. COMMISSIONER OF bonuses it gave to its non-resident
INTERNAL REVENUE [NOVEMBER 28, 1969]) president and vice-president and the
bonuses it gave to its resident officers and
Q: A, an experienced realtor, was paid employees. The company gave its resident
supervision fees in the amount of P100,000 officers and employees much more. The
annually by XYZ Corporation for a three- deductions for bonuses given to resident
year project, an amount when combined officers and employees were disallowed for
with his salary and bonuses is double the being excessive and for no special reason.
XYZ’s income. Are the supervision fees Is the disallowance proper?
deductible?
It would depend on the nature, extent, and quality of
No. In C.M. HOSKINS & CO., INC. VS. COMMISSIONER the services actually rendered by the resident
OF INTERNAL REVENUE [NOVEMBER 28, 1969], officers and employees. In KUENZLE & STREIFF, INC.
Hoskins & Co. claimed as deductions the payment VS. COLLECTOR OF INTERNAL REVENUE [OCTOBER 20,
of P100,000 to its founder and controlling 1959], the Supreme Court held that the bonuses to
stockholder, Hoskins representing 50% of the 8% its resident officers and employees were reasonable
supervision fees the company received as managing taking into account the situation at the time when the
agent for Paradise Farms. In this case, the Supreme services were rendered: unsettling conditions after
Court held that such was not deductible for failing to the war, the imposition of controls on exports and
pass the reasonableness test. If allowed, Hoskin imports, and he use of foreign exchange which
would be receiving on his salary, bonus, and resulted in diminution of the amount of business.
supervision fees at total of P185,000 which is double
the company’s reported net income. The Supreme
---------------------------------------------------------------
Court stated that if it was a one-time payment, it
could have been deducted since Hoskin was an (3) Travelling/transportation expenses
experienced realtor. However, the P100,000 ---------------------------------------------------------------
supervision fee was being paid every year (for three
years) for the entire duration of the company’s Q: What are the requisites for deductibility
project with Paradise Farms. of travelling or transportation expenses?
Q: Can a bonus given to corporate officers 1. It must be paid or incurred while away from
be deducted from gross income from the home
sale of one of its properties on the 2. It must be incurred in the pursuit of the
representation that corporate officers, by taxpayer’s trade or business
virtue of their positions, contributed to the 3. It must be reasonable and necessary
consummation of the sale?
---------------------------------------------------------------
No. In AGUINALDO INDUSTRIES CORPORATION VS. (4) Cost of materials
COMMISSIONER OF INTERNAL REVENUE [FEBRUARY 25, ---------------------------------------------------------------
1982], Aguinaldo Industries sought to claim as
deductions the bonuses given to its corporate Q: What are the requisites for deductibility
officers from the sale of one of its properties.The of cost of materials?
Supreme Court held that the said bonuses cannot
be deducted because there is no evidence that the The charges for materials and supplies shall be only
said officers did any work which would be the basis to the amount that they are actually consumed and
of the grant of the bonuses. One of the requisites for used in operation during the year for which the
return is made, provided that the cost of such

materials and supplies has not been deducted in Q: What are the allowable deductions by a
determining the net income for any previous year lessee?
(see Section 67, RR No. 2-40)
The lessee may deduct the amount of rent paid or
--------------------------------------------------------------- accrued including all expenses which under the
(5) Rentals and/or other payments for terms of the agreement, the lessee is required to
use or possession of property pay to, or for the account of the lessor. If the
--------------------------------------------------------------- payments are so arranged as to constitute advance
rentals, such payment will be duly apportioned over
the lease term (see Section 3.01, RR No. 19-86)
Q: What are the requisites for deductibility
of rental expenses?
---------------------------------------------------------------
1. Made as a condition to the continued use or (8) Expenses for professionals
possession of property ---------------------------------------------------------------
2. Taxpayer has not taken or is not taking title
to the property or has no equity other than Q: What are the allowable deductions for
that of a lessee, use or possessor professionals?
3. Property must be used in trade or business
4. Subjected to withholding tax of 5%; 1. The cost of supplies used by him in the
otherwise, it shall be disallowed as a practice of his profession
deduction 2. Expenses paid in the operation and repair of
--------------------------------------------------------------- transportation equipment used in making
(6) Repairs and maintenance professional calls
--------------------------------------------------------------- 3. Dues to professional societies and
subscriptions to professional journals
Q: Discuss the deductibility of repairs 4. The rent paid for office rooms
expenses. 5. The expenses of the fuel, light, water,
telephone, etc. used in such offices; and
The cost of incidental repairs which neither 6. The hire of office assistants
materially add to the value of the property nor
appreciably prolong its life, but keep it in an ordinary ---------------------------------------------------------------
working condition, may be deducted as a business (9) Entertainment/Representation
expense. However, extraordinary repairs (those expenses
which prolong its life or add material value) are not ---------------------------------------------------------------
deductible
Q: What is the rule on the deductibility of
---------------------------------------------------------------
representation or entertainment, amusement
(7) Expenses under lease agreements
and recreation expenses?
---------------------------------------------------------------
Such expenses must:
Q: What are the allowable deductions by a 1. Must be paid or incurred during the taxable
lessor? year
2. be directly related to or in furtherance of the
Since the rentals are considered as income of the conduct of the trade, business or exercise of
lessor (owner of the property, such lessor may the profession
deduct all ordinary and necessary expenses paid or 3. not be contrary to law, morals, public policy
incurred during the taxable year which are or public order
attributable to the earning of the income. (see 4. does not constitute a bribe, kickback or
Section 2.01, RR No. 19-86) other similar payment

5. must be duly substantiated by adequate determine from all available data, the amount
proof properly deductible as representation expenses. In
6. The appropriate amount of withholding tax if view of this, the Supreme Court held CTA did not
applicable should have been withheld commit error in allowing as promotion expenses in
therefrom and paid to the BIR A’s income tax returns at merely one-half.
7. not exceed such ceilings prescribed by the
Secretary of Finance. ---------------------------------------------------------------
(10) Political campaign expenses
Q: Is there a ceiling on entertainment, ---------------------------------------------------------------
amusement and recreational expenses?
Note: I will use this as an opportunity to discuss the import
Yes. RR 10-2002 [JULY 10, 2002] provides that: of RR 8-2009 in relation to RMC 63-09 and RR 7-2011 in
relation to RMC 15-2013 which are recent BIR issuances
1. Sellers of goods or properties – 0.5% of on the matter of political campaign expenses. We know (or
their net sales as representation expenses should know) that contributions given to candidates or
2. Sellers of services – 1% of their net political parties are not subject to donor’s tax (see Section
revenues as representation expenses. 13, RA 7166). It may, however, be subject to income tax.
In order for the campaign expenditure to be tax-exempt, it
must be fully utilized. If it is not fully utilized, it is subject to
However, when supporting documents reflect a income tax (see Section 2, RR 7-2011). These
lower amount, then such lower amount shall be contributions are intended to finance the operation
used. expenditures of a candidate. Any unexpended balance
from any contribution to a candidate or party shall be
Q: A, a hotel owner, claimed as deduction subject to income tax. Further, if the candidate fails to
include certain campaign expenditures in the Statement of
promotion expenses incurred by his wife for Expenditures to be filed with the COMELEC, such
the promotion of the hotel. Half of the said amounts will be automatically subjected to income tax.
expenses were disallowed as deductions
because on the finding that his wife went RMC 15-2013 requires every candidate, treasurer of the
abroad on a combined business and party and person acting under authority of that candidate
or treasurer a) to keep detailed, full and accurate records
medical trip. Is the disallowance proper? of all contributions received and expenditures incurred; b)
to be responsible for the preservation of the records of
Yes. In ZAMORA VS. COLLECTOR OF INTERNAL contributions and expenditures together with all pertinent
REVENUE [M AY 31, 1963], Zamora, a hotel owner, documents, for at least three years after the holding of the
claimed as deduction promotion expenses incurred election to which they pertain and for the productions for
by his wife for the promotion of the hotel. On appeal, inspection by the COMELEC or its duly authorized
the CTA only allowed 50% of the promotional representative, or upon presentation of a subpoena duces
expenses as deductions because it was found in the tecum duly issued by the COMELEC.
Central Bank dollar allocation that his wife went Now, with that said, we now answer whether political
abroad on a combined business and medical trip. campaign expenses are deductible.
The Supreme Court stated that promotional Q: Are political campaign expenses
expenses are deductible but must be substantiated. deductible?
When some of the representation expenses claimed
by the taxpayer were evidenced by vouchers or We must distinguish between (1) the candidate,
chits, but others were without vouchers or chits, political party, or contributor and (2) the supplier of
documents or supporting papers; that there is no the goods and services pertaining to the campaign
more than oral proof to the effect that payments expenditures.
have been made for representation expenses
allegedly made by the taxpayer and about the As to the candidate, political party, or contributor, the
general nature of such alleged expenses; that political campaign expenses are not deductible. If
accordingly, it is not possible to determine the actual they are fully utilized, they are tax exempt and thus
amount covered by supporting papers and the there’s no need for any deduction at all. If they are
amount without supporting papers, the court should

not fully utilized and hence subject to income tax, it Q: What are the requisites for the
is submitted that they cannot still be deducted either deductibility of interest expenses from
as a business expense or as a contribution. gross income?
MONTENEGRO V. COMMISSIONER, CTA CASE 695,
APRIL 30, 1965) The requisites are:
80
1. There must be indebtedness
However, as to the supplier of the goods or services, 2. There should be an interest expense paid or
he may avail of a deduction. RR 8-2009 subjects the incurred upon such indebtedness
following to a 5% creditable withholding tax: (a) 3. The indebtedness must be that of the
payments made by the political parties and taxpayer
candidates of local and national elections for their 4. The indebtedness must be connected with
campaign expenditures; and (b) payments made by the taxpayer’s trade, business or exercise of
individuals or juridical persons for their purchases of profession
goods and services intended to be given as 5. The interest expense must have been paid
campaign contributions to political parties and or incurred during the taxable year.
candidates. RMC 63-2009 provides that such 5% 6. The interest must be legally due
creditable withholding tax shall be allowed as a tax 7. the interest payment arrangement must not
credit or deduction against the total income tax be between related taxpayers
liability of the supplier of goods or services. 8. the interest must not be incurred to finance
petroleum operations
--------------------------------------------------------------- 9. in case of interest incurred to acquire
(11) Training expenses property used in trade, business, or exercise
--------------------------------------------------------------- of profession, the same was not treated as a
capital expenditure
Q: Discuss the deductibility of training 10. The interest must have been stipulated in
expenses as a business expense. writing
11. The allowable deduction have been reduced
by an amount equal to 33% of the interest
The training expenses must constitute ordinary and
income subject to final tax
necessary business expenses of a taxpayer.
(see RR 13-2000 [NOVEMBER 20, 2000])
---------------------------------------------------------------
(b) Interest
(1) Requisites for deductibility Q: When is interest expense not deductible
(2) Non-deductible interest expense from gross income?
(3) Interest subject to special rules
--------------------------------------------------------------- 1. an indebtedness on which an interest is
paid in advance through discount or
Section 34(B), Tax Code otherwise. Such interest shall be allowed as
a deduction in the year the indebtedness is
paid. If the indebtedness is payable in
---------------------------------------------------------------
periodic amortization, the amount of
(1) Requisites for deductibility interest which corresponds to the amount of
(2) Non-deductible interest expense the principal amortized or paid during the
--------------------------------------------------------------- year shall be allowed as deduction in such
taxable year.
_________________________________________
80
Indebtedness is something owned by one who is
unconditionally obligated or bound to pay

2. If both the taxpayer and the person to whom Such interest shall be allowed as a deduction in the
the payment has been made or is to be year the indebtedness is paid.
made are “related” persons specified
under Section 36(B). Q: What is the rule on interest periodically
3. If the indebtedness is used to finance amortized?
petroleum exploration.
4. Interest expense equal to 33% of the The amount of interest which corresponds to the
interest income subject to final tax amount of the principal amortized or paid during the
year shall be allowed as deduction in such taxable
Q: Enumerate the cases when no deduction year.
is allowed because the loan is between
related taxpayers. ---------------------------------------------------------------
(c) Interest expense incurred to acquire
1. Between members of the family (brother, property for use in trade, business,
sisters, ascendant, lineal descendant) profession
2. Between an individual and a corporation –
where the individual paid interest on a loan
---------------------------------------------------------------
granted by the corporation more than 50%
of the capital stock of which is owned by the Q: May the taxpayer choose to treat
individual interest expense as capital expenditure?
3. Between two corporations – where one
corporation owns more than 50% of the Yes. Section 34(B)(3) provides that at the option of
other the taxpayer, interest incurred to acquire property
4. Between a grantor and fiduciary of a trust used in trade, business or exercise of a profession
5. Between the fiduciary of a trust and the may be allowed as a deduction or treated as a
fiduciary of another trust with the same capital expenditure.
grantor
6. Between a fiduciary of a trust and a However, should the taxpayer elect to deduct the
beneficiary of such trust interest payments against its gross income, the
taxpayer cannot at the same time capitalize the
Read Section 36(B), Tax Code interest payments because that would constitute
double tax benefits which is not authorized by law
---------------------------------------------------------------
(3) Interest subject to special rules In PAPER INDUSTRIES CORPORATION OF THE
(a) Interest paid in advance PHILIPPINES VS. COURT OF APPEALS [DECEMBER 1,
1995], Paper Industries claimed as deductions
(b) Interest periodically amortized
against gross income interest payments on loans for
(c) Interest expense incurred to acquire the purchase of machinery and equipment. The CIR
property for use in trade, business, disallowed the deduction on the ground that
profession because the loans had been incurred for the
(d) Reduction of interest purchase of machinery and equipment, the interest
expense/interest arbitrage payments on the said loans should have been
--------------------------------------------------------------- capitalized instead and claimed as a depreciation
deduction taking into account the adjusted basis of
--------------------------------------------------------------- the machinery and equipment (original acquisition
(a) Interest paid in advance cost plus interest charges) over the useful life of
(b) Interest periodically amortized such assets.
---------------------------------------------------------------
The Supreme Court ruled that Paper Industries is
entitled to its claimed deduction for interest
Q: What is the rule on interest paid in payments on loans for, among other things, the
advance? purchase of machinery and equipment. The general

rule is that interest expenses are deductible against tax) thus benefiting by 12% representing the
gross income and this certainly includes interest difference the 32% deduction and the 20%
paid under loans incurred in connection with the withholding tax. It does not matter if the taxpayer
carrying on of the business of the taxpayer. In this actually intended to save taxes.
case, the CIR does not dispute that the interest
payments were made on loans incurred in In BIR RULING NO. 006-00 [JANUARY 5, 2000], PNB
connection with the carrying on of the registered requested the BIR to exclude the interest income
operations of Paper Industries, i.e., the financing of derived by it from treasury bonds in the
the purchase of machinery and equipment actually determination of the interest expense not allowable
used in the registered operations of Paper as deduction as gross income. PNB argues that the
Industries. Neither does the CIR deny that such said bonds were given by the Government for
interest payments were legally due and payment for its liabilities to PNB and hence, it has
demandable under the terms of such loans, and in not engaged in a tax arbitrage scheme.
fact paid by Paper Indusries during the tax year.
The CIR has been unable to point to any provision of Although as a general rule, the amount of interest
the Tax Code or any other Statute that requires the expense paid or incurred by a taxpayer within a
disallowance of the interest payments made by taxable year on indebtedness in connection with his
Paper Industries. The general rule that interest trade, business or exercise of profession shall be
payments on a legally demandable loan are allowed as a deduction from his gross income, the
deductible from gross income must be applied. said interest expense, however, shall be reduced if
the taxpayer has derived certain interest income
--------------------------------------------------------------- which had been subject to final withholding tax. The
(d) Reduction of interest CIR ruled that this limitation on the deductibility of
expense/interest arbitrage interest expenses applies whether or not a tax
arbitrage scheme was entered into by the taxpayer
---------------------------------------------------------------
Q: Do tax obligations constitute
Q: What is the limitation on the amount of
indebtedness?
interest expense allowed to be deductible?
Yes. In COMMISSIONER OF INTERNAL REVENUE VS.
The amount of interest expense paid or incurred by
VDA. DE PRIETO [SEPTEMBER 30, 1960], Vda. de
a taxpayer in connection with his trade, business, or
Prieto conveyed real property by way of gifts to her
exercise of a profession from an existing
four children. She was assessed for donor’s gift
indebtedness shall be reduced by an amount equal
taxes including interests due thereon. She claimed
to 33% of the interest income earned which had
as deduction the total interest on account of the
been subject to final withholding taxes.
delinquency. She contends that the interests due
from her tax obligations are deductible from gross
Q: What is interest arbitrage? income.
Interest arbitrage results in the reduction of the The Supreme Court held that although interest
interest expense by a percentage of the interest payment for delinquent taxes is not deductible as tax
income subject to final tax. It is also defined as a under Section 34(C) of the Tax Code, the taxpayer
circumstance which is presumed to exist because by is not precluded thereby from claiming said interest
putting excess funds in deposits/securities subject to payment as deduction under Section 34(B) of the
20% withholding, taxpayers are able to avoid the same Code. It is a well-settled rule that tax
32% tax which will happen if the same funds are obligations constitute indebtedness for purposes of
invested in revenue-generating activities. deduction from gross income of the amount of
interest paid on indebtedness.
Another illustration of this is when a taxpayer
borrows money from the bank (interest payments on
---------------------------------------------------------------
which can then be claimed as expense and thus a
32% benefit) then deposits it in a bank (and (c) Taxes
subsequently suffers only a 20% final withholding (1) Requisites for Deductibility

(2) Non-deductible taxes No. Section 34(C)(1) provides that all taxes,
(3) Treatments of national or local, paid or accrued during the taxable
surcharges/interests/fines for year in connection with the trade or business or
delinquency profession of the taxpayer are deductible from
gross income except:
(4) Treatment of special assessment
(5) Tax credit vis-à-vis deduction 1. Philippine income tax
--------------------------------------------------------------- 2. Foreign income taxes unless the taxpayer
does not make use of the tax credit privilege
Read Section 34(C), Tax Code under Section 34(C)(3).
3. Estate and donor’s taxes
--------------------------------------------------------------- 4. Taxes assessed against local benefits of a
(1) Requisites for Deductibility kind tending to increase the value of the
(2) Non-deductible taxes property assessed (special assessments)
5. VAT
---------------------------------------------------------------
Note: In the case of nonresident alien individual or a
Q: Who are entitled to deduct taxes from foreign corporation, deduction is only allowed if and to
gross income? the extent that the taxes for which deduction is claimed
are connected with income from sources within the
Taxes are deductible as such only by the taxpayer Philippines.
upon which they are imposed.
---------------------------------------------------------------
Q: What are the requisites for the (3) Treatments of
deductibility of taxes? surcharges/interests/fines for
delinquency
1. The payments must be for taxes (4) Treatment of special assessment
2. It must be paid or incurred within the taxable ---------------------------------------------------------------
year
3. It must be incurred in connection with trade, Q: Are surcharges, interest and fines for
business or profession delinquency deductible?
4. Tax must be imposed by law on and payable
by the taxpayer (indirect taxes not included) No. To allow them to be deducted defeats the
5. Taxes are not specifically excluded by law prescribed punishment. GUITIERREZ V. COLLECTION
from being deducted from the taxpayer’s [14 SCRA 33]
gross income
Note: However, as discussed, Interest on deficiency taxes
may be allowed as deduction (considered as interest on
indebtedness).
Q: What is the effect of a refund or credit of
deducted taxes? Q: Are special assessments deductible?
The taxes that are allowed as deductions, when It depends.

refunded or credited, shall be included as part of
gross income in the year of receipt to the extent of 1. Maintenance or repair of local benefits –
the income tax benefit of said deduction (Tax Benefit deductible as an expense incurred in trade,
Rule) (see Section 34(C)(1)) business or exercise of a profession if the
payment of such assessment is ordinary and
Q: Are all taxes deductible from gross necessary to the conduct of trade, business
income? or profession
2. Construction of local benefits which increase
the value of the property assessed – the

payments should be treated as capital Q: What are the remedies for a taxpayer who
expenditures and hence are not deductible has paid income taxes to a foreign country
for which he would also be liable for
(see Section 83, RR No. 2-40) Philippine income tax?
--------------------------------------------------------------- 1. Tax credit against the Philippine income tax
(5) Tax credit vis-à-vis deduction due;
--------------------------------------------------------------- 2. Deduction from gross income
Q: What is a tax credit? Note: Rationale for allowing tax credit for foreign
taxes – to address indirect double taxation.
A tax credit is the amount subtracted from an

Q: Who are allowed to avail of credit against
individual’s or entity’s tax liability to arrive at the
tax for taxes of foreign countries?
total tax liability.
Only those subject to tax on worldwide income
Q: Distinguish a tax credit from a tax (resident citizen and domestic corporations) may
deduction. avail of tax credits because they pay taxes for
foreign sources income twice (in the Philippines and
Tax Credit Tax Deduction abroad) and the tax credit is meant to lessen the
impact of double taxation.
Reduces the taxpayer’s Reduces taxable income
liability peso for peso upon which the tax Note: This would include members of GPPs and estates.
liability is calculated
Q: May a resident alien deduct from their
gross income income taxes they paid to
Subtracted from the tax Subtracted from the their government?
income before the tax is
computed No. In COMMISSIONER OF INTERNAL REVENUE VS.
81
LEDNICKY [JULY 31, 1964], US citizens residing in
Q: Is the 20% sales discount granted by the Philippines who derives income wholly from
establishments to qualified senior citizens sources within the Philippines, sought to deduct from
considered a tax credit or a tax deduction? their gross income the income taxes they have paid
to the US government.
In M.E. HOLDING CORPORATION V. COURT OF APPEALS
[M ARCH 3, 2008], the Supreme Court noted that The Supreme Court held that to allow an alien
under RA 9257 or the Expanded Senior Citizens Act resident to deduct from his gross income whatever
of 2003, starting taxable year 2004, the 20% sales taxes he pays to his own government is
discount shall be treated as a tax deduction and no incompatible with the status of the Philippines as a
longer as a tax credit. sovereign state. This is because the foreign
government will have the power to reduce the tax
Q: What is the difference between a tax income of the Philippine government simply by
increasing their tax rates.
credit and tax deduction?
A tax credit is a peso-for-peso deduction from the _________________________________________

taxpayer’s tax liability or a full recovery while a tax
81
deduction only benefits the taxpayer to the extent of Note that at the time this case was decided, resident aliens
a percentage of the amount granted as a discount. were still allowed to claim a tax credit. The present rule is that
only resident citizens and domestic corporations can claim a tax
(See CARLOS SUPERDRUG CORP. V. DSQS [JUNE 29, credit. Also, in this case, their net income for foreign sources was
2007] and M.E. HOLDING CORPORATION V. COURT OF zero and, thus, there was no need to apply the tax credit.
APPEALS [M ARCH 3, 2008])

Note: Also important is this case is the statement made by (2) Other types of losses
the court on the exception: a taxpayer may only be (a) Capital losses
allowed to deduct from his gross income, taxes paid to a
foreign country when such taxpayer is entitled to a foreign (b) Securities becoming worthless
tax credit and he does not choose to exercise such right. (c) Losses on wash sales of stocks or
The right to deduct foreign tax paid is only an alternative to securities
the taxpayer’s right to the foreign tax credit. (d) Wagering Losses
(e) NOLCO
Q: What are the limitations on credit for
---------------------------------------------------------------
foreign taxes?
The amount of the credit shall be subject to the Read Section 34(D), Tax Code
following limitations:
Q: What are the conditions for deductibility
1. The amount of the credit in respect to the of losses?
tax paid or incurred to any country shall not
exceed the same proportion of the tax In order that losses may be allowed as deductions,
against which such credit is taken, which the the following conditions must concur:
taxpayer’s taxable income from sources
within such country under this Title bears to 1. The losses must actually be sustained and
his entire taxable income for the same charged off within the taxable year
taxable year. 2. Evidenced by a closed and completed
transaction
Note: For those who have not yet been rendered 3. Loss is not compensated by insurance or
mathematically impaired by law school, the formula is this: otherwise
4. In the case of an individual, the loss must have
been incurred in the business, trade or
profession of the taxpayer or incurred in any
transaction entered into for profit though not
connected with his trade or business
5. In the case of casualty loss, declaration of loss
2. The total amount of the credit shall not is filed within 45 days from the occurrence of the
exceed the same proportion of the tax casualty loss
against which such credit is taken, which the
taxpayer’s taxable income from sources Note: (1) Losses are deductible only by the person sustaining
them. They are purely personal and cannot be used as
without the Philippines taxable under this
deductions by another
Title bears to his entire taxable income for
the same taxable year. (2) The loss shall not be allowed as a deduction if such
loss was claimed as a deduction for estate tax purposes
Note: Again for the mathematically unimpaired, the (see Section 34(D)(1)(c))
formula is this:
(3) It is not required that the loss must be a result of
transactions in the taxable year only. The taxpayer need
only prove that a closed and completed transaction sets
the loss in the taxable year or in the year claimed and it is
not compensated by insurance or otherwise.
Note: Actually, mas madali naman i-memorize ang
formula instead of trying to memorize and make some Q: How shall the amount of the loss
sense out of those two sentences. deductible be determined?
--------------------------------------------------------------- The amount of loss deductible is limited to the

(d) Losses difference between the value of the property
(1) Requisites for deductibility immediately preceding the loss and its value
immediately thereafter but shall not exceed an

amount equal of the cost or other adjusted basis of

the property, or depreciated cost reduced by any Q: What are the substantiation requirements
82
insurance or other compensation received. for losses arising from casualty, robbery,
theft, or embezzlement?
Q: What are the kinds of losses allowed to
be deducted from gross income? Generally, under RR 12-77 [OCTOBER 6, 1977], the
substantiation requirements are:
1. Ordinary losses
2. Losses from casualty, theft or 1. A declaration of loss filed with the CIR or his
embezzlement (casualty losses) deputies within a certain period as
3. Net operating loss (where there is a carry- prescribed in the RR after the occurrence of
over of deductions) the casualty, robbery, theft, or
embezzlement
Q: What are ordinary losses? 2. Proof of the elements of the loss claimed
These are losses that are incurred by a taxable RMO 31-2009 [OCTOBER 16, 2009] provides for
entity as a result of its day to day operations policies and guidelines for the reporting of casualty
conducted for profit or otherwise. losses.
Q. What are casualty losses? ---------------------------------------------------------------

(2) Other types of losses
These are the loss or physical damage suffered by (a) Capital losses
property used in trade, business, or the profession (b) Securities becoming worthless
that results from unforeseen, identifiable events that (c) Losses on wash sales of stocks or
are sudden, unexpected, and unusual in character. securities
(d) Wagering Losses
Q: Define casualty, theft, and embezzlement ---------------------------------------------------------------
for purposes of tax deduction
Q: Discuss the deductibility of capital
Casualty means the complete or partial losses.
destruction of property resulting from
an identifiable event of a sudden,
unexpected or unusual nature. Capital losses may not be deducted from ordinary
gains; such capital losses may only be deducted
from capital gains unless a final tax on the capital
Theft Criminal appropriation of another’s transaction is imposed.
property to the use of the taker Q: What is the rule with respect to loss
resulting from shrinkage in the value of the
Embezzlement Fraudulent appropriation of another’s
property by a person to whom it has
stock
been entrusted or into whose hands it
has lawfully come A person cannot deduct from gross income any
amount claimed as a loss merely on account of
(see Section 1, RR No. 12-77) shrinkage in value of such stock through fluctuations
of the market or otherwise.
_________________________________________
82
For example, you purchased a piece of machinery for the value Q: What is the rule with respect to loss
of 200,000 to be depreciated for 20 years. On the 10th year, it was resulting from stocks becoming worthless?
lost due to fire and for the loss, you received P50,000 from your
insurance. How much can you deduct? Get the depreciated cost
which is now 100,000 and deduct the insurance received. The
If the securities become worthless during the taxable
amount that can be deducted is then 50,000. year and are capital assets, the loss resulting
therefrom shall be considered as a loss from the

sale or exchange, on the last day of such taxable ---------------------------------------------------------------

year, of capital assets. (e) NOLCO
---------------------------------------------------------------
Shares of stock becoming worthless in the hands of
an investor are capital assets, as such capital losses
Q: What is a net operating loss?
are allowed to be deducted only to the extent of
capital gains.
Net Operating loss refers to the excess of
allowable deduction over gross income of a
Read Section 38, Tax Code business for any taxable year.
Q: What is a wash sale? Q: What are the requisites for the

deductibility of NOLCO from gross income?
Wash sale is a sale or other disposition of stock or
securities where substantially identical securities are
1. The net operating loss of the business or
acquired or purchased within a 61-day period,
enterprise
beginning 30 days before the sale and ending 30
2. for any taxable year immediately preceding
days after the sale.
the current taxable year
3. which had not been previously offset as
Q: Are losses from wash sales deductible? deduction from gross income
4. shall be carried over as a deduction from
No. This is an exception to the general rule that gross income
losses from sales or exchanges of stock or securities 5. for the next 3 consecutive taxable years
are deductible as losses from sales or exchange of immediately following the year of such loss
property. 6. Provided, any net loss incurred in a taxable
year during which the taxpayer was exempt
This will not apply to a loss incurred by a dealer in from income tax shall not be allowed as a
securities. A loss incurred by a dealer in securities deduction
with respect to a transaction made in the ordinary 7. Provided, further, a net operating loss carry-
course of the business of such dealer is deductible. over shall be allowed only if there has been
no substantial change in the ownership of
Example: the business or enterprise.
A, whose taxable year is the calendar year, on
Q: What is meant by “substantial change in
December 1, 2012, purchased 100 shares of
common stock in the ABC Company for P100,000 the ownership of the business or
and on December 15, 2012, purchased 100 enterprise?”
additional shares for P80,000. On January 2, 2012,
he sold the 100 shares purchased on December 1, The 75% equity rule or ownership or interest rule
2012, for P80,000. Because of the provisions of shall only apply to a transfer or assignment of the
Section 38, no loss from the sale is allowable as a taxpayer’s net operating losses as a result of or
deduction. arising from the said taxpayer’s merger or
consolidation or business combination with another
(see Section 38, Tax Code and Section 131, RR 2) person.
Q: Discuss the deductibility of wagering The transferee or assignee shall not be entitled to
claim the same as a deduction from gross income
losses.
except when as a result of the said merger,
consolidation, or combination, the shareholders of
Losses from wagering transaction shall be allowed the transferor/assignor, or the transferor gains
only to the extent of the gains from such control of:
transactions.
(a) not less than 75% in nominal value of
outstanding issued shares or paid up capital of

the transferee/assignee in case the No. In PAPER INDUSTRIES CORPORATION OF THE

transferee/assignee is a corporation or PHILIPPINES VS. COURT OF APPEALS [DECEMBER 1,
1995], the Supreme Court ruled that the deduction
(b) Not less than 75% of the interest in the was improper. NOLCO of the taxpayer shall not be
business of the transferee/assignee in case he transferred or assigned to another person, whether
transferee/assignee is not a corporation. directly or indirectly, such as, but not limited to, the
transfer or assignment thereof through merger,
Q: Who are the taxpayers who are entitled to consolidation or any form of business combination of
the deduct NOLCO from gross income? such taxpayer with another person. To allow the
deduction claimed by the surviving corporation
1. Any individual engaged in trade or business would be to permit one corporation or enterprise to
or in the exercise of his profession benefit from the operating losses accumulated by
2. Domestic and resident foreign corporations another corporation or enterprise.
subject to normal corporate income tax
Q: If several corporations enter an
Q: Discuss the relationship between NOLCO agreement to integrate their respective
and the Minimum Corporate Income Tax businesses, can each of the corporations
(MCIT) continue to carry-over their respective net
operating losses?
Domestic and resident foreign corporations are
liable to the 2% MCIT (computed based on gross It depends on the nature of the integration plan. In
income) whenever the amount of MCIT is greater BIR RULING 30-00 [AUGUST 10, 2000], three cement
than the normal income tax due (which would be companies (Republic, Fortune and Blue Circle)
computed with the benefit of NOLCO if any). Thus, sought the opinion of the CIR on the tax implications
such corporation cannot enjoy the benefit of NOLCO of their integration plan. With regard to NOLCO, the
when it is subject to MCIT. CIR held that since, under the plan, the corporation
are not dissolved but merely integrated for a specific
Q: Will the three-year reglementary period bona fide purpose, the net operation losses of each
of the cement corporations are preserved after the
on the carry-over of NOLCO continue to run
proposed share swap and may be carried over and
notwithstanding that the corporation is claimed as a deduction from their respective gross
subject to MCIT (and hence, cannot avail of income because there is no substantial change in
the benefit of NOLCO)? the ownership of either of the three cement
companies.
Yes. RR 14-01 [AUGUST 27, 2001] provides that the
three-year reglementary period on the carry-over of Q: Are foreign exchange losses deductible?
NOLCO shall continue to run notwithstanding the
fact that the corporation paid its income tax under No. In BIR RULING 206-90 [OCTOBER 30, 1990] and
the MCIT computation BIR RULING NO. 144-85 [AUGUST 26, 1985], the CIR
held that, with regard to foreign exchange losses,
Q: XYZ entered into a merger agreement the annual increase in value of an asset is not
with ABC. Under this agreement, the rights, taxable income because such increase has not yet
properties, privileges, powers and been realized, The increase in value could only be
franchises of the said ABC were to be taxed when a disposition of the property occurred
transferred, assigned and conveyed to XYZ which was of such a nature as to constitute a
as the surviving corporation. Before merger, realization of such gain. The same conclusion
the company had over preceding years obtains to losses. The annual decline in the value of
property is not normally allowable as a deduction.
accumulated losses. XYZ claimed these
Hence, to be allowable the loss must be realized.
losses as a deduction against its gross
income. Should the deduction be allowed?

--------------------------------------------------------------- 1. The BSP, through the Monetary Board, shall ascertain

(e) Bad Debts the worthlessness and uncollectibility of the bad debts
and it shall approve the writing off of the said
(1) Requisites for deductibility indebtedness from the banks; books of accounts at
(2) Effect of recovery of bad debts the end of the taxable year.
--------------------------------------------------------------- 2. In no case may a receivable from an insurance or
surety company be written-off from the taxpayer's
books and claimed as bad debts deduction unless
Read Section 34(E), Tax Code such company has been declared closed due to
insolvency or for any such similar reason by the
Q: What are bad debts? Insurance Commissioner
Bad debts shall refer to those debts resulting from In both cases, requisites nos. 1-4 should still be complied
the worthlessness or uncollectibility, in whole or with.
in part, of amounts due the taxpayer by others,
arising from money lent or form uncollectable Q: What is meant by “actually ascertained to
amounts of income from goods sold or services be worthless?”
rendered.
The phrase means that a debt is not worthless
Q: How do you distinguish bad debts from simply because it is of doubtful value or difficult to
loss? collect. Conclusive evidence must be presented to
show that the taxpayer’s receivable from a debtor
Voluntary cancellation or forgiveness of a debt does has definitely become worthless.
not give rise to a deductible loss. However, if the
debt is actually worthless, there may be a bad debt Q: What is meant by “actually charged off?”
deduction. That deduction would be allowed
because the debt was worthless, not because it was The phrase means that the amount of money lent by
forgiven. the taxpayer to his debtor has been recorded in his
books of account as a receivable that has actually
Q: What are the conditions for bad debts to become worthless of as of the end of the taxable
year, that the said receivable has been cancelled
be deductible?
and written-off from the said taxpayers’ books of
account.
As provided in RR 5-99 [March 10, 1999], the
requisites for deductibility of bad debts are:
Q: ABC mining entered into a management
1. There must be an existing indebtedness due to contract with XYZ mining. ABC made
the taxpayer which must be valid and legally advances of cash and property. However,
demandable XYZ’s mine suffered continuing losses
2. The same must be connected with the which led to ABC;s withdrawal as manager
taxpayer’s trade, business or practice of and cessation of mine operations. ABC and
profession XYZ entered into two compromises: the first
3. The same must not be sustained in a transaction involved alleged indebtedness by XYZ from
entered into between related parties the advances of ABC and the second
4. The same must actually be charged-off within
involved long-term loans guaranteed by
the taxable year
5. The same must be actually ascertained to be ABC. ABC deducted the amounts as bad
worthless and uncollectible as of the end of the debt. Is the deduction proper?
taxable year.
6. The debts are uncollectible despite diligent No. In PHILEX MINING CORPORATION VS.
efforts exerted by the taxpayer COMMISSIONER OF INTERNAL REVENUE [APRIL 16,
2008], the Supreme Court held that Philex cannot
Note: RR 5-99 [March 10, 1999] provides for two deduct the amounts as bad debt. The agreement
exceptions to requisite no. 5, namely: provided for a distribution of assets of the mine upon
termination, a provision that is more consistent with

a partnership than a creditor-debtor relationship. In 30, 1969], the Supreme Court held that the
this connection, there is no contractual basis for the deduction was improper. The Court opined that
execution of the two compromise agreements in assuming that in this case there was a valid and
which Baguio Gold recognized a debt in favor of subsisting debt and that the debtor was incapable of
Philex. Philex’s advances should be treated as paying the debt, the debt is still not deductible as a
investments in a partnership. The advances were worthless debt because the debtor was still in
not "debts" of Baguio Gold to Philex inasmuch as the operation. It has been held that if the debtor
latter was under no unconditional obligation to return corporation, although losing money or insolvent, was
the same to the former. still operating at the end of the taxable year, the debt
is not considered worthless and therefore not
As for the amounts that Philex paid as guarantor to deductible.
Baguio Gold’s creditors, the debts were not yet due
and demandable at the time that Philex paid the Q: What is the effect of recovery of bad
same. Philex cannot claim the advances as a bad debts?
debt deduction from its gross income. Deductions for
income tax purposes partake of the nature of tax The recovery of bad debts previously allowed as
exemptions and are strictly construed against the deduction in the preceding year or years shall be
taxpayer, who must prove by convincing evidence included as part of the taxpayer’s gross income in
that he is entitled to the deduction claimed. In this the year of such recovery to the extent of the income
case, Philex failed to substantiate its assertion that tax benefit of said deduction (equitable doctrine of
the advances were subsisting debts of Baguio Gold tax benefit or tax benefit rule)
that could be deducted from its gross income.
Consequently, it could not claim the advances as a
valid bad debt deduction. ---------------------------------------------------------------
(f) Depreciation
Is the declaration by the taxpayer that a debt is (1) Requisites of computing depreciation
worthless sufficient for it to claim a bad debt allowance
deduction? (2) Methods of computing depreciation
allowance
No. In PHILIPPINE REFINING COMPANY VS. COURT OF (a) Straightline method
APPEALS [M AY 8, 1996], at issue was PRC’s (now (b) Declining-balance method
Unilever) claimed of bad debt deduction. On appeal, (c) Sum-of-the-years-digit method
the CTA disallowed the same as there was no iota of
---------------------------------------------------------------
documentary evidence to prove the worthlessness of
the debts sought to be deducted. The Supreme
Court stated that before a debt can be considered Read Section 34(F), Tax Code
worthless, the taxpayer must also show that it is
indeed uncollectible even in the future. PRC here ---------------------------------------------------------------
failed to prove the worthlessness of the amounts (1) Requisites of computing depreciation
receivable. allowance
---------------------------------------------------------------
Q: ABC, an investment company made
advances to XYZ under an agreement that a Q: What is depreciation?
portion of its net profits would go to ABC.
XYZ suffered substantial losses but Depreciation is the gradual diminution in the useful
83
continued to operate. ABC made a partial value of tangible property resulting from wear and
write-off of the losses and deducted the tear and normal obsolescense.
amount in its return. Is the deduction _________________________________________
proper? 83
Not all tangible property can be depreciated. Land, for example,
cannot be depreciated because its value continues to increase.
No. In FERNANDEZ HERMANOS, INC. VS.
COMMISSIONER OF INTERNAL REVENUE [SEPTEMBER

aside some money to buy a replacement or, in other

The term is also applied to amortization of the value words, to gradually recover the acquisition cost. The
84
of intangible assets, the use of which in the trade income tax law does not authorize the depreciation
or business is definitely limited in duration. of an asset beyond its acquisition cost. The reason
is that deductions from gross income are privileges,
Q: What is the rationale behind not matters of right. More importantly, the recovery,
depreciation? free of income tax, of an amount more than the
invested capital in an asset will run counter to the
Depreciation commences with the acquisition of the purpose of a depreciation allowance. For then, the
property and its owner is not bound to see his taxpayer can not only recover the acquisition cost,
property gradually waste, without making provision but also make some profit. Recovery in due time
out of earnings for its replacement. It is entitled to through depreciation of investment made is the
see to it that from earnings the value of the property philosophy behind depreciation allowance; the idea
invested is kept unimpaired so that at the end of any of profit on the investment made has never been the
given term of years, the original investment remains underlying reason for the allowance of a deduction
as it was in the beginning for depreciation.
Q: What are the requisites for the The BIR found that ABC claimed excessive
deductibility of a depreciation expense? depreciation of its buildings. In its defense, ABC
Limpan argued that that some of its buildings
1. The allowance for depreciation must be are old and out of style; hence, they are entitled
reasonable to higher rates of depreciation than those
2. It must be for property used in the trade, adopted by the BIR in its assessment. On appeal,
business, or profession the CTA found that the depreciation was
3. It must be charged off during the taxable year; excessive. Should the findings of the CTA be
and affirmed?
4. A statement on the allowance must be attached
to the return Yes provided there no arbitrariness and abuse of
discretion on the part of the CTA. In LIMPAN
INVESTMENT CORPORATION VS. COMMISSIONER OF
Q: Can an asset be depreciated beyond its
INTERNAL REVENUE [JULY 26, 1966], the Supreme
acquisition cost? Court opined that depreciation is a question of fact
and is not measured by theoretical yardstick, but
No. In BASILAN ESTATES, INC. VS. COMMISSIONER OF should be determined by a consideration of actual
INTERNAL REVENUE [SEPTEMBER 5, 1967], Basilan facts. The findings of the tax court in this respect
Estates claimed deductions for the depreciation of should not be disturbed when not shown to be
its assets up to 1949 on the basis of their acquisition arbitrary or in abuse of discretion. Limpan has not
cost. In 1950, however, it changed the depreciable shown any arbitrariness or abuse of discretion on
value of the assets by increasing it to conform with the part of the CTA. In fact, the CTA applied rates of
the increase in cost of their replacement. depreciation in accordance with Bulletin F of the US
Accordingly, in 1950 to 1953, the company deducted Federal Internal Revenue Service, which the
from gross income the value of the depreciation Supreme Court, has pronounced as having strong
based on this reappraised value. persuasive effect.
The Supreme Court held that such value cannot be
deducted from gross income as it was beyond the
acquisition cost. Depreciation as a deduction is RR 12-2012 [OCTOBER 12, 2012] Deductibility
allowed so that the owner of the assets can set of Depreciation Expense as it relates to
purchase of vehicles
_________________________________________
84
Guidelines to claim depreciation as a deduction in
Like those with limited duration gross income:

1. Only one vehicle for land transport is allowed for in a constant charge over the useful
the use of an official or employee life.
2. The value of which should not exceed
P2,400,000 Declining- It is an accelerated method of
3. It must be substantiated with sufficient evidence, balance depreciation which writes off a
such as official receipts or other adequate method relatively larger amount of the
records; and asset’s cost nearer the start of its
4. There is a direct connection or relation of the useful life than does the straight
vehicle to the development, management, line. It results in a decreasing
operation, and/or conduct of the trade or charge over the useful life
business or profession of the taxpayer
Sum-of-the- It is an accelerated method of
Generally, no deduction in the gross income shall be years-digit depreciation that provides higher
allowed for depreciation of the following: method depreciation expense in the earlier
years and lower charges in the later
1. Yachts, helicopters, airplanes, and/or aircrafts; years.
and
2. Land vehicles with a value of more than
P2,400,000 ---------------------------------------------------------------
(g) Charitable and other contributions
Exception: the taxpayer is in the business of (1) Requisites for deductibility
transport operations or lease of transportation
(2) Amount that may be deducted
equipment and the vehicles purchased are used in
such operations. ---------------------------------------------------------------
In addition, the following shall be disallowed as Read Section 34(H), Tax Code
deductions in the gross income:
Q: What are the conditions for deductibility
1. All maintenance expenses on account of non- of charitable contributions?
depreciable vehicles;
2. Input taxes on the purchase of non-depreciable The requisites are:
vehicles and all input taxes on maintenance 1. Actually paid or made to the Philippine
expenses. Government or any political subdivision
thereof, or any of the domestic corporation
or association specified in the Tax Code
--------------------------------------------------------------- 2. Made within the taxable year
(2) Methods of computing depreciation 3. Not exceeding 10% (individuals) or 5%
allowance (corporations) of the taxpayer’s taxable
(a) Straightline method income before charitable contributions
(b) Declining-balance method 4. Evidenced by adequate receipts or records
(c) Sum-of-the-years-digit method
Q: What contributions are deductible in full?
---------------------------------------------------------------
Donations to the following institutions are deductible
Q: What are the methods of computing in full:
depreciation allowance and define each?
1. Donations to the Government, its entities,
Straight-line The annual depreciation charge is political subdivisions or fully owned
method calculated by allocating the amount corporations exclusively for undertaking
to be depreciated equally over the priority activities in accordance with the
number of years of the estimated national priority plan to be determined by
useful life of the property. It results NEDA

2. Donations to foreign institutions or ---------------------------------------------------------------

international organizations pursuant to (h) Contributions to pension trusts
agreements, treaties entered into by ---------------------------------------------------------------
Government or special laws
3. Donations to accredited Non-Government
Organizations (non-profit domestic
Read Section 34(J), Tax Code
85
corporation)
Q: When are donations subject to of contributions to pension trust?
limitations?
1. Employer must have established a pension
When the donation is made to: or retirement plan for the payment of
1. The government for public purposes reasonable pension to its employees
2. Accredited domestic corporations for 2. Pension plan is reasonable and actuarially
religious, charitable, scientific, etc. purposes sound
3. Social welfare institutions 3. Funded by the employer (employer
4. NGOs (not accredited) contributes cash)
4. Amount contributed must no longer be
The limitations are 10% of net income for individual subject to the control of the employer
taxpayers and 5% of net income for corporate 5. Payment has not yet been allowed as
taxpayers. deduction
---------------------------------------------------------------
Note: A non-government organization shall refer to a (i) Deductions under special laws
non-stock, non-profit domestic corporation organized ---------------------------------------------------------------
and operated exclusively for scientific, research,
educational, character-building and youth and sports
development, health, social welfare, cultural or Q: Name some special laws which provide
charitable purposes or a combination thereof, no part for deductible business expenses.
of the net income of which inures to the benefit of any
private individual. 1. Republic Act 10028 (Expanded Breastfeeding
Promotion Act)
Q: Is an international NGO qualified to be
granted accreditation? The law provides that the expenses incurred by a
private health and non-health facility, establishment
No. In BIR RULING 19-01 [M AY 10, 2001], at issue or institution, in complying with the provisions of this
was whether or not international organizations with Act, shall be deductible expenses for income tax
home offices based abroad are qualified to be purposes up to twice the actual amount incurred
granted donee institution status (accreditations as provided:
NGO), the CIR ruled that a non-stock, non-profit
corporation or organization must be created or 1. That the deduction shall apply for the
organized under Philippine laws and that an NGO taxable period when the expenses were
must be a non-profit domestic corporation, a foreign incurred
corporation whether resident or non-resident cannot 2. That all health and non-health facilities,
be accredited as a done institution. establishments and institutions shall comply
with the provisions of this Act within six (6)
months after its approval
3. That such facilities, establishments or
institutions shall secure a "Working Mother-
_________________________________________ Baby-Friendly Certificate" from the
Department of Health to be filed with the
85
NGOs are accredited by the PCNC (Philippine Council for NGO Bureau of Internal Revenue, before they can
Certification) avail of the incentive.

2. Republic Act 8502 (Jewelry Industry (c) Partnerships

Development Act) ---------------------------------------------------------------
The law provides for a deduction from taxable Read Section 34(L), Tax Code
income of fifty percent (50%) of expenses incurred in
training schemes in connection with the Act and
which shall be deductible during the financial year Q: What is meant by “Optional Standard
the expenses were incurred. deduction?”
3. Republic Act 8525 (Adopt a school act) Section 34(L) provides that in lieu of the itemized
deductions, an individual subject to tax excluding a
The law provides for a deduction from the gross nonresident alien may elect a standard
income equivalent to fifty percent (50%) of expenses deduction of not exceeding 40% of his gross sales
incurred in connection with the said act. or gross receipts, as the case may be. In the case of
a domestic corporation and a resident foreign
4. Republic Act 9999 (Free Legal Assistance Act) corporation, it may elect a standard deduction in an
amount not exceeding 40% of its gross income.
The law provides that a lawyer or professional
partnerships rendering actual free legal services, as A non-resident alien (whether engaged or not) and a
defined by the Supreme Court, shall be entitled to an non-resident foreign corporation cannot claim OSD.
allowable deduction from the gross income, the
amount that could have been collected for the actual The election to use OSD when made in the return
free legal services rendered or up to ten percent shall be irrevocable for the taxable year for which
(10%) of the gross income derived from the actual the return is made.
performance of the legal profession, whichever is
lower Q: Who may avail of the OSD?
5. RA No. 9994 (Expanded Senior Citizens Act) in 1. A citizen, whether resident or non-resident
relation to RR 7-2010 [July 20, 2010] 2. Resident alien
3. Taxable estate or trust
The law provides that discounts given to senior
Note: A non-resident alien and a non-resident foreign
citizens on certain goods and services shall be
corporation cannot claim OSD.
deductible from gross income. Also, private
establishments employing senior citizens shall be
entitled to additional deductions from gross income Q: What are the rules in the determination of
equivalent to fifteen (15%) of the total amount paid the amount of OSD?
as salaries and wages to senior citizens.
RR 16-2008 [NOVEMBER 26, 2008] provides for the
following rules:
6. RA No. 7277, as amended (Magna Carta of
Disabled Persons) in relation to RR 7-2010 [July
1. For individuals
20, 2010]
a. If on accrual basis of accounting, the OSD
shall be based on gross sales
The law provides that sales discounts given to
b. If on cash basis of accounting, the OSD
persons with disabilities shall be deductible from
shall be based on gross receipts
gross income subject to certain conditions.
c. Cost of sales and cost of services are not
allowed to be deducted for purposes of
--------------------------------------------------------------- determining the basis of the OSD
(4) Optional Standard Deduction
(a) Individuals, except non-resident 2. For corporations
aliens a. It shall be based on gross income
(b) Corporations, except non-resident
foreign corporations

Note: The basis of the 40% OSD for individual taxpayers Q: What is the rationale behind personal and
shall be gross sales or gross receipts, not gross income, additional exemptions under the Tax Code?
because the “cost of sales” and the “cost of services” are
not allowed to be deducted for purposes of determining
the basis of OSD. Exemptions are fixed at arbitrary amounts intended
to substitute for the disallowance of personal or
Q: What are the rules in the determination of living expenses as deductible items from the taxable
income of certain individual taxpayers. The amounts
the amount of OSD of GPPs?
represent roughly the equivalent of the taxpayer’s
minimum subsistence and those of his
RR 2-2010 [FEBRUARY 18, 2010] amended Sections
dependents.(see PANSACOLA V. CIR [NOVEMBER 16,
6 to 7 of RR 16-2008 with respect to the
2006])
determination of the OSD of GPPs.
A GPP is not subject to income tax but the partners Q: Which kinds of individual taxpayers can
shall be liable to pay income tax on their separate avail of personal and additional
and individual capabilities for their respective exemptions?
distributive share in the net income of the GPP.
Citizens and resident aliens are allowed personal
For purposes of computing the distributive share of and additional exemptions; nonresident aliens
the partners, the net income of the GPP shall be engaged in trade or business in the Philippines
computed in the same manner as a corporation. The are entitled to personal exemptions only by way of
86
GPP may claim itemized deductions or in lieu reciprocity but not to additional exemptions.
thereof may opt to avail of the OSD allowed to
corporations. The net income determined by either Q: How should these exemptions be
claiming the itemized deductions or OSD from the credited?
GPP’s gross income is the distributable net income
from which the share of each partner is determined. These exemptions must first be credited against
gross compensation income; the excess, if any, can
If the GPP availed of the itemized deductions in be used to offset taxable net income.
computing its net income, a partner may still claim
itemized deductions from his share in the net income Q: What is personal exemption allowed to
of the partnership. individual taxpayers?
However, if the GPP availed of the OSD in 87
All individual taxpayers, regardless of status, shall
computing its net income, the partner can no longer be allowed a basic personal exemption of P50,000.
claim further deduction from his share in the said net
income.
--------------------------------------------------------------- _________________________________________
(5) Personal and additional exemption (RA.
86
9504, Minimum Wage Earner Law) Thus, for a nonresident alien, his entitlement to personal and
additional exemption depends on whether he is engaged in trade
(a) Basic Personal Exemptions or business and his country of residence allows exemption to
(b) Additional exemptions for taxpayer Filipinos. If not engaged, he will not be allowed the exemption.
with dependents Note as well that employees of ROHQs, OBUs, and FCDUs are
not entitled to personal and additional exemptions as they are
(c) Status-at-the-end-of-the-year rule subject to tax on gross income without the benefit of deductions/
(d) Exemptions claimed by non-resident exemptions.
87
aliens Note that, previously, the amount of personal exemption
depended on the status of the individual taxpayer. It was P20,000
--------------------------------------------------------------- for single individuals, P32,000 for legally married and P25,000 for
head of a family. As amended by RA 9504, all individuals,
regardless of status, are entitlted to a basic personal exemption of
Read Section 35, Tax Code P50,000.

Q: Can a benefactor88 of a PWD whose civil Q: May parents and siblings be considered
status is single avail of the “head of family” as additional exemptions?
status to be entitled to personal exemption?
No. parents and siblings are considered dependents
It is no longer necessary. RA 9442, which amends only for purposes of qualifying an individual to
RA 7277 or the Magna Carta for Persons with become head of a family but not for purposes of
Disability, provides that a benefactor of a PWD additional exemptions.
whose civil status is single shall be considered as
“head of family” and, as such, shall be entitled to Q: Are senior citizens supported and living
personal exemption. However, the terms “head of with a taxpayer considered as additional tax
family” and “his/her dependents” for purposes of exemptions?
availing personal exemption have been eliminated in
view of an amendment brought about by RA 9504. No. The word “dependent” does not include senior
The rule is that individual taxpayers regardless of citizens.
status are entitled to the personal exemption. [see
RR NO. 001-09 [DECEMBER 9, 2008]. Q: Is a foster child considered a dependent?
Q: What is the rule for married individuals? Yes. RA 10165 or “The Foster Care Act of 2012”
amended the NIRC to include a “foster child” in the
In the case of married individuals where only one term “dependent.” Thus, foster parents may claim an
spouse is deriving gross income, only such spouse addition exemption of P25,000 for each dependent
shall be allowed the personal exemption. (which includes the foster child) not exceeding 4.
Q: What are the additional exemptions Q: What is the rule for spouses and legally
allowed to individual taxpayers? separated spouses?
There shall be allowed an additional exemption of The additional exemption for dependents can be
89
P25,000 for each dependent not exceeding four. claimed by only one of the spouses. In the case of
legally separated spouses, additional exemptions
Q: Who is a “dependent” under the Tax may be claimed only by the spouse who has custody
Code? of the child or children.
90
A dependent means a legitimate, illegitimate, or Q: What is the “status-at-the-end-of-the-
legally adopted child chiefly dependent upon and year” rule or the “change-of-status” rule
living with the taxpayer if such dependent is not with respect to personal and additional
more than 21 years of age, unmarried and not exemptions?
gainfully employed or if such dependent, regardless
of age, is incapable of self-support because of This means that whatever is the status of the
mental or physical defect. taxpayer at the end of the calendar year shall be
used for purposes of determining his personal and
Q: Are illegitimate children considered for additional exemptions.
additional exemptions?
Yes. By express wording of the law, a dependent As held in PANSACOLA V. CIR [NOVEMBER 16, 2006],
includes an illegitimate child. what the law should consider for the purpose of
_________________________________________ determining the tax due from an individual taxpayer
is his status and qualified dependents at the close of
88
A benefactor refers to any person, whether related or not to the the taxable year and not at the time the return is filed
person with disability, who takes care of him/her as a dependent
89 and the tax due thereon is paid.
Previously, the amount was P8,000.
90
Note that Illegitimate children are included in the definition of
dependents and in the entitlement for additional exemption.

A change of status of the taxpayer during the Read Section 36, Tax Code
taxable year generally benefits, but does not
91
prejudice him.
Q: What items are not deductible from
In the following cases, the rule is applied as follows: gross income?
1. If the taxpayer marries or should have additional A: No deduction shall in any case be allowed in
dependents during the taxable year, he may respect to:
claim the corresponding additional exemption in
full for such year. 1. Personal, living or family expenses
2. If the taxpayer dies during the taxable year, his
estate may still claim the personal and additional 2. Any amount paid out for new buildings or
exemptions for himself and his dependents as if for permanent improvements or
he died at the close of such year. betterments made to increase the value of
3. If the spouse or any of the dependents dies or if any property or estate. (Capital
any such dependent marries, becomes 21 years expenditures, see COMMISSIONER VS.
old or becomes gainfully employed during the SORIANO)
taxable year, the taxpayer may still claim the
same exemptions as if the spouse or any oth e 3. Any amount expended in restoring
dependents died, or if such dependents married, property or in making good the exhaustion
became 21 years old or became gainfully thereof for which an allowance is or has
employed at the close of such year. been made (capitalized interest, see
PAPER INDUSTRIES VS. CA).
---------------------------------------------------------------
(6) Items not deductible 4. Premiums paid on any life insurance
policy covering the life of any officer or
(a) General Rules
employee or of any person financially
(b) Personal, living or family expenses interested in any trade or business carried
(c) Amount paid for new buildings or for on by the taxpayer, individual, or corporate
permanent improvements (Capital when the taxpayer is directly or indirectly a
expenditures) beneficiary under such policy
(d) Amount expended in restoring property
(major repairs) 5. Losses from sales or exchanges of property
(e) Premiums paid on life insurance policy directly or indirectly between related
covering life or any other officer or persons
employee financially interested a. Between members of a family
b. Between an individual and a
(f) Interest expense, bad debts, and losses
corporation more than 50% in value of
from sales of property between related the outstanding stock of which is owned
parties by such individual (except in the case of
(g) non-deductible interest distributions in liquidation)
(h) non-deductible taxes c. Between two corporations more than
(i) non-deductible losses 50% in value of the outstanding stock of
(k) losses from wash sales of stock or each of which is owned by the same
securities individual if either one of the companies
--------------------------------------------------------------- is a holding company
d. Between the grantor and a fiduciary of
_________________________________________ any trust
91
e. Between the fiduciary of a trust and
The rule of thumb is that which will be beneficial to the the fiduciary of another trust if the
taxpayer.
same person is a grantor with respect to
each trust

f. Between a fiduciary of a trust and a true taxable income or to prevent evasion of taxes. RR 2-
beneficiary of such trust. 2013 [January 23, 2013] which provides the guidelines on
transfer pricing implements this authority of the CIR to
6. Non-deductible interest review controlled transactions among associated
enterprises and to allocate or distribute their income and
7. Non-deductible taxes deductions in order to determine the appropriate revenues
8. Non-deductible losses and taxable income of the associated enterprises involved
9. Losses from wash sales of stock or in controlled transactions
securities
Q: GSK purchased a pharmaceutical
Note: Since we mentioned related parties, I shall discuss
an important topic in light of RR No. 2-2013 [January 23,
ingredient from Adechsa, a related non-
2013] or the Transfer Pricing Guidelines. Previously, residency company for between $1,512 and
the Philippines does not have any guidelines on transfer $1,651 per kg. During the same period, two
pricing unlike in other jurisdictions. RMC 026-08 [March Canadian pharmaceutical companies
24, 2008] states that while the BIR is still revising the final purchase the same ingredient for between
draft of the RR on transfer pricing, the BIR as a matter of
policy subscribes to the OECD Transfer Pricing Guidelines $194 and $304 per kg from arm’s length
in the interim. Now, we have Transfer pricing guidelines suppliers. Canada’s minister for internal
which give life to Section 50 of the Tax Code. revenue reassessed GSK because the
prices it paid for the ingredient were greater
Read Section 50, Tax Code than an amount that would have been
reasonable in the circumstances had they
Q: What is transfer pricing? been dealing at arm’s length. GSK argues
the License and Supply Agreement it
Transfer pricing is generally defined as the pricing of entered with Adechsa should be considered
cross-border, intra-firm transactions between related
in determining if it is an arm’s length
parties or associated enterprises. Typically, a
transfer price occurs between a taxpayer of a
transaction. Is GSK’s contention correct?
country with high income taxes and a related or
Yes. As held by the Supreme Court of Canada in
associated enterprise of a country with low income
HM V. GLAXOSMITHKLINE [2012 SCC 52, OCTOBER
taxes.
18, 2012], a proper application of the arm’s length
.
principle requires that regard be had for the
While transfer pricing issue typically occurs in cross-
“economically relevant characteristics” of the arm’s
border transactions, it can also occur in domestic
length and non-arm’s length circumstances to
transactions. One context where transfer pricing
ensure they are “sufficiently comparable.” The
issue occurs domestically is where one associated
“economically relevant characteristics of the
enterprise, entitled to income tax exemptions, is
situations being compared” may make it necessary
being used to allocate income away from a company
to consider other transactions that impact the
subject to regular income taxes. is a domestic
transfer price under consideration. Such
transfer pricing issue when income are shifted in
circumstances will include agreements that may
favor of a related company with special tax
confer rights and benefits in addition to the purchase
privileges such as Board of Investments (BOI)
of property where those agreements are linked to
Incentives and Philippine Economic Zone Authority
the purchasing agreement. The objective is to
(PEZA) fiscal incentives or when expenses of a
determine what an arm’s length purchaser would
related company with special tax privileges are
pay for the property and the rights and benefits
shifted to a related company subject to regular
together where the rights and benefits are linked to
income taxes or in other circumstances, when
the price paid for the property. In this case, GSK was
income and/or expenses are shifted to a related
party in order to minimize tax liabilities (see RR 2- paying for at least some of the rights and benefits
under the Licence Agreement as part of the
2013 [January 23, 2013])
purchase prices for ranitidine from Adechsa. As
such, the Licence Agreement could not be ignored in
Note: Section 50 of the Tax Code refers to the power of
the CIR to distribute, apportion, allocate, and shift income
determining the reasonable amount paid to Adechsa
and expenses between related taxpayers to reflect their

which applies not only to payment for goods but also situations being compared can materially affect the
to payment for services. price or margin being compared, or
(2) reasonably accurate adjustments can be made to
eliminate the effect of any such differences.
Q: What is the “arm’s length bargaining
standard” with respect to the determination Step 2: Identify the tested party and the appropriate
of the taxable income on inter-company transfer pricing method.
loans or advances in relation to transfer
pricing? The tested party is the entity to which a transfer pricing
method can be most reliably applied to and from which the
most reliable comparables can be found. For an entity to
RMC 026-08 [M ARCH 24, 2008] adopts the arm’s become a tested party, the Bureau requires sufficient and
length standard as the ultimate test for determining verifiable information on such entity
the fairness of related party transactions. The
standard to be applied in every case is that of an The selection of a transfer pricing method is aimed at
uncontrolled taxpayer dealing at arm’s length with finding the most appropriate method for a particular case.
another uncontrolled taxpayer. Accordingly, the method that provides the most reliable
measure of an arm‟s length result shall be used. (see
Thus, where a member of a group of controlled methods below)
entities makes a loan or advances directly or
Step 3: Determine the arm’s length results.
indirectly or becomes a creditor of another member
of such group and charges no interest, or chargest Once the appropriate transfer pricing method has been
interest at a rate which is not equal to an arm’s- identified, such is applied on the data of independent party
92
length rate, the CIR may make appropriate transactions to arrive at the arm‟s length result.
allocations to reflect an arm’s length interest rate for
use of such loan or advance. In some cases, it will be possible to apply the arm‟s length
principle to arrive at a single figure or specific ratio (e.g.
Note: RR No. 2-2013 [January 23, 2013] also adopted price or margin) that is the most reliable to establish
the arm‟s length principle as the most appropriate whether the conditions of a transaction are arm's length.
standard to determine transfer prices of related parties However, it is generally difficult to arrive at a specific ratio
or range of deviation that may be considered as arm‟s
length. More likely, the transfer pricing analysis would lead
to a range of ratios.
RR No. 2-2013 [January 23, 2013] Transfer
Pricing Guidelines 1. If the relevant condition of the controlled
transaction (i.e. price or margin) is within the
The Regulations prescribe the 3-step approach in the arm‟s length range, no adjustment should be
application of the arm’s length principle: made.
2. If the relevant condition of the controlled
Step 1: Conduct a comparability analysis. transaction (e.g. price or margin) falls outside the
arm‟s length range asserted by the Bureau, the
The arm‟s length principle is based on a comparison of taxpayer should present proof or substantiation
the prices or margins adopted or obtained by related that the conditions of the controlled transaction
parties with those adopted or obtained by independent satisfy the arm‟s length principle, and that the
parties engaged in similar transactions. For such price or result falls within the arm‟s length range (i.e. that
margin comparisons to be meaningful, all economically the arm‟s length range is different from the one
relevant characteristics of the situations being compared asserted by the tax administration).
should be sufficiently similar so that: 3. If the taxpayer is unable to establish this fact, the
Bureau must determine the point within the arm‟s
(1) none of the differences (if any) between the length range to which it will adjust the condition of
_________________________________________ the controlled transaction.
92
The arm's length interest rate shall be the rate of interest which The Regulations also adopt the following arm’s length
was charged or would have been charged at the time the pricing methodologies to be used as appropriate:
indebtedness arose in independent transaction with or between
unrelated parties under similar circumstances. 1. Comparable Uncontrolled Price (CUP) Method -
The CUP Method evaluates whether the amount charged
in a controlled transaction is at arm‟s length by reference

to the amount charged in a comparable uncontrolled demanded in the absence of a stipulation to

transaction in comparable circumstances. Any difference that effect. Is FDC’s contention correct?
between the two prices may indicate that the conditions of
the commercial and financial relations of the associated
enterprises are not arm‟s length, and that the price in the Yes. According to the case of CIR V. FILINVEST
uncontrolled transaction may need to be substituted for DEVELOPMENT CORPORATION [JULY 19, 2011],
the price in the controlled transaction. Despite the seemingly broad power of the CIR to
distribute, apportion and allocate gross income
2. Resale Price Method (RPM) - RPM is applied where under Section 50, the same does not include the
a product that has been purchased from a related party is power to impute theoretical interest even with regard
resold to an independent party. Essentially, it seeks to to controlled taxpayers’ transactions. This is true
value the functions performed by the reseller of a product. even if the CIR is able to prove that the interest
The resale price method evaluates whether the amount
expense was in fact claimed by FDC. The term in
charged in a controlled transaction is at arm‟s length by
reference to the gross profit margin realized in comparable the definition of gross income that even those
uncontrolled transactions. This method is generally income “from whatever source derived” is covered
appropriate where the final transaction is made with an still requires that there must be actual or at least
independent party. probable receipt or realization of the time of gross
income sought to be apportioned, distributed or
3. Cost Plus Method (CPM) - CPM focuses on the reallocated. Finally, under the Civil Code, no interest
gross mark-up obtained by a supplier who transfers 93
shall be due unless expressly stipulated in writing.
property or provides services to a related purchaser.
Essentially, the method attempts to value the functions
performed by the supplier of the property or services. CPM Q: Are margin fees deductible business
is most useful where semi-finished goods are sold expenses?
between associated enterprises or where the controlled
transaction involves the provision of services. No. In ESSO STANDARD EASTERN, INC. VS.
COMMISSIONER OF INTERNAL REVENUE [JULY 7, 1989],
4. Profit Split Method (PSM) - PSM seeks to eliminate Esso made profit remittances to its New York Head
the effect on profits of special conditions made or imposed Office. Esso claims that the margin fees it paid to the
in a controlled transaction (or in controlled transactions
Central Bank on the remittances are ordinary and
that are appropriate to aggregate) by determining the
division of profits (or losses) that independent enterprises necessary expenses and should be deducted from
would have expected to realize from engaging in the its gross income.
transaction or transactions.
The Supreme Court held that margin fees are not
5. Transactional Net Margin Method (TNMM) - TNMM necessary and ordinary expenses. The margin fees
operates in a manner similar to the cost plus and resale are not expenses in connection with the production
price methods in the sense that it uses the margin or earning of petitioner's incomes in the Philippines..
approach. This method examines the net profit margin Since the margin fees in question were incurred for
relative to an appropriate base such as costs, sales or
the remittance of funds to petitioner's Head Office in
assets attained by the member of a group of controlled
taxpayers from a controlled transaction. New York, which is a separate and distinct income
taxpayer from the branch in the Philippines, for its
Note: The case below would have been decided disposal abroad, it can never be said therefore that
differently if we had an RR on Transfer Pricing at that time. the margin fees were appropriate and helpful in the
development of petitioner's business in the
Q: Filinvest Development Corporation (FDC) Philippines exclusively or were incurred for purposes
extended advances in favour of its affiliate. proper to the conduct of the affairs of petitioner's
The BIR assesses FDC for deficiency branch in the Philippines exclusively or for the
income by unilaterally imputing an “arm’s purpose of realizing a profit or of minimizing a loss in
the Philippines exclusively
length” interest rate on its advances. FDC
disputes this by saying the CIR lacks _________________________________________
authority to impute theoretical interest and 93
The case would have been decided differently if we had an RR
the rule is that interests cannot be on Transfer Pricing.

or asset devoted to the institution’s purposes and all

--------------------------------------------------------------- its activities.
(7) Exempt Corporations
(a) Proprietary educational institutions and As noted by the Supreme Court IN CIR V. ST. LUKES
hospitals MEDICAL CENTER [SEPTEMBER 26, 2012], “non-profit”
does not necessarily mean “charitable.”
(b) Government owned or controlled
corporations
Q: What is meant by “unrelated trade,
(c) Others
business, or other activity”?
---------------------------------------------------------------
It means any trade, business or other activity, the
--------------------------------------------------------------- conduct of which is not substantially related to the
(a) Proprietary educational institutions and exercise or performance by such institution of its
hospitals primary purpose or function.
---------------------------------------------------------------
Q: What are the guidelines for the tax
Read Section 27(B), Tax Code exemption of non-stock, non-profit
educational institutions, non-stock, non-
profit corporations and private educational
Q: What is the tax treatment of proprietary institutions as provided in RMC 76-03?
education institutions and hospitals which
are non-profit? Non-stock, non-profit educational institutions –
Section 27(B) of the Tax Code provides that they 1. Their exemption refers only to revenues
shall pay a tax of 10% on their taxable income derived from assets used actually, directly,
except: and exclusively for educational purposes
1. Certain passive incomes subject to final tax 2. Income from cafeterias, canteens and
2. If the gross income from unrelated trade, bookstores are also exempt if they are
94
business, or other activity exceeds 50% of owned and operated by the educational
the total gross income derived by such institution and are located within the school
95
proprietary educational institution and premises
hospital which are non-profit from all 3. However, they shall be subject to internal
sources, the tax shall be imposed on the revenue taxes on income from trade,
entire taxable income at 30% business or other activity, the conduct of
which is not related to the exercise or
Q: What is meant by the terms “proprietary” performance by such educational institution
and “non-profit?” of their educational purposes or functions
4. The interest income on bank deposits and
Proprietary means private while non-profit means no yields from deposit substitutes may be
net income or asset accrues to or benefits any exempt from income tax if there is showing
member or specific person, with all the net income that said income will be used actually,
directly, and exclusively for educational
_________________________________________ purposes.
94
Means any trade, business, or other activity, the conduct of Non-stock, non-profit corporations –
which is not substantially related to the exercise or performance
by such educational institution or hospital of its primary purpose
or function.
While generally exempt, they remain liable for
95
Is any private schoolm maintained and administered by private
individuals or groups with an issued permit to operation from the 1. Income derived from any of their real
Department of Education or CHED, or TESDA, as the case may properties
be
2. Any activity conducted from profit regardless
of disposition thereof

3. Interest income from any bank deposits or hospital. For Section 27(B) to apply, the hospital
yield on deposit substitutes, including must be non-profit which means that no net income
foreign currency deposits. or asset accrues to or benefits any member or
4. They shall be withholding agents for their specific person and all the activities of the hospital
employees’ compensation income subject to are non-profit. On the other hand, Section 30(E) and
withholding tax. (G), while providing for an exemption is qualified by
the last paragraph which, in turn, provides that
Private educational institutions – activities conducted for profit shall be taxable.
Section 30(E) and (G) requires that an institution be
They shall be exempt from VAT but must be operated exclusively for charitable purposes to be
accredited with either the DepEd or CHED. completely exempt from income tax. In this case,
however, St. Lukes is not operated exclusively for
1. However, income derived from trade, charitable purposes insofar as its revenues from
business or other activity is still taxable paying patients are concerned. Such revenue is
2. Bank deposits and foreign currency deposits subject to income tax at 10% under Section 27(B).
are exempt from withholding tax but they
must show proof that such income is used to Q: Reconcile the tax treatment of proprietary
fund proposed projects for their institution’s educational institutions and hospitals which
improvement are non-profit under Section 27(B) and non-
3. They shall be withholding agents for their stock, non-profit charitable institutions
employees’ compensation income subject to
under Section 30(E) and (G).
withholding tax.
To be exempt from income taxes, Section 30(E)
Q: St. Lukes Medical Center is a hospital requires that the charitable institution must be
organized as a non-stock and non-profit organized and operated exclusively for charitable
corporation. It admits both paying and non- purpose. It is nevertheless allowed to engage in
paying patients. The CIR claimed that St. “activities conducted for profit” without losing its tax-
Lukes was liable for income tax at 10% as exempt status for its not-for-profit activities. The
provided under Section 27(B)96 of the NIRC. consequence, however, is that such income from
St. Lukes argues that it is a non-stock, non- activities conducted for profit, regardless of the
profit institution for charitable and social disposition made of such income, shall be subject to
welfare purposes exempt from income tax tax.
under Section 30(E) and (G) of the NIRC.97
For proprietary educational institutions and hospitals
Decide. which are non-profit to avail of the preferential tax
rate, no net income or asset accrues to or benefits
In CIR V. ST. LUKES MEDICAL CENTER [SEPTEMBER any member or specific person, with all the net
26, 2012], the Supreme Court ruled that St. Lukes income or asset devoted to the institution’s purposes
cannot claim full tax exemption under Section 30 and all its activities.
because it has paying patients and this is
notwithstanding the fact that it is a non-profit Thus, in CIR V. ST. LUKES MEDICAL CENTER
[SEPTEMBER 26, 2012], while the St. Lukes did not
_________________________________________
qualify as a non-profit, non-stock charitable
96
Section 27(B) provides that proprietary educational institutions institution under Section 30(E) as it was not
and hospitals which are non-profit shal pay a tax of ten percent operated exclusively for charitable purposes, it
(10%) on their taxable income
97
remains to be a proprietary non-profit hospital under
Section 30(E), NIRC provides that a non-stock corporation or Section 27(E) as long as it does not distribute any of
association organized and operated exclusively for charitable
purposes is exempt from income tax while Section 30(G) provides its profits to its members and such profits are
that a civic league or organization not organized for profit but reinvested pursuant to its corporate purposes. St.
operated exclusively for the promotion of social welfare is likewise Lukes, as a proprietary non-profit hospital, is entitled
exempt. to the preferential tax rate of 10% on its net income
from its for-profit activities.

--------------------------------------------------------------- 2005 which the BIR issued to implement the VAT

(b) Government owned or controlled law subjecting PAGCOR to VAT is invalid for being
corporations contrary to RA 9337. PAGCOR V. BIR [M ARCH 15,
--------------------------------------------------------------- 2011]
Read Section 27(C), Tax Code ---------------------------------------------------------------

(c) Others
Q: Are GOCCs, agencies and ---------------------------------------------------------------
instrumentalities owned and control by the
government liable to pay income tax? Read Section 30, Tax Code
All corporations, agencies, or instrumentalities Q: What are the exempt corporations

owned or controlled by the government shall pay enumerated in Section 30 of the Tax Code?
such rate of tax upon their taxable income except:
1. Labor, agricultural or horticultural organization
1. GSIS not organized principally for profit
2. SSS 2. Mutual savings bank not having a capital stock
3. Phil Health represented by shares and cooperative bank
98
4. Local Water Districts without capital stock organized and operated for
5. PCSO mutual purposes and without profit
3. A beneficiary society, order or association,
(see Section 27(C), Tax Code) operating for the exclusive benefit of the
members such as a fraternal organization
Note: That is the general rule. The provisions of special operating under the lodge system, or a mutual
laws or general laws may provide otherwise. aid association or a non-stock corporation
organized by employees providing for the
Q: RA 9337 amended Section 27(C) of the payment of life, sickness, accident, or other
Tax Code and excluded PAGCOR from the benefits exclusively to the members of such
enumeration of GOCCs exempt from the society, order, or association, or non-stock
payment of corporate income tax. Is corporation or their dependents
PAGCOR subject to income tax? 4. Cemetery company owned and operated
exclusively for the benefit of its members
5. Non-stock corporation or association organized
No. The Supreme Court held that the original
and operated exclusively for religious,
exemption of PAGCOR from corporate income tax
charitable, scientific, athletic, or cultural
was not made pursuant to a valid classification
purposes, or for the rehabilitation of veterans, no
based on substantial distinction so that the law may
part of its net income or asset shall belong to or
operate only on some and not on all. Instead, the
inure to the benefit of any member, organizer,
same was merely granted to the acquiescence of
officer or any specific person
the House Committee on Ways and Means to the
6. Business league, chamber of commerce, or
request of PAGCOR. The argument that the
board of trade, not organized for profit and no
withdrawal of the exemption violates the non-
part of the net income of which inures to the
impairment clause will not hold since any franchise
benefit of any private stockholder or individual
is subject to amendment, alteration or repeal by
7. Civil league or organization not organized for
Congress. The Court, however, made clear that
profit but operated exclusively for the promotion
PAGCOR remains to be exempt from VAT. Nowhere
of social welfare
in RA 9337 is it provided that PAGCOR can be
8. A non-stock and non-profit educational
subjected to VAT. Thus, the provision of RR 16-
institution
_________________________________________ 9. Government educational institution
98 10. Farmers or mutual typhoon or fire insurance
Inserted by RA 10026.
company, mutual ditch or irrigation company,
mutual or cooperative telephone company or like

organization of a purely local character, the preferential treatment accorded to members of

income of which consists solely of assessments, cooperatives who are exempt in the same way as
dues, and fees collected from members for the the cooperative themselves. (see DUMAGUETE
sole purpose of meeting its expenses; and CREDIT COOPERATIVE V. CIR [JANUARY 22, 2010]).
11. Farmers, fruit growers, or like association
organized and operated as a sales agent for the Q: Are all the activities of the enumerated
purpose of marketing the products of its exempt corporations exempt from tax?
members and turning back to them the proceeds
of sales, less the necessary selling expenses on No. Notwithstanding that they are exempt
the basis of the quantity of produce finished by corporations, the income of whatever kind and
them. character of the organizations mentioned above
from any of their properties, real or personal, or form
Note: The exemption refers to income received by these any of their activities conducted for profit regardless
corporations from undertakings which are essential to or of the disposition made of such income shall be
necessarily connected with the purposes for which hthey
were organized and operated. They are subject to income
subject to tax imposed under the Code.
tax on income of whatever kind and character from any of
their properties (real or personal) or from any of their Q: If a non-stock, non-profit educational
activites (unrelated) conducted for profit, regardless of the institution charges tuition and other fees for
disposition made of such income. the different services it renders, does the
institution lose its tax-exempt status?
Q: Are recreational clubs exempt from
income tax? No. In CIR V. G. SINCO EDUCATIONAL CORP
[OCTOBER 23, 1956], the Supreme Court held that
No. As clarified by RMC 35-2012 [AUGUST 3, 2012], the amount of fees charged by the school depends
clubs which are organized and operated exclusively upon the policy and a given administration at a given
for pleasure, recreation, and other non-profit time and is not conclusive of the purposes of the
purposes (hereinafter referred to as "recreational institution. It does not in itself make a school a profit-
clubs") are not exempt from income tax. The making enterprise.
provision in the National Internal Revenue Code of
1977 which granted income tax exemption to such Q: What is the difference in tax treatment on
recreational clubs was omitted in the current list of interest income from currency bank
tax exempt corporations under National Internal
deposits and yield, etc and on interest
Revenue Code of 1997, as amended.
income from a depository bank under the
Q: A credit cooperative was assessed EFCDS of non-stock, non-profit
deficiency withholding tax on interest from corporations and non-stock, non-profit
savings and time deposits of its members. educational institutions?
The CTA ruled against the credit
As provided in RMC 76-03 [November 14, 2003]:
cooperative stating that withholding tax on
income payments subject to FWT includes For non-stock non-profit corporation, their interest
said interests as “interests from similar income from currency bank deposits and yield or
arrangements.” Is CTA’s ratio correct? any other monetary benefit from deposit substitute
instruments and from trust funds and similar
No. Since interest from any Philippine currency bank arrangement, and royalties derived from sources
deposit yield or any other monetary benefit from within the Philippines are subject to the 20% final
deposit substitutes are paid by banks, other entities withholding tax and interest income derived by them
such as cooperative are not required to withhold the from a depository bank under the expanded foreign
corresponding tax on the interest from savings and currency deposit system shall be subject to 71/2%
time deposits of its members. The fact that “similar final withholding tax.
arrangements” is preceded by banking terms means
that those subject to withholding must have deposit
peculiarities. This is also consistent with the

Unlike non-stock, non-profit corporations, for non-

stock non-profit education institutions, the interest Q: Differentiate ordinary income from
income from currency bank deposits and yield from passive income.
deposit substitute instruments used actually, directly
and exclusively in pursuance of their purposes as an Ordinary income is income other than capital gain
educational institution, are exempt from the 20% and those incomes which fall under the category of
final tax and 7 ½% tax on interest income under the passive income.
expanded foreign currency deposit system imposed
provided they submit on an annual basis submit to On the other hand, if the income is generated in the
the Revenue District Office concerned an annual active pursuit and performance of the corporation’s
information return and duly audited financial primary purposes, the same is not passive income.
statement together with the following: Generally, passive income is income generated by
the taxpayer’s assets. These assets can be in the
1. Certification from their depository banks as to form of real properties that return rental income,
the amount of interest income earned from shares of stock in a corporation that earn dividends
passive investment not subject to the 20% final or interest income received from savings.
withholding tax and 7 ½% tax on interest income
under the expanded foreign currency deposit Q: What is the income tax rate imposed on
system.
ordinary income?
2. Certification of actual utilization of the said
income; and
It shall be subject to the graduated income tax with
3. Board Resolution by the school administration 99
rates from 5% to 32%.
on proposed projects to be funded out of the
money deposited in banks or placed in money
In relation to Section 23 of the NIRC, the taxable
markets, on or before the 14th day of the fourth
income derived for each taxable year:
month following the end of its taxable year.
1. From all sources within and without the
Note: I stated several pages back that I would focus on
the concepts first and that I would discuss the tax rates at
Philippines by resident citizens;
a later time. That time is now. If you look closely at Part 10 2. From all sources within the Philippines only
to 15 of the reviewer which deals with the taxation of the by a non-resident citizen including overseas
different taxpayers, it’s basically a summary of what we contract workers;
already have discussed except for a few topics. Those 3. From all sources within the Philippines only,
topics I have discussed previously, I will no longer discuss by a resident alien or a non-resident alien
or I will not discuss extensively. Again, my focus on these engaged in trade or business in the
parts will be the tax rates and no longer the concepts and Philippines;
100
principles.
shall be subject to the graduated income tax in
--------------------------------------------------------------- accordance with the following schedule provided
10. Taxation of resident citizens, non- under Section 24
resident citizens, non-resident aliens
th
a) General rule that resident citizens are Note: Again for the n time. Resident citizens are taxable
taxable on income from all sources on income from all sources within and without the
Philippines. All other individuals are taxable only on
within and without the Philippines income from sources within the Philippines.
b) Taxation on compensation income
c) Taxation of business income/income
from practice of profession _________________________________________
d) Taxation of passive income 99
For ordinary income over P10,000 but not over P30,000 and
e) Taxation of capital gains upper brackets, a fixed amount is added to the taxable amount
--------------------------------------------------------------- subject to the graduated income tax rate.
100
Only difference really is the source of income

Q: Differentiate the tax treatment of the income ---------------------------------------------------------------

of non-resident aliens engaged in trade or b) Taxation on compensation income
business in the Philippines and those non- (i) Inclusions
resident aliens not so engaged. (iii) Exclusions
Engaged in trade or Not engaged in trade or business
(iii) Deductions
business ---------------------------------------------------------------
Subject to income The tax is 25% of the entire or ---------------------------------------------------------------

tax in the same gross income received from (i) Inclusions
manner as an sources within the Philippines and
individual citizen 15% of the gross income received
(a) Monetary compensation
and a resident alien as compensation, salaries and (1) Regular salary/wage
on taxable income other emoluments by reason of his (2) Separation pay/retirement benefit
received from employment by: Not otherwise exempt
sources within the
Philippines
(3) Bonuses, 13th month pay, and
1. RHQ or ROHQ of MNCs
2. OBUs Other benefits not exempt
3. Foreign petroleum service (4) Director’s fees
contractor or subcontractors (b) Non-monetary compensation
(1) Fringe benefit not subject to tax
---------------------------------------------------------------
Q: How is the income tax of married
individuals computed? Note: Let’s just reiterate and clarify the topics here. As to
(a)(2) – Separation pay is part of taxable compensation
Married individuals shall compute separately their income when the separation is involuntary.
individual income tax based on their respective total
As to (a)(3) – Retirement benefits shall be part of taxable
taxable income.
compensation income if such benefits were received by an
employee who fails to meet the minimum requirements of
If any cannot be definitely attributed to or identified a reasonable private benefit plan (e.g. age or length of
as income exclusively earned or realized by either of service. When the aggregate amount of monetary benefits
th
the spouses, the same shall be divided equally like bonuses, and 13 month pay in addition to the basic
between them for the purpose of determining their salary/wage exceed P30,000, they shall be included in the
respective taxable income taxable compensation income.
As to (a)(4) – Director’s fees, if the director is at the same
time an employee of the employer/corporation constitute
Q: Is the income of minimum wage earners
compensation income. If he is not an employee of the
be subject to the graduated income tax corporation, it is not treated as compensation income
rates? because of the absence of an employer-employee
relationship. It is instead income derived from the conduct
No. Minimum wage earners shall be exempt from of trade or business or exercise of a profession
the payment of income tax on their taxable income.
Further, their holiday pay, overtime pay, night shift As to (b)(1) – The following fringe benefits form part of
compensation income:
differential pay, and hazard pay received by them
1. Fringe benefits given to rank-and-file employees
shall likewise be exempt from income tax. 2. De minimis benefits granted by an employer to
employees, whether rank-and-file or managerial
Q: What incomes are subject to the or supervisory in excess of the ceiling prescribed.
graduated rates?
Note that the value of such fringe benefits and de minimis
in excess of the ceiling is included in the determination of
1. Compensation income
the P30,000 benefits excluded from gross income. If the
2. Business income and income from practice total exceeds P30,000, the excess shall be taxable gross
of profession income.
3. Passive income not subject to final tax
4. Gains not subject to capital gains tax ---------------------------------------------------------------

(iii) Exclusions Well, you should know by now that they’re not entitled to
(a) Fringe benefits subject to tax any deduction or exemptions.
(b) De minimis benefits ---------------------------------------------------------------
(c) 13th month pay and other benefits and c) Taxation of business income/income
payments specifically excluded from from practice of profession
taxable compensation income ---------------------------------------------------------------
---------------------------------------------------------------
Note: We already discussed this. What is important to
Note: We need not discuss this any further. Remember
note is that such income is subject to the graduated
our previous discussions.
income tax rates. The next part I will discuss extensively
and with the corresponding final tax rates.
---------------------------------------------------------------
(iii) Deductions
---------------------------------------------------------------
(a) Personal exemptions and additional
d) Taxation of passive income
exemptions
(i) Passive income subject to final tax
(b) Health and hospitalization insurance
(a) Interest income
(c) Taxation of compensation income of
(b) Royalties
a minimum wage earner
(c) Dividends from domestic
---------------------------------------------------------------
Corporations
Note: Again, we shouldn’t dwell too much here especially (d) Prizes and other winnings
on personal exemptions and additional exemptions. Some (ii) Passive income not subject to final
points lang. As to (iii)(c) – I’d like to reiterate that the tax
exemption of the minimum wage is actually an exclusion,
not a deduction. It is tax-exempt! We have also discussed ---------------------------------------------------------------
that in the kinds of taxpayers. Also note that following
income of a minimum wage worker are also exempt from ---------------------------------------------------------------
tax: (a) Interest income
1. Holiday pay
2. Overtime pay
---------------------------------------------------------------
3. Nightshift differential; and
4. Hazard pay Read Section 24(B)(1), Section 25(A)(2),
Section 25(B), Section 27(D)(1), Section
Let’s discuss briefly health and hospitalization insurance. (D)(3), Section 28(A)(7), Section 28(B)(1),
Section (B)(5), Tax Code
Read Section 34(M), Tax Code
Note: The relevant and recent BIR issuance on the matter
Q: May a taxpayer deduct from his gross is RR No. 14-2012 [NOVEMBER 7, 2012] which clarifies and
income premium payments for health and sums up the proper tax treatment of interest income
earnings on financial instruments and other related
hospitalization insurance? transactions. To simplify matters, I will include the tax
rates for all taxpayers instead of separating the
Yes. An individual taxpayer can claim as deduction discussion. This is to make it easier to memorize and so
from his gross income the premium payment for we can better highlight the differences in tax treatment.
health and/or hospitalization insurance for an
amount not exceeding P2,400 per family during the
taxable year provided the gross family income does
not exceed P250,000 for the taxable year. Only one
spouse claiming the additional exemption for
dependents shall be entitled to this deduction.
Note: Only a non-resident alien not engaged in trade or

business in the Philippines cannot claim this deduction.

REVENUE REGULATIONS NO. 14-2012 the form of savings, common or individual trust
[NOVEMBER 7, 2012] – Proper Tax Treatment funds, deposit substitutes, etc evidences by
certificates in the BSP-prescribed form
of Interest Income Earnings on Financial d. The long-term deposits or investments must be
Instruments and Other Related Transactions issued by banks only;
e. The long-term deposits or investments must have
1. Interest from Philippine currency bank a maturity period of not less than 5 years
deposits and yield from deposit substitute f. The long-term deposits or investments must be in
and from trust funds or similar arrangements the denominations of P10,000 and other BSP-
prescribed denominations
a. Citizens 20% g. The long-term deposits or investments should not
b. Resident aliens be pre-terminated.
c. Non-resident h. Except those specifically exempted by law, any
aliens engaged other income such as gains from trading, foreign
in trade or exchange gain shall not be covered by income
tax exemption.
business
d. Domestic If the deposit or investment is pre-terminated, a final tax
corporation shall be imposed on the entire income.
e. Resident foreign
corporation Four years to less than five year – 5%.
a. Non-resident 25% (flat tax rate Three years to less than four years – 12%
alien not imposed on gross If less than three years – 20%.
engaged in income)
Note: As clarified in RMC 77-2012 [November 22, 2012] -
trade or
Interest income derived by domestic and resident foreign
business corporations from long-term deposits NOT issued by
a. Non-resident 30% banks or investment certificates that are NOT considered
foreign deposits or deposit shall be subject to 30% regular
corporation corporate income tax. The interest payors in such a case
are required to withhold 20% creditable withholding tax
2. Interest income derived from government pursuant to section 7 of RR 14-2012
debt instruments and securities
4. Interest income derived from a depository
They are considered “deposit substitutes.” The same tax bank under the expanded foreign currency
treatment as above is applied. deposit system (EFCDS)
Note: As clarified in RMC 77-2012 [November 22, 2012] Derived from FCDUs:
– The mere issuance of government debt instruments and
securities is deemed as falling within the coverage of
"deposit substitutes" irrespective of the number of lenders a. Citizens 7½%
at the time of origination. Thus, subject to 20% final b. Resident aliens
withholding tax. The final withholding tax shall accrue, in c. Domestic
case of zero-coupon instruments and securities upon their corporation
original issuance. In case of interest bearing, final
withholding tax shall accrue upon payment of the interest.
d. Resident foreign
corporation
3. Interest derived from long long-term deposits a. Non-resident Tax-exempt
or investments alien
b. Non-resident
They are exempt from tax, provided the following foreign
requisites are met: corporations
a. Depositor is an individual citizen (resident or non-
resident), a resident alien or a nonresident alien Note: If the bank account is jointly in the name of a non-
engaged in trade or business in the Philippines; resident and a resident, 50% shall be treated as exempt
b. The long-term deposit or investment certificates and the remaining 50% shall be subject to the final tax of 7
under name of the individual; ½.
c. The long-term deposits or investments must be in

investment until maturity. What is the FWT

Derived by FCDUs: due?
a. Residents 10%
The individual depositor or investor who acquired
b. Non-residents Tax-exempt
the instrument shall be subject to 20% FWT on his
5. Interest income derived from offshore interest income because the remaining maturity
banking units of OBUs period is less than 5 years (RMC 81-2012)
a. If the foreign 10% Q: Using the abovementioned facts, let us

currency say the investors held the instrument for
transactions are less than 5 years upon exercising his call
with residents option. What is the FWT due?
other than OBUs
and local The individual depositor or investor who acquired
commercial the instrument shall be subject to the graduated
banks, rates of FWT provided in Sections 24(B)(1) and
b. Income derived Tax-exempt Sections 25(A)(2) depending on the period he held
by OBUs from the same (RMC 81-2012)
foreign currency
transactions
---------------------------------------------------------------
with
nonresidents,
(b) Royalties
other OBUs, and ---------------------------------------------------------------
local
commercial Read Section 24(B)(1), Section 25(A)(2),
banks Section 25(B), Section 27(D)(1), Section
28(A)(7), Section 28(B), Tax Code
6. Interest income derived all other instruments
Any other debt instrument not within the coverage of Q: What is the proper tax treatment on
deposit substitutes shall be subjected to a creditable individual taxpayers of income derived from
withholding tax of 20%. royalties?
Note: As clarified in RMC 77-2012 [November 22, 2012] - Royalties (except 20% - Citizens, whether
The 20% creditable withholding tax (CWT) on interest books, literary works, resident or nonresident,
income derived from any other debt instrument shall be musical compositions resident aliens and
imposed on each Interest payment to be made beginning non-resident aliens
on November 23, 2012 (date of effectivity of RR 12-2012),
engaged in trade or
irrespective of the instruments’ and securities’ date of
issuance. This covers all interest income from current business and domestic
outstanding instruments, securities, or accounts as of corporations and
November 23, 2012. resident foreign
corporations
25% - Non-resident
Q: An individual depositor or investor (a aliens not engaged in
trade or business (shall
citizen, resident alien, or non-resident alien
form part of their gross
engaged in trade or business in the income)
Philippines) invests in a long-term deposit
or investment which has a remaining 30% - Non-resident
maturity period of less than 5 years and said foreign corporation
investor holds the said deposit or (shall form part of their
gross income

corporation, however,
Royalties from books, 10% - Citizens, whether are subject to the 15%
literary works, resident or nonresident, branch profit remittance
musical compositions resident aliens and tax
non-resident aliens a. Non-resident 1. Tax treaty rate, if
engaged in trade or foreign applicable
business corporation 2. 15% if no tax treaty
but satisfies the
25% - Non-resident tax-sparing
aliens not engaged in provision
trade or business (shall 3. 30% if no tax treaty
form part of their gross and does not
income) comply with the
tax-sparing
provision
---------------------------------------------------------------
(c) Dividends from domestic Q: What is the proper tax treatment on
Corporations dividends from foreign corporations?
---------------------------------------------------------------
The income shall form part of the gross income of
the corporation but the situs of the income becomes
Read Section 24(B)(2), Section 25(A)(2), material except for a resident citizen and domestic
Section 25(B), Section 27(D)(4), Section corporation which is taxed on worldwide income.
28(A)(7)(d) and Section 28(B)(5)(b), Tax
Code Note: In other words, only resident citizens and domestic
corporations would be subject to tax on dividends received
Note: I’ll discuss the tax treatment of dividends of all kinds from foreign corporations as they taxable on income
of taxpayers here na so it’s simpler. Just the tax rates. I without the Philippines.
shall discuss later the topic of tax treatment on dividends
received from a domestic corporation by a non-resident ---------------------------------------------------------------
foreign corporation in relation to the tax-sparing provision (d) Prizes and other winnings
and tax treaties. For now, just the basics lang muna for
dividends received by corporate taxpayers.
---------------------------------------------------------------
Q: What is the proper tax treatment on Read Section 24(B)(1), Section 25(A)(2), and
dividends from domestic corporations? Section 25(B), Tax Code
a. Citizens 10% Q: What is the proper tax treatment on

b. Resident aliens individual taxpayers of income derived from
a. Non-resident 20% royalties, prizes and other winnings?
engaged in
trade or Prizes amount to more 20% - Citizens, whether
business than P10,000 resident or nonresident,
a. Non-resident 25% (flat tax rate resident aliens and non-
aliens not imposed on gross resident aliens engaged in
engaged in income) trade or business
trade or
25% - Non-resident aliens
business not engaged in trade or
a. Domestic Tax-exempt (treated as business (shall form part
corporation inter-corporate of their gross income)
b. Resident dividends)
foreign Prizes amounting to Shall form part of ordinary
corporation Resident foreign P10,000 or less income

(ii) Passive income not subject to final

PCSO and Lotto Tax-exempt tax
Winnings
---------------------------------------------------------------
--------------------------------------------------------------- Q: What is the tax treatment of passive
e) Taxation of capital gains incomes which do not meet the conditions
(i) Income from sale of shares of stock of for them to be subject to final tax?
a Philippine corporation
(a) Shares traded and listed in the Such incomes shall be included in gross income of
stock exchange the taxpayer and shall be subject to the graduated
(b) Shares not listed and traded in the income tax rates.
stock exchange ---------------------------------------------------------------
(ii) Income from the sale of real property 11. Taxation of non-resident aliens engaged
situated in the Philippines in trade or business
(iii) Income from the sale, exchange, or a) General rules
other disposition of other capital assets b) Cash and/or property dividends
--------------------------------------------------------------- c) Capital gains
Note: This applies to all taxpayers, whether an individual Exclude: Non-resident aliens not engaged in
or a corporation. trade or business
---------------------------------------------------------------
Q: What is the tax treatment on capital gains
on sales or exchanges of capital stock and Note: There is no need for an extensive discussion here. The
general rule is that non-resident aliens engaged in trade or
real property? business shall be subject to the graduated income tax rate like
citizens and resident aliens. In the case of dividends, non-resident
aliens engaged in trade or business are taxed at 20%. As to
On sale of shares of stock of a capital gains, remember that is the only tax which makes no
domestic corporation not listed and distinction as to who the taxpayer is so we follow the standard
not traded through a local stock rates.
exchange held as a capital asset
a. Capital gains not over 5% of the net ---------------------------------------------------------------
P100,000 capital gains 12. Individual taxpayers exempt from
b. Capital gains in excess of 10% of the
net capital
income tax
P100,000
gains a) Senior citizens
b) Minimum wage earners
On sale of real property in the c) Exemption granted under international
Philippines held as a capital asset 6% of the agreements
gross selling
price, or the ---------------------------------------------------------------
current
Note: No need to discuss minimum wage earners. As to
market value exemption granted under international agreements, certain
at the time of persons and entities are exempt from taxation because the
sale, Philippines is a signatory to tax treaties which provide for such
whichever is exemptions. Let’s discuss the treatment of senior citizens.
higher.
Q: What is the tax treatment of senior
Note: (1) Shares listed and traded in the stock exchange citizens for purposes of income tax?
are not subject to capital gains tax. Instead, such shall be
subject to the ½ of 1% stock transaction tax. (2) If the real
property is not a capital asset, the gain will form part of Generally, qualified senior citizens deriving
ordinary income, subject to the graduated income tax returnable income during the taxable year, whether
rates. from compensation or otherwise, are required to file
their income tax return and pay the tax.
---------------------------------------------------------------

However, he shall be exempt under the following Q: Define taxable income and gross income
cases: for purposes of corporate income taxes.
1. The returnable income is in the nature of Taxable Income means the pertinent items of gross
compensation income but he qualifies as a income specified in the Code, less the
minimum wage earner; and deductions and/or personal and
2. If the aggregate amount of gross income earned additional exemptions, if any
by the Senior Citizen during the taxable year authorized for such types of income
does not exceed the amount of his personal by the Code or other special laws. For
corporations, taxable income would
exemptions (basic and additional) mean net income. Net income and
taxable income is used
Note that the exemption of senior citizens from interchangeably when it comes to
income tax does not extend to all types of income corporations.
earned during the taxable year such as those
subject to final taxes. (see RR No. 007-10 [JULY 20, Gross Income Shall mean gross sales less sales
2010].) returns, discounts, allowances and
cost of goods sold.
---------------------------------------------------------------
13. Taxation of domestic corporations Q: Why is the distinction of the two relevant for
a) Tax payable purposes of corporate income tax?
b) Allowable deductions 1. For domestic corporations and resident foreign
c) Taxation of passive income corporations, Regular Corporate Income Tax
d) Taxation of capital gains (RCIT) is imposed on taxable income. For non-
e) Tax on proprietary educational resident foreign corporations, RCIT is imposed
institutions and hospitals on its gross income.
f) Tax on government-owned or controlled 2. When applicable, MCIT is imposed on the gross
corporations, agencies, or instrumentalities income of domestic and resident foreign
--------------------------------------------------------------- corporations.
Note: I will no longer discuss Items (b) to (e). We already Q: What is the regular corporate income tax
discussed those. Just refer to the previous discussions. (RCIT) imposed on corporations?
Let’s focus instead on Item (a) so we can discuss the
normal corporate income tax rate and the minimum 101
The rate of RCIT imposed on corporations is 30%.
corporate income tax (MCIT).
--------------------------------------------------------------- For domestic corporations:

a) Tax payable
1. The rate is imposed on taxable income from
(i) Regular tax sources within and without the Philippines.
(iii) Minimum corporate income tax (MCIT) 2. Different rates of tax apply on certain passive
--------------------------------------------------------------- incomes.
--------------------------------------------------------------- For resident foreign corporations:
(i) Regular tax
--------------------------------------------------------------- 1. The rate is imposed on taxable income from
sources within the Philippines.
Read Section 27(A), Section 28(A)(1),
Section 28(B)(1), Tax Code
_________________________________________
Note: I will discuss the regular or normal corporate income 101
Note that it was 35% effective November 1, 2005 but on
tax rate as it applies to resident foreign corporations and January 1, 2009, the effective rate is now 30%.
nonresident foreign corporations here na rin.

2. Different rates of tax apply on certain passive (d) Corporations exempt from MCIT
incomes. (e) Applicability of the MCIT where a
corporation is governed both under the
For nonresident foreign corporations: regular tax system and a special income
tax system
1. The rate is imposed on gross income from all
sources within the Philippines. ---------------------------------------------------------------
2. The gross income includes those income
sourced from certain passive incomes including Section 27(E) and Section 28(A)(2), Tax
capital gains. Code
3. However, capital gains from sales of shares of
stock not traded in the stock exchange are, not
included in the gross income as well as interest Q: What is the minimum corporate income
from foreign loans and intercorporate dividends tax (MICT?)
which are subject to final tax rates.
A minimum corporate income tax of 2% of gross
Q: May the President allow domestic and income shall be imposed on a domestic
resident foreign corporations the option to corporation and resident foreign corporation
be taxed on their gross income? beginning on the fourth taxable year immediately
following the year in which such corporation
Yes. As provided under Section 27(A)(1) and commenced its business operations when:
Section 28(A)(1), the President upon
recommendation of the Secretary of Finance may 1. the MCIT is greater than the RCIT for the
allow domestic and resident foreign corporations the taxable year.
option to be taxed at 15% of gross income after the 2. such operation has zero or negative taxable
following conditions have been satisfied: income
1. a tax effort ratio of 20% of the GNP (see Section 27(E), Section 28(A)(2), Tax Code
2. a ratio of 40% of income tax collection to and RR 9-98 [August 5, 1998], as amended by RR
total tax revenues 12-2007 [October 10, 2007])
3. a VAT tax effort of 4% of GNP
4. a 0.9% ratio of Consolidated Public Sector Q: Which corporate taxpayers can be
Financial Position (CPSFP) to GNP subject to MCIT?
This option is available to firms whose ratio of cost of 1. Domestic corporation

sales to gross sales or receipts from all sources 2. Resident Foreign corporation
does not exceed 55%. Upon election of the gross
income tax option, it shall be irrevocable for 3 Q: Which corporate taxpayers are exempted
consecutive taxable years during which the from MCIT?
corporation is qualified
1. Resident foreign corporations engaged in
Note: I’m sure when you read the enumeration, you business as international carriers
thought of this: WTF is this shit?!?! Well, just memorize it 2. Resident foreign corporations engaged as
nalang. Let’s not waste time and energy explaining each
OBUs
item of the enumeration. Baka dumugo mga ilong natin.
3. Resident foreign corporations engaged in
--------------------------------------------------------------- business as ROHQs
4. Firms that are taxed under a special income
(iii) Minimum corporate income tax (MCIT)
tax regime.
(a) Imposition of MCIT
(b) Carry forward of excess minimum tax
(c) Relief from the MCIT under certain
conditions

Q: What is the purpose of MCIT? tax cannot cover MCIT since the basis for the first is
the annual net taxable income; while the basis for
As held in the case of CHAMBER OF REAL ESTATE the second is gross. Thus, MCIT is included in “all
AND BUILDER’S ASSOCIATION, INC. V. ROMULO [MARCH other taxes” from which PAL is exempted.
9, 2010]), the primary purpose of any legitimate
business is to earn a profit. Continued and repeated Q: For purposes of MCIT, what is gross
losses after operations of a corporation or consistent income?
reports of minimal net income render its financial
statements and its tax payments suspect. For sure, As provided in RR 9-98 [August 5, 1998], as
certain tax avoidance schemes resorted to by amended by RR 12-2007 [October 10, 2007]:
corporations are allowed in our jurisdiction. The
MCIT serves to put a cap on such tax shelters. As a For purposes of MCIT, the term "gross income"
tax on gross income, it prevents tax evasion and means gross sales less sales returns, discounts, and
minimizes tax avoidance schemes achieved through allowances and cost of goods sold, in case of sale of
sophisticated and artful manipulations of deductions goods, or gross revenue less sales returns,
and other stratagems. Since the tax base was discounts, allowances and cost of services/direct
broader, the tax rate was lowered. cost, in case of sale of services.
Q: Is MCIT a tax on capital and an additional Note: “Cost of goods sold” shall include all business
tax imposition? expenses directly incurred to produce the merchandise to
bring them to their present location and use while “cost of
services” shall mean all direct costs and expenses
The Supreme Court in CHAMBER OF REAL ESTATE necessarily incurred to provide the services required by
AND BUILDER’S ASSOCIATION, INC. V. ROMULO [MARCH the customs and clients.
102
9, 2010] answered this in the negative. The MCIT is

imposed on gross income which is arrived at by As noted by the Supreme Court in COMMISSIONER
deducting the capital spent by the corporation in the VS. PAL [JULY 7, 2009], inclusions and
sale of its goods, i.e. the cost of goods and other exclusions/deductions from gross income for MCIT
direct expenses from gross sales. Thus, the capital purposes are limited to those directly arising from
is not being taxed. Furthermore, the MCIT is not an the conduct of the taxpayer’s business. It is thus
additional tax imposition. It is imposed in lieu of the more limited than the gross income used in the
RCIT. computation of basic corporate income tax.
Q: What is the difference between RCIT and Q: What if apart from the income from core
MCIT? business activities, other items of gross
income are realized or earned by the
The tax base of RCIT is taxable income while the tax
corporation, are these items included as
base of MCIT is gross income.
part of gross income?
In COMMISSIONER VS. PAL [JULY 7, 2009], PAL under
PD 1590 (its franchise) was liable only for basic Yes. If apart from deriving income from these core
corporate income tax or franchise tax, whichever is business activities there are other items of gross
lower and this is in lieu of all other taxes, except real income realized or earned by the taxpayer during
property. The CIR contends that PAL is subject to the taxable period which are subject to the normal
MCIT while it was the contention of PAL that the corporate income tax, the same items must be
MCIT was included in the “in lieu of all other taxes”
provision. The Supreme Court noted there is a
distinction between taxable income, which is the
basis for basic corporate income tax; and gross _________________________________________
income, which is the basis for the MCIT under
102
Section 27(E). The two terms have their respective This only shows that deductions are not taken into account in
technical meanings, and cannot be used MCIT.
interchangeably. Hence, the basic corporate income

included as part of the taxpayer's gross income for Yes, the Secretary of Finance can suspend its
103
computing MCIT. imposition on any corporation which suffers losses
on account of
Q: Explain the carrying forward of excess
MCIT against normal income tax. Prolonged labor Defined as losses arising from a
dispute strike staged by the employees
Any excess MCIT against the normal income tax is which lasted for more than six
creditable within the next three (3) years from (6) months within a taxable
payment thereof. For the carry-over to apply, the period and which has caused
normal tax should be higher than the MCIT. To the temporary shutdown of
illustrate: business operations.
Year RCIT MCIT Excess Force majeure It means a cause due to an

MCIT irresistible force as by "Act of
against God" like lightning, earthquake,
RCIT storm, flood and the like. This
1998 50,000 75,000 (tax 25,000 term shall also include armed
to be conflicts like war or insurgency.
104
paid)
1999 60,000 100,000 40,000 Legitimate It shall include substantial
(tax to be business losses sustained due to fire,
paid) reverses robbery, theft or embezzlement,
2000 100,000 60,000 or for other economic reason as
(tax to be determined by the Secretary of
paid)
105 Finance.
In the year 2000, since the RCIT is greater than

Q: Discuss the applicability of the MCIT
MCIT, the firm will have to pay the RCIT of
P100,000. To this amount, the corporation can credit
where the corporation is governed by both
the excess MCIT is has so far which totals 65,000. under the regular income tax system and
The amount of income tax payable now becomes special tax income tax system.
35,000. Note that with respect to the excess MCIT of
25,000, that can be claimed as tax credit against the In the case of a domestic corporation whose
normal income tax up to the year 2001 or three operations or activities are partly covered by the
years from payment of the MCIT in 1998 and only regular income tax system and partly covered under
when the RCIT is greater than MCIT. You cannot a special income tax system, the MCIT shall apply
credit the MCIT against the MCIT or other losses. on operations covered by the regular income tax
system. (see Section 2.27(E)(1), RR No. 9-98)
Q: Can the imposition of MCIT be
suspended? Note: So, in the case of a BOI-registered enterprise, its
“registered” activity shall be subject to the special tax
regime tax while its “unregistered” activity shall be subject
to the RCIT.
_________________________________________ ---------------------------------------------------------------
14. Taxation of resident foreign corporations
103
This means that the term "gross income" will also include all a) General rule
items of gross income enumerated under Section 32(A) of the Tax b) With respect to their income from
Code, as amended, except income exempt from income tax and
income subject to final withholding tax sources within the Philippines
104
105
This is the tax to be paid because MCIT > RCIT c) Minimum corporate income tax
This Is the tax to be paid because MICT < RCIT
d) Tax on certain income
Exclude:

(i) International carrier For non-resident foreign corporations, the dividend

(ii) Offshore banking units is subject to:
(iii) branch profits remittances
(iv) Regional or area headquarters 1. Tax treaty rate, if applicable
2. 15% if no tax treaty but satisfies the tax-sparing
And regional operating headquarters
provision
Of multinational companies 3. 30% if no tax treaty and does not comply with
--------------------------------------------------------------- the tax-sparing provision
Note: I will not discuss this part na. We have already
discussed them in domestic corporations. Just to stress
the point, a resident foreign corporation is taxed in the
same manner as a domestic corporation. It may be subject Q: What is a tax-sparing provision?
to RCIT or MCIT as the case may be. The rates are just
different for certain passive incomes. As explained in the case of CIR V. PROCTER &
GAMBLE PHILIPPINES [DECEMBER 2, 1999]: A more
--------------------------------------------------------------- general way of mitigating the impact of double
14. Taxation of nonresident foreign taxation is to recognize the foreign tax as a tax
corporations credit. However, the principal defect of the tax credit
a) General rule system is when low tax rates or special tax
b) Tax on certain income concessions are granted in a country for the obvious
(i) interest on foreign loans reason of encouraging foreign investments. For
(ii) intercorporate dividends instance, if the usual tax rate is 35 percent but a
(iii) Capital gains from sale of shares of concession rate accrues to the country of the
106
investor rather than to the investor himself. To
stock not traded in the stock exchange
obviate this, a tax sparing provision may be
Exclude: stipulated. With tax sparing, taxes exempted or
(i) Non-resident cinematographic film reduced are considered as having been fully paid.
owner, lessor or distributor
(ii) Non-resident owner of lessor of In the Philippines, the 15% tax on dividends
vessels chartered by Philippine nationals received by a non-resident foreign corporation from
(iii) Non-resident owner or less or aircraft a domestic corporation is imposed subject to the
machineries and other equipment condition that the country in which the nonresident
--------------------------------------------------------------- foreign corporation is domiciled shall allow a credit
against the tax due from the nonresident foreign
Note: As a general rule, nonresident foreign corporations corporation taxes deemed to have been paid in the
are also subject to RCIT only that it is imposed on their Philippines equivalent to 15%, which represents the
gross income as compared to domestic and resident different between the regular income tax of 30% and
107
foreign corporations (on their taxable income). This is so the 15% tax on dividends.
because they’re not entitled to deductions. They cannot be
subject to MCIT. MCIT is imposed on gross income. The
RCIT in the case of nonresident foreign corporation is
already imposed on gross income! The gross income
would include those income sourced from certain passive
incomes except capital gains from sales of shares of
stock, interest from foreign loans and intercorporate
dividends. _________________________________________
I will not discuss the other topics here. I will zero in on 106
This means that, at the end of the day, the foreign investor
dividends. Ito medyo madugo. would be paying the same total amount of taxes due to the foreign
country and the Philippines.
107
Q: What is the tax treatment on dividends Note that previously, it was 20% which represents the
difference between the RCIT of 35% and the 15% tax on
received from a domestic corporation by a dividends.
non-resident foreign corporation?

Q: Illustrate the application of the tax-

sparing provision by providing an example. The total tax payable of the foreign corporation is
108 now 140.
1. "X" Foreign Corp. Tax Liability with no Q: Is it required that the foreign country
preferential rates must give a “deemed paid” tax credit for the
dividend tax waived by the Philippines
"X" Foreign Corporation income 400 making applicable the preferred dividend tax
109
Foreign Tax rate (50%) 200 rate of 15%?
110
RP Tax Rate (30%) 120
Foreign Tax Credit 120 As ruled in CIR V. PROCTER & GAMBLE PHILIPPINES
111
"X" tax payable to Foreign 80 [DECEMBER 2, 1999], the Tax Code does not require
"X" tax payable to RP 120 that the foreign country’s tax laws deemed the
parent-corporation to have paid the dividend tax
Here, the total tax payable of the foreign corporation waived by the Philippines. The Code only requires
is 200. that the foreign country shall allow the corporation a
“deemed paid” tax credit in an amount equivalent to
2. "X" Foreign Corp. Tax Liability with Preferential the percentage points waived by the Philippines.
Rate and without Tax Sparing
Q: When does a non-resident foreign
"X" Foreign Corporation income 400 corporation become entitled to the 15%
Foreign Tax rate (50%) 200
FWT?
Foreign Tax Credit 60
In INTERPUBLIC GROUP OF COMPANIES, INC. VS.
"X" tax payable to Foreign 140
COMMISSIONER OF INTERNAL REVENUE [CTA CASE
"X" tax payable to RP 60
NO. 7796 DATED FEBRUARY 21, 2011], a US
Corporation, who owns 30% of the total and
Here, the total tax payable of the foreign corporation
outstanding voting capital stock of a Philippine
is still the same at 200.
advertising company filed a claim for the refund or
issuance of a TCC for overpaid FWT on dividends
3. "X" Foreign Corp. Tax Liability with Preferential
withheld and remitted by the Philippine company. In
Rate and with Tax Sparing
the administrative claim, the US corporation alleged
that, as a non-resident foreign corporation, it may
"X" Foreign Corporation income 400
avail of the preferential FWT rate of 15% on cash
Foreign Tax rate (50%) 200
dividends received from a domestic corporation
112 during the taxable year 2006. The CIR, in response,
Foreign Tax Credit 120
raised the question of whether the US corporation is
"X" tax payable to Foreign 80
entitled to the FWT at the rate of 15% or the rate of
"X" tax payable to RP 60
20% in accordance with the RP-US Tax Treaty.
_________________________________________
108
The CTA, applying the ruling in CIR V. PROCTER &
The example provided in the case of CIR v. Procter & Gamble GAMBLE PHILIPPINES [DECEMBER 2, 1999], concluded
uses the old rates. This example modifies the example provided
in the case and uses the current rates effective January 1, 2009. that if the country of domicile of the recipient
Note that the foreign tax rate and the foreign corporation income corporation allows a credit against the tax imposable
113
are hypothetical. by it an amount equivalent to 20% of the
109
Income (400) x Foreign Tax Rate (50%) = 200
110 dividends remitted from a Philippine domestic
Income (400) x RP Tax Rate (30%) = 120
111
[Income (400) x Foreign Tax Rate (50%)] – Foreign Tax Credit corporation to corporations domiciled therein, the
(120) = 80
112
The additional 60 will be considered as tax deemed paid or _________________________________________
also known as the “phantom tax.” It is the foreign jurisdiction that
113
will allow the “deemed paid” tax credit. Now, 15% effective January 1, 2009.

dividends remitted are subject to FWT at the

preferential rate of 15% in accordance with Section Note: In SAL OPPENHEIM J R. & CIE
28 (b)(5)(b) of the Tax Code of 1997, as amended. KOMMANDITGESELLSCHAFT AUF AKTIEN VS. COMMISSIONER OF
INTERNAL REVENUE [CTA CASE NO. 7923, FEBRUARY 27,
2012], the CTA held that an availment of a tax treaty
Q: Is there a need for an application for a tax provision must be preceded by an application for a tax
treaty relief with the International Tax Affairs treaty relief with the BIR's International Tax Affairs
Division (ITAD)114 in order to avail of the Division.
benefit?
SECOND VIEW: No. In INTERPUBLIC GROUP OF
FIRST VIEW: Yes. In MIRANT V. CIR [CTA CASE NO. COMPANIES, INC. VS. COMMISSIONER OF INTERNAL
7796, FEBRUARY 21, 2011], Mirant made income REVENUE [CTA CASE NO. 7796 DATED FEBRUARY 21,
payments to VHL enterprises, a US nonresident 2011], the CIR also contended that the US
foreign corporation and to WES World, a UK company’s transactions were bereft of any tax treaty
nonresident foreign corporation. It accordingly relief application with the International Tax Affairs
withheld the tax due on these interest payments. Division (ITAD). On this point, the CTA ruled that the
Thereafter, Mirant filed for a refund contending that same is not necessary. The CTA stated that even
the two foreign corporations have created with respect to the applicability of the 20% FWT
“permanent establishments” in the Philippines and under the RP-US Tax Treaty, a tax treaty relief
thus making applicable the lower withholding tax application “is not made a condition precedent by
rate under the RP-UK and RP-US tax treaties. The law.”
CTA noted that under those treaties, VHL and WES
World, while not having a fixed place of business Note: For purposes of the bar, it is submitted that we
have established “permanent establishments” in the adopt the first view.
Philippines because they have “furnished services
through their employees or other personnel for a Q: If the foreign country does not impose a
period or periods the aggregate of which is more tax on the dividend, is the dividend received
than 183 days in a twelve-month period." by the non-resident foreign corporation
subject to the 15% FWT?
However, under RMO 01-2000, it is provided that
the availment of a tax treaty provision must be Yes. In BIR RULING DA-145-07 [M ARCH 8, 2007], SM
preceded by an application for a tax treaty relief with Investments asked for the BIR’s opinion on whether
its International Tax Affairs Division (ITAD). A foreign the cash dividends declared by them to Asia
corporation wishing to avail of the benefits of the tax Opportunities Limited, a corporation organized and
treaty should invoke the provisions of the tax treaty existing under the laws of the British Virgin Islands
and prove that indeed the provisions of the tax treaty are subject to 15% FWT. The CIR noted that the
applies to it, before the benefits may be extended to International Business Companies Ordinance of the
such corporation.The CTA noted that Mirant did not Territory of the British Virgin Islands does not
make such application. Thus, the CTA finally held impose any tax on dividends from foreign sources,
that the income payments of Mirant to VHL and which logically would include those received from
WES, which are both non-resident foreign Philippine corporations. As such, the dividend is
115
corporations, are subject to the final tax of 32%. subject only to the FWT of 15%.
_________________________________________
Q: What is the meaning of most-favoured
114
As provided in RMO 072-10 [AUGUST 25, 2010], the ITAD is nation (MFN) and how is it applied to
the sole office charged with the receiving of tax treaty relief applications for tax treaty reliefs?
applications (TTRA). All tax treaty relief applications relative to the
implementation and interpretation of the provisions of Philippine
tax treaties shall only be submitted to and received by the The most-favoured nation simply means that a
International Tax Affairs Division (ITAD). All rulings relative to the country which is the recipient of this treatment must,
application, implementation and interpretation of the provisions of receive equal advantages as the "most favoured
Philippine tax treaties shall emanate from ITAD.
115 nation" by the country granting such treatment. Most
Note that the applicable tax rate is now 30%.
tax treaties would have a MFN clause making a

benefit which is more advantageous accorded to the Philippines as those allowed to their German
one country demandable. counterparts. Further, the RP-Germany Tax Treaty
allows for crediting against German income and
In ITAD RULING 102-02 [M AY 28, 2002], Energizer corporate tax of 20% of the gross amount of
Philippines claims that its royalty payments to royalties paid under the law of the Philippines. On
Eveready Battery are subject to the preferential tax the other hand, the RP-US Tax Treaty does not
rate of 15% pursuant to the MFN clause of the RP- provide for the similar crediting of 20% of the gross
US Tax Treaty in relation to the RP-Netherlands Tax amount of royalties paid. The similarity in the
Treaty. The CIR applied the ruling in CIR V. S.C. circumstances of payment of taxes is a condition for
JOHNSON AND SONS, INC. [JUNE 25, 1999], where the the enjoyment of most favored nation treatment
Supreme Court interpreted the MFN clause, or the precisely to underscore the need for equality of
phrase “paid under similar circumstances” as treatment. since the RP-US Tax Treaty does not
referring to the manner of payment of taxes and not give a matching tax credit of 20 percent for the taxes
the subject matter of the tax which is royalties. The paid to the Philippines on royalties as allowed under
CIR found that the RP-US and RP-Netherland tax the RP-West Germany Tax Treaty, XYZ cannot be
treaties show a similarity on the manner of payment deemed entitled to the 10 percent rate granted
of taxes, that is, the allowable foreign tax credit on under the latter treaty for the reason that there is no
both treaties is the amount actually paid in the payment of taxes on royalties under similar
Philippines. Thus, the royalty payments by Energizer circumstances.
to Eveready are subject to the preferential tax rate of
15% of the gross amount of royalties pursuant to the ---------------------------------------------------------------
"most-favored-nation" provision of the RP-US tax 16. Improperly Accumulated earnings of
treaty in relation to the RP-Netherlands tax. corporations
---------------------------------------------------------------
Q: XYZ Corporation is a domestic
corporation which entered into a license Read Section 29, Tax Code
agreement with ABC Corporation, a non-
resident foreign corporation based in the US Q: What is an improperly accumulated
pursuant to which the former was granted earnings tax?
the right to use trademark, patents and
technology owned by the latter. For such This is the income tax imposed on a corporation if its
use, XYZ paid royalties to ABC and earnings and profits are accumulated (undistributed)
subjected the same to the 25% withholding instead of being divided and distributed to its
tax on royalty payments. XYZ claimed for a stockholders.
refund and argues that the withholding tax
should only be 10% pursuant to the most- An improperly accumulated earnings tax (IAET)
favoured nation clause of the RP-US Tax equal to 10% is imposed for each taxable year on
the improperly accumulated taxable income of each
Treaty in relation to the RP-West Germany
corporation.
Tax Treaty. Is XYZ’s contention correct?
It is imposed on domestic corporations which are
No. In CIR V. S.C. JOHNSON AND SONS, INC. [JUNE 25, classified as closely-held corporations.
116
1999], the Supreme Court held that the concessional
tax rate of 10% provided for in the RP-Germany Tax _________________________________________
Treaty could not apply to taxes imposed upon
royalties in the RP-US Tax Treaty since the two 116
Closely-held corporations are those corporations at least fifty
taxes imposed under the two tax treaties are not percent (50%) in value of the outstanding capital stock or at least
fifty percent (50%) of the total combined voting power of all
paid under similar circumstances and do not contain
classes of stock entitled to vote is owned directly or indirectly by
similar provisions on tax crediting. It is not proved or for not more than twenty (20) individuals. Domestic
that the RP-US Tax Treaty grants similar tax reliefs corporations not falling under the aforesaid definition are,
to residents of the US in respect of the taxes therefore, publicly-held corporations.
imposable upon royalties earned from sources within

Q: Define “improperly accumulated taxable As a general rule, the IAET shall apply to every
income.” corporation formed or availed for the purpose of
avoiding the income tax with respect to its
The term “improperly accumulated taxable income” shareholders or the shareholders of any other
means taxable income adjusted by: corporation, by permitting earnings and profits
accumulate instead of being divided or distributed.
1. Income exempt from tax
2. Income excluded from gross income As provided in RR 2-01, this refers to all domestic
3. Income subject to final tax; and corporations which are classified as closely held
4. The amount of net operating loss carry-over corporations. A closely held corporation are those at
deducted; and least 50% in value of the outstanding capital stock or
5. Reduced by the sum of: at least 50% of the total combined voting power of
a. dividends actually or constructively paid; and all classes of stock is owned directly or indirectly by
b. income tax paid for the taxable year not more than 20 individuals.
c. amount reserved for the reasonable needs of
117 As exceptions, the IAET shall not apply to:
the business
In relation to 5(c), RMC 35-2011 [March 14, 2011] 1. Publicly-held corporations

states that the amount that may be retained, taking 2. Banks and other non-bank financial
into consideration the reasonable needs of the intermediaries; and
business shall be 100% of the paid-up capital or the 3. Insurance companies
amount contributed to the corporation representing 4. GPPs
the par value of the shares of stock. Any excess 5. Non-taxable joint ventures
capital over and above the par shall be excluded. 6. Enterprises registered under SEZs (see RR
2-01 [FEBRUARY 12, 2001]).
Q: What is the purpose and nature of IAET?
Q: What is the main factor to consider in
The imposition of IAET discouraged tax avoidance holding a corporation liable for IAET?
through corporate surplus accumulation. When
corporations do not declare dividends, income taxes The touchstone of the liability is the purpose behind
are not paid on the undeclared dividends received the accumulation of the income and not the
by the shareholders. The tax on improper consequences of the accumulation. Thus, if the
accumulation of surplus is essentially a penalty tax failure to pay dividends is due to some other causes,
designed to compel corporations to distribute such as the use of undistributed earnings and profits
earnings so that the said earnings by shareholders for the reasonable needs of the business, such
could, in turn, be taxed (see CYNAMID PHILIPPINES purpose would not generally make the accumulated
INC VS. CA [JANUARY 20, 2000]) or undistributed earnings subject to the tax.
The IAET is being imposed in the nature of a penalty However, if there is a determination that a
to the corporation for the improper accumulation of corporation has accumulated income beyond the
its earnings, and as a form of deterrent to the reasonable needs of the business, the 10%
avoidance of tax upon shareholders who are improperly accumulated earnings tax shall be
supposed to pay dividends tax on the earnings imposed. [see RR 2-01 [FEBRUARY 12, 2001]).
distributed to them by the corporation (see RR 2-01
[FEBRUARY 12, 2001]). Q: What circumstances are indicative of a
purpose to avoid the income tax with
Q: What corporations are subject to IAET? respect to shareholders?
The fact that any corporation is a mere holding

_________________________________________ company or investment company shall be prima
117
facie evidence of a purpose to avoid the tax upon its
Added by RR 2-01. shareholders or members. (see Section 29(C)(1),
Tax Code)

3. Earnings reserved for compliance with any

Moreover, the fact that the earnings or profits of a loan or obligation established under a
corporation are permitted to accumulate beyond the legitimate business agreement
reasonable needs (including reasonably anticipated 4. In case of subsidiaries of foreign
needs) of the business shall be determinative of the corporations in the Philippines, all
purpose to avoid the tax upon its shareholders or undistributed earnings intended or reserved
members unless the corporation, by the clear for investments in the Philippines.
preponderance of evidence shall prove the contrary 5. Earnings required by law to be retained
(see Section 29(C)(2), Tax Code) 6. Anticipated losses or reserves in business.
RR 2-01 adds three more instances, namely: Q: What is the “Immediacy Test?”
1. Investment of substantial earnings in The Immediacy Test is used to determine the
unrelated business or in stock or securities “reasonable needs” of business” in order to justify an
of an unrelated business accumulation of earnings. Under this test, the term
2. Investment in bonds and other long term "reasonable needs of the business" are hereby
securities construed to mean the immediate needs of the
3. Accumulation of earnings in excess of 100% business, including reasonably anticipated needs.
of paid up capital The corporation should be able to prove an
immediate need for the accumulation of the earnings
and profits, or the direct correlation of anticipated
In CIR v. TUASON [M AY 15, 1989], the CIR assessed needs to such accumulation of profits. Otherwise,
Tuason, Inc. for IAET. The CIR presumed that when such accumulation would be deemed to be not for
Tuason, Inc. accumulated profits, the purpose was the reasonable needs of the business, and the
to avoid the income tax on its shareholders on the penalty tax would apply.
finding that it was a mere holding or investment
company. Tuason contended it was for the purpose In M ANILA WINE MERCHANTS V. CIR [FEBRUARY 20,
of expanding their business as a real estate broker. 1984], Manila Wine Merchants (MWM) invested in
The Supreme Court ruled that Tuason was liable for several companies and bought shares in Wack
IAET. Tuason was a mere holding company as it Wack Golf and Country Club and likewise acquired
was not involved itself in the development of the US Treasury Bills. CIR found that MWM had
subdivisions but merely subdivided its own lots and unreasonably accumulated a surplus. On appeal,
sold them for bigger profits. It derived its income the CTA ruled that the purchase of shares were
from interest, dividends, and rental from the sale of harmless. However, the CTA also ruled that the
realty. The touchstone of liability is the purpose purchase of US Treasury Bills was in no way related
behind the accumulation of the income and not the to the business of importing and selling wines and
consequences of the accumulation. The company's ordered MWM to pay IAET on the said treasury bills.
failure to distribute dividends to its stockholders was One of the contentions of MWM was that it will be
clearly for reasons other than the reasonable needs used to aid its importations The Supreme Court
of the business. ruled against MWM. It noted that the bonds were
bought in 1951 and until 1961; it was never used to
Q: What is meant by “reasonable needs”? aid MWM’s importations. To justify an accumulation
of earnings and profits for the reasonably anticipated
Reasonable needs means the immediate needs of future needs, such accumulation must be used
the business. Examples of what can be considered within a reasonable time after the close of the
reasonable needs include: taxable year.
1. Allowance for the increase of accumulated In CYNAMID V. CA [JANUARY 20, 2000], Cynamid
earnings up to 100% of the paid-up capital argued that the increase of working capital by a
2. Earnings reserved for building, plant or corporation justifies accumulating income. It invoked
equipment acquisitions the Bardahl Formula which allowed retention, as
working capital reserve, sufficient amounts of liquid
assets to carry the company though one operating

cycle and pay all of its current liabilities and any non-resident foreign corporation. Abbot-
extraordinary expenses reasonably anticipated. The Phils claims that by virtue of this, it is
Supreme Court ruled that, as stressed by American exempt from the IAET. Is this contention
authorities, the formula is used only for correct?
administrative convenience and not a precise rule.
The Court found that in companies where the Yes. In BIR RULING 25-02 [JUNE 25, 2002], the CIR
formula was applied, they had operating cycles ruled that Abbot-Phils was exempt from IAET. Since
shorten than that of Cynamid. The ratio of current Abbott-Phils. is a wholly-owned subsidiary of Abbott-
assets to current liabilities should be used to US, such shares will be considered as being owned
determine the sufficiency of working capital which proportionately by the Abbott-US shareholders. The
ideally should be 2:1. Cyanamid’s ratio is 2.21:1 ownership of a domestic corporation for purposes of
and, thus, there was no need to infuse working determining whether it is a closely held corporation
capital. or a publicly held corporation is ultimately traced to
the individual shareholders of the parent company.
Q: In determining if profits are reasonably Thus, where at least 50% of the outstanding capital
accumulated for business needs, the stock or at least 50% of the total combined voting
intention of the taxpayer is reckoned at what power of all classes of stock entitled to vote in a
time? corporation is owned directly or indirectly by at least
21 or more individuals, the corporation is considered
It is reckoned at the time of accumulation. In M ANILA publicly-held corporation. As of the year-end 2000,
WINE MERCHANTS V. CIR [FEBRUARY 20, 1984], one Abbott-US had 101,272 shareholders holding a
of the contentions of MWM was that it held on to combined 1,545,934,133 shares of common stock
said bonds for several years to wait for 60% of its and the twenty largest shareholders of Abbott-US as
stock to be owned by Filipinos so it can purchase its of September 30, 2001 own an aggregate of 30.1
own lot and building. The Supreme Court stated that percent of Abbott-US' issued and outstanding
to determine if profits are reasonably accumulated shares. Thus, Abbot-Phils is a publicly-held
for business needs, the controlling intention is that corporation exempt from IAET.
manifested at the time of accumulation and not later
ones. The second reason given by MWM was too ---------------------------------------------------------------
indefinite and was a mere afterthought. 17. Exemption from tax on corporations
---------------------------------------------------------------
Q: Are there ways by which to avoid liability
from IAET? Note: I have already discussed this. See exempt
corporations.
Yes, when the accumulation is justified by
reasonable needs of the business such as: ---------------------------------------------------------------
18. Taxation of partnerships
1. Accumulation up to 100% of the paid-up capital
---------------------------------------------------------------
2. For definite corporate expansion projects or
programs
Note: We already discussed this. To reiterate, all
3. For buildings, plants or equipment acquisitions partnerships si subject to income tax in the same manner
4. For compliance with a loan covenant or pre- and at the same rate as a corporation except:
existing obligation under a legitimate business a. GPP
agreement b. Joint venture of consortium formed for the
5. When there is a legal prohibition for its purpose of:
distribution i. Undertaking construction projects
6. In the case of Philippine subsidiaries of foreign ii. Engaging in petroleum, coal, geothermal
corporations, undistributed earnings intended or and other energy operations pursuant to
reserved for investments within the Philippines an operating or consortium agreement
under a service contract with the
government.
Q: Abbot-Phils, a domestic corporation, is a
wholly owned subsidiary of Abbot-US, a

--------------------------------------------------------------- 4. To minimize tax evasion, thus resulting in a

19. Taxation of general professional more efficient tax collection system?
partnerships
--------------------------------------------------------------- Q: Who is the withholding agent?
Note: I already discussed GPPs. Just remember that The withholding agent is the one who has control,
these three points. First, the GPP as an entity is not liable custody, or receipt of the funds that is subject to
for income tax. However, the persons engaging in income tax and to be withheld and remitted to the
business as partners in a GPP shall be liable for income BIR. The withholding agent holds the amount
tax only in their separate and individual capacities for their
respective distributive share in the net income of the GPP.
withheld from the income of another person in trust
Second, the net income of the GPP shall be computed in for the government until paid.
the same manner as a corporation. Each partner shall
report as gross income his distributive share, actually or The duty to withhold is different from the duty to pay
constructively received, in the net income of the income tax. The obligation to withhold is imposed
partnership. Third, GPPs may claim OSD. upon the buyer-payor of income but the burden of
tax is really upon the seller-income earner.
---------------------------------------------------------------
20. Withholding tax The obligation to withhold is compulsory as it makes
a) Concepts such withholding agent personally liable for payment
b) Kinds of the tax. Such liability of the withholding agent is
c) Withholding of VAT direct and independent from the liability of the
income recipient.
d) Filing of return and payment of taxes
withheld
Q: Who are required by law to withhold on
e) Final withholding tax at source
income payments?
f) Creditable withholding tax
g) Timing of withholding 1. Agents or employees of withholding agents
--------------------------------------------------------------- 2. Persons having control of the payment and
claiming the expense
Read Section 57 to 58 Tax Code 3. Payor having control of the payment where
payment is made through brokers
---------------------------------------------------------------
a) Concepts Q: When does the obligation to withhold
--------------------------------------------------------------- arise?
Q: What is a withholding tax? Either when:
Withholding tax is a method of collecting income tax 1. It is paid

in advance from the taxable income of the recipient 2. It becomes payable (i.e. it is legally due,
of income. It is not a tax. demandable, or enforceable)
3. It is accrued as an asset or expense
Q: What is the purpose of the withholding
tax system? In FILIPINAS SYNTHETIC FIBER CORPORATION V. CA
[OCTOBER 12, 1999], the Supreme Court stated that
the Tax Code is silent as to when the duty to
1. To provide the taxpayer a convenient
withhold taxes arises. In this case, to determine
manner to meet his probable income tax
when the duty to withhold the taxes arose, the Court
liability
inquired into the nature of accrual method of
2. To ensure the collection of the income tax
accounting, the procedure used by the taxpayer, and
which could otherwise be lost or
to the modus vivendi of withholding tax at source
substantially reduced through the failure to
come. It noted that under the accrual basis method
file the corresponding returns
of accounting, income is reportable when all the
3. To improve the government’s cash flow

events have occurred that fix the taxpayer’s right to 1. The claim must be filed with the BIR within
receive the income and the amount can be the two-year period from the date of
determined with reasonable accuracy. Such method payment of the tax
is allowed by law in reporting incomes. 2. It must be shown on the return that the
income received was declared as part of the
Q: May a withholding agent file a claim for gross income
tax refund? 3. The fact of withholding must be established
by a copy of statement duly issued by the
Yes. Generally, the person entitled to claim a tax payor to the payee showing the amount paid
refund is the taxpayer. However, if the taxpayer and the amount of the tax withheld
does not file the claim, the withholding agent may
file the same. (see CIR V. MIRANT [JUNE 15, 2011])
In CIR V. SMART COMMUNICATIONS [AUGUST 25,
2010], it was submitted that rule allowing the ---------------------------------------------------------------
withholding agent to file the claim is applicable only b) Kinds
when the withholding agent and the taxpayer are (i) Withholding of final tax on certain
related parties. The Supreme Court disagreed and incomes
stated that such relationship is not required. A (ii) Withholding of creditable tax at source
withholding agent has a legal right to file a claim for
---------------------------------------------------------------
refund. First, he is considered a taxpayer under the
Tax Code as he is personally liable for the Q: What are the two kinds of withholding
withholding tax as well as for deficiency
tax?
assessments, surcharges, and penalties, should the
amount withheld be finally found to be less than the
1. Final withholding tax (FWT)
amount that should have been withheld. Second, as
2. Creditable Withholding Tax (CWT)
an agent of the taxpayer, his authority to file the
income tax return and remit the tax withheld to the Q: Differentiate final withholding tax (FWT)
government includes the authority to file a claim for
from creditable withholding tax (CWT).
refund and to bring an action for recovery of such
claim.
The differences are as follows:
Q: Is the withholding agent who filed the FWT CWT
claim for tax refund obliged to remit the
same to the taxpayer? The amount of income Taxes withheld on
tax withheld by the certain income payments
Yes. The right of the withholding agent to claim a withholding agent is are intended to equal or
refund of erroneously or illegally withheld taxes constituted as a full and at least approximate the
comes with the responsibility to return the same to final payment of the tax due of the payee on
the taxpayer.In CIR V. SMART COMMUNICATIONS income tax due from the said income.
[AUGUST 25, 2010], the Supreme Court ruled that payee on the said
while the withholding agent has the right to recover income.
the taxes erroneously or illegally collected, he
nevertheless has the obligation to remit the same;
otherwise, he would be unjustly enriching himself at The liability for payment Payee of income is
the expense of the principal taxpayer from whom the of the tax rests primarily required to report the
taxes were withheld, and from whom he derives his on the payor as a income and/or pay the
legal right to file a claim for refund. withholding agent. difference between the
tax withheld and the tax
Q: What are the requisites to be complied due on the income. The
with in a claim for refund of unutilized payee also has the right
withholding tax? to ask for a refund if the
tax withheld is more than

the tax due. Q: What are the other obligations of the

withholding agent with respect to the return
The payee is not The income recipient is and payment of the tax withheld?
required to file an still required to file an
income tax return for the income tax return, as 1. He shall furnish the recipient of the income a
particular income. prescribed in Sec. 51 written statement showing the income or other
and Sec. 52 of the NIRC. payments made by him during such quarter or
year, and the amount of the tax deducted and
(see Section 2.57(A) and (B), RR 2-98 [April 17, withheld therefrom.
1998] and CHAMBER OF REAL ESTATE AND BUILDER’S 2. He shall submit an annual information return
ASSOCIATION, INC. V. ROMULO [M ARCH 9, 2010]) containing the list of payees and income
payments, amount of taxes withheld for each
--------------------------------------------------------------- payee and other pertinent information. (see
c) Withholding of VAT Section 58(B) and (C), Tax Code)
---------------------------------------------------------------
Note: Wait lang. Last time I checked Income Tax ang
Q: Since CWT is but an approximation, what
pinaguusapan natin. Naligaw ito sa 2013 Syllabus. happens if there is excess payment or
Anyway, let’s enumerate for now the types of withholding deficiency in payment?
VAT leaving an extensive discussion of withholding VAT
kapag we’re in VAT na. The excess of the amount of tax so withheld over
the tax due on his return shall be refunded.
Q: What are the types of withholding VAT?
If the income tax collected at source is less than the
1. Payments are made to a non-resident whose tax due on his return, the difference shall be paid.
services are considered as VAT-taxable in which (see Section 58(D), Tax Code)
case the 12% will be withheld by the payor (final
withholding VAT) Q: What is the effect of non-payment of CWT
2. Payments by government agencies, in which to the transfer of real property?
case the government entity will withhold 5% on
its payments. (creditable withholding VATT) No registration of any document transferring real
property shall be effected by the Register of Deeds
--------------------------------------------------------------- unless the CIR or his duly authorized representative
d) Filing of return and payment of taxes has certified that such transfer has been reported
withheld and the capital gains or CWT, if any, has been paid.
(i) Return and payment in case of (see Section 58(E), Tax Code)
government employees ---------------------------------------------------------------
(ii) Statement and returns (i) Return and payment in case of
--------------------------------------------------------------- government employees
Q: Who is obliged to file the return and pay ---------------------------------------------------------------
the tax withheld?
Read Section 78 to 83, Tax Code
The withholding agent shall file the return and pay Note: I will discuss employees in the private sector na rin.
the tax:
1. FWT - within 25 days from the close of each Q: What income payments are exempted
calendar quarter for FWT from the requirement of withholding tax on
2. CWT - not later than the last day of the month compensation?
following the close of the quarter during which
withholding was made. (see Section 58(A), Tax
As provided in SECTION 2.78, RR 2-98 [APRIL 17,
Code)
1998], as amended by RR 1-2006 [DECEMBER 29,
2005]:

Q: Are backwages, allowances and benefits

1. Compensation income of individuals that do not awarded in a labor dispute subject to
exceed the statutory minimum wage or P5,000 withholding tax?
pesos per month, whichever is higher.
2. Compensation income of government Yes. Backwages, allowances, and benefits awarded
employees with salary grades 1 to 3. in a labor dispute constitute remunerations for
services that would have been performed by the
Q: Who is obliged to deduct, withhold, file employee in the year when actually received, or
the return and pay the tax upon wages? during the period of his dismissal from the service
which was subsequently ruled to be illegal. The said
Every employer making payment of wages shall back wages, allowances and benefits are subject to
deduct and withhold upon such wages the withholding tax on wages. (see RMC 39-2012
applicable tax except in the case of minimum wage [August 3, 2012])
118
earners. (see Section 79(A), Tax Code)
Q: Who should withhold the tax due
The return shall be filed and the payment made thereon?
within 25 days from the close of each calendar
quarter (see Section 81, Tax Code) The employers are mandated to withhold taxes on
wages and this includes those backwages,
However, if the employer is the Government or any allowances, and benefits awarded in a labor dispute.
political subdivision, agency, or instrumentality, the
return of the amount deducted and withheld upon Q: If the backwages, allowances, disputes
any wage shall be made:
are received by virtue of a labor dispute
1. by the officer or employee having control over award through garnishment of debts due to
the payment of such wage, or the employer and other credits to which the
2. by any officer duly designated for the purpose employer is entitled to subject to
(see Section 82, Tax Code) withholding tax?
Q: What are the other obligations of the In RMC 39-2012 [August 3, 2012], the CIR
employer with respect to the withholding of answered this question in the affirmative. Persons
tax on wages? having control of the payment of wages or salaries
are authorized to deduct and withhold upon such
1. Every employer shall furnish to each such wages or salaries the withholding tax due thereon. In
employee a written statement confirming wages this case, the garnishees are the persons owning
paid by the employer during the calendar year debts due to the employer or in possession or
and the amount of tax deducted and withheld control of credits to which the employer are entitled.
Accordingly, they are in control of the payment of
2. Every employer shall submit to the CIR an backwages, allowances and benefits. Thus, in order
annual information return containing a list of to ensure the collection of the appropriate
employees, the total amount of compensation withholding taxes on wages, garnishees of a
income of each employee, the total amount of judgment award in a labor dispute are constituted as
taxes, accompanied by copies of the written withholding agents with the duty of deducting the
statements, and other information as may be corresponding withholding tax on wages due
deemed necessary. thereon in an amount equivalent to five percent (5%)
of the portion of the judgment award representing
the taxable backwages, allowances and benefits.
_________________________________________
118
Minimum wage earners are exempt from income tax.

--------------------------------------------------------------- 1. Expanded withholding tax on certain income

e) Final withholding tax at source payments made by private persons to resident
--------------------------------------------------------------- taxpayers (e.g. professional fees, income
payments to brokers, income payments to
Q: What is meant by withholding tax at partners of GPPs, etc)
source? 2. Withholding tax on compensation income for
services done in the Philippines
Since the withholding taxes are deducted by the 3. Withholding tax on money payments made by
withholding agent when the income payments are the government
paid or payable, they are described as “withholding
taxes-at-source.” This means that the income tax of Q: What is the rule on creditable withholding
the recipient of income is withheld and deducted at of income payments to medical petitioners
the source and at the time of accrual or payment of as laid down in RR 13-98 [August 14, 1998]?
the expense by the withholding agent-payer of
income. It shall be presumed that the hospital or clinic has
collected the professional fee of the said medical
Q: What are the four general types of practitioner and shall, accordingly, be liable for the
income payments subject to FWT? withholding of the tax vis-a-vis each and every
patient admitted into the hospital or clinic under the
1. Passive Incomes care of the said medical practitioner.
2. Income payments to entities where their gross
income is subject to tax (i.e. non-resident aliens However, the withholding tax shall not apply
not engaged in trade or business, non-resident whenever there is proof that no professional fee has
foreign corporations, special aliens) in fact been charged by the medical practitioner and
3. Fringe Benefits paid by his patient,
4. Informer’s Reward to Persons Instrumental in
the Discovery of the Violations of the Tax Code. ---------------------------------------------------------------
g) Timing of withholding
(see Section 2.57.1, RR 2-98 [April 17, 1998]) ---------------------------------------------------------------
--------------------------------------------------------------- General rule: The obligation of the payor to deduct
f) Creditable withholding tax and withhold tax arises at the time an income
(i) Expanded withholding tax payment is paid or payable or the income payment
(ii) Withholding tax on compensation is accrued or recorded as an expense or asset,
--------------------------------------------------------------- whichever is applicable, in the payor’s books,
whichever comes first.
Q: What is meant by creditable withholding
tax? Exception: Where the income is not yet paid or
payable but the same has been recorded as an
Under the CWT tax system, taxes withheld on expense or asset, whichever is applicable, in the
certain payments are but intended to approximate payor’s books, the obligation to withhold shall arise
the tax due from the payee. The withheld taxes in the last month of the return period in which the
remitted to the BIR are treated as deposits or same is claimed as an expense or amortized for tax
advances on the actual tax liability of the taxpayer, purposes.
subject to adjustment at the proper time when the
(see Section 2.57.4, RR No. 2-98, as
actual tax liability can be fully and finally determined.
amended by RR No. 12-2001)
Q: What are the three general types of
creditable withholding taxes? ========== END OF REVIEWER ============
The three types of creditable withholding taxes are: Thank you for using my reviewer. Again, if you
find it useful, please share it to others. Also, if

it’s not so much to ask, pray that my girlfriend

and I do well and pass the bar exams.
Ateneo Law Batch 2013 and all the other

barristers who will come to possess this
reviewer, good luck to us all. AMDG.
For comments, corrections, and suggestions,

please email me at pmreyestax@gmail.com.
Prayer to St. Joseph of Cupertino for

success in Examinations
O Great St. Joseph of Cupertino who while

on earth did obtain from God the grace to be
asked at your examination only the
questions you knew, obtain for me a like
favour in the examinations for which I am
now preparing. In return I promise to make
you known and cause you to be invoked.
Through Christ our Lord.
St. Joseph of Cupertino, Pray for us.

Amen.

PM REYES BAR REVIEWER ON TAXATION II
(Based on the 2013 Bar Syllabus and Updated with the Recent BIR Issuances and the
This is the second installment of my two-part reviewer Note: Before we discuss Estate Tax, let us discuss the
on taxation. It covers 8 topics, namely: (1) Estate Tax concept of Transfer Taxes.
(2) Donor’s Tax (3) Tax Remedies (4) Organization and
Functions of the BIR (5) Local Government Taxation Q: What are transfer taxes?
(6) Real Property Taxation (7) Tariff and Customs
Code; (8) Judicial Remedies (CTA). It is a consolidated
and updated version of my reviewers in Tax 2 and
Transfer taxes are those taxes imposed upon the
Taxation Law Review. This reviewer is based on notes privilege granted by the state to the taxpayer so that
from Atty. Montero and Assoc. Dean Gruba and the he may transfer properties, real or personal, without
books and reviewers of Atty. Mamalateo and Atty. consideration.
Domondon. I also added some stuff from Atty. Mickey
Ingles’ reviewer and Justice Dimaampao. For the Q: What is the nature of transfer taxes?
transfer taxes, I added stuff from Starr Weigand’s
notes. References have also been made to the 2013
Transfer taxes are excise or privilege taxes that are
Bedan Red Book and the 2012 UP Tax Reviewer.
imposed on the act of passing ownership of property
Further, I added the recent and relevant revenue and not taxes on the property transferred.
regulations and other BIR issuances (especially those
issued in 2012) and the latest SC and CTA Q: What are the kinds of transfer taxes and
jurisprudence (as of January 31, 2013). Most of the define each?
digests were sourced from Du Baladad and
Associates (BDB Law) and from Baniqued & At present, the kinds of transfer taxes are:
Baniqued. The reviewer will make reference to codal
provisions. Thus, I recommend that you read this with
a copy of the NIRC and other Laws Codal (2012
1. Estate tax – a tax that is levied, assessed,
edition) by Atty. Sacadalan-Casasola collected and paid upon the transfer of the net
estate of a decedent to his or her heirs.
Possessors may reproduce and distribute my 2. Donor’s tax - is an excise tax levied, collected,
reviewer provided my name remains clearly and paid upon the privilege of transferring
associated with my work and no alterations in the property gratuitously by way of gift inter vivos by
form and content of my reviewer are made. No any person, resident or non-resident
stamping please.
Note: In 1973, aside from estate and donor’s tax,
May this reviewer prove useful to you. If it does, inheritance and donee’s tax were imposed. Inheritance
please share it to others. Happy studying! taxes are imposed on the right of the heirs to receive
property upon death of the decedent. Donee’s taxes are
--------------------------------------------------------------------------- imposed on the right given to the done to receive property
TABLE OF CONTENTS from a donor during his lifetime. PD No. 69 abolished
--------------------------------------------------------------------------- these two transfer taxes. Today, the recipient of property
by inheritance or donation is no longer liable for transfer
II. NIRC taxes.
B. Estate Tax ................................................. 2
C. Donor’s Tax ............................................. 18 Q: Differentiate estate tax from donor’s tax.
D. Value-Added Tax .................................... 25
E. Tax Remedies ......................................... 59 Estate Tax Donor’s Tax
F. Organization and Function of the Bureau
of Internal Revenue................................... 100 Tax on the privilege to Tax on the privilege to
III. Local Government Code transfer property upon transfer property during
A. Local Government Taxation ................ 104 one’s death (mortis one’s life time (inter
B. Real Property Taxation ........................ 120 causa) vivos)
IV. Tariff and Customs Code ......................... 137
V. Judicial Remedies (CTA) ......................... 152
Maximum tax rate of Maximum tax rate is
--------------------------------------------------------------------------- estate tax is 20% on net 15% on the net gifts
estates exceeding Php exceeding Php 10 million
10 million and the first and the first Php
Php 200,000 is exempt 100,000 is tax exempt

Ateneo Law Batch 2013 Last Updated: 30 July 2013 (v3)
Estate tax is computed Donor’s tax is computed Q: What is the basis of the imposition of
on the basis of the net on the basis of net gifts estate tax?
estate transferred at the given during a calendar
time of the death of the year Estate tax is imposed upon the basis of the net
decedent estate of the decedent, considered as a unit,
regardless of the number of shares into which it may
Q: Compare and contrast donation mortis be divided or the relationship of the beneficiaries.
causa and donation inter vivos.
Q: What law shall govern the imposition of
Mortis Causa Inter Vivos estate tax?
Both are transfers without onerous consideration RR 02-2003 [December 16, 2002] reiterates the
well-settled rule that estate taxation is governed by
takes effect upon the takes effect during the the statute in force at the time of the death of the
death of the transferor lifetime of the transferor decedent.
Ownership will pass only Ownership will pass Q: When does the estate tax accrue?
upon death during the donor’s life
time It accrues upon the death of the decedent. (Section
3, RR 2—2003 [December 16, 2002]
subject to estate tax subject to donor’s tax
Q: Is the accrual of the estate tax distinct
Q: What is the law that governs the from the obligation to pay the same?
imposition of transfer taxes?
Yes. The accrual of the tax is distinct from the
obligation to pay the same. Upon the death of the
Transfer taxes are governed by the laws existing at
decedent, succession takes place and the right of
the time the transfer takes place. In particular –
the State to tax the privilege to transmit the estate
vests instantly upon death (see RR 02-2003
a. Donations inter vivos are governed by the
[December 16, 2002].
law existing at the time of the effectivity of
the donation since the transfer takes place
Generally, the estate tax is paid at the time the
at that time
estate tax return is filed by the executor,
b. Donations mortis causa are governed by the
administrator or the heirs. The period to file an
law at the time of death because it is at that
estate tax return within six months from the death of
time that the property is transferred.
the decedent except in meritorious cases where an
extension not exceeding 30 days is granted. (see
---------------------------------------------------------- Section 90, Tax Code)
B. ESTATE TAX
---------------------------------------------------------- Q: A died. He left a will which provided that
all real estate shall not be sold or disposed
--------------------------------------------------------------- of 10 years after his death and when such
1. Basic Principles period lapses, the property shall be given to
--------------------------------------------------------------- B. (1) When does the estate tax accrue?
Q: What transfer is subject to estate tax? The estate tax accrues as of the death of the
decedent.
The transfer of the net estate of every decedent,
whether resident or non-resident is subject to estate Q: Based on the same facts as stated above,
tax. B contended that the inheritance tax should
be based on the value of the estate at the
lapse of the 10-year period. Is B’s
contention correct?

3. Provide for an equal distribution of wealth

No, the tax accrues at the time of death 4. It is the most appropriate and effective
notwithstanding the condition. Since death is the method for taxing the “privilege” which the
generating source from which the power of the State decedent enjoys of controlling the
to impose estate taxes takes its being and if upon dispositions
the death of the decedent, succession takes place 5. It is the only method of collecting the share
and the right of the state to tax vests instantly, the which is properly due to the State as a
tax is to be measured by the value of the estate as it partner in the accumulation of property
stood at the time of the decedent’s death, regardless which was made possible on account of the
of any postponement of actual possession or any protection given by the State
subsequent increase or decrease in value.
(LORENZO V. POSADAS [JUNE 18, 1937]) Q: Discuss the different theories regarding
the purposes of estate tax.
---------------------------------------------------------------
2. Definition Benefit-received The tax is in return for the
--------------------------------------------------------------- theory services rendered by the state
in the distribution of the estate
Q: Define estate tax? of the decedent and for the
benefits that accrue to the
An estate tax is a graduated tax imposed on the estate and the heirs
privilege of the decedent to transmit property at
death and is based on the entire net estate, State- The tax is in the share of the
regardless of the number of heirs and relations to partnership state as a passive and silent
the decedent. theory partner in the accumulation of
property
It is a tax levied, assessed, collected and paid upon
the privilege of gratuitously transferring the net Ability to Pay The tax is based on the act that
estate of a decedent to his heirs. Theory the receipt of inheritance
creates the ability to pay and
--------------------------------------------------------------- thus contribute to governmental
3. Nature income
---------------------------------------------------------------
Redistribution The tax is imposed to help
of wealth theory reduce undue concentration of
Q: What is the nature of the estate tax? wealth in society to which the
receipt of inheritance is a
The Estate Tax is
contributing factor
a. It is not a tax on property
b. It is a tax imposed on the privilege to
---------------------------------------------------------------
transmit property a death and is measured
by the value of the property. 5. Time and transfer of properties
---------------------------------------------------------------
---------------------------------------------------------------
4. Purpose or object Q: When are properties and rights
--------------------------------------------------------------- transferred to successors?
The properties and rights are transferred to the

Q: What are the purposes for imposing the
successors at the time of death of the decedent (Art.
estate tax? 777, NCC).
The generally accepted purposes for imposing the However, despite the transfer of properties and
estate tax are as follows: rights at the time of death, the executor or
administrator shall not deliver a distributive share to
1. To generate additional revenue for the any party interested in the estate unless there is a
government
2. To reduce the concentration of wealth

certification from the CIR that estate tax has been 8. Determination of gross estate and net
paid. (see Section 94, Tax Code) estate
---------------------------------------------------------------
Note: In the determination of the estate tax, you should
note 4 things: (1) The classification of the decedent based
on nationality and/or domicile (2) The nature and the Read Section 85, ¶1
location of the assets (3) The computation and valuation of
the assets (which includes deductions) and (4) Rates. Q: How is gross estate determined?
--------------------------------------------------------------- Decedent Determination of gross
6. Classification of decedent estate
---------------------------------------------------------------
Resident Citizen, All properties, real or
Q: Who are the taxpayers liable to pay Non-resident personal, tangible or
estate tax? Citizen, Resident intangible, wherever
Alien situated, plus items
1. Resident citizens includible in gross estate
2. Non-resident citizens
3. Resident alien Non-Resident Alien Only those properties
4. Non-resident alien situated in the Philippines
provided that with respect to
Note: Only natural persons can be held liable for estate intangible personal property,
tax. A corporation cannot be liable for the obvious reason its inclusion in the gross
that they cannot die (naturally speaking). estate is subject to the rule
of reciprocity under Section
--------------------------------------------------------------- 104 of the Tax Code
7. Gross estate vis-à-vis net estate
--------------------------------------------------------------- (See Section 4, RR No. 2-2003 [December 16,
2002])
Q: Distinguish Gross Estate from Net Estate
Read Section 104, Tax Code
Gross Estate Net Estate
The value of all the The value of the gross Q: What is the rule in determining the situs
property, real or estate less the ordinary of intangible personal property for estate tax
personal, tangible or and special deductions purposes?
intangible, of the (see Section 86, Tax
decedent wherever Code) As a general rule, we apply the principle of res
situated to the extent of mobilia sequuntur personam (“chattels follow the
his interest at the time of person”). In other words, the intangible property is
his death as well as taxed based on the domicile of the owner.
other items includible in
the gross estate (See However, SECTION 104 provides that certain
Section 85, Tax Code) intangibles be deemed located in the Philippines,
namely:
Note: In the case of a non-
resident alien decedent, 1. Franchises being exercised in the
only that part of the entire Philippines
gross estate which is
2. Shares, obligations, or bonds issued by
situated in the Philippines
shall form part of his gross domestic corporations, or partnerships,
estate. business or industry located in the
Philippines
--------------------------------------------------------------- 3. Shares, obligations or bonds issued by
foreign corporations

a. at least 85% of the business of Non-Resident Alien Net estate is equal to gross
which is located in the Philippines; estate less ordinary
or deductions and exclusions
b. which have acquired situs in the allowed by law
Philippines
4. All intangibles owned by residents Note: Non-resident alien
decedent cannot avail of
Q: What is meant by reciprocity as applied special deductions.
to intangibles of a non-resident alien for
estate tax purposes? ---------------------------------------------------------------
9. Composition of gross estate
As provided in Section 104, there is reciprocity if the ---------------------------------------------------------------
foreign country of which the decedent was a citizen
or resident at the time of his death: Read Section 85, ¶1 and Section 104, Tax
Code
1. Did not impose an estate tax; or
2. Allowed a similar exemption from estate tax Q: What does the gross estate of a decedent
with respect to intangible personal property consist of?
owned by Filipino citizens not residing in that
foreign country. Decedent Composition of gross
estate
Q: Must there be total reciprocity?
Resident Citizen, 1. Real property within and
Yes. In COLLECTOR OF INTERNAL REVENUE V. FISHER Non-resident without the Philippines
[JANUARY 28, 1961], at issue is whether the shares Citizen, Resident 2. Tangible personal
of stock of a nonresident alien in a domestic mining Alien property within and
company can be exempted from estate tax pursuant without the Philippines
to the reciprocity proviso in the Philippine Tax Code. 3. Intangible personal
The Supreme Court held in the negative. Reciprocity property within and
must be total. If any of the two states collects or without the Philippines
imposes or does not exempt any transfer, death,
legacy, or succession tax of any character, the Non-Resident Alien 1. Real property within the
reciprocity does not work. In this case, the Philippines
Philippines imposed an estate and an inheritance 2. Tangible personal
tax at the time while California imposed only property within the
inheritance tax. Philippines
3. Intangible personal
Q: How is net estate determined? property within the
Philippines unless there
Decedent Determination of net estate is reciprocity in which
case it is not taxable
Resident Citizen, Net estate is equal to gross
Non-resident estate less ordinary and
Citizen, Resident special deductions and Note: In sum, all assets, real or personal, tangible or
Alien exclusions allowed by law intangible wherever located of a citizen and resident
alien is subject to estate tax while for nonresident aliens,
Note: The special estate tax is imposed only on properties within the
deductions (FSMA) are: (1) Philippines provided in the case of intangible personal
Family Home; (2) Standard property, it is subject to the rule of reciprocity under
Section 104 of the Tax Code.
deduction (3) Medical
expenses and (4) Amount
received by heir under RA
4917.

Q: How do you value the estate for estate b. Transfers in contemplation of death
tax purposes? c. Revocable transfers
d. Property under general power of
The properties comprising the gross estate shall be appointment
valued based on their fair market value as of the e. Proceeds of a life insurance taken out by the
time of death. decedent upon his own life where the
beneficiary is the estate, his executor or
Q: For purposes of estate taxation, how is administrator irrespective of whether or not
insured retained power of revocation or any
the fair market value of the following
beneficiary designated as recovable
properties determined? f. Transfers for insufficient consideration
Real Property Fair market value determined by: Note: These are considered “substitutes for testamentary
dispositions.” Although inter vivos in form, they are mortis
1. the CIR (zonal value) or causa in substance. Note that in all these transfers, if they
2. that shown in the schedule of were made for a bona fide consideration, they shall not
values fixed by Provincial and form part of the gross estate.
City Assessors, whichever is
higher Decedent’s Interest
Shares of If unlisted:
Stock Read Section 85(A)
1. Unlisted common shares are
valued based on their book Q: What does the decedent’s interest
value include?
2. Unlisted preferred shares are
valued at par value. It includes any interest having value or capable of
being valued, transferred by the decedent at his
If listed: death
The fair market value shall be the Transfer in contemplation of death

arithmetic mean between the
highest and lowest quotation at a Read Section 85(B)
date nearest the date of death, if
none is available on the date of Q: When is a transfer considered one made
death itself. in contemplation of death?
Usufructuary, The probable life of the
use or beneficiary in accordance with the A transfer is considered made in contemplation of
habitation, latest basic standard mortality death when the impelling motive or reason for the
annuity table shall be taken into account transfer is the thought of death, regardless of
whether the transferor is near the possibility of death
Improvement 1. The construction cost per or not.
building permit or
2. FMV per latest tax declaration Note: The presumption that transfers made within three
years before death are made in contemplation of death as
(See SECTION 88, TAX CODE AND SECTION 5, RR 02- provided under PD 1705 is no longer applicable.
2003]
Q: What factors should be considered in
--------------------------------------------------------------- determining whether a transfer was made in
10. Items to be included in gross estate contemplation of death?
---------------------------------------------------------------
One should consider the following:
Q: What items/transfers should be included 1. The type of heir (whether compulsory or
in the gross estate? voluntary)
2. The timing of the transfer
a. Decedent’s interest at the time of death 3. Other special factors

and Z. The CIR contends that such transfers

Q: What is the relevance of the type of heir should form part of the gross estate for
in determining if the transfer was made in purposes of estate taxation. Is the CIR
contemplation of death? correct?
When there is a donation inter vivos is made to a No. The donation inter vivos was made to a legatee
person who is not a forced heir, the presumption is who is not a forced heir. Thus, absent any evidence
that such transfer is a donation inter vivos. to the contrary, the presumption holds that such
transfer is a donation inter vivos. Such being the
However, if the recipient of the property is a forced case, the transfer shall not form part of the gross
heir, the presumption is that such transfer was made estate (see TUASON V. POSADAS [JANUARY 23,
to accelerate inheritance and hence, such transfer is 1930]).
mortis causa. This presumption may be rebutted by
evidence to the contrary. (see VIDAL DE ROCES V. Q: Using the same facts above, it was
POSADAS [M ARCH 13, 1933]) determined that the transfer was made three
months before his death. Will the transfer
Q: Name some instances/factors which form part of the gross estate?
would disprove the claim that the transfer
was made in contemplation of death. Yes. In VIDAL DE ROCES V. POSADAS [M ARCH 13,
1933], the decedent died without forced heirs but
When the reason for the transfer was the desire of instituted a certain person as a legatee in his will.
the decedent to: The presumption that such transfer was a donation
inter vivos did not hold because of the timing of the
1. see his children enjoy the property while the transfer, which was a short period before death.
donor is still alive
2. save income of property taxes Q: Prior to his death, A gave his son B a
3. settle family disputes parcel of land through a deed of donation.
4. relieve donor from administrative burden
Upon A’s death, the CIR contends that the
5. to reward services rendered
6. to provide independent income for transfer should form part of the gross estate
dependents for purposes of estate taxation. Is the CIR
correct?
In GESTOPA V. CA [OCTOBER 5, 2000], the Supreme
Court enumerated some indications that the transfer Yes. Since the recipient of the property, the son, is a
was a donation inter vivos, to wit: forced heir, the presumption is that such transfer
was made in contemplation of death. Thus, the
1. Property was donated out of love and transfer should form part of the gross estate. (see
affection DIZON V POSADAS [NOVEMBER 4, 1933])
2. When a reservation on the donation is made
only with respect to the right of usufruct Q: During his lifetime, Father Z donated
which denotes naked ownership was some of his property to A, B, C on the
already transferred condition that they provide him rice and
3. When the transferors retained sufficient money every year. Father Z died. The CIR
property only for the purpose of maintaining contends that the transfers should form part
their status in life, thereby implying that it of the gross estate of Father Z. Is the CIR
was alright to part with the property even
correct?
during the transferor’s lifetime
4. Donee accepted the donation since in a
No. In donations inter vivos, as in the present case,
donation mortis causa acceptance is not
the donees acquired the right to the property while
required.
the donor was still alive, subject only to their
acceptance and the condition that they pay the
Q: A donated parcels of land to X, Y, and Z. donor rice and/or money. (see ZAPANTA V. POSADAS
A died without any forced heir. In her well, [DECEMBER 29, 1928])
she bequeathed personal property to X, Y,

Recovable Transfers Proceeds of Life Insurance

Read Section 85(C) Read Section 85(E)
Q: What is a revocable transfer? Q: When shall proceeds of the life insurance

of the decedent form part of his gross
A revocable transfer is a transfer where the estate?
transferor has reserved his right to alter, amend or
revoke such transfer, regardless of whether the They shall form part of the gross estate if the
power is actually exercised or not during his lifetime beneficiary is:
and whether the power should be exercised by him
alone or in conjunction with someone else. To the 1. The estate of the deceased, his executor or
extent of any interest therein, it forms part of the administrator, irrespective of whether the
gross estate of the decedent. insured retained the power of revocation
2. Any beneficiary (third person) designated in
Property under General Power of the policy as revocable
Appointment
Note: (1) If the policy expressly stipulates that the
Read Section 85(D) designation of the beneficiary is irrevocable, then the
amount of the proceeds shall not be included in the gross
estate.
Q: Differentiate the estate tax treatment of
property passing under a general power of (2) It is revocable when the beneficiary may still be
appointment and one under a special power changed and the decedent has still retained interest in the
of appointment. policy. It is irrevocable when the beneficiary may no longer
be changed as they have acquired a vested interest. For
third persons whose designations are irrevocable, the
Kind of Nature Tax Treatment
proceeds of life insurance shall not form part of the gross
appointment estate. If it is revocable, it shall form part of the gross
estate.
General Donor gives the Shall form part
donee the power of the gross Transfers for Insufficient Consideration
to appoint any estate
person as Read Section 85(G)
successor to
enjoy the
Q: What are transfers for insufficient
property.
consideration?
Special Donor gives the Shall not form
Transfers for insufficient consideration are those
donee the power part of the
transfers that are not bona fide sales of property for
to appoint a gross estate
an adequate and full consideration in money or
person within a
money’s worth.
limited group to
succeed in the
The excess of the fair market value at the time of the
enjoyment of the
death over the value of the consideration received
property
by the decedent shall form part of his gross estate.
Note: (1) The rule on transfer for insufficient

consideration applies to (a) Transfers in contemplation of
death (b) Revocable transfers and (c) Transfers under
general power of appointment.
(2) As a numerical example –

Note: Nonresident aliens cannot avail of the special

Example 1 Example 2 deductions.
FMV at time of transfer 100 100
FMV at time of death 200 200 Expenses, losses, indebtedness, taxes, etc
Consideration received 70 100 (ELIT)
at time of transfer
Amount included in 30 0 Read Section 86(A)(1)
estate
In determining whether there was sufficient consideration,

Funeral expenses
compare the FMV of the property at the time of the
transfer with the amount of consideration received at the Q: What the conditions for the deductibility
time of the transfer. However, the amount to be included in of funeral expenses?
the estate is computed by taking the difference between
the FMV of the property at the time of death and the
1. Whether paid or unpaid
amount of consideration received at the time of transfer.
2. Up to the time of interment
Example 1: Since the property was sold for 30 less than its 3. The actual amount or in an amount equal to
FMV at the time of the transfer, there is insufficient 5% of the gross estate, whichever is lower,
consideration. Hence, the difference between the but in no case to exceed P200,000
consideration received and the FMV at time of death shall
form part of the gross estate. Note: (1) Actual funeral expenses shall mean those which
are actually incurred in connection with the interment or
Example 2: This is not a transfer for insufficient burial of the deceased. The expenses must be duly
consideration, hence, it shall not form part of the gross supported by receipts or invoices or other evidence to
estate. This is a bona fide sale for an adequate and full show that they were actually incurred.
consideration in money’s worth.
(2) The amount in excess of the P200,000 threshold shall
--------------------------------------------------------------- not be allowed as a deduction nor will it be allowed to be
11. Deductions from estate claimed as a deduction under “claims against the estate.
---------------------------------------------------------------
Q: A died leaving an estate valued at
Q: Enumerate the deductions from the gross P20,000,000. His heirs spent P500,000 for all
estate. the funeral services. How much should be
allowed as a deduction?
The deductions from the gross estate are:
The amount deductible is only P200,000. To
1. Ordinary deductions determine amount deductible, compare P500,000
a. Expenses, losses, indebtedness, taxes, and P1,000,000 (5% of P20 million). The lower
etc (ELIT) amount is P500,000. However, it is beyond the
i. Funeral expenses P200,000 threshold. Thus, only P200,000 will be
ii. Judicial expenses allowed as a deduction.
iii. Claims against the estate
iv. Claims against insolvent persons
v. Unpaid mortgage or indebtedness Q: Give some examples of funeral expenses
on property that are deductible
vi. Taxes
vii. Losses 1. The mourning apparel of the surviving
b. Vanishing Deduction spouse and unmarried minor children of the
c. Transfer for public use deceased, bought and used on the occasion
2. Special deductions (FSMA) of the burial
a. Family home 2. Expenses for the deceased’s wake,
b. Standard deduction including food and drinks
c. Medical expenses 3. Publication charges for death notices;
d. Amount received by heir under RA 4917 4. Telecommunication expenses incurred in
informing relatives of the deceased;

5. Cost of burial plot, tombstones, monument Q: Give some examples of judicial expenses
or mausoleum but not their upkeep. In case
the deceased owns a family estate or Judicial expenses may include:
several burial lots, only the value
corresponding to the plot where he is buried 1. Fees of executor or administrator;
is deductible; 2. Attorney’s fees;
6. interment and/or cremation fees and 3. Court fees;
charges; and 4. Accountant’s fees;
7. All other expenses incurred for the 5. Appraiser’s fees;
performance of the rites and ceremonies 6. Clerk hire;
incident to interment. (See RR 2-2003 7. Costs of preserving and distributing the
[December 16, 2002]) estate;
8. Costs of storing or maintaining property of
Q: Give some examples of funeral expenses the estate; and
that are not deductible 9. Brokerage fees for selling property of the
estate. (RR 2-2003)
1. Expenses incurred after the interment, such
as for prayers, masses, entertainment, or In CIR V. CA AND PAJONAR [M ARCH 22, 2000], the
the like. Supreme Court held that expenses incurred in the
2. Any portion of the funeral and burial extrajudicial settlement of the estate should be
expenses borne or defrayed by relatives and allowed as a deduction from the gross estate. It is
friends of the deceased. sufficient that the expense be a necessary
3. Medical expenses as of the last illness (See contribution toward the settlement of the estate. The
RR 2-2003 [December 16, 2002]) notarial fee paid for the extrajudicial settlement is
deductible since such settlement effected a
Note: As to (3) – This should instead be claimed as part of distribution of the decedent’s estate to his lawful
the deduction for “medical expenses”. heirs. The attorney’s fees in the guardianship
proceedings of the insane deceased is also
Judicial expenses deductible as it essential to the proper settlement of
the estate, to preserve the properties of the
Q: What are the requisites for the deceased.
deductibility of judicial expenses?
In Lorenzo v. Posadas [June 18, 1937], the
Judicial expenses to be deductible Supreme Court held that compensation of the
trustee earned, not in the administration of the
1. Must be incurred during the settlement of estate, but in the management thereof for the benefit
the estate but not beyond the last day of the legatees or devisees, does not come within
prescribed by law (within 6 months from the the class or reason for exempting administration
date of death of the decedent) or the expenses. Service rendered in behalf that behalf has
extension thereof (in meritorious cases, the no reference to closing the estate for the purpose of
CIR may grant reasonable extension not a distribution thereof to those entitled to it, and is not
exceeding 30 days) for the filing of the required or essential to the perfection of the rights of
estate tax return. the heirs or legatees.
In De Guzman v. De Guzman-Carillo [May 18,

2. The judicial expenses are incurred in: 1978], the Court allowed the following expenses as
proper expenses for administration of the estate of
a. Inventory-taking of assets comprising the deceased: expenses for the renovation and
the gross estate improvement of the family home, expenses for the
b. Administration lawyer’s subsistence and physician of the deceased
c. Payment of debts of the estate during his last illness, and irrigation fees. However,
d. The distribution of the estate among the expenses which inured to the benefit of only one heir
heirs (RR 2-2003) were not allowed. Further, the expenses for
stenographic notes, and celebration of the one year

death anniversary were not allowed as they had any legislative intent in our tax laws, which
nothing to do with the administration of the estate. disregards the date-of-death valuation principle
which is the US rule on deductions. The amount
Claims against the estate deductible is the debt which could have been
enforced against the deceased in his lifetime,
Q: What are claims against the estate? nothing more and nothing less (DIZON V. CIR [APRIL
30, 2008])
These are debts or demands of pecuniary nature
Note: In sum, post-death developments should not be
which could have been enforced against the considered in determining the net value of the estate
deceased in his lifetime and could have been
reduced to simple money judgments. It may arise
Q: What are the requirements to substantial
out of:
the claims?
1. Contract
2. Tort In case of a. Instrument must be duly
3. Operation of law simple loan notarized
b. Duly notarized Certification
from the creditor
c. Proof of financial capacity of the
of claims against the estate? creditor to lend;
d. Statement under oath executed
1. Must be a personal obligation of the by the executor/administrator of
deceased existing at the time of his death the estate reflecting the
except those incurred incident to his death disposition of the proceeds of
or those medical expenses the loan (if the loan was
2. Liability must have been contracted in good contracted within 3 years prior
faith to the death of the decedent)
3. The claim must be a debt or claim which is
valid in law and enforceable in court
In unpaid a. Pertinent documents
4. Indebtedness not condoned by the creditor
obligation evidencing the purchase of
or the action to collect from the decedent
arose from goods or service
must not have prescribed purchase of b. Duly notarized Certification
goods or from the creditor as to the
Q: There were claims against the estate of services unpaid balance of the debt,
the deceased which allegedly exceed the including interest as of the time
gross estate which resulted in the of death;
administrator reporting no estate tax c. Certified true copy of the latest
liability. The BIR contested the amounts of audited balance sheet of the
the claims against the estate deductions creditor
stating that lower amounts were paid as
compromise payments during the
settlement of the estate and these amounts
should be what will be considered in Claims against insolvent persons
arriving at the net estate. Will the
compromise amounts be the amounts Q: What are the requisites for claims against
considered as deductions to the gross insolvent persons to be deductible?
estate?
1. The amount has been initially included as
part of the gross estate; and
No, the deduction allowable is that amount
2. The incapacity of the debtors to pay their
determined at the time of death. Post-death
obligations is proven, not merely alleged.
developments are not material in determining the
amount of deduction, especially for the claims
against the estate deduction. There is no law, nor

Unpaid mortgage or indebtedness on Losses

property
Q: What are the requisites for losses to be
Q: What are the requisites for unpaid deductible from the gross estate?
mortgages to be allowed as a deduction?
Losses are deductible:
1. The FMV of the property mortgaged without 1. were incurred during the settlement of the estate
deducting the indebtedness has been 2. arose from fires, storms, shipwreck or other
initially included as part of the gross estate; casualties or from robbery, theft or
and embezzlement
2. The mortgage indebtedness was contracted 3. are not compensable
in good faith and for an adequate and full 4. are not claimed as deduction for income tax
consideration in money/money’s worth. purposes
5. were incurred not later than the last day for
payment of the estate tax
Taxes
Vanishing Deduction
Q: What are the requisites for unpaid taxes
to be deductible? Read Section 86(A)(2), Tax Code
1. Taxes which have accrued as of or before Q: What is a vanishing deduction?

the death of the decedent; and
2. Unpaid as of the time of his death, A vanishing deduction is a deduction allowed on the
regardless of whether or not it was incurred property left behind by the decedent which he had
in connection with trade or business acquired previously by inheritance or donation
Note: This deduction will not include: (1) income tax upon Note: The rationale is to minimize the effects of double
income received after death, or (2) property taxes not taxation on the same property within a short period of
accrued before his death, or (3) the estate tax due from time; the law allows a deduction to be claimed on the said
the transmission of his/her estate. These shall be property.
chargeable against the income of the estate because it
accrued after the death of the decedent. Q: What are the conditions for the
deductibility of property previously taxed or
Q: Are claims for taxes against the estate vanishing deduction?
not filed in time barred forever?
1. Death
No. As a general rule, all claims for money against 2. Identity of property (the property with
the decedent, arising from contracts, express or respect to which deduction is sought can be
implied, whether the same be due, not due, or identified as the one received from the prior
contingent, all claims for funeral expenses and decedent)
expenses for the last sickness of the decedent, and 3. Inclusion of the property (the property must
judgment for money against the decedent, must be form part of the gross estate situated in the
filed within the time limited in they notice; otherwise Philippines of the prior decedent or was a
they are barred forever. taxable gift of the donor)
4. Previous taxation of property (Estate tax or
However, as an exception, taxes assessed against donor’s tax due thereon must have been
the estate of a deceased person need not be paid)
submitted to the committee on claims in the ordinary 5. No vanishing deduction on the property was
course of administration. They may be collected allowed to the estate of the prior decedent
even after the distribution of the decedent’s estate
among his heirs who shall be liable therefore in
proportion of their share in the inheritance. (Vera v.
Fernandez [March 30, 1979])

Q: What are the conditions for the 2. The total value of the family home must be
deductibility of property previously taxed or included as part of the gross estate
3. Allowable deduction must be in an amount
vanishing deduction? equivalent to:
a. the current FMV of the family home as
1. Determine the FMV of the PPT at the time of declared or included in the gross estate or
the prior decedent’s death and the FMV at b. the extent of the decedent’s interest
the time of the present decedent’s death (whether conjugal/community or exclusive
then get the lower of these two amounts property), whichever is lower
2. Prorate: 4. The deduction not exceed Php 1,000,000.
Standard deduction
Read Section 86(A)(5)

Note: Total deductions do not include the special
deductions (FSMA)
3. Subtract 2 from 1 Q: What is the standard deduction?

4. Apply the rate of vanishing deduction to 3
above. The standard deduction shall be Php 1,000,000
without need of substantiation.
Note: Let us have a numerical example. In 2000, A
inherits a land valued at P500,000. In 2003, A died with
the said land having a value of P600,000. His gross estate Medical expenses
amounted to P2 million. His allowable deductions
amounted to P400,000 Read Section 86(A)(6)
500,000 – ( Q: What are the requisites for deductibility
of medical expenses?
= 400,000 1. The expenses were incurred by the decedent
= 400,000 x 60% = P240,000 within 1 year prior to his death
2. The expenses are duly substantiated with
Transfer for public use receipts
3. The deductible expense shall not exceed Php
500,000
Note: The amounts of medical expenses incurred in
Q: What are allowed deductions as excess of P500,000 shall no longer be allowed as a
Transfers for Public Use? deduction for medical expenses. Neither can any unpaid
amount thereof in excess of the P500,000 threshold nor
The deduction on transfers for public purpose refers any unpaid amount for medical expenses incurred prior to
the one-year period from date of death be allowed to be
to the amount of all bequests, legacies, devises, or
deducted from the gross estate as claim against the estate
transfers to or for the use of the Government or any (see Section 6, RR 2-2003)
political subdivision thereof, for exclusively public
purposes,
Amount received by heir under RA 4917
Family home Read Section 86(A)(7), Tax Code
Read Section 86(A)(4), Tax Code Q: Discuss the deductibility of amounts
received by heirs under RA 4917.
of a family home? Amounts received from the decedent’s employer as
a consequence of the death of the decedent-
1. The family home must be the actual residential employee as retirements benefits under RA 4917
home of the decedent and his family at the time (An Act Providing that Retirement Benefits of
of his death as certified by the barangay captain
Employees of Private Firms shall not be subject to

any Tax whatsoever) is allowed as a deduction 2. Special deductions

provided that the amount of benefit is included in the (FSMA)
gross estate. a. Family home
b. Standard
Net share of the Surviving Spouse deduction
c. Medical
Read Section 86(C), Tax Code expenses
d. Amount
received by heir
Deductions allowed to Non-Resident Estate under RA 4917
3. Share in conjugal
Read Section 86(B) to (D), Tax Code property
---------------------------------------------------------------
Q: What may be deducted from the gross 12. Exclusions from estate
estate of non-resident aliens? ---------------------------------------------------------------
Citizen or Resident Non-resident alien Q: What are the exclusion from the gross
Alien Decedents decedents estate?
Gross Estate - all Gross Estate – includes 1. The capital (exclusive property) of he
property at the time of only that part of the gross surviving spouse is considered as an
death, wherever estate located in the exclusion in the gross estate under Section
situated. Philippines 85(H) of the Tax Code
Note: Under Section 86(C), the share of the

Deductions: Deductions: surviving spouse n the absolute
1. Ordinary deductions 1. Ordinary deductions community/conjugal partnership is considered as
a. Expenses, 2. Share in conjugal a deduction
losses, property
indebtedness, 2. Other items which are excluded:
taxes, etc Note: (1) Non-resident alien a. GSIS proceeds/benefits
(ELIT) decedent cannot avail of b. Accruals from SSS
i. Funeral special deductions. c. Proceeds of life insurance where the
expenses (2) No deduction shall be beneficiary is irrevocably appointed
allowed unless the executor, d. Proceeds of life insurance under a
ii. Judicial administrator, or anyone of
expenses group insurance taken by employer (not
the heirs as the case may be
iii. Claims includes in the estate tax taken out upon his life)
against the return of the decedent, the e. War damage payments
estate value at the time of his death f. Transfer by way of bona fide sales
iv. Claims that part of the gross estate g. Transfer of property to the government
against of the non-resident not or to any of its political subdivisions
insolvent situated in the Philippines h. Merger or usufruct in the owner of the
persons (Section 86(D), Tax Code) naked title
v. Unpaid i. Properties held in trust by the decedent
mortgage or j. Acquisition and/or transfer expressly
indebtedness declared as not taxable
on property
vi. Taxes ---------------------------------------------------------------
vii. Losses 13. Tax credit for estate taxes paid in a
b. Vanishing foreign country
Deduction ---------------------------------------------------------------
c. Transfer for
public use

Read Section 86(E), Tax Code Q: What are the acquisitions and transfers
expressly declared as exempt?
Note: It is a remedy against international double taxation.
to minimize the onerous effect of taxing the same property 1. Merger of the usufruct in the owner of the
twice, tax credit against Philippine estate tax is allowed for naked property
estate taxes paid to foreign countries. 2. Transmission or delivery of the inheritance
or legacy by the fiduciary heirs or legatee to
Q: Who may avail of tax credit? the fideicomissary
3. Transmission from the first heirs, legatees or
1. Citizen donees in favor of another beneficiary in
2. Resident alien accordance with the desire of the testator
4. All bequests, devises, legacies or transfers
to social welfare, cultural and charitable
Q: What is the amount allowable as a Tax institutions, no part of the income of which
Credit? inures to the benefit of any individual,
provided that not more than 30% of the said
The estate tax imposed by the Philippines shall be bequests, devises, legacies or transfers
credited with the amounts of an estate tax imposed shall be used for administrative purposes
by the authority of a foreign country.
Note: The bequest, devises, legacies, or transfers does
However, the amount of tax credit is subject to the not include those made to educational institutions.
following limitations:
Now, I want to show how we compute estate tax due and
1. Per country basis: The amount of the credit payable.
in respect to the tax paid to any country shall
not exceed the same proportion of the tax Q: How is estate tax computed?
against which such credit is taken which the
decedent’s net estate situated within such 1. List down all the common (conjugal or
country taxable under the NIRC bears to his community) property
entire net estate. 2. List down all the separate or exclusive
property of the decedent (exclude the
Note: To best illustrate: separate or exclusive property of the
surviving spouse)
3. Include the family home either in (a) or (b),
depending on the status of the house and lot
4. The resulting total is the gross estate
2. Overall basis: The total amount of the credit 5. Deduct the appropriate deductions
shall not exceed the same proportion of the 6. The resulting balance is the net estate
tax against which such credit is taken, which 7. Deduct the special deductions: (1) share of
the decedent’s net estate situated outside the surviving spouse (1/2) of the net
the Philippines taxable under the NIRC common properties and (2) family home
bears to his entire net estate. 8. The resulting balance is the taxable net
estate
Note: To best illustrate: 9. Compute the estate tax using the graduated
estate tax rates
10. Deduct any tax credits
11. The resulting balance is the estate tax due
and payable
---------------------------------------------------------------
14. Exemption of certain acquisitions and
transmissions
---------------------------------------------------------------

Note: To best illustrate or registerable property such as real

property, motor vehicle, shares of stock or
Conjugal community property other similar property for which a clearance
+ Separate property of decedent from the BIR is required as a condition
= Gross Estate
precedent for the transfer of ownership
thereof in the name of the transferee.
Less: Allowable deductions, conjugal/community
deductions, separate/exclusive deductions Q: When should the estate tax return be
filed?
= Net Estate
General Rule: Within 6 months from the death of
Less: Special deductions
decedent
= Taxable Net Estate
Multiplied by estate tax (per graduated rates) Exceptions: The CIR, in meritorious cases, grant an
extension not exceeding 30 days for filing the return.
Less: Tax Credits
Other Administrative Requirements
= Estate Tax due and payable
--------------------------------------------------------------- Read Section 91-97, Tax Code

15. Filing of notice of death
--------------------------------------------------------------- Q: When should the estate tax be paid?
Read Section 89, Tax Code General Rule: At the time the return is filed by the
executor, administrator or the heirs
Q: When is notice of death required to be Exception: The CIR, if he finds that the payment on
given to the BIR? the due date would impose undue hardship, may
grant an extension of:
1. In all cases of transfers subject to tax; or 1. Not to exceed 5 years in case the estate is
2. Where, though exempt from tax, the gross settled judicially
value of the estate exceeds P20,000 2. Not to exceed 2 years in case the estate is
settled extrajudicially
Q: If required, when shall the notice of death
be given? Q: Who is liable for the payment of the
estate tax?
1. Within 2 months after the death of the
decedent; or The estate tax imposed under the Tax Code shall be
2. Within a like period after the executor or
paid by the executor or administrator before the
administrator or executor qualifies as such. delivery of the distributive share in the inheritance to
any heir or beneficiary.
---------------------------------------------------------------
In CIR V. GONZALES [NOVEMBER 24, 1966], the
16. Estate Tax Return
Supreme Court held that estate taxes are satisfied
-------------------------------------------------------------- from the estate and are to be paid by the executor or
administrator. Where there are 2 or more executors,
Read Section 90, Tax Code all of them are severally liable for the payment of the
estate tax. Failure to pay the estate taxes before
Q: When is an estate tax return required? distribution of the estate would subject the executor
or administrator to criminal liability. It is immaterial
1. When the estate is subject to estate tax that an heir administers only 1/3 of the estate and
2. When, though exempt from tax, the gross will receive as her share only said portion, for her
value of the estate exceeds Php 200,000 right to the estate comes after taxes. As an
3. Regardless of the gross value of the estate administratrix, she is liable for the entire estate tax.
when the said estate consists of registered As an heir, she is liable for the entire inheritance tax

although her liability would not exceed the amount of the pertinent remedial laws that implies the
her share in the estate. necessity of the probate or estate settlement court's
approval of the state's claim for estate taxes, before
Q: May estate tax be collected even after the the same can be enforced and collected.
distribution to the heirs?
Q: What is the duty of a bank in case of the
Yes. As held in GOVERNMENT V. PAMINTUAN death of a decedent-depositor?
[OCTOBER 11, 1930], a claim for taxes and
assessments whether assessed before or after the General Rule: If a bank has knowledge of the death of a
death of the decedent, is not required to be person, who maintained a bank deposit account alone, or
jointly with another, it shall not allow any withdrawal from
presented to the committee on claims and the said deposit account, unless the Commissioner has
appraisals. The Heirs are liable for the deficiency certified that the estate taxes imposed thereon have been
income taxes, in proportion to their share in the paid.
inheritance.
Exception: The administrator of the estate or any one (1)
As held in CIR V. PINEDA [SEPTEMBER 15, 1967], an of the heirs of the decedent may, upon authorization by
heir is individually answerable for the part of the tax the Commissioner, withdraw an amount not exceeding
proportionate to the share he received from the Twenty thousand pesos (P20,000) without the said
inheritance. His liability, however, cannot exceed the certification.
amount of his share. On the other hand, a holder of
property belonging to the estate is liable for the tax Q: A died and B (wife) tried to withdraw the
up to the amount of the property in his possession. joint savings deposit they maintained at the
PNB Tarlac but failed because C, who
Q: How can the BIR recover such unpaid tax claimed to be the couple’s adopted child,
liabilities? objected thereto. C claims that B cannot
withdraw any amount from the bank account
The BIR can recover in 2 ways: because she should follow legal procedures
1. It may recover said liability from all the heirs governing settlement of the estate of a
who shall share proportionately; or deceased, unless a competent court issues
2. It may go against the property held by an an order allowing her to withdraw invoking
heir if the same is sufficient to cover the Section 97 of the Tax Code. Can the money
whole tax liability (in which case, the heir be released to B?
who paid can seek reimbursement from
his/her co-heirs) CIR V. PINEDA [SEPTEMBER No. Section 97 of the National Internal Revenue
15, 1967] Code states: “If a bank has knowledge of the
death of a person, who maintained a bank deposit
Note: In both instances, the respective heirs may not be account alone, or jointly with another, it shall not
held accountable for more than the share he/she inherited. allow any withdrawal from the said deposit account
unless the Commissioner had certified that the taxes
Q: Is the approval of the probate court or the imposed thereon by this Title have been
court settling the estate of the decedent a paid; Provided, however, That the administrator of
mandatory requirement in the collection of the estate or any one (1) of the heirs of the decedent
the estate tax? may, upon authorization by the Commissioner,
withdraw an amount not exceeding Twenty thousand
No. As held in M ARCOS II V. CA [JUNE 5, 1997], it is pesos (P20,000) without the said certification. For
discernible that the approval of the court, sitting in this purpose, all withdrawal slips shall contain a
probate, or as a settlement tribunal over the statement to the effect that all of the joint depositors
deceased is not a mandatory requirement in the are still living at the time of withdrawal by any one of
collection of estate taxes. It cannot therefore be the joint depositors and such statement shall be
argued that the Tax Bureau erred in proceeding with under oath by the said depositors.” (POLIDO V. CA
the levying and sale of the properties allegedly [JULY 10, 2007])
owned by the late President, on the ground that it
was required to seek first the probate court's
sanction. There is nothing in the Tax Code, and in

---------------------------------------------------------- Note: Its purpose is to complement estate taxation by

preventing tax-free depletion of the transferor’s estate
C. DONOR’S TAX during his lifetime.
----------------------------------------------------------
---------------------------------------------------------------
--------------------------------------------------------------- 3. Nature
1. Basic Principles ---------------------------------------------------------------
---------------------------------------------------------------
Q: What is the nature of a donor’s tax?
Read Section 98
It is an excise tax on the privilege of the donor to
Q: What donations are covered by the give or on the transfer of property by way of gift inter
donor’s tax? vivos. It is not a property tax (Lladoc v. CIR [14
SCRA 292])
The donor’s tax is imposed only on donaitons inter
vivos. Donations mortis causa partake of the nature ---------------------------------------------------------------
of testamentary dispositions are subject to estate tax 4. Purpose or object
---------------------------------------------------------------
In the case of Gestopa v CA [October 5, 2000], the
Supreme Court held that the donation of the Q: What are the purposes for the imposition
deceased spouses to their illegitimate daughter was of donor’s tax?
a donation inter vivos. The spouses executed the
deed out of love and affection for the donee, which 1. To raise revenues
is a mark of a donation inter vivos. The donor 2. To tax the wealthy and reduce certain other
reserved sufficient properties for their maintenance excise taxes
in accord with their standing in society, indicating the 3. To discourage inter vivos transfers of
donor intended to part with the property donated. property which could reduce the mortis
And, the donee accepted the donation, which is only causa transfers on which a higher tax, the
required in donations inter vivos. estate tax would be collected
4. It will tend to reduce the incentive to make
Q: When is donor’s tax imposed? gifts in order that distribution of future
income from the donated property may be to
Donor’s tax is imposed upon the transfer by any a number of persons with the result that the
person, resident or non-resident, of any property by taxes imposed by the higher brackets of the
gift. income tax are avoided.
Q: What law governs the imposition of ---------------------------------------------------------------

donor’s tax? 5. Requisites of valid donation
---------------------------------------------------------------
The donor’s tax is governed by the statute in force at
the time of the transfer. Q: What are the requisites of a valid
--------------------------------------------------------------- donation?
2. Definition 1. Capacity of donor
--------------------------------------------------------------- 2. Donative intent (intention to donate)
3. Delivery, whether actual or constructive, of
Q: What is a donor’s tax? the subject gift
4. Acceptance by the done
A donor’s tax is an excise tax imposed on the 5. Form prescribed by law
privilege to transfer property by way of gift inter vivos
based on pure act of liberality without any or less Note: (1) As to (1) – All persons who may contract or
than adequate consideration and without any legal dispose of their property may make a donation (Art. 735,
compulsion to give. NCC). The donor’s capacity shall be determined as of the
time of the making of the donation (Art. 737, NCC).

1. It must be in public document

(2) As to (2) – Donative intent is necessary only in case of 2. The property donated and the value of the
a direct gift. If the gift is indirectly taking place by way of charges which the done must satisfy must
sale, exchange or other transfer of property as be specified
contemplated in cases of transfers for less than adequate
and full consideration (see Section 100, Tax Code),
3. The donee must accept through a deed or
donative intent is not always essential to constitute a gift. similar instrument. (Art. 749, NCC)
(3) As to (3) – There is delivery if the subject matter is Q: What are the requirements for a donation
within the dominion and control of the done to be subject to donor’s tax?
(4) As to (4) – Acceptance is necessary because nobody 1. Property donated is not real property that is
is obliged to receive a gift against his will (OSORIO V.
OSORIO [41 PHIL. 531])
a capital asset
2. The transfer is for less than adequate
Q: ABC Steamship insured the life of A who consideration
3. The transfer is inter vivos
was then its President and General
Manager. He was responsible for the
---------------------------------------------------------------
success of the company for which he was
6. Transfers which may be constituted as
compensated for. The company initially
donation
designated itself as the beneficiary of the
a) Sale/exchange/transfer of property for
policies but, after A’s death, it renounced all
insufficient consideration
its rights, title and interest therein in favor of
b) Condonation/remission of debt
A’s heirs. The CIR subjected the donation to ---------------------------------------------------------------
donor’s tax. The heirs contend that it was a
remuneratory donation on full and adequate
Q: What are considered donations for tax
compensation for the valuable services of A
purposes?
and as such is not subject to donor’s tax. Is
the contention of the heirs correct? 1. Sales, exchanges and other transfers of
property for less than an adequate and full
No. The donation is not remuneratory as A has been consideration in money or money’s worth
fully compensated for his services. A donation made
by the corporation to the heirs of a deceased officer Except: Transfers of real property
out of gratitude for the officer's past services is considered as capital assets which is
considered a donation and is subject to donee's gift subject to CGT.
tax. The fact that his services contributed in a large
measure to the success of the company did not give 2. Condonation or remission of debt where
rise to a recoverable debt, and the conveyances the debtor did not render service in favor of
made by the company to his heirs remain a gift or the creditor
donation. (Pirovano v. CIR [July 31, 1965])
Note: Condonation or remission of a debt would
Q: What are the requisites for a donation of constitute a donation to the extent of the fair
value of the debt condoned or remitted.
a movable to be valid? Therefore, the creditor would be considered a
donor for donor’s tax purposes and would be
1. Donation may be oral or in writing liable for the tax thereon.
2. If oral, the donation must be accompanied
with delivery Q: A sold his lot not used for business tto
3. If value is more than Php 5,000, the his brother B for P500,000 when at that time
donation must be in writing and accepted in
the lot was valued in the market at P1
writing. (Art. 748, NCC)
million. A bought it for P100,000. In addition,
Q: What are the requisites for a donation of A sold some of the shares of his company
an immovable to be valid? ABC Corp to his senior executives. He sold
the ABC Corp shares for P300,000 when the

market value was at P500,000. His original Q: Supposing that instead of a general
cost in the shares is P100,000. Are the sales renunciation, B renounced her hereditary
subject to donor’s tax? share in A’s estate to X who is a special
child, would the renunciation be subject to
The sale of the lot is not subject to donor’s tax as it donor’s tax?
is a real property classified as a capital asset and
such is subject to the 6% CGT. The sale of the Yes, the renunciation in favor of X would be subject
shares, however, are subject to the donor’s tax of to donor’s tax. This is so because the renunciation
30% based on the difference between the selling was specifically and categorically done in favor of X
price and the market value. and identified heir to the exclusion or disadvantage
of Y and Z, the other co-heirs in the hereditary
Q: Creditors A, B and C condoned the debt estate. (Section 11, RR No. 2-2003)
of XYZ Corp pursuant to a court approved
restructuring. Are the creditors liable for Note: Without a source of income or acceptable form of
donor’s tax? acquisition of substantial amount to purchase properties,
the inclusion of the names of minor children in the
certificates of title of properties shall be deemed an
No. The transaction is not subject to donor’s tax implied donation, which is subject to donor’s tax. SPS.
since the condonation was not implemented with a HORDON H. EVONO AND MARIBEL C. EVONO VS. CIR, ET. AL.,
donative intent but only for business consideration. CTA EB NO. 705 (CTA CASE NO. 7573), JUNE 4, 2012
The restructuring was not a result of the mutual
agreement of the debtors and creditors. It was ---------------------------------------------------------------
through court action that the debt rehabilitation plan
7. Transfer for less than adequate and full
was approved and implemented. [BIR Ruling DA
028-2005 [January 24, 2005]) consideration
---------------------------------------------------------------
Q: Whether the transfer of property from the
distressed Asset Asia Pacific, Inc. pursuant Read Section 100
to the Special Purpose Vehicle (SPV) Act of
2002 subject to donor’s tax? Q: When is there a transfer for less than an
adequate and full consideration in money or
No. The transaction above is not a donation. Hence, money’s worth?
it is not subject to donor’s tax. [BIR Ruling No. 109-
2011] Where property, other than real property classified
as capital asset subject to final capital gains tax, is
Note: Thus, if the transfer was made pursuant to law, it is transferred for less than an adequate and full
not subject to donor’s tax. consideration in money or money’s worth, the
amount by which the fair market value of the
Q: A died leaving as his only heirs, his property exceeded the value of the consideration
surviving spouse B, and three minor shall, for purposes of donor’s tax, be deemed a gift.
children, X, Y and Z. Since B does not want Note: (1) The element of donative intent is conclusively
to participate in the distribution of the presumed in transfers of property for less than an
estate, she renounced her hereditary share adequate or full consideration in money or money’s worth.
in the estate. Is the renunciation subject to
donor’s tax? (2) Why is real property, classified as capital asset, that is
transferred for less than an adequate and full
consideration in money or money’s worth not deemed a
No. The general renunciation by an heir, including gift subject to donor’s tax? Well, it is already subject to
the surviving spouse, as in the case of B, of her final capital gains tax, which is 6% of the gross selling
share in the hereditary estate left by the decedent is price of fair market value of the property, whichever is
not subject to donor’s tax. This is so because the higher. So what the seller avoids in the payment of the
general renunciation by B was not specifically and donor’s tax, it pays for in CGT.
categorically done in favor of identified heir/s to the
exclusion or disadvantage of the other co-heirs in Q: As a condition for approving the
the hereditary estate (Section 11, RR No. 2-2003). manufacture by BF Goodrich of tires and

rubber products, the Central Bank required ---------------------------------------------------------------

it to develop a rubber plantation. BF 8. Classification of donor
Goodrich purchased land under the Parity ---------------------------------------------------------------
Amendment. Thereafter, the DOJ rendered
an opinion stating that upon expiration of Q: Who are liable to pay donor’s tax?
the Parity Amendment, ownership rights
over such lands, including right to dispose 1. Resident citizen
or sell them, would be lost. Hence, BF 2. Non-Resident Citizen
3. Resident Alien
Goodrich sold the rubber plantation to
4. Non-Resident Alien
Siltown Realty for a price less than its 5. Domestic Corporation
declared fair market value. The BIR 6. Foreign Corporation
assessed BF Goodrich for deficiency
donor’s tax representing the difference Note: In contrast to estate taxes, a corporation can be
between the fair market value and the actual subject to donor’s tax because it is capable of entering into
purchase price of the property. BIR a contract of donation through the appropriate Board
Resolution.
contended that BF Goodrich filed a false
income return. Did BF Goodrich commit ---------------------------------------------------------------
falsity in its income return? 9. Determination of gross gift
---------------------------------------------------------------
No. It is possible that real property may be sold for
less than adequate consideration for a bona Q: Distinguish Gross Gift from Net Gift
fide business purpose; in such event, the sale
remains an "arm's length" transaction. In this case, Gross Estate Net Estate
Goodrich was compelled to sell the property even at
a price less than its market value, because it would Refers to all property, Means the net economic
have lost all ownership rights over it upon the real or personal, tangible benefit from the transfer
expiration of the parity amendment. In other words, it or intangible, that is that accrues to the done.
was attempting to minimize its losses. At the same given by the donor to the
time, it was able to lease the property for 25 years, done by way of gift,
renewable for another 25. This can be regarded as without the benefit of any
another consideration on the price. deduction.
The fact that Goodrich sold its real property for a
Q: How is gross estate determined?
price less than its declared fair market value did not
by itself justify a finding of false return. Even though
Donor Determination of gross gift
a donor's tax, which is defined as "a tax on the
privilege of transmitting one's property or property
Citizens and Gross gift includes all real
rights to another or others without adequate and full
Resident Aliens properties, tangible and
valuable consideration," is different from capital
intangible personal
gains tax, a tax on the gain from the sale of the
properties wherever located
taxpayer's property forming part of capital
assets, the tax return filed by Goodrich to report its
Non-Resident Gross gift includes all real
income was sufficient compliance with the legal
Aliens properties, tangible, and
requirement to file a return. In other words, the fact
intangible properties located
that the sale transaction may have partly resulted in
in the Philippines unless the
a donation does not change the fact that Goodrich
reciprocity rule applies.
already reported its income by filing an income tax
return. [CIR v. B.F. Goodrich Phils [February 24, Note: In sum, all assets, real or personal, tangible or
1999] intangible given by way of gift wherever located of a
citizen and resident alien is subject to donor’s tax while
for nonresident aliens, donor’s tax is imposed only on
properties located in the Philippines provided in the case

of intangible personal property, it is subject to the rule of schedule of values fixed by the
reciprocity under Section 104 of the Tax Code. provincial and city assessors
(zonal value), whichever is higher.
Same rules as in Estate Taxation. See previous If there is no zonal value, taxable
discussion on intangible properties considered situated in
the Philippines and rule on reciprocity.
base is FMV that appears in the
latest tax declaration.
Q: ABC a multinational corporation doing
For The value of the improvement is
business in the Philippines donated 100
improvements the construction cost per building
shares of stock of said corporation to Mr. Z, permit and/or occupancy permit
its resident manager in the Philippines. plus 10% per year after year of
What is the tax liability, if any, of ABC construction or the FMV per latest
corporation? tax declaration
Foreign corporations effecting a donation are subject to For all other The fair market value at that time
donor’s tax only if the property donated is located in the
properties will be considered the amount of
Philippines. Accordingly, donation of a foreign corporation
of its own shares of stock in favor of resident employees gift
is not subject to donor’s tax.
In GIBBS V. CIR [APRIL 28, 1962], the parents made it
However, if 85% of the business of the foreign corporation appear that they transferred shares of stock in favor
is located in the Philippines or the shares donated have of their children for consideration, but it was found
acquired business situs in the Philippines, the donation out that such was insufficient, and such agreements
may be taxed in the Philippines subject to the rule of were made to evade taxes. The Supreme Court
reciprocity. allowed the CIR to impose taxes for the full value of
the shares of stock, not just the excess of the FMV
--------------------------------------------------------------- over the consideration/price.
10. Composition of gross gift
--------------------------------------------------------------- ---------------------------------------------------------------
12. Tax Credit for donor’s taxes paid in a
Read Section 104, Tax Code foreign country
---------------------------------------------------------------
Q: What is included as part of gross gift?
Read Section 101(C), Tax Code
As a general rule, gross gifts include real and personal
property, whether tangible or intangible or mixed,
Note: See discussion of tax credit under Estate Tax.
wherever situated
Computation of the donor’s tax credit is the same as the
computation for estate tax credit. Just change net estate to
Note: If the donor was a non-resident alien at the time of
net gifts.
the donation, his real and personal property so transferred
but which are situated outside the Philippines shall not be
included as part of gross gift. ---------------------------------------------------------------
13. Exemptions of gifts from donor’s tax
--------------------------------------------------------------- ---------------------------------------------------------------
11. Valuation of gifts made in property
--------------------------------------------------------------- Read Section 101(A) to (B), Tax Code
Note: There are really no deductions from gross gift.
Read Section 102, Tax Code There are only exemptions.
Q: How do we value the gifts subject to Q: Enumerate the exemptions from gross
donor’s tax? gifts (exempt from donor’s tax)
For Real The value shall be based on either 1. Dowries or donations made:
Property (1) the fair market value as a. on account of marriage
determined by the CIR or (2) the b. before its celebration or within one year
fair market value as shown in the thereafter

c. by parents to each of their legitimate, institution, accredited NGO, trust or

recognized natural or adopted children philanthropic organization or research
d. to the extent of the first php10,000 institution or organization to be exempted?
2. Gifts made to or for the use of the national 1. Not more than 30% of the said gift should be
government or any entity created by any of used for administrative purposes
its agencies which is not conducted for 2. The donee must be a non-stock, non-profit
profit, or to any political subdivision of the organization or institution
said government 3. The donee organization or institution should
be governed by trustees who do not receive
3. Gifts in favor of an education and/or any compensation
charitable, religious, cultural or social 4. Said donee devotes all of its income to the
welfare corporation, institution, accredited accomplishment and promotion of its
NGO, trust or philanthropic organization or purposes
research institution or organization provided 5. The NGO must be accredited by the
not more than 30% of said gifts will be used Philippine Council for NGO Certification
by such done for administrative purposes. 6. The donor engaged in business shall give
notice of donation on every donation worth
Q: What exemptions are allowed to non- at least P500,000 to the RDO which has
resident aliens? jurisdiction over his place of business within
30 days after receipt of the qualified donee’s
Non-resident aliens are exempt from donor’s tax with institution’s duly issued Certificate of
respect to (2) and (3) as enumerated above. Donation (RR 2-2003)
Q: In addition to exemptions provided under Q: What are the requisites for a donation
Section 101 of the Tax Code, are there any given to athletes as prize or award to be
other exemptions allowed on gross gift? exempted?
1. Encumbrances on the property donated if The donation must be prize or award given to
assumed by the donee athletes:
2. Donations made to entities exempted under 1. In local and international sports tournaments
special laws (e.g. IBP, IRRI, National and competitions
Museum, National Library) 2. Held in the Philippines or abroad;
3. Amount specifically provided by the donor 3. Sanctioned by their respective national
as a diminution of the property donated. sports associations (RA 7549)
4. Athlete’s Prizes and Awards (see RA 7549)
Note: Remember Section 32(B)(7)(d), Tax Code which
Q: What are the requisites for dowries or provides that all prizes and awards granted to athletes in
gifts made on account of marriage to be local and international competitions and tournaments,
exempted? whether held in the Philippines or abroad, and sanctioned
by their national sports associations are excluded from
1. The gift was made on account of marriage gross income.
2. It was made before or within one year after
the celebration of marriage Read Section 99(C), Tax Code
3. Donor is a parent
4. Donee is a legitimate, recognized natural or Q: Are political contributions considered
adopted child of the donor gifts and therefore liable for donor’s tax?
5. The amount of the gift exempted is only to
the extent of the first P10,000 (per parent, if Under Section 13 of RA 7166, such contributions,
made out of conjugal or community funds) be duly reported to the COMELEC, shall no be
subject to the payment of any gift tax.
Q: What are the requisites for gifts in favor
Note: In Abello v. CIR [February 23, 2005], the Supreme
of an education and/or charitable, religious, Court ruled that the contributions made by certain partners
cultural or social welfare corporation, of the ACCRA law firm to the campaign of Senator

Edgardo Angara constitute as a donation subject to Note: Let’s now discuss how to compute donor’s tax due
donor’s tax. However, this was decided before RA 7166. and payable.
The Court noted that subsequent to the donations involved
in the case, Congress approved RA 7166 on November Read Section 99(A) to (B), Tax Code
25, 1991, providing in Section 13 thereof that
political/electoral contributions, duly reported to the
Commission on Elections, are not subject to the payment Q: What is the basis in computing donor’s
of donor’s tax. RA 7166 provides no retroactive effect. tax?
--------------------------------------------------------------- The tax shall be computed on the basis of the total

14. Person liable net gifts made during the calendar year in
--------------------------------------------------------------- accordance with the graduated donor’s tax rates.
Note: To best illustrate –

In general --
Q: Who are liable for donor’s tax? Gross gifts made

Less: Deductions from the gross gifts
Every person, whether natural or juridical, resident or non- = Net gifts made
resident, who transfers or causes to transfer property by Multiplied by applicable rate
gift, whether in trust or otherwise, whether the gift is direct = Donor’s tax on the net gifts
or indirect and whether the property is real or personal,
tangible or intangible. In other words, the donor is always
liable to pay the donor’s tax. If several gifts were made during the year --
Q: What is the rule for donations made by Gross gifts made

husband and wife? Less: Deductions from the gross gifts
= Net gifts made on this date
Add: all prior net gifts during the year
Husband and wife are considered as separate and = Aggregate net gifts
distinct taxpayer's for purposes of the donor's tax. Multiplied by applicable rate
However, if what was donated is a conjugal or = Donor’s tax on aggregate net gifts
community property and only the husband signed Less: donor’s tax paid on prior net gifts
the deed of donation, there is only one donor for = Donor’s tax payable on the net gifts to date
donor's tax purposes, without prejudice to the right
of the wife to question the validity of the donation In other words, if the donor makes several gifts during the
without her consent pursuant to the pertinent same calendar year, the gifts shall be added on a
provisions of the Civil Code of the Philippines and cumulative basis.
the Family Code of the Philippines. (see RR 2-2003)
Q: What are the rates of tax payable by
In Tang Ho v. Board of Tax Appeals [November donor’s?
19, 1955], the Supreme Court held that a donation
of property belonging to the conjugal partnership, The applicable donor’s tax rate shall depend upon
made during its existence, by the husband alone in the relationship between the donor and the donee.
favor of the common children, is taxable to him
exclusively as sole donor. To be a donation by both If the donee is a The tax rate is 30% of the
spouses, taxable to both, the wife must expressly stranger to the net gifts.
join the husband in making the gift. Her participation donor
cannot be implied. In case a donation was made by
the parents in favor of their children, consisting of If the donee is not The tax for each calendar
cash form the CPG, then only one parent may claim a stranger to the year shall be computed on
the exemption granted by the law. donor the basis of the total net gifts
made during the calendar
--------------------------------------------------------------- year in accordance with the
schedule provided in Section
15. Tax Basis
99(A).
---------------------------------------------------------------

----------------------------------------------------------
Note: This early on I want to make the distinction between
D. VALUE-ADDED TAX an exempt entity (a taxpayer exempt from VAT) and an
---------------------------------------------------------- exempt transaction (a transaction exempt from VAT). The
distinction proceeds from the nature of VAT as an indirect
--------------------------------------------------------------- tax. If the law exempts the statutory taxpayer (aka the
1. Concept seller), this does not mean that the buyer is also exempt.
The VAT can be shifted to the buyer. Also, if the law
--------------------------------------------------------------- exempts the buyer from VAT meaning the seller cannot
pass/shift the VAT to the buyer, this does not mean the
Q: Define Value-Added Tax (VAT). seller is exempt. He must pay the tax. In both cases, the
transaction is not exempt from VAT because someone will
pay. But if the law says the transaction is exempt from
A Value-Added Tax is a tax assessed, levied, and VAT then neither the buyer nor the seller will have to pay
collected on every importation of goods, whether or VAT. That is the distinction. Remember that especially
when we discussed zero-rated, effectively zero-rated and
not in the course of trade or business, or imposed on exempt transactions.
each sale, barter, exchange or lease of goods or
properties or on each rendition of services in the Q: What are VAT-taxable transactions?
course of trade or business as they pass along the
production and distribution chain, the tax being
VAT-taxable transactions are those transactions
limited only to the value added to such goods,
which are subject to VAT either at the rate of 12% or
properties or services by the seller, transferor or
0% and the seller shall be entitled to tax credit for
lessor.
the VAT paid on purchases and leases of goods,
properties, and services. (CIR V. CEBU TOYO
Q: What is the current VAT rate? [FEBRUARY 16, 2005])
The current VAT rate is 12%.
Q: What are the elements of a VAT-taxable
transaction?
---------------------------------------------------------------
2. Characteristics/Elements of a VAT- 1. There must be a sale, barter, exchange or
Taxable Transaction lease in the Philippines
--------------------------------------------------------------- 2. The sale, barter, exchange or lease must be
of taxable goods, properties or services
Q: What are the characteristics of the VAT? 3. The sale must be made by a taxable person
in the course of trade or furtherance of
1. It is a percentage tax imposed at every stage of his/its profession
the distribution process on the sale, barter, or
exchange or lease of goods or properties and on Note: (1) An importation is VAT-taxable whether made in
the performance of service in the course of trade the course of trade or business or not.
or business or on the importation of goods,
whether for business or non-business. Q: What is meant by “in the course of trade
2. It is a business tax levied on certain transactions or business”
involving a wide range of goods, properties and
services, such tax being payable by the seller, In the course of trade or business means the
lessor or transferor. regular conduct or pursuit of a commercial or an
3. It is an excise tax or a tax on the privilege of economic activity including transactions incidental
engaging in the business of selling goods or thereto, by any person regardless of whether or not
services or in the importation of goods the person engaged therein is a non-stock, non-
4. It is an indirect tax, the amount of which may be profit private organization or a government entity.
shifted to or passed on the buyer, transferee or
lessee of the goods, properties or services. Note: Services rendered by non-resident foreign persons
5. It is an ad valorem tax as its amount or rate is shall be considered as being rendered in the course of
based on gross selling price or gross value in trade or business, even if the performance of services is
not regular (Section 4.105-3, RR No. 16-2005)
money or gross receipts derived from the
transaction

(2) Any business where the gross sales or receipts do not reimbursement-of-cost-only” basis and, as
exceed P100,000 during any 12-month period shall be such, the services are not VAT-taxable. Is
considered principally for subsistence or livelihood and not
in the course of trade or business. COMASERCO correct?
(3) Again, an importation is VAT-taxable regardless of No. In CIR V. CA AND COMASERCO [M ARCH 30,
whether made in the course of trade or business or not. 2000] , the Supreme Court opined that VAT is a tax
on transactions imposed at every stage of the
Q: Pursuant to the government’s distribution process on the sale, barter, exchange of
privatization program, NDC decided its goods or property, and on the performance of
shares in the National Marine Corp. and 5 services, even in the absence of profit attributable
vessels. Magsaysay Lines bought the thereto. The definition of the term “in the course of
trade or business” applies to all transactions. Even a
shares and vessels. The CIR contends that
non-stock, non-profit corporation or government
the sale of the 5 vessels is incidental to its entity is liable to pay VAT for the sale of goods and
NDC’s VAT registered activity of leasing out services. In this case, even if the services rendered
personal property and thus VAT-taxable. Is for a fee were on a reimbursement-on-cost
the CIR correct? arrangement and without realizing profit, the
payments are still subject to VAT.
No. In CIR V. M AGSAYSAY LINES [JULY 28, 2006], the
Supreme Court found that any sale, barter or Q: Sony Philippines engaged the services of
exchange of goods or services not in the course of several advertising companies. Due to dire
trade or business is not subject to VAT. In this case, economic conditions, Sony International
the sale of the vessels was an isolated transaction,
Singapore (SIS) gave Sony Philippines a
not done in the ordinary course of NDC’s business
and is thus not subject to VAT. dole-out to pay for said advertising
expenses. Sony Philippines claimed as
Note: In THOMAS C. ONGTENCO VS. CIR, CTA CASE NO. input VAT credits that VAT paid for the
8190, DECEMBER 12, 2012, the CTA held that the advertising expenses. The CIR disallowed
taxpayer’s act of lending money to a corporation, where he this and assessed Sony Philippines
is a director and stockholder cannot be considered as an
act of lending in the course of his trade or business. His
deficiency VAT on the reimbursable
act of lending was not done in the ordinary course of his received by it from SIS. The CIR contends
business or trade but merely an isolated transaction in that the reimbursable was a fee for a VAT-
order to help the company in its provincial expansion taxable activity. Is the CIR correct?
considering that, at that time, it was just starting and was
having difficulties in getting and applying for loans from No. The Supreme Court held in CIR v. SONY
banks. The act of lending was a one-time assistance in his
capacity as stockholder..
PHILIPPINES [NOVEMBER 17, 2010] that Sony
Philippines cannot be deemed to have received the
reimbursable as a fee for a VAT-taxable activity. The
Q: Is the profit element required for VAT to
absence of a sale, barter or exchange of goods or
be imposed? properties supports the non-VAT nature of the
reimbursable. The Supreme Court distinguished this
No. The term “in the course of trade or business” case from CIR V. CA AND COMASERCO [M ARCH 30,
requires the regular conduct or pursuit of a 2000] where even if there was similarly a
commercial or an economic activity, regardless of reimbursement on cost arrangement between
whether or not the entity is profit-oriented. (see CIR affiliates, there was in fact an underlying service.
V. CA AND COMASERCO [M ARCH 30, 2000])
Here, the advertising services were rendered in
favor of Sony Philippines, not SIS.
Q: COMASERCO is a non-stock, non-profit
organization, affiliated with Philamlife and ---------------------------------------------------------------
organized to perform collection, 3. Impact of Tax
consultative or technical services. The BIR 4. Incidence of Tax
assessed COMASERCO for deficiency VAT. ---------------------------------------------------------------
COMASERCO argues that the services
rendered to Philamlife were on a “no-profit,

Note: We discussed this already in General Principles but sales or outputs the VAT paid on its purchases,
let us review. The impact of taxation is the point on which inputs and imports.
a tax is originally imposed. The impact of taxation is on
the seller. The incidence of tax is that point on which the The legal basis can be found in Section 110(A) of
tax burden finally rests or settles down and in most cases,
the incidence is on the final consumer. Because VAT is an
the Tax Code which provides that any input tax
indirect tax, the impact or the tax liability for the payment evidenced by a VAT invoice or official receipt on
of the tax falls on one person but the incidence or burden purchase or importation of goods or for purchase of
thereof can be shifted or passed to another. services shall be creditable against output tax.
--------------------------------------------------------------- Under the VAT method of taxation, which is invoice-

5. Tax Credit Method based, an entity can subtract from the VAT charged
--------------------------------------------------------------- on its sales or outputs the VAT it paid on its
purchases, inputs and imports. (CIR V. SEAGATE
Note: We won’t understand Tax Credit Method if we do TECHNOLOGY [FEBRUARY 11, 2005]).
not define output tax and input tax.
Note: (1) The Tax Credit method is the method used para
malaman mo how much ang babayaran mo na VAT. We
Q: Differentiate “output tax” from “input will talk about this in greater detail sa Determination of
tax” output/input vat. For now, I’ll give you the basics which will
suffice for understanding the succeeding topics.
As differentiated by the Supreme Court in CIR V.
BENGUET CORPORATION [JULY 14, 2006]: As discussed above, the taxpayer determines his tax
liability by computing the tax on the gross selling price or
gross receipt (output tax) and subtracting or crediting the
Input VAT or input tax represents the actual earlier VAT on the purchase or importation of goods or on
payments, costs and expenses incurred by a VAT- the purchase of service (input tax) against the tax due on
registered taxpayer in connection with his purchase his own sale. Gawin nating formula:
of goods and services. Thus, "input tax" means the
value-added tax paid by a VAT-registered
person/entity in the course of his/its trade or
business on the importation of goods or local Okay example. Let’s say seller ka ng wooden furniture.
purchases of goods or services from a VAT- Anong kailangan mo para makagawa ka ng produkto mo?
registered person. Eh di kahoy. Wooden furniture nga diba. So bumili ka ng
kahoy. Yung nagbenta sa iyo binigyan ka ng invoice.
On the other hand, when that person or entity sells Pagtingin mo sa invoice mo naka-indicate yung 12% VAT
his/its products or services, the VAT-registered na binayaran mo sa pagbili mo ng kahoy. Yan ang input
tax mo! So using the kahoy, you made let’s say tables and
taxpayer generally becomes liable for 10% (now
chairs. Eh since ibebenta mo ito, subject ka sa VAT.
12%) of the selling price as output VAT or output Tawag mo dyan output tax. Under the Tax Credit Method,
tax. Hence, "output tax" is the value-added tax on puwede mo ibawas ang 12% na binayaran mo sa pagbili
the sale of taxable goods or services by any person ng kahoy doon sa babayaran mo na 12%VAT sa pagbenta
registered or required to register under the Tax mo ng final product mo, yung tables and chairs. Because
Code. of that nabawasan mo ang VAT liability mo.
Otherwise stated, output tax is the VAT due on the (2) As explained in ABAKADA GURO PARTY LIST V. ERMITA
sale or lease or taxable goods, properties or [SEPTEMBER 1, 2005], the VAT system was previously a
services by an VAT-registered person. On the other single stage system under a “cost deduction method” and
was payable only by the original sellers. Now, the VAT
hand, input tax is the VAT due on or paid by a VAT-
system is a multi-stage system – a mixture of the cost
registered person on importation of good or local deduction method and the tax credit method.
purchases of goods or services, including lease or
use of properties, in the course of his trade or
business.
Q: What is the tax credit method?
Under the tax credit method, an entity can credit

against or subtract from the VAT charged on its

--------------------------------------------------------------- Note: RR 16-2011 [October 27, 2011] increased the

6. Destination Principle threshold amounts for sale of residential lot, sale of house
and lot, lease of residential unit and sale or lease of goods
--------------------------------------------------------------- or properties or performance of services covered by
Section 109(P), (Q) and (V) of the Tax Code. These are
Q: What is the destination principle (cross- the changes:
border doctrine)?
Section Amount in Adjusted
As a general rule, the value-added tax (VAT) system Pesos (2005) amounts
uses the destination principle. It means that the Section 109(P) 1,500,000 1,919,500
destination of the goods determines the taxation or Section 109(P) 2,500,000 3,199,200
exemption from VAT. Goods and services are taxed Section 109(Q) 10,000 12,800
only in the country where they are consumed. Section 109(V) 1,500,000 1,919,500
Note: (1) This is the reason why export sales of goods are I suggest you update your codal with these adjusted
subject 0% while importations of goods are subject to amounts. Importante yan lalo na when we talk about
12%. Exported goods will be consumed in wherever exempt transactions.
country it is exported so it is zero-rated. On the other ---------------------------------------------------------------
hand, we consume imported goods here in the Philippines
that is why it is subject to 12% VAT.
8. VAT on sale of goods or properties
a) Requisites of taxability of sale of goods
(2) In the case of services, consumption takes place or properties
where the service is performed. Note, however, na may ---------------------------------------------------------------
exception to the destination principle when it comes to
sale of services. Although the services are performed in
the Philippines, there are certain sales of services that are
zero-rated. We will discuss this later when we get to
Section 108(B) or zero-rated sales of services. Q: What are considered as “goods or
--------------------------------------------------------------- properties” for VAT purposes?
7. Persons liable
--------------------------------------------------------------- All tangible and intangible objects which are capable
of pecuniary estimation, including:
1. Real properties held primarily for sale to
customers or held for lease in the ordinary
course of business
Q: In general, who are liable to pay the VAT?
2. The right or privilege to use patent, copyright,
design or model, plan, secret formula or
1. Any person who, in the course of trade or
process, good will, trademark, trade brand, or
business, sells, barters, exchanges or leases
other like property or right
goods or properties, or renders services
3. The right or privilege to use in the Philippines of
any industrial, commercial or scientific
Except: A person, whether or not VAT-
equipment
registered, whose annual gross sales or receipts
1 4. The right or the privilege to use motion picture
does not exceed P1,919,500.
files, films tapes and discs
5. Radio, television, satellite transmission and
2. Any person who imports goods, whether in the
cable television line (see SECTION 106(A)(1), TAX
course of trade or business or not.
CODE)
(see SECTION 105, TAX CODE, SECTION 4.105-1, RR
16-2005) Q: What is the tax base of VAT on sale of
goods or properties?
The 12% VAT is based on the gross selling price

(GSP) or gross value in money of the taxable goods
1
If the annual gross sales or receipts does not exceed or properties sold, bartered or exchanged.
P1,919,500, he shall be liable instead for the 3% percentage tax
on small business enterprises (see Section 116, Tax Code).

For goods and The total amount of exchange of goods or including dacion en
properties other than money or its equivalent properties for a pago, barter or
real properties which the purchaser valuable exchange,
pays or is obligated to consideration assignment, transfer
pay to the seller in 2. The sale is or conveyance, or
consideration of the sale, undertaken in the merely contract to
barter or exchange of course of trade or sell involving real
the goods or properties business or exercise property
excluding the VAT. Any of profession in the 2. The real property is
excise tax, if any, on Philippines located in the
such goods or properties 3. The goods or Philippines
shall form part of the properties are located 3. The seller or
GSP within the Philippines transferor is
and are for use or engaged in real
Note: If the consideration of consumption therein estate business
a sale is not wholly in 4. The sale is not either as a real
money as in a part- exempt from VAT estate dealer,
exchange or barter under Section 109 of developer or lessor
transaction, the base is the
price that would have been
the Tax Code, special 4. The real property is
charged in an open market law or international held primarily for
sale for purely monetary agreement binding sale or for lease in
consideration. upon the government the ordinary course
of the Philippines. of his trade or
In case of real property The gross selling price business
shall mean the Note: (1) The absence of 5. The sale is not
consideration stated in any of the above requisites exempt from VAT
the sales document or exempts the transaction under Section 109,
2 from VAT. However, special law or
the fair market value, percentage taxes may
whichever is higher. apply. Actually, the annual
international
gross sales or receipts agreement binding
must exceed P1,199,500. upon the
(see SECTION 4.106-4, RR 16-2005 [SEPTEMBER 1, Otherwise, it is subject to government of the
2005]) the 3% percentage tax on Philippines.
small business enterprises. 6. The threshold
Note: If the VAT is not billed separately, the selling price amount set by the
stated in the sales document shall be deemed to be (2) We can combine (3) and law should be met
inclusive of VAT (RR 16-2005) (4) by stating that the
transaction should not be a
VAT zero-rated or a VAT-
Note: (1) The absence of
Q: What are the requisites of a VAT-taxable exempt transaction.
any of the above requisites
sale? exempts the transaction
from VAT. However,
For goods or For real property percentage taxes may
apply.
properties other than
real property (2) As to (4) Remember
that real properties held
1. There is an actual or 1. The seller executes primarily for sale to
deemed sale, barter, a deed of sale, customers are ordinary
assets. Hence, the income
from the sale thereof shall
2
form part of ordinary
The fair market value shall mean whichever is the higher of (1) income subject to
the fair market value as determined by the CIR (zonal value) or
graduated income tax rates.
(2) the air market value as shown in the schedule of values of the
provincial and city assessors (real property tax declaration). In the If it’s a capital asset, the
absence of a zonal value, gross selling price shall refer to the income would be subject to
market value shown in the latest real property tax declaration or capital gains tax
the consideration, whichever is higher.

Of the amounts typically covering an advance

(3) As to (6), the threshold payment, only the pre-paid rent is subject to VAT.
amounts are: (1) The sale Other forms of advance payment such as option
of a residential lot with a money, security deposit, etc. are not subject to VAT.
GSP must exceed
P1,919,500 and (2) the sale
of a residential house and Q: A bought two adjacent condominium
lot or other residential units which he intended to combine so as to
dwelling with GSP must fit his family. Each unit has a GSP of 2
exceed P3,199,200. million. The two units were separately
Otherwise, they are not
exempt from VAT documented. After 2 years, A decided to sell
the two units. A contends that the units are
Installment sale of a exempt from VAT as the GSP did not
residential house and lot or exceeding 2.5 million. Is A correct?
other residential dwellings
3
exceeding P1 million shall
be subject to VAT.
No. By virtue of the amendment introduced by RR
13-2012 [OCTOBER 12, 2012], the sale of real
(See SECTION 4.106-4, RR properties subject to VAT shall include the sale,
16-2005 [SEPTEMBER 1, transfer, or disposal within a 12-month period of two
2005], AS AMENDED BY RR or more adjacent residential lots, house and lots, or
04-07 [FEBRUARY 7, 2007], other residential dwellings in favor of a buyer. Such
RR 16-2011 [OCTOBER 27, adjacent real properties although covered by
2011], RR 3-2013 separate titles and/or separate tax declarations,
[FEBRUARY 20, 2012] AND when sold to one and the same buyer, whether
RR 13-2012 [OCTOBER 12,
2012].)
covered by one or separate deeds of conveyance,
shall be presumed as a sale of one residential lot,
house and lot or residential dwelling.
Q: How is VAT imposed on real property
Q: Is the sale of the parking lot included in
transactions?
the sale of a condominium unit?
1. If cash or deferred payment, then the VAT on
No. The sale of parking lots is a separate and
the whole amount is already imposed
distinct transaction and is not covered by the rules
2. If installment, then the VAT is imposed on each
on the threshold amount not being a residential lot,
payment
house and lot, or a residential dwelling and thus
3. There is no VAT imposed on Section 40(C)(2)
should be subject to VAT regardless of the amount
exchanges.
of selling price. (see RR 13-2012 [OCTOBER 12,
Note: (1) In an installment plan, the initial payments do
2012])
not exceed 25% of the GSP. If the initial payments exceed
25%, the sale is on a deferred payment basis. ---------------------------------------------------------------
9. Zero-rated sales of goods or properties
(2) In case of installment, the buyer can claim the input tax and effectively zero-rated sales of goods or
in the same period as the seller recognized the output tax.
In deferred-payment basis, the output tax shall be
properties
recognized by the seller and the input tax shall accrue to ---------------------------------------------------------------
the buyer at the time of the execution of the instrument of
sale. Read Section 106(A)(2), Tax Code
Q: Assuming a VAT-taxable transaction, is Q: What are zero-rated transactions?

the advance payment in a real estate
transaction subject to VAT? A VAT zero-rated transaction are sales by VAT-
registered persons which are subject to 0% rate,
meaning the tax burden is not passed on to the
purchaser. A zero-rated sale by a VAT-registered
3
This value has not been changed by the amendments. person, which is a taxable transaction for VAT

purposes, shall not result in any output tax.

However, the input tax on his purchases of goods, The input VAT on the The seller in an exempt
properties or services related to such zero-rated sale purchases of a VAT- transaction is not
shall be available as tax credit or refund. registered person with entitled to any input tax
zero-rated sales may be on his purchases
Q: Distinguish VAT rating (VAT-taxable allowed as tax credits or despite the issuance of
transactions) from zero rating (Zero-rated refunded a VAT invoice or
receipt;
transactions).
As explained by the Supreme Court in CIR V.

Persons engaged in Registration is optional
BENGUET CORPORATION [JULY 14, 2006]:
transactions which are for VAT-exempt
zero-rated, being subject persons.
In transactions taxed at a 10% rate (now 12%),
to VAT, are required to
when at the end of any given taxable quarter the
register
output VAT exceeds the input VAT, the excess shall
be paid to the government; when the input VAT Q: What are the two types of zero-rated
exceeds the output VAT, the excess would be transactions?
carried over to VAT liabilities for the succeeding
quarter or quarters. 1. Automatically zero-rated – which refers to
export sale of goods, properties, and supply
On the other hand, transactions which are taxed at of services by a VAT-registered person
zero-rate do not result in any output tax. Input VAT 2. Effectively zero-rated – which refers to the
attributable to zero-rated sales could be refunded or local sale of goods and properties by a VAT-
credited against other internal revenue taxes at the registered person o a person or entity who
option of the taxpayer was granted direct and indirect tax
exemption under special lws or international
Note: As an example, assume that VAT-registered person agreements (RMC No. 50-2007)
purchases materials from his supplier at P100, P9.6 of
which was passed on to him by his supplier as the latter’s Q: Distinguish zero-rated (automatically
12% output VAT. In a zero-rated transaction, the taxpayer
zero-rated) from effectively zero-rated
can recover the P9.6 from the BIR either through a refund
or a tax credit. When the taxpayer sells his finished transactions.
product for let’s say P120, he is not required to pay the
output VAT of P2.4 (12% of the P20 value he has added As distinguished by the Supreme Court in CIR V.
to the P100 material). SEAGATE TECHNOLOGY [FEBRUARY 11, 2006]:
In a transaction subject to VAT, however, he may recover

both the input VAT of P9.6 which he paid to the supplier Zero-rated Effectively zero-rated
and his output VAT of P2.4 by passing both these costs to
the buyer. The buyer then pays P12, the total 12% VAT.
generally refers to the refers to the sale of

Q: Distinguish zero rating from VAT-
export sale of goods goods or supply of
exemption. and supply of services services to persons or
entities whose
As differentiated by the Supreme Court in CIR v. exemption under
CEBU TOYO CORPORATION [FEBRUARY 16, 2005]: special laws or
international
agreements to which
Zero-rated VAT-Exempt the Philippines is a
signatory effectively
subjects such
It is a taxable transaction Not subject to the transactions to a zero
but does not result in an output tax rate.
output tax

Q: Enumerate the requisites that must be

The tax rate is set at As applied to the tax complied with in order to be entitled to a
zero. When applied to base, such rate does refund or issuance of a TCC for input VAT
the tax base, such rate not yield any tax due or paid attributable to zero-rated or
obviously results in no chargeable against the
effectively zero-rated sales.
tax chargeable against purchaser
the purchaser
1. There must be zero‐rated or effectively zero‐
rated sales;
2. Input taxes were incurred or paid;
The seller of such The seller who charges
3. Such input taxes are directly attributable to zero‐
transactions charges zero output tax on such
rated or effectively zero‐rated sales;
no output tax, but can transactions can also
4. Input taxes were not applied against any output
claim a refund of or a claim a refund of or a
VAT liability; and
tax credit certificate for tax credit certificate for
5. The claim for refund was filed within the two‐
the VAT previously the VAT previously
year prescriptive period. (see SITEL PHILIPPINES
charged by suppliers charged by suppliers
CORPORATION V. CIR [CTA CASE NO. 7623,
M ARCH 3, 2010])
intended to be enjoyed intended to benefit the Note: No more VAT TCCs shall be issued. In connection
by the seller who is purchaser who, not with this, Executive Order 68 [March 27, 2012] provides
directly and legally being directly and for the monetization of outstanding VAT TCCs. EO 68
liable for the VAT, legally liable for the allows qualified VAT-registered taxpayers to receive the
making such seller payment of the VAT, cash equivalent of their outstanding TCCs either: (1)
internationally will ultimately bear the Collecting in advance from a trustee bank a discounted
competitive by allowing burden of the tax shifted cash value of their TCCs or (2) Collect full cash value of
the refund or credit of by the suppliers. their TCC upon a certain maturity date to be determined
input taxes that are by the BIR and BOC. DOF Joint Circular 2-2012 provides
that the monetization will start in 2012 for TCCs issued
attributable to export prior to 2004 while those issued in 2011 and 2012 will be
sales. monetized in 2016. RMO 21-2012 [August 9, 2012]
provides the guidelines, policies and procedures for the
The taxpayer need not The rules are: implementation of the VAT TCC Monetization Program.
file an application form 1. Prior to RA 9337
and to secure BIR (before November Q: Enumerate the zero-rated sales of goods.
approval before sale 1, 2005) –
application is 1. Export Sales (IF GONE)
needed except in
sales to PEZA, a) Sale and actual shipment of goods from the
sales to BOI- Philippines to a Foreign country
registered 100% b) Sale of raw materials or packaging materials
manufacturer- to a Non-resident buyer for delivery to a
exporter resident local export-oriented enterprise
2. RA 9337 up to c) Sale of raw materials or packaging materials
before RR 4-2007 to Export-oriented enterprise whose export
(November 1, 2005 sales exceed 70% of total annual production
to April 5, 2007) – d) Sale of Gold to the BSP
application is e) Those that are not considered export sales
needed; no under the Omnibus Investment Code and
exceptions other special laws
3. RR 4-2007 (April 6, f) Sale of goods, supplies, and equipment and
2007 onwards) – fuel to persons engaged in International
need for application shipping or international air transport
not expressly operations.
provided.

2. Foreign currency denominated sale – the sale to As explained by the Court in the cases of CIR V. SEAGATE
a non-resident of goods assembled or TECHNOLOGY [FEBRUARY 11, 2005], CIR v. SEKISUI JUSHI
manufactured in the Philippines for delivery to a PHILIPPINES [JULY 21, 2006], CIR V. TOSHIBA INFORMATION
resident in the Philippines paid in acceptable EQUIPMENT [AUGUST 9, 2005], CIR V. CONTEX [JULY 2,
2004]:
foreign currency and accounted for in
accordance with BSP rules and regulations PEZA-registered enterprises, which would necessarily be
located within ecozones, are VAT-exempt entities not
3. Sales to persons or entities whose exemption because of Section 24 of RA 7926 (which imposes the 5%
under special laws and international agreements preferential tax rate on gross income of PEZA-registered
to which the Philippines is a signatory subjects enterprises in lieu of all taxes) but rather because of
such sales to 0% rate (effectively zero-rated Section 8 of the same which establishes the fiction that
transactions) ecozones are foreign territory. As a result, sales made by
a supplier in the Customs Territory (national territory of the
Philippines outside the borders of the ecozone) to a
Note: As to 1(e), “considered export sales under E.O. 226”
purchaser in the ecozone shall be considered as
includes the sale of goods and services by a VAT-
exportation from the Customs Territory. Conversely, sales
registered person in the customs territory to ecozone and
made by a supplier from the ecozone to a purchaser in the
Freeport enterprises so as to make them automatically
Customs Territory shall be considered as an importation
zero-rated (Section 4.106-5, RR No. 4-2007)
into the Customs Territory.
As to 1(f), the goods subject to zero-rating are limited to
The Philippine VAT system adheres to the cross-border
goods and passengers transported from a port in the
doctrine which means that no VAT shall be imposed to
Philippines directly to a foreign port, or vice versa, without
form part of the cost of goods destined for consumption
docking or stopping at any other port in the Philippines.
outside of the territorial border of the taxing authority.
(Ibid)
Hence, actual export of goods and services from the
Philippines to a foreign country must be free of VAT; while
Now, I want to discuss the VAT treatment of PEZA-
those destined for use or consumption within the
registered enterprises. This has been the subject of much
Philippines shall be imposed with ten percent (10%) (now
confusion. The cases added more to the confusion. What
12% VAT). Sales made by an enterprise within a non-
you have to note in reading the cases is whether it was
ecozone territory, i.e., Customs Territory, to an enterprise
decided before or after the effectivity of RMC 74-99.
within an ecozone territory shall be free of VAT.
Before RMC 74-99, whether a PEZA-registered enterprise
was exempt or subject to VAT depended on the type of
This has been further clarified in RMC 50-2007 [July 30-
fiscal incentives availed of by the said enterprise. PEZA
2007].
entities can avail of two alternative or subsequent
incentives of income tax holiday (ITH) or 5% preferential
tax rate on gross income. If the entity avails of the 5% Q: Summarize the current tax treatment of
preferential tax rate, it is exempt from all taxes including PEZA-registered enterprises as provided in
VAT but if it avails of the ITH, it shall be exempt from RMC 74-99 and as further clarified in RMC
income taxes for a number of years but not VAT (see CIR 50-2007.
v. SEKISUI JUSHI PHILIPPINES [JULY 21, 2006]).
This explains the decisions in CIR V. TOSHIBA INFORMATION 1. Any sale of goods, property or services by a
EQUIPMENT [AUGUST 9, 2005] and CIR v. CEBU TOYO VAT-registered supplier from the customs-
CORPORATION [FEBRUARY 16, 2005] where in both cases territory to any Ecozone-registered enterprise –
the Supreme Court held that the PEZA-registered regardless of incentive availed – is zero-rated on
enterprise is entitled to a VAT refund/credit because it the part of the VAT-registered seller because
opted to avail itself of the income tax holiday. Having ecozones are foreign soil by fiction and thus the
availed of the income tax holiday and its export sales sale is considered an export sale.
being a zero-rated transaction, the PEZA-registered
enterprise was entitled to refund or credit for its unutilized
input taxes. In both cases, the transactions were made
2. Sales to an ecozone enterprise made by a non-
prior to the effectivity of RMC 74-99. VAT or unregistered supplier would only be
exempt from VAT and the supplier shall not be
Now, after the effectivity of RMC 74-99, the tax treatment able to claim credit/refund for its input VAT
of sales of goods and services of PEZA-registered because, under Section 109(O) of the Tax Code,
enterprises is now based on the principles of “separate export sales by persons who are not VAT-
custom territory” and “cross border doctrine.” registered are exempt transactions.

3. If the ecozone-enteprise is an exporter, its input enterprise seller

VAT are subject to refund not because of the if the service is
incentives it availed but because of the nature of performed
its transactions (export sales). outside or the
property leased
is located outside
4. Any sale of goods or property by an ecozone- the ecozone,
registered enterprise to a buyer in the customs
territory shall be subject to 12% VAT because it ---------------------------------------------------------------
shall be considered an importation. The tax is
10. Transactions deemed sale
imposed on the buyer/importer.
a) Transfer, use or consumption not in the
5. The sale of service or lease of properties by course of business of goods/properties
PEZA-registered enterprises to a customer or originally intended for sale or use in the
lessee from the customs territory shall be course of business
exempt from VAT if the service is performed b) Distribution or transfer to shareholders,
within the ecozone. The lease of properties will investors, or creditors
be exempt if the property is located within the c) Consignment of goods if actual sale not
ecozone. However, if the properties are located made within 60 days from date of
outside of the ecozone, payments to such consignment
enterprise shall be considered as royalties and
d) Retirement from or cessation of business
subject to final withholding VAT of 12%
with respect to inventories on hand
---------------------------------------------------------------
Sale of Goods Sale of Services
VAT - 0% VAT 0% VAT

Read Section 106(B), Tax Code
registered
supplier from Q: What is meant by transactions deemed
customs sale?
territory to
PEZA -
There is no actual sale. However, the law deems
registered
enterprise
that there is a taxable sale.
Q: Enumerate the deemed sale transactions

VAT-exempt VAT exempt VAT exempt
supplier from 1. Transfer of goods or properties not in the course
customs of business (originally intended for sale or for
territory to use in the course of business)
PEZA- 2. Property dividends (transfer to shareholders as
registered share in the profits of VAT-registered persons or
enterprise to creditors in payment of debt)
3. Consignment of goods without the sale being
made within 60 days
PEZA- 12% VAT imposed VAT-exempt if
registered
4. Retirement from or cessation of business with
on buyer in the service is
enterprise to addition to the performed or respect to inventories of taxable goods existing
buyer from import tax and rendered within (see SECTION 106(B), TAX CODE)
customs customs duties the ecozone.
territory Same rule Note: (1) Before considering whether the transaction is
(local/domestic applies to lease deemed sale, it must first be determined whether the sale
sales) of properties if was in the ordinary course of trade or business. Even if
located in the the transaction was “deemed sale,” if it was note done in
ecozone. the ordinary course of trade or business, still the
transaction is not subject to VAT (CIR v. MAGSAYSAY LINES
12% VAT [JULY 28, 2006]).
imposed on the
PEZA-registered

(2) As to (1), the transaction is deemed sale when the ---------------------------------------------------------------

taxpayer-seller withdraws goods from his inventory of 11. Change or cessation of status as VAT-
goods held primarily for sale for his own personal or non-
business use. The withdrawal or transfer of goods results registered person
in the use or consumption of such goods by a person (the a) Subject to VAT
seller himself) who is effectively the final consumer, such (i) Change of business activity from VAT
withdrawal or transfer is deemed a sale subject to output taxable status to VAT-exempt status
tax.
(ii) Approval of request for cancellation of
(3) As to (2), the requisites to constitute the distribution or registration due to reversion to exempt
transfer to a shareholder or creditor a transaction deemed status
sale are: (a) the VAT-registered person distributing or (iii) Approval of request for cancellation
paying is a domestic corporation; (b) what is being of a registration due to desire to revert to
declared or paid is either real property owned by the
company or shares of stocks owned in another company;
exempt status after lapse of 3
and (c) the domestic corporation is either a real estate consecutive years
dealer (in case of real property) or dealer in securities (in b) Not subject to VAT
case of shares of stock) (i) Change of control of a corporation
(ii) Change in the trade or corporate name
(4) As to (3), as a general rule, a consignment of goods by
the consignment-owner to the consignee is not a taxable (iii) Merger or consolidation of
transaction. However, it is subject to VAT when the corporations
consigned goods are: (a) not sold by the consignee; and ---------------------------------------------------------------
(b) not returned by him to the consignor-owner within 60
days from date of consignment.
(5) As to (4), the VAT-registered taxpayer who ceases or
retires from business, including an unregistered joint Q: When is a change in or cessation of
venture undertaking construction activity, must pay output status of a VAT registered person subject to
tax on the gross value of his inventory of materials, goods VAT?
and supplies existing at the time of cessation or retirement
of business.
1. Change of business When a VAT-registered
Q: San Roque Power entered into a activity from VAT- person engaged in a
purchase power agreement with NAPOCOR taxable status to VAT-taxable activity
to develop the hydroelectric potential of the VAT-exempt status decides to discontinue
Lower Agno River. During the testing such activity and engage
period, electricity was transferred by San in a non-VAT-taxable
Roque to NAPOCOR. Can the transfer be activity.
considered a sale of electricity?
2. Approval of a When a person
Yes. In SAN ROQUE POWER CORP. V. CIR [NOVEMBER request for commenced a business
25, 2009], the Supreme Court held that although the cancellation of a with the expectation that
transfer was not a commercial sale, the NIRC does registration due to is gross sales or receipts
not limit the definition of “sale” to commercial reversion to exempt will exceed P1,919,500
transactions in the normal course of business. status but failed to exceed this
Conspicuously, Section 106(B) of the NIRC, which amount during the first
deals with the imposition of VAT, does not limit the 12 months of operation.
term sale to commercial sales, rather it extends the
term to transactions that are deemed sale. In the 3. Approval of request When a person who is
said case, it was undisputed that San Roque for cancellation of a VAT-exempt and not
transferred to NPC all the electricity that was registration due to required to register for
produced during the trial period. The fact that it was desire to revert to VAT opted to register as
not transferred through a commercial sale or in the exempt status after a VAT taxpayer and after
normal course of business does not deflect from the lapse of 3 the lapse of 3 years
fact that such transaction is deemed as a sale. consecutive years desire to revert to
exempt status

Q: Does VAT apply to every importation?
Q: When is a change in or cessation of Yes. The VAT shall be imposed on every importation
status of a VAT registered person NOT of goods, whether or not in the course of trade or
subject to VAT? business. This is unlike VAT on sale of goods or
properties which must be in the course of trade or
business. Otherwise, the person/transaction shall
1. Change or control The goods or properties not be liable to pay VAT. (see CIR V. SEAGATE
of a corporation by used in the business or TECHNOLOGY [FEBRUARY 11, 2005]).
acquisition of the those comprising the
controlling interest stock-in-trade will not be Q: What is the tax base of VAT on
of such corporation considered sold, importation of goods?
by another bartered or exchanged
stockholder or because the corporation The tax base is the total value used by the BOC in
group of still owns them. determining tariff and customs duties plus customs
stockholders duties, excise taxes, if any, and other charges.
Subject to VAT:
Where the customs duties are determined on the
a. Exchange of basis of the quantity or volume of the goods, the
property by VAT shall be based on the landed cost plus excise
corporation taxes, if any.
acquiring control for
the shares of stocks Read Section 107(B), Tax Code
of the target
corporation Q: What is technical importation?
b. Exchange of
properties by a Technical importation is the subsequent sale,
person who wants to transfer or exchange of imported goods by VAT-
join the corporation exempt persons to non-exempt persons or entities.
of his properties
held for sale or for
Q: What is the legal consequence of
lease for shares of
stock whether technical importation?
resulting to
corporate control or The non-exempt buyers, transferees, or recipients
not shall be deemed the importers of the taxable goods
and shall be liable for the VAT due on such
2. Change in trade or importation. (see SECTION 107(B), TAX CODE)
corporate name
Q: Anshari, an alien employee of ADB, who
3. Merger or The unused input tax of is retiring soon has offered to sell you his
consolidation the dissolved corporation car, which he imported tax-free for his
as of the date of merger personal use. The privilege of tax exemption
or consolidation shall be is recognized by tax authorities. If you
absorbed by the decide to purchase the car, is the sale
surviving corporation.
subject to tax?
--------------------------------------------------------------- Yes. Section 107(B) provides that in case of tax-free
12. VAT on importation of goods importation of goods into the Philippines by persons,
a) Transfer of goods by tax exempt persons entities or agencies exempt from tax, where the
--------------------------------------------------------------- goods are subsequently sold, transferred, or
exchanged in the Philippines to non-exempt persons
Read Section 107(A), Tax Code or entities, the purchasers, transferees, or recipients
shall be considered as the importer thereof, who

shall be liable for any internal revenue tax on such Section 108 of the 1997 Tax Code is not exhaustive.
importation. Among those included in the enumeration is the
“lease of motion picture films, films, tapes and
--------------------------------------------------------------- discs.” This, however, is not the same as the
13. Tax on sale of service and use or lease showing or exhibition of motion pictures or films.
of properties Hence, since the showing or exhibition of motion
a) Requisites of taxability pictures or films Is not in the enumeration, such is
not a VAT-taxable transaction.
---------------------------------------------------------------
Q: Are association dues, membership fees,
and other assessment and charges
collected by a condominium corporation/
Q: What is a sale or exchange of services?
homeowners’ association subject to VAT?
A sale of exchange of services means the
performance of all kinds of services in the Yes because they constitute as income payment or
Philippines for others for a fee, remuneration or compensation for the beneficial services the
consideration. condominium corporation/ homeowners’ association
provides for its tenants and members (RMC 65-
(See SECTION 108(A), TAX CODE for an extensive 2012).
enumeration of the type of services including in said
Note: (1) The fact that a condominium
definition) corporation/homeowners’ association is a non-stock, non-
profit organization is immaterial. As held in CIR V. CA &
Q: Are toll fees collected by tollway COMASERCO [MARCH 30, 2000], even a non-stock, non-
operators subject to VAT? profit organization or government entity is liable to pay
VAT on sale of goods and services.
Yes. The Supreme Court in DIAZ V. SECRETARY OF
FINANCE [JULY 10, 2011] answered this issue in the (2) Pursuant to Section 18 of RA 9904 (Magna Carta for
Homeowners and Homeowners’ Association), the
affirmative. The court held that VAT is imposed on
association dues and income derived from rentals of the
“all kinds of services” and tollway operations who are homeowner’s associations may be exempted from tax
engaged in construction, maintaining, and operating subject to the following conditions: (a) The homeowners
expressways are no different from lessors of association must be a duly constituted “Association” as
property, transportation contractors, etc. Further, defined under Section 3(b) of RA 9904; (b) The LGU
they also come under those described as “all other having jurisdiction over the homeowners’ association must
franchise grantees” which is not confined only to issue a certification identifying the basic services being
legislative franchise grantees since the law does not rendered by the association and its lack of resources to
distinguish. They are also not a franchise grantee render such services; and (c) the association must present
proof that the income and dues are used for the
under Section 119 of the Tax Code which would cleanliness, security and other basic services need by
have made them subject to percentage tax instead. members, including maintenance of the facilities in their
Neither are the services part of the enumeration respective subdivisions and villages. (RMC 9-2013
under Section 109 on VAT-exempt transactions. [January 29, 2013]
Note: RMC 63-2010 [JULY 19, 2010] was issued to Q: When is the lease of properties subject to
implement Section 108 and impose VAT on the gross
receipts of tollway operators from all types of vehicles
VAT?
starting August 16, 2010.
The use or lease of properties shall be subject to
Q: Are the gross receipts derived by VAT irrespective of the place where the contract of
lease or licensing agreement was executed if the
operators or proprietors of cinema/theater
property is leased or used in the Philippines.
houses from admission tickets subject to
VAT?
No. The Supreme Court in CIR v. SM PRIME

HOLDINGS [FEBRUARY 26, 2010] held that although
the enumeration of services subject to VAT under

Q: Is the lease of residential units subject to 5. The service is not exempt under the Tax
VAT? Code, special law or internal agreement
Yes as to the lease of residential units with a Note: Absence of any of the requirements renders the
monthly rental per unit exceeding P12,800, transaction exempt from VAT but may be subject to other
percentage tax.
regardless of the amount of aggregate rentals
received by the lessor during the year
---------------------------------------------------------------
Q: What is the tax treatment of the lease of 14. Zero-rated sale of services
residential units, where some are leased out ---------------------------------------------------------------
for exceeding P12,800 while others are
leased out for more than P12,800? Read Section 108(B), Tax Code
The tax treatment shall be as follows: Q: Enumerate the zero-rated sales of

services.
1. The gross receipts from rentals not exceeding
P12,800 per month per unit shall be exempt SECTION 108(B) provides for the following:
from VAT regardless of aggregate gross receipts
2. The gross receipts from rentals exceeding 1. Processing, Manufacturing, or Repacking Goods
P12,800 shall be subject to VAT if the aggregate for Other Persons Doing Business outside the
annual gross receipts from said units exceeds Philippines, which goods are subsequently
4
P1,919,500,000. exported, where the services are paid for in
acceptable foreign currency and accounted for
Q: Give the basis of VAT on sale of services in accordance with the rules and regulations of
and use or lease of properties? the BSP
2. Services Other than those mentioned in the
The basis shall be the gross receipts derived from preceding paragraph rendered to a person
the sale or exchange of services including the use or engaged in business conducted outside the
lease of properties. (see Section 108(A), Tax Code) Philippines or a nonresident person not engaged
in business who is outside the Philippines when
Note: Gross receipts means the total amount of money the services were performed, the consideration
or its equivalent representing the contract price, for which is paid for in acceptable foreign
compensation, service fee, rental or royalty actually or currency and accounted for in accordance with
constructively received during the taxable quarter for the the rules and regulations of the BSP.
services performed or to be performed for another person. 3. Services rendered to person or entities whose
exemption under Special Laws or International
Q: What are the requisites for the taxability Agreements effectively subjects the supply of
of the sale of services and use or lease of such services to a 0% rate. (effectively zero-
properties? rated transaction)
4. Sale of Services to Persons Engaged in
1. There is a sale or exchange of service or International Shipping or Air Transport
lease or use of property enumerated in the Operations
law or other similar services 5. Sale of Services for Export-Oriented Enterprise
2. The service is performed or to be performed whose export sales exceed 70% of total annual
in the Philippines production
3. The service is in the course of the taxpayer’s 6. Transport of Passengers and Cargo by Air or
trade or business or profession Seal Vessels from the Philippines to a Foreign
4. The service is for a valuable consideration Country
actually or constructively received and 7. Sale of Power Generated through Renewable
Sources of Energy
Q: Acesite is the operator of Holiday Inn

4
Hotel. It leases part of its premises to
Otherwise, the gross receipts will be subject to the 3% tax
imposed under Section 116 of the Tax Code. PAGCOR and caters food and beverages to

its patrons. Acesite contends that the sale while as a general rule, the VAT system uses the
of food and beverages to PAGCOR is zero- destination principle as a basis for the jurisdictional
rated and thus entitling them to claim a tax reach of the tax such that goods and services are
refund/credit. Is Acesite correct? taxed only in the country where they are consumed,
exceptions to the destination principle are found in
Yes. In CIR v. ACESITE PHILIPPINES [FEBRUARY 16, Section 108(B) of the 1997 Tax Code. In this case,
2007], the Supreme Court stated that services Amex Phils. facilitated in the Philippines the
rendered to persons or entities whose exemption collection and payment of receivables belonging to
under special laws or international agreements to its Hong Kong-based foreign client, Amex HK, and
which the Philippines is a signatory effectively getting paid for it in acceptable foreign currency and
subjects the supply of such services to zero (0%) accounted for in accordance with the rules and
rate shall be subject to 0%. Since the law clearly regulations of the BSP. As such, they are deemed
provides for PAGCOR’s exemption, the sale of exceptions because although the services are
services of Acesite to PAGCOR is effectively zero- performed in the Philippines, the sales of such
rated. Hence, Acesite may refund the VAT it paid on services are considered zero-rated.
its sale of food and beverages to PAGCOR.
Q: Placer Dome Inc (PDI) owns 39.9% of
Note: Let’s now discuss the most important zero-rated Marcopper. It undertook to clean-up and
sale in the enumeration – Section 108(B)(2). This is an rehabilitate the Makalupnit and Boac Rivers
exception to the destination principle. Remember that in Marinduque which was affected by its
under the destination principle, goods and services are mining operations. PDI engaged the
taxed only in the country where they are consumed.
Section 108(B)(2) is an exception because although the
services of Placer Dome Technical Services
services are performed in the Philippines, the sales of Limited (PD Canada), a non-resident foreign
such services are zero-rated. corporation in Canada which, in turn,
engaged the services of Placer Dom
Q: What are the requisites for the zero-rating Technical Services Philippines (PD
of the sale of service under Section Philippines). PD Philippines filed for a claim
108(B)(2)? for tax credit/refund and contends that its
sale of services to Placer Dome Canada was
zero-rated. The CIR invokes the destination
1. The service is performed in the Philippines
2. The service falls under any of the categories principle, contending that Placer Dome
provided in Section 108(B) Philippines’ services, while rendered to a
3. It is paid for in acceptable foreign currency that non-resident foreign corporation, are not
is accounted for in accordance with the destined to be consumed abroad. Is the CIR
regulations of the Bangko Sentral ng Pilipinas correct?
4. The recipient of such services is doing business
outside the Philippines. No. In CIR V. PLACER DOME [JUNE 8, 2007], the
Supreme Court reiterated its ruling in AMERICAN
Q: American Express Philippines (AMEX-P) EXPRESS INTERNATIONAL V. CIR [JUNE 29, 2005] to
is a Philippine Branch of AMEX the effect that the services enumerated in Section
International. AMEX-P is a servicing unit of 108B constitute as exceptions to the destination
AMEX Hong Kong (AMEX-HK) and facilitates principle and are zero-rated. Since Placer Dome
Philippines’ services meet the requirements of
the collections of AMEX-HK receivables
Section 108(B)(2), it is zero-rated.
from card members in the Philippines.
AMEX-P claimed a refund for its input taxes Q: A foreign consortium composed of
arising from zero-rated sales of services to Burmeister Denmark and Mitsui Engineering
AMEX-HK. CIR argues that AMEX-P’s entered into a contract with NAPOCOR for
services must be consumed abroad in order the operation and maintenance of two
to be zero-rated. Is the CIR correct? barges.. The Consortium appointed
Burmeister Denmark as coordination
No. In AMERICAN EXPRESS INTERNATIONAL V. CIR
[JUNE 29, 2005], the Supreme Court opined that manager. Burmeister Denmark established

Burmeister Mindanao which subcontracted No. The services performed by AB ROHQ to X Corp
the operation and maintenance of the two do not qualify for zero-rating because X Corp cannot
barges. NAPOCOR paid the foreign be considered doing business outside the
consortium while the consortium, in turn, Philippines. The phrase “other persons doing
business outside the Philippines” under Section
paid Burmeister Philippines foreign
108(B)(2) shall be deemed to pertain exclusively to
currency inwardly remitted into the “affiliates, subsidiaries, or branches” of ROHQs. X
Philippines. The BIR refused to grant a Corp, as the mother company of AB ROHQ, cannot
refund since the services were not destined be considered an affiliate, subsidiary or branch for
for consumption abroad. Are the services of the simple reason that X Corp and AB ROHWQ
Burmeister Philippines entitled to zero-rated must be considered as one and the same entity for
status? purposes of taxation. Further, X Corp is considered
doing business in the Philippines through AB ROHQ.
Yes. In CIR V. BURMEISTER AND W AIN SCANDINAVIAN
CONTRACTOR MINDANAO, INC. [JANUARY 22, 2007], Q: ABC is a business process outsourcing
they are entitled to zero-rated status and to the company and is engaged in the business of
refund but only for the period covered prior to the providing call center services from the
filing of the CIR’s answer in the CTA. This is so Philippines to domestic and offshore
because prior, Burmeister was able to secure a businesses. Can ABC claim for a refund or
ruling from the BIR allowing zero-rating of its sales. issuance of a TCC for its excess input tax paid
However, such ruling is valid only until the time that on domestic purchases of goods and services
the CIR filed its answer in the CTA which amounted which were allegedly attributable to ABC’s zero-
to a revocation of the said ruling. The revocation rated sales of services?
cannot be made retroactive.
Yes provided it meets the following requisites:
It must be noted, however, that without this special
circumstance, Burmeister would not have been 1. the services must be other than processing,
entitled to a zero-rated status. This is because the manufacturing or repacking of goods;
Consortium which was the recipient of the services 2. payment for such services must be in
rendered by Burmeister was deemed doing business acceptable foreign currency accounted for in
within the Philippines. While the Consortium’s accordance with the BSP rules and regulations;
principal members are non-resident foreign and
corporations, the Consortium itself is doing business 3. the recipient of such services is doing business
in the Philippines. Hence, the transactions of BWSC outside the Philippines.
Mindanao are not subject to VAT at zero percent.
Note: In SITEL PHILIPPINES CORPORATION V. CIR [CTA CASE
Q: AB ROHQ is an ROHQ of X Corp, a NO. 7623, MARCH 3, 2010], ACCENTURE VS. COMMISSIONER
OF INTERNAL REVENUE [C.T.A. CASE NO. 7046, SEP. 22,
foreign corporation organized under the 2009], PARLANCE SYSTEMS VS. COMMISSIONER OF INTERNAL
laws of New York, USA. AB ROHQ is a VAT- REVENUE [C.T.A. CASE NO. 7459, JUL. 9, 2009], business
registered taxpayer engaged in providing process outsourcing companies were refused a refund of
services including logistics, research and their excess input VAT because their sale of services were
not zero-rated because they failed to prove that their
development, product development, data clients were non-resident foreign corporations doing
processing and communication, and business outside the Philippines.
business development. It provides services
solely and exclusively for its head office. AB
ROHQ filed a claim for refund or issuance of ACCENTURE V. CIR, G.R. NO. 190102, JULY
TCC for input VAT paid on purchases 11, 2012
arising from its alleged zero-rated sale of
services to X Corp. Are the services DOCTRINE: For VAT zero-rating of services rendered
to non-resident foreign corporation under Section
rendered by AB ROHQ to its head office 108(B)((2) of the NIRC, it is not enough that the
deemed VAT zero-rated? recipient of services be proven to be a foreign
corporation, it must be proven to be a non-resident
foreign corporation.

Q: Enumerate the exempt transactions5

FACTS: Taxpayer filed an application for refund of
unutilized input taxes allocated to its zero-rated sale of SECTION 109(A) TO (V) provides for the following:
services to foreign clients. In order to prove that its sales
are VAT zero-rated, taxpayer presented as evidence the
Official Receipts, Billing Statements, Memo Invoices- a) Sale or importation of agricultural and marine
6
Receivable, Memo Invoices-Payable and Bank food products in their original state.
Statements. Taxpayer argued that these documents show
that the zero-rated sales were paid in foreign currency and b) Sale or importation of fertilizers; seeds,
duly accounted for in accordance with the rules and seedlings and fingerlings; fish, prawn, livestock
7
regulations of the Bangko Sentral ng Pilipinas (BSP). and poultry feeds
HELD: The Court ruled that for sale of services to be VAT c) Importation of personal and household effects
zero-rated under Section 108(B) of the NIRC, the recipient
belonging to the residents of the Philippines
of service must be doing business outside the Philippines.
According to the Court, the documents presented by returning from abroad
taxpayer merely substantiated the existence of sales,
receipt of foreign currency payments and inward d) Importation of professional instruments and
remittance of the proceeds of such sales. There is no implements, wearing apparel, domestic animals
evidence that the clients were doing business outside the and personal household effects belonging to
Philippines. Accordingly, the Court denied the claim on the persons coming to settle for the first time in the
ground that no evidence was presented to prove the fact Philippines
that the foreign clients to whom the taxpayer rendered e) Services subject to percentage tax
services are clients doing business outside the
Philippines.
f) Services by agricultural contract growers and
milling for others of palay into rice, corn into grits
In MINDANAO GEOTHERMAL PARTNERSHIP VS.
and sugarcane into raw sugar
COMMISSIONER OF INTERNAL REVENUE, CTA CASE NO.
7801, JULY 10, 2012, the CTA held that in order to
g) Medical, dental, hospital and veterinary services
qualify for VAT zero-rating under Section 108(B)(7) 8
except those rendered by professionals
of the NIRC, as amended, the taxpayer must be able
to prove that it is a generation company and that it is
h) Educational services rendered by private
engaged in the sale of power or fuel generated
educational institutions duly accredited by
through renewable source of energy.
DEPED, CHED, and TESDA and those by
governmental educational institutions
---------------------------------------------------------------
15. VAT exempt transactions i) Services rendered pursuant to an employee-
a) VAT exempt transactions, in general employer relationship
b) Exempt transactions, enumerated
--------------------------------------------------------------- j) Services rendered by regional or area
headquarters established in the Philippines
Q: What are VAT-exempt transactions?
VAT-exempt transactions refer to the sale of goods

or properties and/or services and the use or lease of 5
Those underlined are the notable VAT-exempt transactions.
properties that is not subject to VAT (output tax) and These enumeration is exclusive.
6
the seller is not allowed any tax credit of VAT (input Such products are still considered in their original state even if
they have undergone simple processes of preparation or
tax) on purchases. preservation for the market, such as freezing, drying, salting,
broiling, roasting, smoking, or stripping. Polished and/or husked
The person making the exempt sale of goods, rice, corn grits, raw cane sugar and molasses, ordinary salt and
properties, or services shall not bill any output tax to copra shall be considered in their original state.
7
Does not include specialty feeds for race hourses, fighting
his customers because the said transaction is not cocks, aquarium fish, zoo animals, and other animals generally
subject to VAT. considered as pets.
8
But see discussion on VAT exemption of doctors registered with
the PRC and lawyers registered with the IBP.

k) Transactions which are exempt under u) Services of banks, non-bank financial

international agreements to which the intermediaries performing quasi-banking
Philippines is a signatory or under special laws functions and other non-bank financial
intermediaries
l) Sales by agricultural cooperatives duly
registered with the Cooperative Development v) Sale or lease of goods or properties or
Authority performance of services other than the
transactions mentioned in the preceding
m) Gross receipts from lending activities by credit or paragraphs, the gross annual sales and/or
multi-purpose cooperatives duly registered with receipts do not exceed the amount of
14
the Cooperative Development Authority whose P1,919,500. .
lending is limited to members
Q: Are senior citizens exempt from the 12%
n) Sales by non-agricultural, non-electric and non- VAT?
credit cooperatives duly registered with the
9
Cooperative Development Authority Yes. RA No. 9994 [February 15, 2010], otherwise
known as the Expanded Senior Citizens Act of 2010
exempts senior citizens from paying 12-percent VAT
o) Export sales by persons who are not VAT- on goods and services.
registered
Q: Are medical services rendered b doctors
p) Sales of real properties not primarily held for registered with the PRC and legal services
sale to customers or held for lease in the
rendered by lawyers registered with the IBP
ordinary course of trade or business or sales
10
within the low-cost cap of below 1,919,500 for subject to VAT?
11
a residential lot and P3,199,200 for a house
and lot and other residential dwelling No. RR 7-2004 [M AY 7, 2004] excludes services by
doctors registered with the PRC and services by
q) Lease of a residential unit with a monthly rental lawyers registered with the IBP as well as GPPs for
not exceeding P12,800
12 the sole and exclusive purport of practising law or
medicine from the coverage of VAT on services
r) Sale, importation, printing or publication of
books and any newspaper, magazine, review or Q: Are pawnshops liable to pay VAT?
bulletin which appears at regular intervals with
fixed prices for subscription and sale and is not No. As explained by the Supreme Court in
devoted principally to publication of paid TAMBUNTING PAWNSHOP V. CIR [JANUARY 21, 2010]:
advertisements Prior to the passage of the EVAT Law in 1994,
pawnshops were treated as lending investors
15
s) Sale, importation, or lease of passenger or subject to lending investor’s tax. Subsequently,
cargo vessels and aircraft
13 pawnshops were treated jurisprudentially as VAT-
able enterprises under the general classification of
t) Importation of fuels, goods and supplies by “sale or exchange of services.” RA No. 9238 which
persons engaged in international shipping or air passed in 2004 finally classified pawnshops as
transport operations “other non-bank financial intermediaries.
9 14
Provided that the share capital contribution of each member Previously 1.5 million. Amended by RR 16-2011 [OCTOBER 27,
does not exceed P15,000 2011].
10 15
Previously 1.5 million. Amended by RR 16-2011 [OCTOBER 27, Note that in FIRST PLANTERS PAWNSHOP VS. CIR [JULY 30,
2011]. 2008], the Supreme Court held that First Planters Pawnshop was
11
Previously 2.5 million. Amended by RR 16-2011 [OCTOBER 27, subject to VAT as it was a lending investor. It must be noted that
2011]. the factual circumstances of the said case pertained to a taxable
12
Previously P10,000. Amended by RR 16-2011 [OCTOBER 27, period prior to RA No. 9238. What is important to note in this case
2011]. is that the Supreme Court stated that pawnshops should now be
13
Includes engine, equipment, and spare parts thereof for treated as non-bank financial intermediaries and, as such, not
domestic or international transport operations. subject to VAT.

Q: Is a health maintenance organization Q: Is the sale of e-books and e-journals

liable to pay VAT? appearing at regular intervals with fixed
prices for subscription and sale and not
Yes. In CIR V. PHILIPPINE HEALTH CARE PROVIDERS, devoted principally to publication of paid
INC. [APRIL 24, 2007], PHCPI claimed that its advertisements subject to VAT?
services were exempt from VAT and sought a BIR
ruling in this regard. The BIR ruled that PHCPI was No. The terms “book”, “newspaper,” “magazine”,
exempt. The CIR, however, later assessed PHCPI “review” and “bulletin” shall refer to printed materials
for deficiency VAT taxes. The CIR contended that in hard copies and do not include those in digital or
PHCPI does not actually render medical service but electronic format or computerized versions (RMC
merely acts as a conduit between the members and No. 75-2012 dated November 22, 2012)
PHCPI’s accredited and recognized hospitals and
clinics. The Supreme Court opined that the services Q: Is PAGCOR’s sale of services subject to
of an entity which does not actually provide medical
VAT?
and/or hospital services but merely arranges for the
same are subject to VAT. The Court, however, ruled
No. In PAGCOR V. CIR [M ARCH 15, 2011], the
PHCPI cannot be faulted for its reliance on the BIR
Supreme Court held that RA 9337 only withdrew
ruling as such was issued when the term “health
PAGCOR’s exemption from corporate income taxes
maintenance organization” had no significance for
but does not contain any provision that subjects the
taxation purposes at the time. The failure of PHCPI
same to VAT. PAGCOR is exempt from the payment
to describe itself as a “health maintenance
of VAT, because PAGCOR's charter, P.D. No. 1869,
organization” subject to VAT does not amount to bad
is a special law that grants it exemption from taxes.
faith.
Moreover, the exemption of PAGCOR from VAT is
supported by Section 6 of R.A. No. 9337, which
Q: Is the sale of copra subject to VAT? retained Section 108 (B) (3) of R.A. No. 8424, thus:
Services rendered to persons or entities whose
No. RA 9337 amended Section 109(A) to include exemption under special laws or international
copra as those that should be considered in their agreements to which the Philippines is a signatory
original state. Previously in MISAMIS ORIENTAL V. effectively subjects the supply of such services to
DOF [NOVEMBER 10, 1994], the Supreme Court zero percent (0%) rate
opined that copra is not food and is not intended for
human consumption. Thus, it is not exempt from
VAT. The rule now is the sale of copra is VAT- Q: S and ABS-CBN entered into an
exempt. agreement where S will provide his services
exclusively to ABS-CBN as a talent for the
Q: Is the sale of Andok’s chicken subject to latter’s TV and radio shows. Is he liable to
VAT? pay VAT?
No. The sale of Andok’s chicken is exempt from No provided that there exists no employer-employee
VAT. However, should Andok’s maintain a facility by relationship between S and ABS-CBN. In SONZA V.
which the roasted chicken will be offered as a menu ABS-CBN [JUNE 10, 2004], the Supreme Court held
to customers who would dine-in, then it will be that an independent contractor is liable to pay VAT.
subject to VAT on sale of service which is similarly Section 109 only exempts from VAT services
imposed on restaurants and other eateries (VAT rendered pursuant to an employer-employee
Ruling No. 009-07 dated June 21, 2007) relationship.
Note: Ano lessons sa ruling na ito sa mga gusto

magnegosyo diyan para ma-exempt sa VAT? Una, stall CIR v. PILIPINAS SHELL [G.R. 188497, APRIL
lang itatayo mo na pang-take out. If may dine-in, sale of
service yun! That is subject to VAT. Pangalawa, ito lang 25, 2012]
puwede mo gawin sa manok mo o baboy or isda:
freezing, drying, salting, broiling, roasting, smoking, or DOCTRINE: Oil companies are not exempt from the
stripping. Kapag nagbenta ka ng adobong manok, payment of excise tax on petroleum products
nilagang baboy or sinigang na isda, hindi na original state manufactured and sold by them to international carriers.
yan!

FACTS: The taxpayer filed with the Large Taxpayers Audit of the excise tax.
& Investigation Division II of the (BIR) the several formal
claims for refund or tax credit for various years. It filed Furthermore, considering that the excise taxes attaches to
petitions for review since no action was taken by the BIR petroleum products “as soon as they are in existence as
on its claims. The CTA’s First Division ruled that the such,” there can be no outright exemption from the
taxpayer is entitled to the refund of excise taxes in the payment of excise tax on petroleum products sold to
reduced amount. It relied on a previous ruling rendered by international carriers. The sole basis then of the taxpayer’s
the CTA En Banc in a previous case involving the same claim for refund is the express grant of excise tax
taxpayer, where the CTA also granted the taxpayer’s claim exemption in favor of international carriers under Sec.
for refund on the basis of excise tax exemption for 135(a) for their purchases of locally manufactured
petroleum products sold to international carriers of foreign petroleum products.
registry for their use or consumption outside the
Philippines. On appeal, the CTA En Banc upheld the ruling Citing its ruling in Philippine Acetylene, it held that a tax
of the First Division. exemption being enjoyed by the buyer cannot be the basis
of a claim for tax exemption by the manufacturer or seller
HELD: The Supreme Court held that both the earlier of the goods for any tax due to it as the manufacturer or
amendment in the 1977 Tax Code and the present Sec. seller. The excise tax imposed on petroleum products
135 of the 1997 NIRC did not exempt the oil companies under Sec. 148 is the direct liability of the manufacturer
from the payment of excise tax on petroleum products who cannot thus invoke the excise tax exemption granted
manufactured and sold by them to international carriers. to its buyers who are international carriers.
Because an excise tax is a tax on the manufacturer and

not on the purchaser, and there being no express grant Note: Although hindi kasama sa coverage, note na rin that
under the NIRC of exemption from payment of excise tax by virtue of RA No. 10378 approved March 7, 2013,
to local manufacturers of petroleum products sold to transport of passengers by international carriers is a VAT-
international carriers, and absent any provision in the exempt transaction.
Code authorizing the refund or crediting of such excise
taxes paid, the Court holds that Sec. 135 (a) should be In COMMISSIONER OF INTERNAL REVENUE VS.
construed as prohibiting the shifting of the burden of the
SEMIRARA MINING CORPORATION [CTA EB NO. 752,
excise tax to the international carriers who buys petroleum
products from the local manufacturers. Said provision thus
M ARCH 22, 2012], the CTA held that a coal operator
merely allows the international carriers to purchase with coal operating contract with the government is
petroleum products without the excise tax component as exempt from value-added tax. In order to encourage
an added cost in the price fixed by the manufacturers or and promote said policy, Section 16 of PD 972
distributors/sellers. Consequently, the oil companies which expressly grants tax incentive to operators of a
sold such petroleum products to international carriers are contract under the said Decree which exempts them
not entitled to a refund of excise taxes previously paid on from all taxes except income tax.
the goods.
The Supreme Court pointed out that the taxpayer’s failure ---------------------------------------------------------------
to make a distinction on the exemption under Sections 134 16. Input tax and output tax, defined
and 135 of the Tax Code, apparently led it to mistakenly ---------------------------------------------------------------
assume that the tax exemption under Sec. 135 (a)
“attaches to the goods themselves” such that the excise Note: I already discussed this.
tax should not have been paid in the first place. The
exemption found in Sec. 134 makes reference to the
nature and quality of the goods manufactured (domestic
---------------------------------------------------------------
denatured alcohol) without regard to the tax status of the 17. Sources of input tax
buyer of the said goods while Sec. 135 deals with the tax a) Purchase or importation of goods
treatment of a specified article (petroleum products) in b) Purchase of real properties for which a
relation to its buyer or consumer. VAT has actually been paid
Further, it held that Sec. 135 (a) in relation to the other c) Purchase of services in which VAT has
provisions on excise tax and from the nature of indirect actually been paid
taxation, may only be construed as prohibiting the d) Transactions deemed sale
manufacturers-sellers of petroleum products from passing e) Presumptive input
on the tax to international carriers by incorporating
previously paid excise taxes into the selling price. In other
f) Transitional input
words, the taxpayer cannot shift the tax burden to ---------------------------------------------------------------
international carriers who are allowed to purchase its
petroleum products without having to pay the added cost

Read Section 110(A), Tax Code Q: What is the rule on transitional input
credits?
Q: What are the sources of input tax?
A person who becomes liable to VAT or any person
1. Purchase or importation of goods who elects to be VAT-registered shall, subject to the
a. For sale; or filing of an inventory, be allowed input tax on his
b. For conversion into or intended to form beginning inventory of goods, materials and supplies
part of a finished product for sale equivalent to 2% of the value of such inventory or
including packaging materials; or the actual VAT paid on such goods, materials and
c. For use as supplies in the course of supplies, whichever is higher, which shall be
business; creditable against the output tax.
d. For use as materials supplied in the sale
of service;
e. For use in trade or business for which FORT BONIFACIO DEVELOPMEN CORPORATION V.
deduction for depreciation or CIR, G.R. NO. 173425, SEPTEMBER 4, 2012
amortization is allowed under the Tax
Code except automobiles, aircraft and DOCTRINE: Prior payment of taxes is not required for
yachts. a taxpayer to avail of the 8% transitional input tax
credit.
2. Purchase of real properties for which ha
VAT has actually been paid FACTS: Fort Bonifacio Development Corporation (FBDC)
3. Purchase of services in which VAT has purchased from the government in 1995 portion of the Fort
actually been paid Bonifacio reservation, now known as the Fort Bonifacio
4. Transactions deemed sale Global City. No VAT on the sale of the land was passed
5. Presumptive input tax on by the government to FBDC. On January 1, 1996,
6. Transitional input tax (see Section 4.110-1, Republic Act 7716 took effect, amending certain
RR 16-2005) provisions of the NIRC. One of the amendments is the
extension of the coverage of the VAT to sale of real
properties held primarily for sale to customers or held for
--------------------------------------------------------------- lease in the ordinary course of business. In September
e) Presumptive input 1996, FBDC submitted to the BIR an inventory of all its
--------------------------------------------------------------- real properties, claiming that it is entitled to the transitional
input tax credit on said inventories. FBDC started selling
Read Section 111(B), Tax Code Global City lots in October 2006. For the 1st quarter of
1997, FBDC paid output taxes on the sale of lots after
deducting input taxes. Realizing that the transitional input
Q: What is the rule on presumptive input tax taxes were not applied against the output VAT, which
credits? would have resulted to no net output VAT liability (the
transitional input taxes being higher), FBDC filed a claim
Persons or firms engaged in the processing of for refund for the VAT payment. The Court of Tax Appeals
sardines, mackerel and milk, and in the (CTA) denied the claim on the ground that the benefits of
the transitional input tax credit comes with the condition
manufacturing or refined sugar, cooking oil and
that business taxes should have been paid. Since FBDC
packed noodle-based instant meals, shall be acquired the property from the government free of VAT, it
allowed a presumptive input tax, creditable against cannot avail of the transitional input tax credit. The Court
the output tax, equivalent to 4% of the gross value in of Appeals (CA) affirmed the decision of the CTA, saying
money of their purchases of primary agricultural that FBDC is not entitled to the transitional input tax credit
products which are used as inputs to their since it did not pay any VAT when it purchased the Global
production. City property.
HELD: The Supreme Court (SC) reversed the decision of

---------------------------------------------------------------
the CA and granted the refund. According to the SC, there
f) Transitional input is nothing in Section 105 of the old NIRC that indicate that
--------------------------------------------------------------- prior payment of taxes is necessary for the availment of
the transitional input tax credit. All that is required is for the
Read Section 111(A), Tax Code taxpayer to file a beginning inventory with the BIR.

Note: There are 3 issues in this case: (1) Is the FBDC ---------------------------------------------------------------
entitled to claim transitional input vat (2) If yes, is the 19. Determination for output/input tax; VAT
transitional input vat applicable only to improvements and
(3) should there be a previous payment for the transitional payable; excess input tax credits
input VAT to be creditable. a) Determination of output tax
b) Determination of input tax creditable
The issues were first resolved in the case of FORT c) Allocation of input tax on mixed
BONIFACIO DEVELOPMENT CORP. V. CIR [APRIL 2, 2009] and
was affirmed in a motion for reconsideration in FORT
transaction
BONIFACIO DEVELOPMENT CORP. V. CIR [OCTOBER 2, 2009]. d) Determination of the output tax and VAT
The recent case of FORT BONIFACIO DEVELOPMENT CORP. V. payable and computation of VAT payable or
CIR [SEPTEMBER 4, 2012] simply reaffirmed the doctrines excess tax credits
laid down in the previous cases, which are as follows: ---------------------------------------------------------------
As to (1): Yes, FBDC is entitled to claim transitional input
Note: Remember the formula!
VAT by virtue of Section 111(A) (previously Section 105)
As to (2): No, RR 7-95 cannot limit the application and

coverage of Section 105 (now Section 111(A) by stating
that in the case of real estate dealers, the basis of the ---------------------------------------------------------------
presumptive input tax shall be the improvements. This is a a) Determination of output tax
legislative act beyond authority of the CIR and the ---------------------------------------------------------------
Secretary of Finance. The term “goods and properties”
includes “real properties held primarily for sale to
customers or held for lease in the ordinary course of Q: How is output tax determined?
business. Thus, FBDC is entitled to claim transitional input
VAT based not only the improvements but also on the The output tax is computed by:
value of the entire real property and regardless of whether
or not there was actual payment on the purchase price of 1. Multiplying the GSP (for sellers of goods or
the real property or not. properties) or the gross receipts (for sellers
of services) by 12% or
As to (3): No, the transitional input tax operates to the
2. Where the amount of VAT is erroneously
benefit of newly VAT-registered persons, whether or not
they previously paid taxes in the acquisition of their
billed in the invoice or receipt, by dividing
beginning inventory of goods, materials and supplies. the total invoice amount by a fraction using
the rate of VAT as numerator and 100% plus
--------------------------------------------------------------- the rate of VAT as the denominator (Section
4.110-6, RR 16-2005)
18. Persons who can avail of input tax credit
---------------------------------------------------------------
---------------------------------------------------------------
b) Determination of input tax creditable
Q: Who may avail of input tax credit?
---------------------------------------------------------------
1. The importer upon payment of VAT prior to
the release of goods from customs custody Read Section 105(C), Tax Code
2. The purchaser of the domestic goods or
properties upon consummation of he sale Q: How is the creditable input tax
3. The purchaser of services of the lessee or determined?
licensee upon payment of compensation,
rental, royalty or fee The amount of input taxes creditable during a month
4. Purchaser of real property under or quarter shall be determined by:
cash/deferred payment basis upon
consummation of the sale or if upon 1. Adding all the creditable input taxes arising
instalment basis upon every instalment from the transactions during the month or
payment (Section 4.110-2, RR 16-2005) quarter plus any amount of input tax carried
over from the preceding month or quarter
2. Reduced by the amount of claim for VAT
refund or TCC and other adjustments such
as purchase returns or allowances, input tax

attributable or allocated to exempt sales, The following input taxes were passed on by its VAT
and input tax attributable to sales to suppliers:
government subject to final withholding VAT
(Section 4.110-5, RR 16-2005) Input tax on taxable goods at 12% - P5,000
Input tax on zero-rated sales - P3,000
Input tax on sale of exempt goods - P2,000
--------------------------------------------------------------- Input tax on sale to government - P4,000
c) Allocation of input tax on mixed Input tax on depreciable capital - P20,000
transaction Not attributable to any specific activity
--------------------------------------------------------------- (monthly amortization for 60 months)
The creditable input VAT available for each of the

Q: Explain the rule on the apportionment of respective type of transactions entered into by ABC Corp
input VAT on mixed transactions. are as follows:
SECTION 4.110-4 OF RR16-2005 [SEPTEMBER 1, 1. For the sales subject to 12% VAT – (i) actual input of
2005] provides that a VAT-registered taxpayer who P5,000 and (ii) ratable portion of P5,000
is also engaged in transactions not subject to VAT 2. For the sales subject to 0% VAT – (i) actual input VAT
of 3,000 and (ii) ratable portion of P5,000
shall be allowed to recognize input tax credit on 3. For sale of exempt goods – no input VAT is creditable
transactions subject to VAT as follows: as the transactions are VAT-exempt
4. For the sales to government – no input VAT is
1. All the input taxes that can be directly attributed creditable as the law imposes a 5% FWT obligation
to transactions subject to VAT may be on the government agency-payor.
recognized for input tax credit
How was the ratable portion of creditable input VAT for
Exception: Input taxes that can be directly VAT-taxable and zero-rated sales computed?
attributable to VAT taxable sales to the
For input VAT creditable on VAT-taxable sales:
Government or any of its political subdivisions,
instrumentalities or agencies shall not be
credited against output taxes arising from sales
to non-Government entities.
2. The input tax attributable to VAT-exempt sales

shall not be allowed as credit against output tax,
but should be treated as part of cost of asset or
operating expense
For input VAT creditable on VAT zero-rated sales
3. If any input tax cannot be directly attributed to
either a VAT-taxable or VAT-exempt transaction,
the input tax shall be pro-rated to the VAT
taxable and VAT-exempt transactions and only
the ratable portion pertaining to transactions
subject to VAT may be recognized for input tax
credit.
Note: To illustrate by way of computation.

---------------------------------------------------------------
ABC Corporation had the following sales during the d) Determination of the output tax and VAT
month: payable and computation of VAT payable or
Sale to private entities subject to 12% - P100,000 excess tax credits
Sale to private entities subject to 0% - P100,000 ---------------------------------------------------------------
Sale of exempt goods - P100,000
Sale to gov’t subject to 5% FWT - P100,000 Read Section 110(B), Tax Code
Total Sales for the month - P400,000

Q: Give the three possible scenarios that transactions Note: We will discuss what the
may arise in computing the VAT payable. required invoices are later.
7. Input tax from Copy of the Monthly Remittance

If at the end of any taxable month or quarter: payments made to Return of Value Added Tax
non-residents Withheld (BIR Form 1600) filed
Output tax = input tax No VAT payable by the resident payor in behalf
of the non-resident evidencing
Output tax > input tax The excess shall be paid by remittance of VAT due which
the VAT-registered person was withheld by the payor
Output tax < input tax The excess shall be carried
over to the succeeding 8. Advance VAT on Payment Order showing
quarter or quarters sugar payment of the advance VAT.
Note: If input vat results from zero-rated or effectively (Section 4.110-8, RR 16-2005)
zero-rated transactions, any excess over the output taxes
shall be refunded to the taxpayer or credited against other ---------------------------------------------------------------
internal revenue taxes, at the taxpayer’s option. 21. Refund or tax credit of excess input tax
a) Who may claim for refund/apply for
--------------------------------------------------------------- issuance of tax credit certificate
20. Substantiation of input tax credits b) Period to file claim/apply for issuance of
--------------------------------------------------------------- TCC
c) Manner of giving refund
Q: What are the substantiation requirements d) Destination principle or cross-border
of input tax credits? doctrine
---------------------------------------------------------------
Input taxes must be substantiated and supported by
the following documents, and must be reported in
the information returns required to be submitted to Read Section 112(c), Tax Code
the Bureau:
Q: Who may claim for refund/apply for
1. For the Import entry or other equivalent issuance of tax credit certificate?
importation of document showing actual
goods payment of VAT on the A VAT-registered person whose sales of goods,
imported goods properties or services are zero-rated or effectively
zero-rated may apply for the issuance of a TCC or
2. For the domestic Invoice showing the information
refund of input tax attributable to such sales
purchase of required under Section 113 and
goods and 237 of the Tax Code (Section 4.112-1, RR No. 16-2005).
properties
3. For the purchase Public instrument i.e., deed of Note: The refund or application for issuance of TCC must
of real property absolute sale, deed of be filed with the appropriate BIR Office-Large Taxpayers
conditional sale, Service (LTS) or RDO having jurisdiction over the principal
contract/agreement to sell, etc., place of business of the taxpayer. Direct exporters may file
together with VAT invoice their claim for TCC with the One Stop Shop Center of the
issued by the seller. DOF. (see Section 4.112-1, RR No. 16-2005). The filing
of the claim with one office shall preclude the filing of the
4. For the purchase same claim with another office.
Official receipt showing the
of services information required under
Section 113 and 237 of the Tax The proper party to seek refund of an indirect tax is
Code. the statutory taxpayer, not the person on whom it is
shifted to. (EXXON MOBIL – PHILIPPINES V. CIR
5. Transitional input Inventory of goods as shown in [JANUARY 26, 2011]; SILKAIR V. CIR [FEBRUARY 25,
tax a detailed list to be submitted to 2010]
the BIR
6. Input tax on Invoice required

Deemed sale

and paid the related excise taxes thereon before the same
SILKAIR V. CIR [G.R. NO. 166482, JANUARY 25, were sold to the petitioner. The purchase price for the raw
2012] alcohol included, among others, the excise taxes paid by
the supplier. Subsequently, petitioner exported its locally
DOCTRINE: The proper party to question or seek a manufactured liquor products and received the
corresponding foreign currency proceeds of such export
refund of an indirect tax is the statutory taxpayer, the
sales. Petitioner then filed applications for tax refund/
person on whom the tax is imposed by law and who paid
issuance of tax credit certificates corresponding to the
the same even if he shifts the burden thereof to another.
excise taxes which its supplier paid but passed on to it as
part of the purchase price of the subject raw alcohol
FACTS: Petitioner filed an administrative claim for refund invoking Section130(D) of the Tax Code.
on the excise taxes paid on the purchase of jet fuel from
HELD: The Court ruled that “the right to claim a refund or
its supplier oil company for the period of July 1, 1998 to
be credited with the excise taxes belongs to its supplier.”
December 31, 1998, which it alleged to have been
Any excise tax paid thereon shall be credited or refunded”
erroneously paid based on Section 135(a) and (b) of the
requires that the claimant be the same person who paid
Tax Code of 1997. Due to inaction by respondent
the excise tax.
Commissioner, petitioner filed a Petition for Review with
the Court of Tax Appeals. The CTA denied the petition
and ruled that while petitioner’s country indeed exempts
from excise taxes petroleum products sold to international Q: What are the requirements for a claim for
carriers, petitioner nevertheless failed to comply with the VAT refund/credit?
second requirement under Section 135 (a) of the 1997 Tax
Code as it failed to prove that the jet fuel delivered by 1. The taxpayer is engaged in sales which are
Petron came from the latter’s bonded storage tank. Upon zero-rated or effectively zero-rated
the denial of the motion of reconsideration, petitioner
2. The taxpayer is VAT-registered
elevated the case to the CA. The CA affirmed the denial
and ruled that petitioner is not the proper party to seek for 3. The claim must be filed within two years after
the refund of the excise taxes paid. the close of the taxable quarter when such sales
were made
HELD: The Supreme Court held that excise taxes, which 4. The input taxes are due or paid;
apply to articles manufactured or produced in the 5. The input taxes are not transitional input taxes
Philippines for domestic sale or consumption or for any 6. The input taxes have not been applied against
other disposition and to things imported into the output taxes during and in the succeeding
Philippines, is basically an indirect tax. While the tax is quarters
directly levied upon the manufacturer/importer upon
7. The input taxes claimed are attributable to zero-
removal of the taxable goods from its place of production
or from the customs custody, the tax, in reality, is actually rated or effectively zero-rated sales
passed on to the end consumer as part of the transfer 8. In certain types of zero-rated sales, the
value or selling price of the goods, sold, bartered or acceptable foreign currency exchange proceeds
exchanged. The proper party to question, or seek a refund thereof had been duly accounted for in
of an indirect tax is the statutory taxpayer, the person on accordance with BSP rules and regulations
whom the tax is imposed by law and who paid the same [Sections 106(A)(2)(a)(1) and (2); Section
even if he shifts the burden thereof to another. Petitioner, 106(B); Sections 108(B)(1) and (2)]
as the purchaser and end-consumer, ultimately bears the 9. Where there are both zero-rated or effectively
tax burden, but this does not transform its status into a
zero-rated sales and taxable or exempt sales,
statutory taxpayer.
and the input taxes cannot be directly and
entirely attributable to any of these sales, the
input taxes shall be proportionately allocated on
the basis of sales volume. (See INTEL
DIAGEO PHILIPPINES V. CIR [G.R. NO. 183553, TECHNOLOGY PHILIPPINES V. CIR [APRIL 27,
NOVEMBER 12, 2012] 2007])
DOCTRINE: The claimant for the refund of excise taxes Note: In JP MORGAN CHASE BANK, N.A. – PHILIPPINE
related to exported products shall be the same person CUSTOMER CARE CENTER VS. COMMISSIONER OF INTERNAL
who paid the taxes. REVENUE [CTA CASE NOS. 7650, 7681 AND 7782, MARCH
13, 2012], the CTA held that Input taxes incurred prior to
FACTS: Diageo Philippines, Inc. purchased raw alcohol registration as VAT taxpayer with the BIR cannot be the
from its supplier for use in the manufacture of its beverage subject of a refund.
and liquor products. The supplier imported the raw alcohol

An application for refund/tax credit certificate on the basis application for effective zero-rating. The BIR issued
of the cancellation of VAT registration filed before the a ruling stating that the supply of electricity by Mirant
effectivity of the cancellation is premature. MINDANAO I to NAPOCOR shall be subject to 0% VAT. On April
GEOTHERMAL PARTNERSHIP VS. COMMISSIONER OF INTERNAL 14, 1998, Mirant paid Mitsubishi the VAT component
REVENUE, CTA CASE NO. 8247, AUGUST 10, 2012
billed by the latter for services rendered. Mirant files
nd
its quarterly VAT return for the 2 quarter of 1998,
Amounts reflected in the supporting documents must the
same with the amount reported as zero-rated sales in its
where it reflected the input VAT paid to Mitsubishi.
VAT Return for the period subject for refund. (HARTE- Subsequently, on December 20, 1999, Mirant filed
HANKS PHILIPPINES, INC. VS. COMMISSIONER OF INTERNAL an administrative claim for refund of unutilized input
REVENUE, CTA CASE NO. 7975 & 7998, JULY 2, 2012) VAT arising from purchase of capital goods from
Mitsubishi and its domestic purchase of goods and
A VAT-registered person claiming VAT zero rated direct services attributable to its zero-rated sales of power-
export sales must present at least three (3) types of generation services to NAPOCOR. The claim was
documents, to wit: (a) the sales invoice as proof of sale of denied for being filed beyond the prescriptive period
goods; (b) the export declaration and bill of lading or of two years.
airway bill as proof of actual shipment of goods from the
Philippines to a foreign country; and (c) bank credit advice,
certificate of bank remittance or any other document The Supreme Court held that Mirant’s claim has
proving payment for the goods in acceptable foreign prescribed. Unutilized input VAT payments must be
currency or its equivalent in goods and services. PHILEX claimed within two years reckoned from the close of
MINING CORPORATION INC. VS. COMMISSIONER OF INTERNAL the taxable quarter when the relevant sales were
REVENUE, CTA CASE NO. 8284, JULY 30, 2012 made pertaining to the input VAT even if the
payment for the VAT was made some quarters after
16
--------------------------------------------------------------- that. The fact that there was a pending request for
b) Period to file claim/apply for issuance of zero-rating cannot be a basis for the late filing of
TCC return and payment of taxes. Further, Mirant cannot
--------------------------------------------------------------- avail itself of the provisions of either Section 204(C)
or 229 of the NIRC which, for the purpose of refund,
Q: What is the prescriptive period to file the prescribes the payment of the tax as the starting
point for the two-year prescriptive limit for the filing of
claim for refund or application for issuance
a claim. These provisions apply only to instances of
of TCC? erroneous payment or illegal collection of internal
revenue taxes.
The written application for the issuance of a TCC or
refund must be filed with the BIR within 2 years after Note: In the case of claims for refund of unutilized VAT on
the close of the taxable quarter when the relevant account of cessation of business, the 2-year period shall
sales were made. commence from the date of cancellation of registration of
the taxpayer and not from the close of the taxable quarter
Q: In claims for VAT refund/credit, what is when the sales were made (Associated Swedish Steels
the reckoning point for the two-year v. CIR [CTA Case No. 7850, August 23, 2012).
prescriptive period? The cancellation of VAT registration commences from the
first day of the month following the application, under
The reckoning period is from the close of the taxable Section 236 of the Tax Code. (Ibid)
when the relevant sales were made.
Q: What is the period within which tax
Note: For this matter, It is important to discuss the leading refund/credit of input taxes shall be made?
case of CIR V. MIRANT PAGBILAO CORP. [SEPTEMBER 12,
2008].
The CIR shall grant a tax credit certificate/refund for
In CIR V. MIRANT PAGBILAO CORP. [SEPTEMBER 12, creditable input taxes within 120 days from the date
2008], Mirant generated power which it sells to
NAPOCOR in which connection it secured the
services of Mitsubishi Corporation of Japan. In the
belief that its sale of power generation services to 16
Note that previously in ATLAS CONSOLIDATED MINING V. CIR
the NPC was VAT zero-rated because of [JUNE 8, 2007], the rule was that the two-year prescriptive period
NAPOCOR’s tax exempt status, Mirant filed an for filing a claim for refund/credit of input VAT on zero-rated sales
was counted from the date of filing of the return

of submission of complete documents in support of the Court the authority to entertain the same.
the application. (see Section 112(C), Tax Code) COMMISSIONER OF INTERNAL REVENUE, VS. TEAM SUAL
CORPORATION [C.T.A. EB NO. 686, MAY 22, 2012]; CE
Note: The 120-day period is counted from the submission CASECNAN WATER AND ENERGY COMPANY, INC. VS. CIR, CTA
of the complete documents with the BIR. (PILIPINAS TOTAL EB NO. 726 [CTA CASE NO. 7739, June 26, 2012]; PHILEX
GAS, INC. VS. COMMISSIONER OF INTERNAL REVENUE [CTA, MINING CORPORATION VS. CIR [CTA EB NO. 778 CTA CASE
JANUARY 05, 2012]) NO. 7720, JUNE 26, 2012]
Non-submission of complete documents at the As the provision is phrased, the word "may" relates to the
administrative level is not fatal to a judicial claim (PHILEX taxpayer's option to appeal or not to appeal, upon the
MINING CORPORATION VS. COMMISSIONER OF INTERNAL denial of its claim for refund or after the expiration of the
REVENUE [CTA CASE NO. 8228, MAY 31, 2012]) 120-day period. However, if the tax payer opts to appeal,
such claim must be filed within the 30-day period given
What is fatal to the taxpayer's cause is its failure to submit from receipt of the denial or the expiration of the 120-day
sufficient evidence such as invoices and receipts in period. Thus, it is the option to appeal which is permissive,
support of its claim before the CTA and not its failure of to however, the period to appeal must be mandatorily
submit complete documents before the BIR and not before complied with. (MINDANAO II GEOTHERMAL PARTNERSHIP VS.
the CTA. COMMISSIONER OF INTERNAL REVENUE VS. COMMISSIONER OF INTERNAL REVENUE, CTA EB CASE NO.
PHILIPPINE AIRLINES, INC., CTA EB CASE NO. 775, JULY 24, 750, JULY 5, 2012)
2012
Q: Can the taxpayer appeal to the CTA
Q: What is the remedy in case of denial of without waiting for the lapse of the 120 day
the CTA of the claim for refund or if the CIR period?
failed to act on the claim within the 120-day
period? No. Where the taxpayer did not wait for the decision
of the CIR or the lapse of the 120-day period, the
In case of full or partial denial of the claim for tax filing of the said judicial claim with the CTA is
credit certificate/refund: premature. The non-observance of the 120-day
period is fatal to the filing of a judicial claim.
a) The taxpayer may appeal to the CTA within
30 days from the receipt of said denial, Note: In this regard, let us discuss the leading case of CIR
V. AICHI FORGING COMPANY OF ASIA [ OCTOBER 6, 2010].
otherwise the decision shall be come final
In CIR V. AICHI FORGING COMPANY OF ASIA [
b) If no action on the claim for tax credit
OCTOBER 6, 2010], Aichi Forging is a VAT-registered
certificate/refund has been taken by the CIR
corporation engaged in manufacturing and
after the 120 day period in which he must
processing of steel. Aichi filed a tax credit/refund for
decide, the taxpayer may appeal to the CTA
its unutilized input tax from purchases and
within 30 days from the lapse of the 120 day
importation attributed to its zero-rated sales. The
period.
CIR and CTA ruled that the administrative and
Note: Judicial claim for refund should be filed within thirty
judicial claims were filed beyond the period allowed
(30) days from the receipt of the decision of the by law. Moreover, the CIR puts in issue the fact that
Commissioner of Internal Revenue (CIR) or upon the the administrative claim and the judicial claim were
expiration of the one hundred twenty (120) days in case of filed on the same day. The CIR opines that
inaction of the CIR. KEPCO PHILIPPINES CORPORATION VS. simultaneous filing of the claims contravenes the
COMMISSIONER OF INTERNAL REVENUE, [CTA EB NO. 736 NIRC which requires the prior filing of an
695, JANUARY 10, 2012]; DIAGEO PHILIPPINES, INC. VS. administrative claim.
COMMISSIONER OF INTERNAL REVENUE, [CTA CASE NOS.
7846 AND 7865, JANUARY 16, 2012]; PHILEX MINING The Supreme Court first reiterated that the unutilized
CORPORATION VS. COMMISSIONER OF INTERNAL REVENUE,
C.T.A. EB NO. 728, AUGUST 31, 2012; PILIPINAS TOTAL GAS,
input VAT must be claimed within two years after the
INC. VS. CIR, C.T.A. EB NO. 776, OCTOBER 11, 2012; close of the taxable quarter when the sales were
NORTHWIND DEVELOPMENT CORPORATION VS. CIR, CTA made as laid down in CIR V. MIRANT PAGBILAO
CASE NO. 7918, OCTOBER 03, 2012 CORP. [SEPTEMBER 12, 2008]. Going to the
administrative and judicial claims, the Court ruled
In case of inaction by the BIR, judicial claim for refund filed that the administrative claim was timely filed while
beyond thirty (30) days from the expiration of the one the judicial claim was premature. In this case,
hundred twenty (120) days is filed out of time and deprives

applying the Administrative Code which states that a Thus:

year is composed of 12 calendar months instead of
the Civil Code (a year is equivalent to 365 days), it is 1. For the administrative claim, file
clear that Aichi timely filed its administrative claim within 2 years from end of the taxable
quarter when sales were made.
within the two-year prescriptive period. On the other
hand, the claim of Aichi must be denied for non- 2. For judicial claim, BIR has 120 days
observance of the 120-day period Where the to decide. If adverse decision within
taxpayer did not wait for the decision of the CIR or the 120 day period, 30 days from
the lapse of the 120-day period, it having receipt of decision to appeal to CTA. If
simultaneously filed the administrative and the no BIR decision within 120 days, 30
th
judicial claims, the filing of the said judicial claim with days from the 120 day to appeal to
the CTA is premature. The non-observance of the the CTA.
120-day period is fatal to the filing of a judicial claim.
The claim of Aichi that such non-observance is not Note: (1) Thus, Aichi affirmed the Court’s ruling in Mirant
in that the 2-year prescriptive period shall be reckoned
fatal as long as both the administrative and judicial
from the end of the taxable quarter when the relevant
claim is filed within the 2-year prescriptive period is sales were made but clarified that such prescriptive period
without legal basis. The 2 year prescriptive period applies only to the filing of the administrative claim.
refers to applications for refund/credit filed with the
CIR and not to appeals made to the CTA. Applying See THIRD MILLENNIUM OIL MILLS, INC. VS. CIR [CTA EB
the two-year period to judicial claims would render NO. 729 (CTA CASE NO. 7583), JUNE 7, 2012]; CIR VS.
nugatory Section 112(D) of the NIRC, which already PENN PHILIPPINES, INC., CTA EB NO. 693 [CTA CASE NO.
provides for a specific period within which a taxpayer 7457), JUNE 27, 2012]
should appeal the decision or inaction of the CIR.
The taxpayer’s compliance with the 120-day period under
The 120-day period is crucial in filing an appeal with
Section 112(C) is both mandatory and jurisdictional.
the CTA.
See PROCTER & GAMBLE ASIA, PTE. LTD. VS. CIR [CTA EB
Note: In other words, the 2-year prescriptive period CASE NO. 740 (CTA CASE NO. 7683), JUNE 18, 2012];
applies only to the filing of the administrative claim CARGILL PHILIPPINES, INC. VS. CIR, [CTA EB CASE NO. 779
meaning the filing of the claim for refund or application for (CTA CASE NOS. 6714 & 7262), JUNE 18, 2012]; PHILEX
TCC with the CIR. If you want to file a suit with the CTA, MINING CORPORATION VS. CIR, [CTA EB NO. 817 (CTA
you wait for the 120-day period to lapse. Dahil dun, you CASE NO. 7798), JUNE 13, 2012]; DIAGEO PHILIPPINES, INC.
cannot simultaneously file a claim with the CIR and file a VS. CIR, [CTA EB NO. 806 (CTA CASE NO. 7778), JUNE 21,
suit with the CTA. This early on I will tell you that the rule 2012]; PHILEX MINING CORPORATION VS. CIR, CTA EB NO.
is different pagdating sa refund or credit of an erroneously 808 (CTA CASE NOS. 7859 & 7886), JUNE 6, 2012; CE
or illegally collected tax under Section 229. Doon, both the CASECNAN WATER AND ENERGY COMPANY, INC. VS. CIR, CTA
administrative and judicial claim must be filed within the 2 EB NO. 726 (CTA CASE NO. 7739), JUNE 26, 2012;
year prescriptive period. Further, you need not wait for the
BIR to act. You can simultaneously file your claim for (2) Citing Aichi, the CTA in numerous cases have held that
refund or credit and the suit with the CTA. We will discuss filing the judicial claim without waiting for the lapse of the
that later in Tax Remedies. 120-day period is fatal. The premature filing of the judicial
claim warrants dismissal.
Q: How do we reconcile CIR V. MIRANT
PAGBILAO CORP. [SEPTEMBER 12, 2008] and SEE DEUTSCHE KNOWLEDGE SERVICES, PTE. LTD. VS.
CIR V. AICHI FORGING COMPANY OF ASIA [ COMMISSIONER OF INTERNAL REVENUE [CTA CASE NO. 8165,
OCTOBER 6, 2010]? JANUARY 08, 2013]; CASECNAN WATER AND COMPANY, INC.
VS.COMMISSIONER OF INTERNAL REVENUE [CTA EB NO. 836,
JANUARY 28, 2013]; HEDCOR SIBULAN, INC. VS.
In both Mirant The 2-year prescriptive period is COMMISSIONER OF INTERNAL REVENUE [C.T.A. CASE NO.
and Aichi counted from the end of the taxable 8051, JANUARY 05, 2012]; SITEL PHILIPPINES CORPORATION
quarter when the sales were made. VS. COMMISSIONER OF INTERNAL REVENUE, [C.T.A. EB NO.
In Mirant The 2-year prescriptive period applies 668, JANUARY 06, 2012]; CE CEBU GEOTHERMAL POWER
to both the administrative and judicial COMPANY, INC. VS. COMMISSIONER OF INTERNAL REVENUE
claim. Thus, both claims must be filed [CTA EB NO. 741, JANUARY 12, 2012]; CBK POWER
within 2 years from the end of the COMPANY LIMITED VS. COMMISSIONER OF INTERNAL REVENUE
taxable quarter when the sales were [CTA EB NO. 760, FEB 1, 2012]; SAN ROQUE POWER
made CORPORATION VS. COMMISSIONER OF INTERNAL REVENUE
In Aichi The 2-year prescriptive period only [CTA CASE NO, 7937, FEBRUARY 8, 2012]; AIR LIQUIDE
applies to the administrative claim.

PHILIPPINES INC., VS. COMMISSIONER OF INTERNAL REVENUE ---------------------------------------------------------------

[CTA EB NO. 704, FEBRUARY 27, 2012]; PANAY POWER c) Manner of giving refund
CORPORATION VS. COMMISSIONER OF INTERNAL REVENUE
[CTA EB NO. 709, MAY 17, 2012]; ENERGY DEVELOPMENT ---------------------------------------------------------------
CORPORATION VS. COMMISSIONER OF INTERNAL REVENUE
[CTA EB NO. 809, MAY 31, 2012]; CHEVRON HOLDINGS, INC. Q: What is the manner of giving refund?
VS. CIR, [CTA CASE NOS. 7776 & 7813, JUNE 6, 2012]; CIR
VS. PENN PHILIPPINES, INC., CTA EB NO. 693 [CTA CASE
Refunds shall be made upon warrants drawn by the
NO. 7457), JUNE 27, 2012]; AIR LIQUIDE PHILIPPINES, INC. VS.
COMMISSIONER OF INTERNAL REVENUE, CTA CASE NO. 8017,
Commissioner or by his duly authorized
JULY 03, 2012; MINDANAO II GEOTHERMAL PARTNERSHIP VS. representative without the necessity of being
COMMISSIONER OF INTERNAL REVENUE, CTA CASE NOS. 7899 countersigned by the Chairman, Commission on
AND 7942, AUGUST 1, 2012; CBK POWER COMPANY LIMITED Audit, the provisions of the Administrative Code of
VS. CIR, CTA EB NO. 758, OCTOBER 04, 2012; VISAYAS 1987 notwithstanding: That refunds shall be subject
GEOTHERMAL POWER COMPANY VS. CIR, CTA EB CASE NO. to post audit by the Commission on Audit. (See
864, OCTOBER 08, 2012; PROCTER & GAMBLE ASIA PTE. LTD. Section 112(D), Tax Code)
VS. CIR, CTA EB NO. 765, OCTOBER 11, 2012; HEDCOR
SIBULAN, INC. VS. COMMISSIONER OF INTERNAL REVENUE,
Note: If you ask for a tax credit, you get what you call a
CTA EB CASE NO. 890, DECEMBER 06, 2012
Tax Credit Certificate (TCC). However, note Executive
Order 68 [March 27, 2012]. No more issuance of VAT
Now, let us outline the process. TCCs and the EO provides for the monetization of
outstanding VAT TCCs. EO 68 allows qualified VAT-
Q: Outline the process for the refund or registered taxpayers to receive the cash equivalent of their
credit of excess or unutilized input taxes outstanding TCCs either: (1) Collecting in advance from a
under Section 112(c). trustee bank a discounted cash value of their TCCs or (2)
Collect full cash value of their TCC upon a certain maturity
date to be determined by the BIR and BOC. DOF Joint
1. Filing and Payment Circular 2-2012 provides that the monetization will start in
2012 for TCCs issued prior to 2004 while those issued in
2. Administrative 2011 and 2012 will be monetized in 2016.
claim within 2 years – counted from the close .
of the taxable quarter when the relevant sales ---------------------------------------------------------------
were made d) Destination principle or cross-border
doctrine
3. Submission of additional and relevant ---------------------------------------------------------------
support documents – within 60 days from filing
of claim Note: I already discussed this.
4. Appeal to CTA Division – within 30 days from
---------------------------------------------------------------
receipt of notice of denial or from lapse of 120
days of inaction counted from submission of 22. Invoicing Requirements
documents. The appeal should not be made a) Invoicing requirements in general
within the 2-year prescriptive period. Otherwise, b) Invoicing and recording deemed sale
the judicial claim is premature. The Motion for transactions
Reconsideration or New Trial to CTA Division c) Consequences of issuing erroneous VAT
within 15 days from receipt of decision. invoice or VAT official receipt
---------------------------------------------------------------
5. Appeal to CTA En Banc – within 15 days from
receipt of resolution. Motion for Reconsideration ---------------------------------------------------------------
to the CTA En Banc within 15 days from receipt a) Invoicing requirements in general
of decision
---------------------------------------------------------------
6. Appeal to the SC – within 15 days from receipt
of resolution under Rule 45 Read Section 113(A), Tax Code

Q: What are required to be issued by a VAT- Read Section 113(B), Tax Code
registered person?
Q: What information should be contained in
1. VAT invoice – for every sale, barter or the VAT invoice or VAT official receipt?
exchange of goods or properties
2. VAT official receipt – for every lease of 1. A statement that the seller is a VAT-registered
goods or properties and for every sale, person, followed by his taxpayer's identification
barter or exchange of services. number (TIN);
Note: Only VAT-registered persons are required to print 2. The total amount which the purchaser pays or is
their Tax Identification Number (TIN) followed by the word obligated to pay to the seller with the indication
“VAT” in their invoice or official receipt, which shall be
considered the VAT invoice or VAT official receipt. All
that such amount includes the value-added tax
purchases not covered by invoices/receipts other than the provided, that:
VAT invoice or VAT official receipt shall not give rise to
any input tax (see Section 4.113-1(A), RR 16-2005] a) The amount of the tax shall be shown as a
separate item in the invoice or receipt;
Q: Is there a difference between an invoice b) If the sale is exempt from value-added tax,
and official receipt for purposes of the term "VAT-exempt sale" shall be written
substantiation? or printed prominently on the invoice or
receipt;
In KEPCO PHILIPPINES V. CIR [NOVEMBER 24, 2010], c) If the sale is subject to zero percent (0%)
in ruling on Kepco’s contention that an invoice and value-added tax, the term "zero-rated sale"
an official receipt are interchangeable, the Supreme shall be written or printed prominently on the
Court stated that only a VAT invoice might be invoice or receipt;
presented to substantiate a sale of goods or d) If the sale involves goods, properties or
properties, while only a VAT receipt could services some of which are subject to and
substantiate a sale of services. The VAT invoice is some of which are VAT zero-rated or VAT-
the seller’s best proof of the sale of the goods or exempt, the invoice or receipt shall clearly
services to the buyer while the VAT receipt is the indicate the breakdown of the sale price
buyer’s best evidence of the payment of goods or between its taxable, exempt and zero-rated
services received from the seller. Even though VAT components, and the calculation of the
invoices and receipts are normally issued by the value-added tax on each portion of the sale
supplier/seller alone, the said invoices and receipts, shall be shown on the invoice or receipt:
taken collectively, are necessary to substantiate the Provided, That the seller may issue separate
actual amount or quantity of goods sold and their invoices or receipts for the taxable, exempt,
selling price (proof of transaction), and the best and zero-rated components of the sale.
means to prove the input VAT payments (proof of
payment). Hence, VAT invoice and VAT receipt 3. The date of transaction, quantity, unit cost and
should not be confused as referring to one and the description of the goods or properties or nature
same thing. Certainly, neither does the law intend of the service; and
the two to be used alternatively
4. In the case of sales in the amount of one
Note: The unamended Section 113 did not thousand pesos (P1,000) or more where the
distinguish between an invoice and a receipt when sale or transfer is made to a VAT-registered
used as evidence of a zero-rated transaction. Thus, person, the name, business style, if any,
in the case of transactions which took place during address and taxpayer identification number
the period of the unamended law, the Court could (TIN) of the purchaser, customer or client. (see
accept either or both of the documents as evidence Section 4.113-1(B), RR 16-2005)
of zero-rated transactions (SOUTHERN PHILIPPINES V.
CIR [OCTOBER 19, 2011]; AT&T COMMUNICATIONS ---------------------------------------------------------------
SERVICES PHILIPPINES V. CIR [AUGUST 3, 2010] b) Invoicing and recording deemed sale
transactions
---------------------------------------------------------------

Q: What are the invoicing and recording disposed of it VAT-

requirements for deemed sale transactions? registered buyers, an
invoice or instrument of sale
or transfer shall be
prepared, citing the invoice
Deemed sale Invoicing and recording
number wherein the tax was
transaction requirements
imposed on the deemed
sale. At the same time, the
tax paid corresponding to
1. Transfer, use or A memorandum entry in the the goods sold should be
consumption not in subsidiary sales journal to separately indicated in the
the course of record withdrawal of goods for instrument of sale
business of goods personal use
or properties
originally intended (Section 4.113-2, RR 16-2005)
for sale or use in
the course of
business ---------------------------------------------------------------
c) Consequences of issuing erroneous VAT
2. Distribution or Invoice, at the time of the invoice or VAT official receipt
transfer to transaction, which should ---------------------------------------------------------------
shareholders/invest include all the info prescribed in
ors or creditors Sec. 113(B)
Read Section 113(D), Tax Code
3. Consignment of Invoice, at the time of the Q: What are the consequences of issuing
goods if actual sale transaction, which should erroneous VAT invoices or VAT official
is not made within include all the info prescribed in
60 days Sec. 113(B)
receipts?
4. Retirement from or An inventory shall be prepared 1. If a person who is not VAT-registered issues an
cessation of and submitted to the RDO who invoice or receipt showing his TIN, followed by
business with has jurisdiction over the the word “VAT”, the erroneous issuance shall
respect to all goods taxpayer‘s principal place of result to the following:
on hand business not later than 30 days
after retirement or cessation a) The Non-VAT person shall be liable to the:
from the business. An invoice
shall be prepared for the entire
inventory, which shall be the i. percentage taxes applicable
basis of the entry into the ii. VAT due on the transactions without
subsidiary sales journal. The the benefit of any input tax credit
invoice need not enumerate the iii. 50% surcharge as penalty
specific items appearing in the
inventory regarding the b) The VAT shall, if the other requisite
description of the goods. information required is shown on the invoice
However, the sales invoice or receipt, be recognized as an input tax
number should be indicated in
credit to the purchaser.
the inventory filed and a copy
thereof shall form part of this
invoice. 2. If a VAT-registered person issues a VAT invoice
or VAT official receipt for a VAT-exempt
i. If the business is to be transaction, but fails to display prominently on
continued by the new the invoice or receipt the term “VAT-exempt
owners or successors, the Sale,” the issuer shall be liable to account for the
entire amount of output tax VAT imposed. The purchaser shall be entitled to
on the amount deemed sold claim an input tax credit on said purchase. (see
shall be allowed as input
Section 4.113-4, RR 16-2005)
taxes.
ii. If the business is to be
liquidated and the goods in Note: Failure or refusal to comply with the requirement
the inventory are sold or that the amount of tax shall be shown as a separate item

in the invoice or receipt shall, upon conviction, for each act same Tax Code and its amendments. It cited the cases of
or omission, be punished by a fine of not less than P1,000 Panasonic Communications Imaging Corporation of the
but not more than P50,000 and suffer imprisonment of not Philippines v. Commissioner of Internal Revenue, G.R.
less than 2 years but not more than 4 years (RR 18-2011 No. 178090, 8 February 2010, were it was ruled that this
[November 21, 2011]) provision is “reasonable and is in accord with the efficient
collection of VAT from the covered sales of goods and
Q: What is the effect of the failure to comply services” and Kepco Philippines Corporation v.
with the invoicing requirements on the claim Commissioner of Internal Revenue, G.R. No. 179961, 31
January 2011 where it was ruled that the subsequent
for refund or credit of input VAT on zero- incorporation of Section 4.108-1 of RR 7-95 in Section 113
rated sales? (B) (2) (c) of R.A. 9337 actually confirmed the validity of
the imprinting requirement on VAT invoices or official
The claim for refund of unutilized or excess input receipts – a case falling under the principle of legislative
taxes on the alleged zero-rated sales will be denied. approval of administrative interpretation by reenactment.
The invoicing requirements are mandatory and the
failure to comply is fatal in claims for a refund or
credit of input VAT on zero-rated sales. (SILICON
PHILIPPINES V. CIR [JANUARY 21, 2011]. EASTERN TELECOMMUNICATIONS V. CIR, G.R.
NO. 168856, AUGUST 29, 2012
See also MICROSOFT PHILIPPINES V. CIR [APRIL 6,
2011]; PANASONIC COMMUNICATION IMAGING CORP V. DOCTRINE: Failure of a taxpayer to print the word
CIR [FEBRUARY 8, 2010]; JRA PHILIPPINES V. CIR “zero-rated” on its invoices or receipts is fatal to its
claim for tax refund.
[OCTOBER 11, 2010]; HITACHI GLOBAL STORAGE
TECHNOLOGIES PHILIPPINES CORP V. CIR [OCTOBER FACTS: Taxpayer rendered incoming telecommunication
20, 2010]; KEPCO PHILIPPINES CORP V. CIR services for non-resident foreign telecommunication
[NOVEMBER 24, 2010]. companies. For these services to non-resident foreign
telecommunication companies, taxpayer generated foreign
currency revenues which were inwardly remitted in
WESTERN MINDANAO POWER CORPORATION V. accordance with the rules and regulations of the BSP.
CIR, G.R. NO. 181136, JUNE 13, 2012 Believing that these are zero-rated sales, taxpayer filed an
application for refund for the unutilized input taxes
DOCTRINE: Failure to print the word “zero-rated” on allocated to such sales, for the period January 1 to
the VAT invoices or official receipts is fatal in claims December 31, 1999.
for a refund or credit of input VAT on zero-rated sales,
even if the claims were made prior to the effectivity of HELD: The Court denied the claim on the ground that the
R.A. 9337. taxpayer failed to imprint the word “zero-rated” on the face
of its VAT invoices or receipts, in violation of Revenue
FACTS: Taxpayer contends that RR 7-95 constitutes Regulations No. 7-95. The absence of the word “zero-
undue expansion of the scope of the legislation it seeks to rated” on the invoices and receipts of a taxpayer will result
implement on the ground that the statutory requirement for in the denial of the claim for tax refund.
imprinting the phrase “zero-rated” on VAT official receipts The claim was also denied on the ground that the taxpayer
appears only in Republic Act No. 9337. This law took failed to substantiate its taxable
effect on 1 July 2005, or long after petitioner had filed its and exempt sales, the verification of which was not
claim for a refund. included in the examination of the commissioned
independent certified public accountant.
HELD: the Supreme Court held that in a claim for tax
refund or tax credit, the applicant must prove not only Q: Kepco filed a claim for refund of
entitlement to the grant ofnthe claim under substantive unutilized input VAT based on its zero-rated
law. It must also show satisfaction of all the documentary sale of power to NAPOCOR. A substantial
and evidentiary requirements for an administrative claim
for a refund or tax credit. Hence, the mere fact that portion of the claim was denied for having
taxpayer’s application for zero-rating has been approved been supported by VAT invoices which only
by the CIR does not, by itself, justify the grant of a refund had the TIN-VAT stamped and not printed. Is
or tax credit. The taxpayer claiming the refund must further Kepco entitled to the claim for refund?
comply with the invoicing and accounting requirements
mandated by the NIRC, as well as by revenue regulations
implementing them. It further held that RR 7-95 proceeds
No. In KEPCO PHILIPPINES V. CIR [NOVEMBER 24,
from the rule-making authority granted to the Secretary of 2010], the Supreme Court ruled that the requirement
Finance by the NIRC for the efficient enforcement of the that the TIN be imprinted and not merely stamped is

a reasonable requirement imposed by the BIR.. The 3. Any person who imports goods
failure to adhere to this rule will not only expose the 4. Professional practitioners whose gross
taxpayer to penalties but should also serve to professional fees exceed P1,919,500 for any
disallow the claim. 12-month period.
Q: Is the printing of the Authority to Print Q: What are the rules regarding the time for
(ATP) required in the invoices or receipts? filing the return and payment of the tax?
No. The ATP need not be reflected in the invoices or Every person liable to pay VAT shall file a:
receipts because there is no law or regulation
requiring it. Failure to print the ATP on the invoices a. The monthly VAT Declarations of taxpayers
or receipts should not result in the outright denial of whether large or not shall be filed and the
a claim or the invalidation of the invoices or receipts taxes paid not later than the 20th day
for purposes of claiming a refund. following the end of each month
b. A quarterly VAT return of the amount of his
But, while there is no such law, the Tax Code gross sales or receipts within 25 days after
requires persons engaged in business to secure the close of each taxable quarter prescribed
ATP from the BIR prior to printing invoices or for each taxpayer.
receipts. Since the ATP is not indicated in the
receipts or invoices, the only way to verify whether Note: (1) A VAT-registered person shall pay VAT on a
the invoices or receipts are duly registered is by monthly basis. Amounts reflected in the monthly VAT
requiring the claimant to present its ATP from the return for the first 2 months of the quarter shall be included
BIR. Without which, the invoices or receipts would in the quarterly VAT return which reflects the cumulative
figures for the taxable quarter. Payments in the monthly
not have probative value for the purpose of refund. returns shall be credited in the quarterly return to arrive at
(SILICON PHILIPPINES V. CIR [JANUARY 21, 2011]). the net VAT payable or excess input tax as of the end of
the quarter
Note: A taxpayer exempt from VAT but opting to be
registered as VAT taxpayer may be held liable for VAT (2) Taxable quarter shall mean the quarter that is
deficiency for failure to print the words “VAT-exempt sale” synchronized to the income tax quarter of the taxpayer.
on the official receipts issued to its PEZA-registered
lessee First Sumiden Realty, Inc. vs. CIR, CTA Case
No. 8151, September 27, 2012
---------------------------------------------------------------
24. Withholding of final VAT on sales to
Refund claim under Section 229 of the Tax Code does not government
require proof of compliance with the invoicing ---------------------------------------------------------------
requirements. ERICSSON TELECOMMUNICATIONS, INC. VS.
AUGUST 2, 2012
--------------------------------------------------------------- Q: What is the rule on withholding of VAT by

23. Filing of return and payment government agencies?
---------------------------------------------------------------
The government or any of its political subdivisions,
instrumentalities or agencies, including GOCCs,
Read Section 114(A) and (B), Tax Code shall, before making payment on account of each
purchase of goods or services subject to VAT,
Q: Who are required to file a VAT return? deduct and withhold a final VAT equivalent to 5% of
the gross payment thereof provided that the
1. Every person or entity who in the course of payment for lease or use of properties or property
his trade or business, sells or leases goods, rights to non-resident owners shall be subject to
properties and services subject to VAT if the 10% withholding tax at the time of payment.
aggregate amount of actual gross sales or (Section 4.114-2, RR 16-2005)
receipts exceed P1,919,500 for any 12-
month period Note: The 5% final VAT shall represent the net VAT
2. A person required to register as a VAT payable of the seller or, otherwise stated, the presumed
taxpayer but failed to register input VAT cost of the entity dealing with the government

agency. The remaining 7% effectively accounts for the No. In LVM CONSTRUCTION CORPORATION V.
standard input VAT, in lieu of the actual input VAT directly SANCHEZ [DECEMBER 5, 2011], the Supreme Court
attributable or ratably apportioned to such sales. (Ibid) held that as an entity which dealt directly with the
Okay, I sense confusion. government insofar as the main contract was
Let me explain. Remember na in order for the taxpayer to
concerned, LVM was itself required by law to pay
determine yung tax liability niya, yan ang formula! the 8.5% (now 5%) VAT which was withheld by
Remember also na if input tax > output tax, pwde mo i- DPWH. Given that the JV complied with their own
carry over ito to the succeeding quarters or kapag yung obligation when they paid their VAT from their gross
input vat results from a zero-rated or effectively zero-rated receipts and the fact that the contract between LVM
transaction, puwede humingi ng refund or credit. Ang and the JV did not stipulate any obligation on LVM
implication in case of 5% final VAT ay hindi magaaply assuming the VAT, LVM has no basis to withhold
yang formula na output tax minus input tax. So automatic payments. Although the burden to pay an indirect
kapag withholding by the government, do not use that tax like the VAT can be passed on, the liability to
formula!
pay the same remains with the seller. IN this case,
Tanong: Is the taxpayer still entitled to the excess input both LVM and the JV are liable for their respective
VAT if meron? It depends. Ito ang rules. If the actual input VAT obligations as respective sellers.
VAT is above 7% of gross payments, then the difference
between the actual input VAT and the 7% or the excess
may form part of seller’s expense or cost. On the other
hand, if the actual input VAT is below 7% of gross
payments, the different must be closed or deducted to
expense or cost. Hence, the taxpayer will realize
additional income.
Q: In what instances shall the 12% final VAT

be withheld?
1. Lease or use of properties or property rights
owned by non-residents;
2. Services rendered to local insurance companies,
with respect to reinsurance premiums payable to
non-residents; and;
3. Other services rendered in the Philippines by
non-residents
Q: LVM Construction Corp. was engaged by

the DPWH for the construction of roads and
bridges. LVM subcontracted one of the
projects to a Joint Venture. After
completion, the JV demanded full payment
to which LVM responded that they
discovered that no deductions for VAT were
made on previous payments and as such
they were going to deduct 8.5% (now 5%)
from the payments still due. The JV
disputed this and argued that all the
receipts issued to LVM would have made
JV subject to VAT and, hence, LVM could
claim such as input tax. Can LVM rightfully
deduct the amount representing the
withholding VAT due on its transaction with
DPWH?

---------------------------------------------------------- (b) Suspension of running of statute of

E. TAX REMEDIES limitations
---------------------------------------------------------- (iv) General provisions on additions to
the tax
Note: I want to start by saying that the bar syllabus (a) Civil penalties or Surcharges
creates an impression that the remedies of the (b) Interest
taxpayer are assessment, collection and refund. (c) Compromise penalties
That is wrong. Assessment and collection are the (v) Assessment process
powers of the taxing authority/government. Under (a) Tax audit
the power of collection, different remedies are (b) Notice of informal conference
available to the government namely: (1) tax lien, (2)
(c) Issuance of preliminary
compromise, (2) distraint of personal property or levy
of real property or garnishment of bank deposits (3) assessment notice
sale of property, (4) forfeiture, (5) compromise and (d) Exceptions to issuance of
abatement, (6) penalties and fines, (7) suspension of preliminary assessment notice
business operations, (8) civil action and (9) criminal (e) Reply to preliminary assessment
action. (1) to (7) are the administrative remedies notice
while (8) to (9) are the judicial remedies. Taxpayers (f) Issuance of formal letter of demand
have two remedies: (1) administrative protest (you and assessment notice/final
protest the assessment) and (2) claim for refund. assessment notice
(g) Disputed assessment
In this chapter, I won’t discuss the topics under the
(h) Administrative decision on a
Syllabus in the order provided because if I do, I don’t
think we will have a good understanding of tax disputed assessment
remedies. Here’s what I’ll do. I’ll follow the outline up ---------------------------------------------------------------
to Protest. And then I’ll rearrange the topics under b)
Collection and 2. Government Remedies and ---------------------------------------------------------------
integrate the discussion. After that, I’ll discuss a) Assessment
Refunds. (i) Concept of assessment
(a) Requisites for valid assessment
--------------------------------------------------------------- (b) Constructive method for income
a) Assessment determination
(i) Concept of assessment (c) Inventory method for income
(a) Requisites for valid assessment determination
(b) Constructive method for income (d) Jeopardy assessment
determination (e) Tax delinquency and tax deficiency
(c) Inventory method for income ---------------------------------------------------------------
determination
(d) Jeopardy assessment Read Sections 56 and 71, Tax Code
(e) Tax delinquency and tax deficiency
(ii) Power of the Commissioner to make Q: Define assessment
assessments and prescribe additional
requirements for tax administration and The term assessment may refer to:
enforcement 1. The official action of an administrative officer
(a) Power of the Commissioner to in determining the amount of tax due from a
obtain information and to taxpayer
summon/examine and take testimony 2. A notice to the effect that the amount therein
of persons stated is due from the taxpayer as a tax with
(iii) When assessment is made a demand for payment of the tax or
deficiency stated therein.
(a) Prescriptive period for assessment
(1) False, fraudulent, and non-filing
of returns

Q: May the CIR be compelled by mandamus

to make an assessment? (2) A jeopardy assessment is an indication of the doubtful
validity of the assessment, hence it may be subject to a
compromise.
No. In MERALCO SECURITIES CORP V. SAVELLANO [
OCTOBER 23, 1982], the Supreme Court held that
---------------------------------------------------------------
mandamus cannot lie to compel the CIR to impose a
deficiency tax assessment. The CIR’s power to (a) Requisites for valid assessment
assess is a discretionary one. ---------------------------------------------------------------
Q: How are taxes assessed? Q: What are the requisites of a valid

assessment?
1. Self-assessment – Taxpayers are required
to file tax returns for various kinds of income 1. A formal letter of demand and assessment notice
earned which may be subject to tax. When a shall be issued by the CIR or his duly authorized
taxpayer files the tax return, he is actually representative
making a self-assessment. 2. The letter of demand calling for payment of the
taxpayer’s deficiency tax or taxes shall state the
2. Deficiency assessment – is an assessment facts, the law, rules and regulations or
made by the BIR after the conduct of an jurisprudence on which the assessment is based.
investigation or audit when it finds that the Otherwise, the formal letter of demand and
tax return filed by the taxpayer contains an assessment notice shall be void
under-declaration of income or when the 3. The same shall be sent to the taxpayer only be
taxpayer does not at all file a tax return registered mail or by personal delivery
4. If sent by personal delivery, the taxpayer or his
3. Jeopardy assessment – a tax assessment duly authorized representative shall acknowledge
which was assessed without the benefit of a receipt thereof in duplicate copy of the letter of
complete or partial audit by an authorized demand, showing the following:
revenue officer who has reason to believe i. His name
that the assessment and collection of a ii. Signature
deficiency tax will be jeopardized by delay iii. Designation and authority to act for and in
because of the taxpayer’s failure to comply behalf of the taxpayer, if acknowledge
with audit and investigation requirements to received by a person other than the taxpayer
present his books of accounts and/or himself; and
pertinent records or substantiate all or any of iv. Date of receipt thereof (see Section 3.1.4, RR
the deductions, exemptions, or credits No. 12-99)
claimed in his return. (see Section 3(1)(a),
RR No. 30-2002) Note: (1) Previously, it is sufficient that the taxpayer be
“notified” of the findings of the CIR. The rule now is that
the taxpayer must be “informed” of not only the law but
Note: (1) Section 56, Tax Code provides that, as a
also of the facts on which an assessment would be made.
general rule, the total amount of the tax shall be paid at
(see CIR V. REYES [JANUARY 27, 2006].
the time the return is filed. This is otherwise known as the
pay-as-you-file system. The pay-as-you-file system is a
(2) An assessment must be based on actual facts and not
self-assessing tax return. Note that internal revenue taxes
on mere presumptions (see CIR V. BENIPAYO [JANUARY 31,
are self-assessing. The tax becomes due and payable
1962])
without need of any prior assessment by the BIR. The
taxpayer himself computes and pays without intervention
(3) In CIR V. PASCOR REALTY [JUNE 29, 1999], the Supreme
from the BIR. Thus, the term self-assessment. However,
court held that an assessment must not only contain a
if the taxing authority is first required to investigate or audit
computation of tax liabilities but also a demand for
and after such investigation or audit to issue the
payment within the prescribed period.
assessment that creates the tax liability, then the tax is not
self-assessed and is most likely a deficiency
(4) An assessment is deemed made only when he BIR
assessment. If despite not having done a complete or
releases, mails or sends such notice to the taxpayer. (Ibid)
partial audit, the BIR issues an assessment believing that
the assessment and collection of the deficiency tax will be
(5) In ADAMSON V. CA [MAY 21, 2009], at issue was
jeopardized by delay, the assessment is called a jeopardy
whether the CIR’s recommendation letter for the filing of a
assessment.

criminal complaint against the taxpayer for fraudulent ---------------------------------------------------------------

returns and tax evasion can be considered a formal (b) Constructive method for income
assessment. The Supreme Court held that such was not
equivalent to a formal assessment. An assessment is a determination
written notice and demand may by the BIR on the (c) Inventory method for income
taxpayer for the settlement of a due tax liability that is determination
there definitely set and fixed. A written communication ---------------------------------------------------------------
containing a computation and giving him an opportunity to
contest or disprove the findings is not an assessment
since it is yet indefinite. Q: What are the constructive methods of
income determination?
(6) As held in CIR V. GONZALEZ [OCTOBER 12, 2010], the
formality of a control number in the assessment notice is The following are the general methods developed by
not a requirement for its validity but rather the contents the BIR for reconstructing a taxpayer’s income
thereof which should inform the taxpayer of the declaration
of deficiency tax against the said taxpayer.
where the records do not show the true income or
where no return was filed or what was filed was a
(7) In BONIFACIO SY PO V. CTA [AUGUST 18, 1988], the false or fraudulent return.
Supreme Court held that tax assessments by tax
examiners are presumed correct and made in good faith. a. Percentage method
The taxpayer has the duty to provide otherwise. b. Net worth method
c. Bank deposit method
(8) Reasons for presumption of correctness of d. Cash expenditure method
assessments: (a) lifeblood theory (b) presumption of
regularity in the performance of public functions (c)
e. Unit and value method
likelihood that the taxpayer will have access to relevant f. Third party information or access to records
information (d) the desirability of bolstering the record- method
keeping requirements of the Tax Code g. Surveillance and assessment method
(9) When prima facie correctness of a tax assessment Note: As to the third party information or access to records
does not apply – In CIR V. HANTEX TRADING [MARCH 31, method, see Section 5(b) of the Tax Code. If the revenue
2005], the Supreme Court held that the rule does not officers were not given the opportunity to examine the
apply when the CIR comes out with a naked assessment taxpayer’s documents, they are authorized under Section
(an assessment that is without any foundation and hence, 5 of the Tax Code to gather information from third parties
arbitrary and capricious). (CIR V. HON. RAUL M. GONZALES [OCTOBER 15, 2010])
In UNITED DISTRIBUTION MANAGEMENT, INC. VS. CIR, CTA

CASE NO. 7885, SEPTEMBER 24, 2012, the CTA held that
Q: What is the inventory method for income
the BIR has neither legal nor factual basis to presume that determination? (Net worth method)
payments made to the stockholder and the interest paid
are dividends. It is true that as a general rule, tax The general theory underlying this method is that the
assessments by tax examiners are presumed correct and taxpayer’s money and other assets in excess of the
made in good faith. However, the prima facie correctness liabilities after accurate and proper adjustment of
of a tax assessment does not apply upon proof that an non-deductible and non-taxable items not accounted
assessment is utterly without foundation, meaning it is
arbitrary and capricious. Where the BIR has come out with
for in his tax return is deemed to be unreported
a “naked assessment” i.e., without any foundation income. In other words, the theory is that the
character, the determination of the tax due is without unexplained increase in net worth of the taxpayer is
rational basis. presumed to be derived from taxable sources.
An assessment that does not state the factual and legal Q: What are the conditions for the use of the
bases is void and cannot give rise to an obligation to pay net worth method?
deficiency taxes. LIQUIGAZ PHILIPPINES CORPORATION VS.
NOVEMBER 22, 2012; COMMISSIONER OF INTERNAL REVENUE 1. That the taxpayer’s books of accounts do not
VS. TOLEDO POWER COMPANY, CTA EB NO. 833, OCTOBER reflect his income or the taxpayer has no books
1, 2012 or if he has books, he refuses to produce them,
or that the few records that he had were
destroyed

2. That there is evidence of possible source or ---------------------------------------------------------------

sources of income to account for the increases of (ii) Power of the Commissioner to make
net worth or expenditures assessments and prescribe additional
3. That here is a fixed starting point or opening net requirements for tax administration and
worth
enforcement
4. That the circumstances are such that the method
does reflect the taxpayer’s income with (a) Power of the Commissioner to obtain
reasonable accuracy and certainty, and proper information and to summon/examine
and just additions of personal expenses and and take testimony of persons
other non-deductible expenditures were made, ---------------------------------------------------------------
and correct, fair, and equitable credit adjustments
were given by way of eliminating non-taxable Read Section 6, Tax Code
items (see RMC No. 43-74)
Q: Enumerate the powers of the CIR in the
--------------------------------------------------------------- assessment of taxes.
(d) Jeopardy assessment
--------------------------------------------------------------- 1. Examination of returns and determination of tax
due
Note: I already discussed this. 2. Use of the best evidence obtainable
3. Authority to conduct inventory-taking,
--------------------------------------------------------------- surveillance, and to prescribe presumptive gross
(e) Tax delinquency and tax deficiency sales and receipts
--------------------------------------------------------------- 4. Authority to terminate the taxable period
5. Authority to prescribe real estate values
Q: When is the taxpayer considered 6. Authority to inquire into bank deposits
delinquent? 7. Authority to accredit and register tax agents
8. Authority to prescribe additional procedural or
1. Self-assessed tax per return filed by the documentary requirements
taxpayer on the prescribed date was not
paid at all or only partially paid or Examination of returns and determination of
2. Deficiency tax assessed by the BIR became tax due
final and executory
Q: When a taxpayer files his return, can he
Q: What is a tax deficiency? still (1) withdraw it; or (2) amend it?
The term “deficiency” means: Once filed, the taxpayer may no longer withdraw it
but he may amend it subject to the following
1. The amount by which the tax imposed requirements:
exceeds the amount shown as the tax by the
taxpayer upon his return 1. It is made within 3 years from filing
2. If no amount is shown as the tax by the 2. No notice for audit or investigation has been
taxpayer upon his return, then the amount actually served to him (see Section 6, Tax
by which the tax exceeds the amount Code)
previously assessed (or collected without
assessment) Use of the best evidence obtainable
Note: If the taxpayer is considered delinquent or there is a
tax deficiency, he taxpayer is subjected to a civil penalty or Q: Explain the best obtainable evidence
surcharge and, if applicable, interests. We will discuss this rule.
later.
The rule is that an assessment must made based on
the best evidence obtainable. In CIR V. HANTEX
TRADING [M ARCH 31, 2005], the Supreme Court
opined that assessments must be based on actual

facts. It ruled that “best evidence” includes the consultation with competent appraisers both from
corporate and accounting records of the taxpayer the public and private sectors.
who is subject of the assessment process while the
best evidence obtainable does not include mere Authority to inquire into bank deposits
photocopies of records and documents. Such
photocopies have no probative value and cannot be Q: Does the CIR’s power to obtain
used as basis for any deficiency taxes against the information include the power to inquire into
taxpayer.
bank deposits?
Note: (1) The BIR is allowed to make or amend a tax
return from his own knowledge or obtained through No as a general rule. However, the CIR is
testimony or otherwise. (see CIR v. Hantex Trading Co. authorized to inquire into the bank deposits of:
[March 31, 2005])
1. A decedent to determine his gross estate
(2) The rule is that in the absence of accounting records of 2. Any taxpayer who has filed an application
a taxpayer, his tax liability may be determined by for compromise of his tax liability under
estimation. The CIR is not required to compute such tax Section 204(A)(2) of the Tax Code by
liabilities with mathematical exactness (Ibid)
reason of financial incapacity to pay his tax
liability.
Authority to conduct inventory-taking, 3. Specific taxpayers subject of a request for
surveillance, and to prescribe presumptive exchange of information by a foreign tax
gross sales and receipts authority pursuant to an international
convention or agreement on tax matters to
Q: In what instance will the CIR exercise which the Philippines is a signatory or a
such authority? party of provided that the requesting foreign
tax authority is able to demonstrate the
It will exercise such authority if there is reason to foreseeable relevance of certain information
believe that the taxpayer is not declaring his correct required to be given to the request (see RA
income, sales or receipts for internal revenue 10021 (Exchange of Information on Tax
purposes Matters Act of 2009) and RR 10-2010
[OCTOBER 6, 2010])
Authority to terminate the taxable period 4. Where the taxpayer has signed a waiver
authorizing the CIR or his duly authorized
Q: In what instances can the CIR terminate representatives to inquire into the bank
the taxable period of a taxpayer? deposits
When the taxpayer is: Authority to accredit and register tax agents
a. Retiring from business
b. Intending to leave the country Q: Who are tax practitioners/tax agents?
c. Removing his property
d. Obstructing tax collection RR 11-2006 [JUNE 15, 2006] defines a tax
practitioner/agent as those who are:
Authority to prescribe real estate values
1. engaged in the regular preparation,
Q: Does the CIR’s power to prescribe real certification, audit and filing of tax returns,
estate values include the power to information returns or other statements or
unilaterally reclassify the zonal valuation of reports
2. engaged in the regular preparation of
properties?
requests for ruling, petitions for
reinvestigation, protests, requests for refund
As held in CIR V. AQUAFRESH SEAFOODS [OCTOBER or tax credit certificates, compromise
20, 2010], the Supreme Court ruled that although the settlement and/or abatement of tax liabilities
CIR has the authority to prescribe real property and other official papers and
values and divide the Philippines into zones, the law correspondence
is clear that the same should be done upon

3. regularly appear in meetings, conferences,

and hearings before any office of the BIR Q: A was assessed for deficiency taxes on
officially on behalf of a taxpayer or client in his Feb 1, 2010 income tax returns by the
all matters relating to a client's rights, BIR. The formal demand letter and
privileges, or liabilities
assessment was stamped Jan 31, 2013,
Note: Tax practitioners and agents are required to apply denoting the date of its release in the mail.
for accreditation. RR 11-2006 [JUNE 15, 2006], as In Feb 2, 2013, A has not yet received the
amended by RR 4-2010 [FEBRUARY 24, 2010] and RR 14- formal demand letter and assessment. He
2010 [NOVEMBER 25, 2010] provide for the guidelines on contends that the assessment is already
accreditation of tax practitioners/agents as a pre-requisite
for their practice and representation before the BIR.
barred by prescription. Is A correct?
No. The assessment is not barred by prescription.

Read Section 5, Tax Code The BIR has 3 years to assess from the date of last
filing. As long as the release of the
Note: As ruled in FITNESS BY DESIGN V. CIR [OCTOBER 17,
2008], the BIR can obtain all relevant records and data in
assessment/demand is effected within the
the person of the taxpayer without his consent. prescriptive period, the assessment is deemed
made on time even though the taxpayer actually
--------------------------------------------------------------- received the assessment/demand after the
expiration of the prescriptive period (see BASILAN
(iii) When assessment is made
ESTATES V. CIR [SEPTEMBER 5, 1967]).
(c) Prescriptive period for assessment
(2) False, fraudulent, and non-filing
Q: What is the exception to the above rule
of returns
that assessment is deemed made when BIR
(d) Suspension of running of statute of
releases, mails, or sends such notice to
limitations
taxpayer?
---------------------------------------------------------------
If the receipt is disputed and for this presumption of
Note: What’s the importance of determining when the
receipt of mail to apply, the CIR must prove that:
assessment is made or deemed made? I’ll give you two
reasons. First, it is important in order to know if the right to
assess has already prescribed. The assessment must be 1. The letter was properly addressed
made within the 3-year prescriptive period. Any 2. The letter was mailed; otherwise,
assessment made thereafter shall be barred. Second, the presumption of receipt can’t apply. (see
date in which the assessment was made is the reckoning NAVA V. CIR [JANUARY 30, 1965])
point of the prescription of the power to collect.
In REPUBLIC V. CA [APRIL 30, 1987], the Supreme
Q: When is an assessment deemed made? Court held that a direct denial of receipt of a mailed
demand letter by the addressee shifts the burden
The assessment is deemed to have been made on upon the party favored by the presumption of receipt
the date when the demand letter or notice of of letter to prove that the mailed letter was indeed
17
assessment is released, mailed or sent, even though received.
the same is actually received by the taxpayer after
the expiration of the prescriptive period (see In COMMISSIONER OF INTERNAL REVENUE VS. GJM
BASILAN ESTATES V. CIR [SEPTEMBER 5, 1967]). PHILIPPINES M ANUFACTURING, INC. [CTA EB CASE
NO. 637, M ARCH 6, 2012], the CTA held that if the
Note: RR 12-99 [SEPTEMBER 6, 1999] provides that if the taxpayer denies receiving the final assessment
notice to the taxpayer is served by registered mail and no notice, it is incumbent upon the BIR to prove that the
response is received from the taxpayer within the assessment was indeed received by the taxpayer.
prescribed period from date of the posting thereof in the
mail, the same shall be considered actually or
constructively received by the taxpayer. Further, if the
same is personally served and the taxpayer refuses to
acknowledge receipt thereof, the same shall be 17
Also important to note in this case is the ruling that a follow-up
constructively received by the taxpayer. letter which reiterates demand for payment of taxes is considered
a notice of assessment.

Note: (1) When an estate is under administration, the Pursuant to Section 229 of the Tax Code, he had two
notice of assessment must be sent to the administrator years from the filing of its final adjusted return to file a
(see Republic v. Leonor dela Rama [Nov. 29, 1956]) claim for tax refund or credit. The CIR argued that the
taxpayer had 730 days to file its claim given that Article 13
(2) Service of an assessment notice made to the agent of of the Civil Code states that a year is understood to mean
the decedent after the decedent’s death is not effective. 365 days. The taxpayer contended that under the 1987
As held in ESTATE OF LATE JULIAN DIEZ V. CIR [JANUARY 27, Administrative Code, a year consists of 12 calendar
2004], service of assessment notice on the trust months and having filed the claim on the last day of the
th
officer/agent of the decedent made after the death is 24 calendar month, the claim was filed within the
invalid since at that time the legal relationship between the prescriptive period. The Supreme Court ruled in favor of
principal and his agent had been automatically severed by the taxpayer. There exists a manifest incompatibility
the death of the principal even if the agent continued to act between the manner of computing legal periods under the
as such by filing the decedent’s ITR. The fact of failure to Civil Code and the Administrative Code. Given that the
file a notice of death will not later this effect but will only Administrative Code is the more recent law, its treatment
expose the estate to penalties and will not continue the of a year governs the computation of legal periods.
relationship with the agent.
Ano kapag the date of which the assessment is due to
prescribe falls on a Saturday? As held in CIR V. WESTERN
Q: What is the significance of the taxpayer’s PACIFIC CORPORATION [MAY 27, 1965], where the last day
indicating in the previous year’s ITR its new for issuing a tax assessment falls on a Saturday, it may be
validly issued the following business day. And anong araw
address? yun? Eh di Monday! What if it’ll prescribe on Sunday? You
can still assess on Monday. What if prescription falls due
As held in CIR V. BPI AS LIQUIDATOR OF PARAMOUNT on a legal holiday? You can still assess on the next day
ACCEPTANCE CORP [SEPTEMBER 23, 2003], any which is neither a Saturday, Sunday or a legal holiday.
service of assessment notice on the old address
subsequent to such previous year invalidates the Read Section 203 and 222, ax Code
assessment.
Q: When does the government’s right to
---------------------------------------------------------------
assess prescribe?
(a) Prescriptive period for assessment
(3) False, fraudulent, and non-filing General Rule: The government’s right to assess
of returns prescribes in 3 years from the date of the last day of
--------------------------------------------------------------- filing.
Note: As a preliminary matters, let’s talk about how to However:

compute the legal period. If we will follow the old 1. If the return is filed after such date, the 3
Administrative Code and the Civil Code, the BIR may year period is reckoned from date of actual
assess the deficiency tax only within 1,095 days because
they both state that a year is 365 days. 365 times 3 equals
filing
1095. So, kapag nag-assess ang CIR sa dulo ng 3 year 2. If the return is filed before the last day, then
period na may leap year, prescribed na! Bakit? A leap considered as filed on last day.
year has 366 days. So 365 + 365 + 366 equals 1096 days!
Kapag may libro or notes ka na ganyan pa rin sinasabi, Exceptions: Section 222, Tax Code provides for
patay tayo diyan! The doctrine to that effect as laid down the following instances –
in NAMARCO v. Tecson [29 SCRA 70] has been
abandoned! 1. False return
2. Fraudulent return
The rule now is very simple. Susundin natin ang
Administrative Code of 1987. A year is 12 calendar
3. Failure to file a return
months. Wag mo na bilangin ang total number of days. So
if the CIR assesses in the last day of the last month of the In such cases, the tax may be assessed or a
3-year period, hindi pa prescribed yun. Ano kapag may proceeding in court for collection may be filed
leap year yung isang taon sa 3-year period. It ain’t gonna without assessment at any time within 10 years from
matter. discovery of the falsity, fraud, or omission.
On a serious note, the relevant case is CIR V. PRIMETOWN Note: (1) In contrast, the right to collect the tax prescribes
PROPERTY [AUGUST 28, 2007]. In that case, the taxpayer in 5 years and the period is reckoned from the date the
filed a claim for tax refund of income tax paid in 1997. assessment is made.

Yes. A false return merely implies deviation from the

(2) May there be a proceeding in court when no truth, whether intentional or not, while a fraudulent
assessment is made within the 3 year period? Yes in the return refers to an intentional evasion of tax. (see
case of false return, fraudulent return, or failure to file AZNAR V. CTA [AUGUST 23, 1974])
return. You can file within 10 years from discovery.
Q: What is the effect if the assessment is Q: A filed his tax return in 2000. The CIR
made beyond the prescribed period? assessed A for deficiency taxes in 2004
alleging fraud in its complaint. Has the right
Assessments made beyond the prescribed period to assess prescribed?
would not be binding on the taxpayer. (see TUPAZ V.
ULEP [OCTOBER 1, 1999]; CIR v. AYALA SECURITIES Yes. As held in REPUBLIC V. LIM DE YU [APRIL 30,
CORPORATION [M ARCH 31, 1976] 1964], it is not enough the fraud is alleged in the
complaint, it must be proven and established.
Q: What if the return is incomplete, will the
prescriptive period to assess run? Q: The CIR contends that seven lots were
deliberately omitted by A in his return filed
No. As held in REPUBLIC V. M ARSMAN DEVELOPMENT as the representative of the heirs. A
COMPANY [APRIL 27, 1972], in order that the filing of contends that the lots were excluded
a return may serve as a starting point of the period because one belonged to one of the heirs,
for making an assessment, the return must be as three were already declared in the return of
substantially complete as to include the needed the surviving spouse, and three were
details on which the full assessment may be made. actually included. Is there a deliberate intent
to evade taxes on the part of A?
Q: What is the reckoning point with respect
to amended returns? No. As held in REPUBLIC V. HEIRS OF CESAR
JALANDONI [SEPTEMBER 20, 1965], the omission as
From the filing of the amended return if the described above was not deliberate and did not
amendment is substantial. In CIR V. PHOENIX [MAY amount to fraud indicative of an intention to evade
20, 1965], the taxpayer filed its ITR for 1952 on 1 payment of the proper tax due the government.
April 1953. It amended the said return on 30 August
1955. Thereafter, on 24 July 1958, the CIR Q: May the period of assessment be
assessed deficiency income tax on the basis of the
extended?
amended return contending that his right to assess
Yes. Before the expiration of the 3-year prescriptive
has not yet prescribed inasmuch as the same was
18 period, both the CIR and the taxpayer may agree in
availed of within 5 years from the filing of the
writing to extend the period of assessment. The
amended return. The Supreme Court ruled that
period so agreed upon may be further extended by
where the deficiency assessment is based on the
subsequent written agreement made before the
amended return, which is substantially different from
expiratiton of the period previously agreed upon (see
the original return, the period of limitation of the right
Section 222(b), Tax Code)
to issue the same should be counted from the filing
of the amended return. In this case, the changes
and alterations embodied in the amended return Q: What are the requirements of a valid
constituted substantial ones and thus the CIR’s waiver of the statute of limitations?
deficiency assessment was not barred by
prescription. As provided in RMO No. 20-90:
Q: Is there a difference between a false 1. The waiver must be in the proper form
return and a fraudulent return? 2. The waiver shall be signed by the taxpayer
himself or his duly authorized
representative.
3. Signature of the proper authority (For tax
cases involving Php 1 million or above, the
18
Note that the case was governed under the old law which
provides for 6 tears to assess and another 5 years to collect.

CIR must sign) indicating that the BIR has This led some to believe that the Waiver form prescribed
accepted and agreed to the waiver under RMO No. 20-90 should be used instead of the
4. The date of the acceptance by the BIR waiver form mandated under RDAO No. 05-01. RMC No.
should be indicated. Both the dae of 29-2012 clarifies that while the provisions of RMO No. 20-
90 should be strictly complied with in order for a Waiver to
execution by the taxpayer and the date of be valid, the Waiver form prescribed in RMO No. 20-90
the acceptance by the BIR should be before should no longer be used as the same has been revised
the expiration of the period of prescription or per RDAO No. 05-01.
before the lapse of the period agreed upon
in case a subsequent agreement is In SMC STOCK TRANSFER SERVICE CORPORATION VS.
executed. COMMISSIONER OF INTERNAL REVENUE [CTA CASE NO. 7944,
5. The waiver must be executed in 3 copies, JANUARY 10, 2012], the CTA held that the waiver of the
the original to be attached to the docket, the Statute of Limitations executed by the taxpayer is
second copy for the taxpayer and the third defective if: (a) It fails to indicate the fact of receipt by the
taxpayer of his file copy of the waiver – The Court noted
copy for the Office accepting the waiver. that the fact of receipt by the taxpayer must be indicated in
Taxpayer must be furnished a copy of the the original copy, which is to be attached to the docket of
waiver in order to perfect the agreement the case; (b) It fails to indicate the specific kind of tax and
since the waiver is not a mere unilateral act the amount of tax due – if the amount of tax were not
indicated in the said waiver, there is no agreement to
Note: (1) The signatures of both the CIR and the taxpayer speak of; (c) It was not duly notarized; (d) Both the
are required for a waiver of the prescriptive period, thus a acceptance by the BIR and the execution by the taxpayer
unilateral waiver on the part of the taxpayer does not of the subsequent waiver was made at a time when the
suspend the prescriptive period (CIR v. CA [February 25, period previously agreed upon had already lapsed. See
1999]) also UNION CEMENT CORPORATION VS. COMMISSIONER OF
INTERNAL REVENUE [CTA CASE NO. 6842, JANUARY 18,
Q: What is the effect of failure to conform to 2012]; EAST ASIA POWER RESOURCES CORPORATION V. CIR
[CTA CASE NO. 7936, FEBRUARY 6, 2012]; NEXT MOBILE,
the requirements of a waiver of the statute INC. VS. COMMISSIONER OF INTERNAL REVENUE, CTA CASE
of limitations? NO. 7965, DECEMBER 11, 2012
A waiver of the statute of limitations under the Tax A waiver of the defense of prescription which does not
Code must conform strictly with the provisions of indicate the date of acceptance by the BIR does not toll
Revenue Memorandum Order No. 20-90 in order to the running of the three-year prescriptive period. FIRST
be valid and binding. (See RMC 06-05 [February 2, GAS POWER CORPORATION VS. CIR, CTA CASE NO. 7281,
2005]; PHILIPPINE JOURNALISTS INC. V. CIR SEPTEMBER 24, 2012
[DECEMBER 16, 2004]).
Q: ABC Bank executed two Waivers of the
The period to assess and collect taxes may only be
Defense of Prescription covering internal
extended upon a written agreement between the
revenue taxes due for the years 1994 and 1995,
CIR and the taxpayer executed before the expiration
extending the period of the BIR to assess up to
of the 3-year period. RMO 20-90 and RDAO 05-01
December 31, 2000. A Formal Letter of Demand
lay down the procedure for the proper execution of
was issued by the BIR which was protested by
the waiver. If not followed, any assessment issued
ABC Bank. Another Formal Letter of Demand
by the BIR beyond the 3-year period is void. (CIR V.
was received by ABC with a reduced assessment
KUDOS METAL CORP [M AY 5, 2010]; see also AVON
which was paid by ABC on the same day except
PRODUCTS V. CIR [MAY 13, 2010])
for two other taxes. ABC argues that the waivers
Note: RMC No. 29-2012 [June 29, 2012] clarifies the form
it executed were not valid because it was not
to be used for Waiver of the Statute of Limitations. In RMO signed or conformed to by the CIR. Are the
20-90, there is a particular waiver form attached as an waivers valid?
Annex. Revenue Delegation Authority Order (RDAO) No.
05-01 was issued in August 2, 2001 prescribing a new Yes. Partial payment of the assessment issued
waiver form to be used. With the decision of the SC in within the extended period to assess as provided in
PHILIPPINE JOURNALISTS INC. V. CIR [DECEMBER 16, 2004], the Waiver of Defense of Prescription is an implied
RMC No. 06-05 was issued on February 2, 2005 citing the admission of the validity of the waiver. (RCBC v.
said decision that "a waiver of the statute of limitations CIR [September 7, 2011])
under the Tax Code must conform strictly with the
provisions of Revenue Memorandum Order No. 20-90.”

Q: Can the waiver cover taxes already (c) Compromise penalties

prescribed? ---------------------------------------------------------------
---------------------------------------------------------------
No. As held in REPUBLIC V. LIM DE YU [APRIL 30, (a) Civil penalties or Surcharges
1964], the waiver of the statute of limitations ---------------------------------------------------------------
executed by the taxpayer cannot be deemed to
include taxes already prescribed. Read Section 247-248, Tax Code
Q: Can the doctrine of estoppel be applied Q: What are the civil penalties (surcharges)
as an exception to the statute of limitations?
under the Tax Code and in what instances
are they imposable?
No. In CIR V. KUDOS METAL CORPORATION [M AY 5,
2010], the Supreme Court held that the doctrine of
estoppels cannot be applied as an exception to the 1. 25% surcharge, which is imposable in case
statute of limitations on the assessment of taxes of:
considering that there is a detailed procedure for the a. Failure to file a return and pay tax
proper execution of the waiver. due thereon
b. Filing with unauthorized revenue
office
--------------------------------------------------------------- c. Failure to pay deficiency tax within
(a) Suspension of running of statute of time prescribed in assessment
limitations notice
--------------------------------------------------------------- d. Failure to pay full or part of the
amount shown in ITR required to be
Read Section 223, Tax Code filed or the full amount of tax due
for which no return is required to be
Q: When is the running of the period of filed on or before the date
prescribed for its payment
prescription suspended?
2. 50% surcharge, which is imposable in case
It is suspended when: of:
1. The CIR was prohibited from making the a. Willful neglect to file the return
assessment or beginning distraint/levy and within the period prescribed
19
for 60 days thereafter b. False or fraudulent return is willfully
2. Taxpayer requests reinvestigation which is made (see Section 248, Tax
granted by the CIR Code).
3. Taxpayer cannot be located in address
4. A warrant of distraint and levy is served (not Note: (1) Surcharges are imposed in addition to the tax
only issued) and no property could be found required. They are in the nature of penalties and shall be
5. Taxpayer is out of the Philippines collected at the same, in the same manner, and as part of
the tax (see Section 248(A), Tax Code)
---------------------------------------------------------------
(2) There is a prima facie evidence of false or fraudulent
(iv) General provisions on additions to return when there is a substantial under-declaration of
the tax taxable sales, receipts or income in an amount exceeding
(a) Civil penalties or Surcharges 30% of that declared per returm.
(b) Interest
(1) In general (3) As held in PHILIPPINE REFINING COMPANY V. CA [MAY 8,
1996], it is mandatory to collect penalty and interest at the
(2) Deficiency interest stated rate in case of delinquency. The intention of the
(3) Delinquency interest law is to discourage the delay in the payment of taxes due
(4) Interest on extended payment the Government, and, in this sense, the penalty and
interest is not penal but compensatory for the concomitant
use of the funds by the taxpayer beyond the date when he
19
is supposed to have paid them to the government.
An example would be when an injunction is allowed under the
CTA law is availed of.

Q: ABC is a cement company. Initially, the tasked to implement the tax are sufficient
BIR ruled that cement is a mineral product justification to delete the imposition of surcharges
rather than a manufactured product and is (MICHEL J. LHUILLIER PAWNSHOP V. CIR [SEPTEMBER
therefore subject to ad valorem tax, not 11, 2006])
sales tax. Subsequently, the CIR ruled that
cement is a manufactured product and Some Problems on Civil Penalty Impositions
therefore subject to sales tax. The BIR then
assessed ABC for deficiency sales tax and Q: If a taxpayer who files a return
imposed the 25% surcharge. Is the 25% subsequently realizes that the return filed
surcharge imposable? was insufficient, will his amended return be
subject to the 25% surcharge?
No. In CIR V. REPUBLIC CEMENT CORP [AUGUST 10,
1983], the Supreme Court noted that the 25% No. As long as the taxpayer files the amended return
penalty contemplates a case where the liability for before the lapse of any demand by the BIR to pay
the tax is undisputed or indisputable. In this case, his deficiency assessment, the taxpayer is not liable
the assessments are disputed. The dispute as to the for any surcharge.
tax liability of Republic Cement for sales tax arose
not simply because of ordinary divergence of views Q: Taxpayer A filed and paid taxes on April
in good faith vis-à-vis the interpretation of the law, 15, 2009 worth 5 million. On May 15, 2009,
the position of Republic Cement was founded upon he realized he should have paid 6 million
the original stand of the BIR itself that cement is a and thus pays the additional 1 million. Is A
mineral product. Under such circumstances, the subject to the 25% surcharge?
25% surcharge imposition must be deleted.
No. None of the violations mentioned was committed
Q: What is the nature of the fraud by the taxpayer.
contemplated in the act of making a
fraudulent return which would subject the Q: Taxpayer B filed and paid taxes on April
taxpayer to a 50% surcharge? 15, 2009 worth 5 million. On May 15, 2009,
the BIR issued an assessment and required
In CIR V. AIR INDIA [JANUARY 29, 1988], the Supreme B to pay an additional 1 million on or before
Court explained the fraud contemplated by the law in June 15, 2009. If B pays before June 15,
this way: “It must be intentional fraud, consisting of
2009, is he subject to the 25% surcharge?
deception willfully and deliberately done or resorted
to in order to induce another to give up some legal
right. Negligence, whether slight or gross, is not No. None of the violations mentioned was committed
equivalent to the fraud with intent to give up some by the taxpayer.
legal right. Negligence, whether slight or gross, is
not equivalent to the fraud with intent to evade the Q: Taxpayer C did not file any return nor pay
tax contemplated by the law. It must amount to any taxes on April 15, 2009. On May 15,
intentional wrongdoing with the sole object of 2009, he realized he should have paid 6
avoiding the tax.” million and thus pays the whole 6 million. Is
he subject to the 25% surcharge?
Q: As a result of divergent rulings on
whether he is subject to tax or not, the Yes. Taxpayer C failed to file a return and pay the
taxpayer failed to pay taxes on time. The CIR tax due thereon which is the first type of act which
imposed surcharges and interests for such requires a 25% surcharge imposition.
delay. The taxpayer invokes good faith. Is
good faith a defense? Q: Taxpayer D filed and paid taxes on April
15, 2009 worth 10 million. On May 15, 2009,
Yes. The settled rule is that good faith and honest the BIR issued an assessment and required
belief that one is not subject to tax on the basis of D to pay an additional 5 million on or before
previous interpretation of government agencies

June 15, 2009. If D pays after June 15, 2009, from the date of notice and demand until it is
is he subject to any surcharge? paid (see Section 249, Tax Code)
Yes. Taxpayer D will be subject to the 50% Note: (1) For delinquency interest, it is important to note
surcharge since (a) he failed to pay within the time that the instances in which it is applied is the same as
those enumerated under 25% surcharge except (b) – filing
prescribed in the notice of assessment; and (b) the with unauthorized officer.
under declaration is 50% or in excess of the 30%
threshold which raises the prima facie presumption (2) Note that in deficiency interest, it is imposed on the
of a false or fraudulent return. As such allegation is deficiency not the amount of tax due. On the other hand,
only prima facie, it may be rebutted. in delinquency interest, it is imposed on the tax due. Thus,
it is an interest earning interest.
---------------------------------------------------------------
(3) Interest on deficiency tax may be waived when the
(d) Interest assessment is highly controversial as in the case of
(1) In general CAGAYAN ELECTRIC POWER & LIGHT CO. V. CIR [SEPTEMBER
(2) Deficiency interest 25, 1985], where there was a withdrawal of its exemption
(3) Delinquency interest from income tax and a subsequent reinstatement of such
exemption. Thus, non-payment during the short time when
(4) Interest on extended payment the taxpayer was exempt was not subjected to interest
--------------------------------------------------------------- payment.
Read Section 249, Tax Code The deficiency interest should be computed from the date
prescribed for the payment of the deficiency tax until full
payment thereof. On the other hand, delinquency interest
Q: What are the types of interests collected should be computed from the due date prescribed under
under the Tax Code the Assessment Notice until the full payment thereof.
REPUBLIC CEMENT CORPORATION (AS SURVIVING
1. In general – there shall be assessed and CORPORATION IN A MERGER INVOLVING FR CEMENT
collected any unpaid amount of tax, interest CORPORATION VS. COMMISSIONER OF INTERNAL REVENUE,
at the rate of 20% per annum or such higher CTA EB CASE NO. 821, JULY 18, 2012)
rate as may be prescribed from the date
prescribed for payment until fully paid Deficiency interest and delinquency interest, having
different nature for their existence, cannot be assailed as
double imposition of interests as the law itself allows the
2. Deficiency interest – any deficiency in the simultaneous imposition of these two kinds of interests.
tax due shall be subject to 20% per annum Deficiency interest on any deficiency tax shall be
assessed “from the date prescribed for its payment until
3. Delinquency interest – the unpaid amount the full payment thereof”; while the assessment of
shall be subject to 20% per annum in case delinquency interest that is imposed upon failure to pay a
of: deficiency tax, or any surcharge or interest thereon, shall
be reckoned from “the due date appearing in the notice
a. Failure to pay the amount of tax due and demand of the Commissioner until the amount is fully
on any return required to be filed paid”.TAKENAKA CORPORATION PHILIPPINE BRANCH, CTA EB
CASE NO. 745 (CTA CASE NO. 7701), SEPTEMBER 4, 2012
b. Failure to pay the amount of tax due
for which no return is required
c. Failure to pay a deficiency tax or ---------------------------------------------------------------
surcharge or interest thereon on the (e) Compromise penalties
due date appearing on the notice ---------------------------------------------------------------
and demand of the CIR
Note: I will discuss this fully later under Compromise and
4. Interest on Extended Payments – if any Abatement but note that in the two instances where the
person is qualified and elects to pay CIR may compromise payment of internal revenue taxes
(doubtful validity of the assessment and financial
installments but fails to pay the tax or any incapacity), there is what you call a compromise penalty. A
installment on or before the date prescribed, compromise penalty is the amount agreed upon between
there shall be assessed and collected the taxpayer and the CIR to be paid as a penalty in cases
interest at the rate of 20% per annum on the of a compromise. For doubtful validity of the assessment,
tax or deficiency tax or part thereof unpaid the minimum compromise rate is 40%. For other cases

(including financial incapacity), the minimum compromise

rate is 10%. See RR 12-99 [SEPTEMBER 6, 1999])
---------------------------------------------------------------
(v) Assessment process 1. The CIR or Revenue Regional Director (RD)
(i) Tax audit issues a Letter of Authority (LA) to the
(j) Notice of informal conference Revenue Officer (RO)
(k) Issuance of preliminary
a. The LA must be served within 30 days from
assessment notice
date of issuance. Otherwise, it shall become
(l) Exceptions to issuance of null and void.
preliminary assessment notice b. The LA is issued to the RO by the:
(m) Reply to preliminary assessment
notice i. CIR or his duly authorized representatives
(n) Issuance of formal letter of demand after a return has been filed or
and assessment notice/final ii. Revenue Regional Director for all audit
assessment notice cases within his regional jurisdiction except
(o) Disputed assessment in:
(p) Administrative decision on a
disputed assessment (1) Cases involving civil or criminal tax
fraud falling under the jurisdiction of
---------------------------------------------------------------
the Tax Fraud Division of the
Enforcement Service
Note: Let’s simplify the discussion. I’ll give you two
versions of the assessment process: a simplified and an
(2) Policy cases under audit by Special
expanded version. I want you first to get an overview of Teams in the National Office (RMO
the whole process first and then in the expanded version, No. 36-99)
we will discuss what happens in each step and other
details. Note: (1) The Letter of Authority is the authority given to
the revenue officer to perform assessment functions.
There must be a grant of authority before any revenue
Q: Enumerate the steps in the assessment officer can conduct an examination or assessment and the
process (simplified) revenue officer must not go beyond the authority given
[CIR v. SONY PHILIPPINES [NOVEMBER 17, 2010].
1. The CIR or Revenue Regional Director (RD)
issues a Letter of Authority (LA) to the Revenue (2) A LA that was issued to cover an audit of “unverified
Officer (RO) prior years” is invalid. A LA should cover a taxable period
2. The RO conducts an Audit within 120 days from not exceeding one taxable year. The practice of issuing
LOAs covering audit of “unverified prior years” is
date of issuance and service of the LOA prohibited. If the audit of a taxpayer shall include more
3. RO sends Notice of Informal Conference (NIC) than one taxable period, the other periods shall be
4. Taxpayer responds within 15 days from receipt of specifically indicated. (see RMO 43-90 [SEPTEMBER 20,
NIC 1990]. In CIR V. SONY PHILIPPINES [NOVEMBER 17, 2010], a
5. The Assessment Division of the Revenue Letter of Authority was issued covering the period 1997
Regional Office or CIR or his duly authorized and unverified prior years. The deficiency VAT
representative issues a Preliminary Assessment assessment was based on records from January to March
Notice 1998. The Supreme Court held that the CIR went beyond
6. Taxpayer responds within 15 days from receipt of the scope of their authority as indicated in the LOA.
Further, the fact that the LOA covers unverified prior years
PAN via a “Reply” invalidates it and a VAT deficiency assessment made on
7. The CIR or his duly authorized representative the basis thereof must be disallowed.
issues a Formal Letter of Demand and
Assessment Notice (FAN) which may be objected (3) Eh ano itong tinatawag na Letter Notice? A Letter
to via “Protest” within 30 days from receipt of the Notice (LN) is a discrepancy notice issued by the CIR
FAN after conducting data matching processes, informing the
taxpayer of findings of discrepancy. A LN covers only a tax
Q: Enumerate the steps in the assessment indicated therein on a given particular period or quarter
rd
(e.g. VAT liabilities for 2002 3 quarter). It must be noted,
process (expanded) however, that under RMC 40-2003 [JULY 7, 2003] and

RMO 55-2010 [JUNE 15, 2010], a LN shall be treated as a Regional Office or to the Commissioner or his
“notice of audit or investigation” in the absence of evident duly authorized representative, as the case
error or clear abuse of discretion. In order to expedite the may be, for appropriate review and issuance
processing of LN cases, the issuance of NICs may of a deficiency tax assessment, if warranted.
immediately commence, even without prior issuance of
LOAs. Ano daw? Ito ibig sabihin: a LN is effectively
Note: Ano ba ang nangyayari sa Informal Conference?
equated to a LA.
This is where you’re given the chance to present your
side. And of course, sasabihin mo ay tama ang binayad
2. The RO conducts an Audit within 120 days mo!
from date of issuance and service of the LOA
5. The Assessment Division of the Revenue
a. If the audit is not completed within the 120 Regional Office or CIR or his duly authorized
day period, the LA is revalidated. representative issues a Preliminary
b. If the RO finds: Assessment Notice
i. No deficiency, the audit ends a. If there is no sufficient basis to assess,
ii. Any deficiency, the RO will inform the dismissed.
taxpayer and write in his report whether b. If there is sufficient basis to assess, a
the taxpayer agrees with his findings: Preliminary Assessment Notice (PAN) shall be
issued for the proposed assessment, showing
(1) If the taxpayer is amenable, the in detail, the facts and the law, rules and
taxpayer pays the tax regulations, or jurisprudence on which the
(2) If the taxpayer is not amendable, the proposed assessment is based
RO shall state such fact in his report of c. A PAN is not required in the following
investigation and submit the same to instances –
the RDO or by the Special
Investigation Division (in case of the i. Assessment is purely mathematical error
Revenue Regional Office) or by the ii. Excise tax on excisable article not paid
Chief of Division (in the case of the iii. Discrepancy between tax withheld and
BIR National Office). remitted
iv. Goods imported by tax-exempt entity are
3. RO sends Notice of Informal Conference (NIC) sold to a taxable entity
v. Claim for refund is filed when it was
a. The taxpayer shall be informed, in writing, by previously carried over
the RDO or by the Special Investigation
Division (in case of the Revenue Regional Note: The PAN must be issued by the BIR before issuing
Office) or by the Chief of Division (in the case the FAN and letter of demand. In CIR V. METRO STAR
of the BIR National Office) of the discrepancy SUPERAMA [DECEMBER 8, 2010], where the taxpayer
or discrepancies in the taxpayer’s payment of received only a FAN, the Supreme Court ruled that such
his internal revenue taxes for the purpose of amounted to a denial of due process. The taxpayer must
“Informal Conference” be informed of the facts and law upon which the
assessment is made. The law imposes a substantive, not
merely a formal requirement. However, if you fall under
4. Taxpayer responds within 15 days from the 5 exceptions, then you can go straight to the FAN.
receipt of NIC
The issuance of Preliminary Assessment Notice is
a. If the taxpayer responds within 15 days, there mandatory in tax assessments except in a few instances,
will be an “Informal Conference” specifically enumerated by law, where it is not required.
b. If the taxpayer fails to reply, he shall be COMMISSIONER OF INTERNAL REVENUE VS. UNIOIL
considered in default. The Revenue District CORPORATION, CTA EB CASE NO. 857, NOVEMBER 13, 2012
Officer or the Chief of the Special
Investigation Division of the Revenue See LAURENCE LEE V. LUANG V. HON. SIXTO S. ESQUIVIAS IV
[CTA CASE NO. 7967, JANUARY 5, 2102] where the CTA
Regional Office, or the Chief of Division in the held that in the absence of proof that taxpayer received
National Office, as the case may be, shall preliminary assessment notice, the assessment is void.
endorse the case with the least possible delay
to the Assessment Division of the Revenue

6. Taxpayer responds within 15 days from Supreme Court reiterated that the assessment must state
receipt of PAN via a “Reply” the fact, the law, the rules and regulations or jurisprudence
on which the assessment is based, otherwise the
a. If the taxpayer fails to respond within 15 days, assessment shall be void (see also CIR V. METRO STAR
SUPERAMA [DECEMBER 8, 2010] and CIR v. ENRON SUBIC
he shall be considered in default, in which POWER CORPORATION [JANUARY 19, 2009]; FLUOR DANIEL
case, a formal letter of demand and PHILIPPINES V. CIR [CTA CASE NO. 7793, APRIL 17, 2012])
assessment notice shall be caused to be
issued calling for payment of the taxpayer's (2) Remember the requisites of a valid assessment we
deficiency tax liability, inclusive of the discussed earlier. If the assessment does not have these
applicable penalties. requisites or, in other words, if the assessment is not valid,
the implication is that the 30-day period allowed to the
Note: (1) Failure to file a reply to the PAN will not bar the taxpayer in which to appeal to the CTA shall not begin to
taxpayer from protesting the FAN. Why? The PAN is not run.
the final assessment contemplated by the NIRC which can
be protested. The only consequence of failure to file a (3) The taxpayer or his duly authorized representative may
reply to the PAN is that the taxpayer shall be considered in protest administratively against the FAN within thirty (30)
default and the BIR can now make a final assessment. days from date of receipt thereof. Otherwise, the FAN will
become final and executory. You can no longer appeal to
7. The CIR or his duly authorized representative the CTA.
issues a Formal Letter of Demand and
Assessment Notice (FAN) which may be Let’s now discuss the remedy of the taxpayer if you’re
given a FAN.
objected to via “Protest” within 30 days from
receipt of the FAN
---------------------------------------------------------------
a. The formal letter of demand and assessment a) Protest
notice shall be issued by the Commissioner or (i) Protesting assessment
his duly authorized representative. (a) Protest of assessment by taxpayer
b. The letter of demand calling for payment of (1) Protested assessment
the taxpayer's deficiency tax or taxes shall (2) When to file a protest
state the facts, the law, rules and regulations, (3) Forms of protest
or jurisprudence on which the assessment is (4) Content and validity of protest
based, otherwise, the formal letter of demand (b) Submission of documents within 60
and assessment notice shall be void days from filing of protest
c. The same shall be sent to the taxpayer only
(c) Effect of failure to protest
by registered mail or by personal delivery. If
sent by personal delivery, the taxpayer or his (d) Period provided for the protest to
duly authorized representative shall be acted upon
acknowledge receipt thereof in the duplicate (ii) Rendition of decision by
copy of the letter of demand. Commissioner
(a) Denial of protest
Note: (1) The requirement that the assessment must first (1) Commissioner’s actions
sate the facts and the law on which the assessment is equivalent to denial of protest
based is not merely a procedural requirement but a
substantive requirement which determines the taxpayer’s (a) Filing of criminal action
ability to protest. Thus, the same must be complied with against taxpayer
otherwise the assessment is void. Thus, assessment (b) Issuing a warrant of distraint
notices which only have computations are invalid. This is and levy
the reason why the new Tax Code provides that the
taxpayer be informed and not merely notified. Given that
(2) Inaction by Commissioner
this new rule benefits the taxpayer, the same may be (iii) Remedies of taxpayer to action by
applied retroactively (CIR V. AZUCENA REYES [JANUARY 27, Commissioner
20
2006]. In CIR V. GONZALEZ [OCTOBER 13, 2010], the (a) In case of denial of protest
thereof which should inform the taxpayer of the declaration of

20
Further, the formality of a control number in the assessment deficiency tax.
notice is not a requirement for its validity but rather the contents

(b) In case of inaction by ---------------------------------------------------------------

Commissioner within 180 days (i) Protesting assessment
from submission of documents (a) Protest of assessment by taxpayer
(c) Effect of failure to appeal (1) Protested assessment
--------------------------------------------------------------- (2) When to file a protest
(3) Forms of protest
Read Section 228, Tax Code (4) Content and validity of protest
(b) Submission of documents within 60
Note: First, I’ll give you the overview of the steps in an
administrative protest and then we’ll go to the topics in the
days from filing of protest
outline. (c) Effect of failure to protest
(d) Period provided for the protest to
Q: Outline the steps in disputing an be acted upon
assessment starting from the filing of the ---------------------------------------------------------------
return until the appeal to the Supreme
Court. ---------------------------------------------------------------
(1) Protested assessment
1. Filing of the Return - period begins on date of ---------------------------------------------------------------
filing or last day required by law, whichever is
later) Q: What is a protested assessment?
2. Issuance of LA – served to the taxpayer within
30 days from issuance A protested assessment or a disputed assessment
3. Audit – within 120 days from date of receipt of is where the taxpayer questions an assessment and
LA by taxpayer asks the BIR to reconsider or cancel the same
4. Notice of Informal Conference – taxpayer because he believes he is not liable therefor
submits explanation within 15 days from receipt
of notice ---------------------------------------------------------------
21
5. Preliminary Assessment Notice (PAN) – (2) When to file a protest
taxpayer submits reply within 15 days from ---------------------------------------------------------------
receipt of notice
6. Final Assessment Notice Q: When should a taxpayer file a protest
7. Taxpayer files protest – within 30 days from
with the CIR?
receipt of FAN and Formal Notice of Demand
8. Relevant supporting documents – submitted
The taxpayer or his duly authorized representative
within 60 days from filing of letter of protest
may protest administratively against the formal letter
9. CIR’s denial of protest or inaction for 180
of demand and assessment notice within thirty (30)
days
days from date of receipt thereof. (see RR No. 12-
10. Appeal to CTA Division – within 30 days from
99)
date of receipt of CIR’s denial or from the lapse
of 180 days of inaction counted from Q: Is payment prior to protest required?
submission of documents to CIR. CTA Division
has to decide the case within 30 days after
General Rule: no prior payment of assessed
submission for decision. Motion for
internal revenue tax is required when protested or
Reconsideration or New Trial to CTA Division
disputed.
within 15 days from receipt of decision.
11. Appeal to CTA En Banc – within 15 days from
Exception: If there are several issues involved in
receipt of resolution.
the formal letter of demand and assessment notice
12. Appeal to the SC – within 15 days from receipt
but the taxpayer only disputes or protests against
of resolution under Rule 45
the validity of some of the issues raised, the
taxpayer shall be required to pay the deficiency tax
or taxes attributable to the undisputed issues, in
which case, a collection letter shall be issued to the
21
When PAN is not required, from filing of return, a final taxpayer calling for payment of the said deficiency
assessment notice will be issued.

tax, inclusive of the applicable surcharge and/or (3) The period utilized for reinvestigation is deducted from
interest. No action shall be taken on the taxpayer's the period within which to collect. (see REPUBLIC V. LOPEZ
22
disputed issues until the taxpayer has paid the [MARCH 30, 1963])
deficiency tax or taxes attributable to the said
The running of the statute of limitations shall not be
undisputed issues. (see RR No. 12-99) suspended or interrupted unless the taxpayer’s request for
reinvestigation is acted upon by the Commissioner. BRAVO
Note: In contrast, payment prior to protest is required in ALABANG, INC. VS. COMMISSIONER OF INTERNAL REVENUE,
real property taxes and customs duties. CTA CASE NO. 8199, NOVEMBER 29, 2012
---------------------------------------------------------------
(3) Forms of protest Q: What happens if the CIR does not
--------------------------------------------------------------- consider or act upon the request for
reinvestigation?
Q: What are the two ways of protesting an
assessment notice for an internal revenue As there was no evidence that the request was
tax? (Two forms of protest) considered or acted upon, it did not suspend the
running of the period for filing an action for collection
1. Request for Reconsideration – refers to a plea for (see REPUBLIC V. ABECEDO [M ARCH 29, 1968])
reevaluation of an assessment on the basis of
existing records without need of additional In BPI v. CA [OCTOBER 17, 2005] as reiterated in
evidence. It may involve both a question of fact or BPI V. CA [M ARCH 17, 2008], the Supreme Court
of law or both emphasized that the BIR must first grant the request
2. Request for Reinvestigation – refers to a plea for for reinvestigation as a requirement for the
reevaluation of an assessment on the basis of suspension of the statute of limitations.
newly discovered evidence or additional evidence
that a intends to present in the investigation. It Q: Can a taxpayer invoke the defense of
may also involve a question of fact or law or both prescription when he made repeated
(see RR No. 12-85) requests for reinvestigation and repeated
requests for extension of time to pay?
Q: What is the difference between a request
for reinvestigation and a request for No. As held explained by the Supreme Court in
reconsideration for purposes of tolling the REPUBLIC V. ARCACHE [FEBRUARY 29, 1964]: “While
running of the prescriptive period? we may argue with the Court of Tax Appeals that a
mere request for re-examination or re-investigation
It is the request for reinvestigation acted upon which may not have the effect of suspending the running of
suspends the prescriptive period to collect. A the period of limitation for in such a case there is
request for reconsideration does not toll the need of a written agreement to extend the period
prescriptive period (see BPI V. CIR [OCTOBER 17, between the Collector and the taxpayer, there are
2005]; CIR V. PHILIPPINE GLOBAL COMMUNICATIONS cases however where a taxpayer may be prevented
[OCTOBER 31, 2006]) from setting up the defense of prescription even if he
has no previously waived it in writing as when by his
Note: (1) The ruling in CIR V. CAPITOL SUBDIVISION [APRIL repeated requests or positive acts the Government
30, 1964] to the effect that the prescriptive period to collect has been, for good reasons, persuaded to postpone
a deficiency tax is interrupted when there is a request for collection to make him feel that the demand was not
review or reconsideration is no longer controlling. unreasonable or that no harassment or injustice is
(2) Why does a request for reinvestigation toll the running
meant by the Government.
of the prescriptive period? Well, a reinvestigation will take
more time because you need to receive and evaluate
additional evidence. 22
Example: If the assessment was made on 1/1/2000 and the
collection was made on 1/1/2006 but it was shown that from
1/1/2000 to 1/1/2003 or a period of 2 years that the assessment
was being reinvestigated, the action to collect has not yet
prescribed since deducting the 2 year period when reinvestigation
was made will only amount to 4 years and is thus still within the 5
year period to collect.

Q: When must the taxpayer submit all

--------------------------------------------------------------- relevant supporting documents?
(4) Content and validity of protest
--------------------------------------------------------------- Within 60 days from filing of protest, the taxpayer
shall submit all relevant supporting documents.
Q: What are the requirements for the validity
of a taxpayer’s protest? Note: “Relevant supporting documents” should be
understood as those documents necessary to support the
legal basis in disputing a tax assessment as determined
1. Must be in writing and addressed to the CIR by the taxpayer. The BIR can only inform the taxpayer to
2. Must contain the information required, namely: submit additional documents. The BIR cannot demand
what type of supporting documents should be submitted.
a. Name of the taxpayer and address for the Otherwise, the taxpayer will be at the mercy of the BIR,
immediate past 3 taxable years which may require the production of documents that a
b. Nature of the request, specifying the newly taxpayer cannot submit (CIR V. FIRST EXPRESS PAWNSHOP
discovered evidence he intends to present [JUNE 16, 2009]; CIR VS. LA SUERTE CIGAR AND CIGARETTE
c. Taxable periods covered by the assessment FACTORY, TELENGTAN BROTHERS AND SONS, INC., CTA EB
d. Amount and kind of tax involved and the CASE NO. 820 (CTA CASE NO. 7390) JUNE 11, 2012.
assessment notice and number
e. Date of receipt of assessment notice or letter ---------------------------------------------------------------
of demand (b) Effect of failure to protest
f. Itemized statement of the finding to which the ---------------------------------------------------------------
taxpayer agrees (if any) as basis for the
computation of the tax due, which must be Q: What is the effect of failure to protest the
paid immediately upon filing of protest FAN?
g. Itemized schedule of the adjustments to which
the taxpayer does not agree If the taxpayer fails to file a valid protest against the
formal letter of demand and assessment notice
3. The taxpayer must not only show the errors of within thirty (30) days from date of receipt thereof,
the BIR but also the correct computation through: the assessment shall become final, executory and
demandable.
a. A statement of the facts, the applicable law,
rules and regulations, or jurisprudence on ---------------------------------------------------------------
which the taxpayer’s protest is based. (c) Period provided for the protest to
Otherwise, his protest shall be considered
be acted upon
void and without force and effect.
b. If there are several issues involved in the ---------------------------------------------------------------
disputed assessment and the taxpayer fails to
state the facts, the applicable law, rules and Q: What is the period for the CIR to act upon
regulations, or jurisprudence in support of his a valid protest against the FAN?
protest against some of the several issues on
which assessment is based, the same shall The CIR or his duly authorized representative may
be considered undisputed issue or issues, in act on the taxpayer’s protest within 180 days from
which case, the taxpayer shall be required to the date of submission by the taxpayer of the
pay the corresponding deficiency tax or taxes required documents in support of his protest
attributable
Note: The 30-day period to appeal set by Section 228 of
4. It must be filed within the reglementary period of the NIRC, as amended, should be reckoned from the
lapse of the 180-day period for the BIR to act on the
30 days from receipt of the notice of assessment protest without any decision having been rendered and not
--------------------------------------------------------------- from the date the taxpayer received the Final Demand and
(a) Submission of documents within 60 Assessment Notice (LA FLOR DELA ISABELA, INC. V. CIR
days from filing of protest [C.T.A. EB NO. 672, FEBRUARY 02, 2012])
---------------------------------------------------------------

--------------------------------------------------------------- Note: This is not an the MR being contemplated in

(iii) Remedies of taxpayer to action by FISHWEALTH CANNING CORPORATION VS. COMMISSIONER OF
INTERNAL REVENUE [JANUARY 21, 2010] which tolls the
Commissioner running of the period to appeal to the CTA.
(a) In case of denial of protest
(b) In case of inaction by Q: Enumerate some acts of the CIR that may
Commissioner within 180 days be considered as denial of the taxpayer’s
from submission of documents protest?
(c) Effect of failure to appeal
--------------------------------------------------------------- 1. An indication to the taxpayer by the CIR in
clear and unequivocal language of his final
--------------------------------------------------------------- denial not the issuance of the warrant of
(a) In case of denial of protest distraint and levy. What is the subject of the
appeal is the final decision not the warrant of
---------------------------------------------------------------
distraint. (CIR v. Union Shopping [May 21,
1990])
Q: What are the remedies of the taxpayer if 2. Filing by the BIR of a civil suit for collection
the protest is denied? of the deficiency tax is considered a denial
of the request for reconsideration (CIR v.
1. Appeal to the CTA within 30 days from date Union Shopping [May 21, 1990])
of receipt of the said decision. Otherwise, 3. Filing of criminal action against the taxpayer
the assessment becomes final, executory (Ibid)
and demandable. 4. A BIR demand letter sent to the taxpayer
2. Instead of appealing to the CTA at once, the after his protest of the assessment notice is
taxpayer may first opt to file a MR of the considered as the final decision of the CIR
denial of the administrative protest with the on the protest (Surigao Electric v. CTA [57
CIR. If the MR is denied, the taxpayer may SCRA 523])
then appeal o the CTA, but only within the 5. A letter of the CIR reiterating to a taxpayer
remaining period of the original 30-day his previous demand to pay an assessment
period to appeal (if any) (see FISHWEALTH is considered a denial of the request for
CANNING CORPORATION VS. COMMISSIONER reconsideration or protest and is appealable
OF INTERNAL REVENUE [JANUARY 21, 2010]) to the CTA (CIR v. Ayala Securities [70
SCRA 204])
Q: Will a Motion for Reconsideration toll the 6. Final notice before seizure considered as
30 day period to appeal the denial of the CIR’s decision of taxpayer’s request for
protest of the FAN? reconsideration who received no other
response. (CIR v. Isabela Cultural Corp
No. A motion for reconsideration of the denial of the [July 11, 2001])
administrative protest does not toll the 30-day period
to appeal to the CTA. (see FISHWEALTH CANNING Q: The BIR issued a Formal Letter of
CORPORATION VS. COMMISSIONER OF INTERNAL Demand which stated “The opinions
REVENUE [JANUARY 21, 2010]) promulgated by the Secretary of Justice are
advisory in nature…and any aggrieved party
Q: What is the remedy of the taxpayer if it is has the court for recourse.” The taxpayer
the duly authorized representative of the did not protest the assessment and instead
CIR who denied the protest? filed a Petitioner for Review with the CTA. Is
the taxpayer correct?
The taxpayer may elevate his protest to the CIR
within 30 days from date of receipt of the final Yes. Estoppel is an exception to the doctrine of
decision of the Commissioner's duly authorized exhaustion of administrative remedies as when the
representative since the latter’s decision is not be wording of the Formal Letter of Demand with
considered final, executory and demandable. Assessment Notices led the taxpayer to believe that
it was in fact a final decision of the CIR. The
statement of the BIR led the taxpayer to believe that

only a final judicial ruling in its favor would be Director of the BIR for the reason that the case was not
accepted by the CIR (ALLIED BANK V. CIR elevated to the Court of Tax Appeals as mandated by the
[FEBRUARY 5, 2010]. provisions of the last paragraph of Section 228 of the Tax
Code. By virtue thereof, the said assessment notice has
become final, executor and demandable.
---------------------------------------------------------------
(b) In case of inaction by HELD: The Supreme Court held that it is not correct to say
Commissioner within 180 days that the assessment became final and executory by the
from submission of documents sole reason that the taxpayer failed to appeal the inaction
of the Commissioner within 30 days after the 180-day
--------------------------------------------------------------- reglementary period because in effect, it limited the
remedy of the taxpayer under Section 228 of the NIRC to
Q: What happens if the protest is not acted just one, that is - to appeal the inaction of the
upon within 180 days by the CIR? Commissioner on its protested assessment after the lapse
of the 180-day period.
1. File a petition for review with the CTA within
30 days after the expiration of the 180 day ---------------------------------------------------------------
period (a) Effect of failure to appeal
2. Await the final decision of the CIR on the ---------------------------------------------------------------
disputed assessment and appeal such final
decision to the CTA within 30 days after Q: What is the effect of the failure of the
receipt of a copy of such decision (see CIR taxpayer to appeal the denial of the protest
V. FIRST EXPRESS PAWNSHOP COMPANY, INC by the CIR to the CTA in due time?
[JUNE 16, 2009]; RCBC V. CA [APRIL 24,
2007]) Failure of the taxpayers to appeal to the CTA in due
time make the assessments in question, final,
Q: If a taxpayer files out of time his petition executory and demandable. (see DAYRIT V. CRUZ
23
for review with the CTA, can he wait for the [SEPTEMBER 26, 1988]).
final decision of the CIR and then appeal the
same to the CTA? Taxpayer’s failure to file a petition for review with the
CTA within the statutory period renders the disputed
No. After availing of the first option (filing of the assessment final, executory and demandable.
petition for review) which was however filed out of PHILIPPINE DREAM COMPANY, INC. VS. BUREAU OF
time, a taxpayer cannot successfully resort to the INTERNAL REVENUE, CTA CASE NO. 7700, DECEMBER
second option (await final decision and appeal the 06, 2012
same to the CTA) on the pretext that there is yet no
final decision on the disputed assessment because Q: Will the failure of the taxpayer to appeal
of the CIR’s inaction. (see also LASCONA LAND V. the inaction result in the finality of the FAN?
CIR [M ARCH 5, 2012])
No. The failure of the taxpayer to appeal the inaction
on the disputed assessment by the CIR or his
LASCONA LAND CO. V. CIR, G.R. NO. 171251, representative within 30 days after the lapse of 30
MARCH 5, 2012 days from the submission of supporting documents
will not result in the finality of the FAN (see RCBC V.
DOCTRINE: Under Section 228, in case of the inaction of CA [APRIL 24, 2007])
the CIR on the protested assessment, the taxpayer
has two options, either: (1) file a petition for review Q: Is the requirement that the appeal of the
with the CTA within 30 days after the expiration of the decision of the CIR to the CTA be brought
180-day period; or (2) await the final decision of the
Commissioner on the disputed assessment and
within 30 days jurisdictional?
appeal such final decision to the CTA within 30 days
from the receipt of a copy of such decision.
FACTS: Taxpayer filed a letter protest against the

Assessment Notice issued alleging deficiency income tax 23
The Court also stated that a suit for collection of internal
for the year 1993. The protest was denied by the Regional revenue taxes where the assessment has already become final
and executory is akin to an action to enforce judgment.

In RCBC V. CIR [JUNE 16, 2006], the Supreme Court b) Collection

held that while the right to appeal a decision of the (i) Requisites
CIR to the CTA is merely a statutory remedy, (ii) Prescriptive periods
nevertheless the requirement that it must be brought ---------------------------------------------------------------
within 30 days is jurisdictional. If a statutory remedy
provides as a condition precedent that the action to
enforce it must be commenced within a prescribed Read Section 203, 222-223, Tax Code
time, such requirement is jurisdictional and failure to
comply may be raised in a motion to dismiss. Q: What are the requisites for the collection
of taxes?
Note: From here on, you will notice that I have already
deviated from the order in the bar syllabus. I’ll integrate We must make a distinction between delinquency
the discussion of Collection and Government Remedies as
they are closely related. In fact, the government remedies
tax and deficiency tax.
are meant to ensure collection, But before that, I want to
dispose of the topic of injunctions. This is just a review. 1. Delinquency tax – can be immediately
We already discussed this in General Principles. collected administratively through issuance
of a warrant of distraint or levy and/or
--------------------------------------------------------------- through judicial action (see Section 205,
(v) Non-availability of injunction to Tax Code)
restraint collection of tax 2. Deficiency tax – can be collected also
--------------------------------------------------------------- through administrative and/or judicial
remedies but has to go through the process
Read Section 218, Tax Code of filing the protest by the taxpayer against
the assessment and the denial of such
protest by the CIR.
Q: Can an injunction be issued to restrain
the collection of any internal revenue tax,
Q: When may collection of taxes be made?
fee or charge?
It may be made within 5 years from assessment
General Rule: No court can issued an injunction, as
provided under Section 218, Tax Code.
Q: Summarize the prescriptive periods for
Exception: Section 11, RA 9282 provides that an the collection of taxes.
injunction may be issued by the CTA to restrain the
collection of taxes “when in the opinion of the Court Regular ITR No ITR, False ITR,
the collection may jeopardize the interest of the Fraudulent ITR
Government and/or the taxpayer, the Court at any Collection w/ prior assessment
stage of the proceeding may suspend the said Assess within 3 years Assess within 10 years
collection and require the taxpayer either to deposit from actual filing or last from discovery of fraud,
the amount claimed or to file a surety bond for not day to file, whichever is falsity or omission
more than double the amount with the Court.” later
Note: (1) TROs and injunctions issued by courts other Collect within 5 years Collection within 5 years
than the CTA against the BIR should be annulled and from date of assessment from date of assessment
cancelled for lack of jurisdiction [see RMO 042-10 [MAY 4, by summary or judicial by summary or judicial
24
2010].)
Collection w/o prior assessment
(2) As held in ANGELES CITY V. ANGELES ELECTRIC This cannot be done Collection within 10
CORPORATION [JUNE 29, 2010], the prohibition on the anymore because there years from date of
issuance of a writ of injunction to enjoin the collection of must be an assessment discovery of the falsity,
taxes is applied only to national internal revenue taxes, not before collection in the fraud, omission by
to local taxes. However, the Supreme Court noted that
such injunctions enjoining the collection of local taxes are
frowned upon.
24
The rule is to the effect that once there is already an
assessment, the period to collect is always 5 years even if the
--------------------------------------------------------------- return is fraudulent, false, or was not filed.

case of a regular ITR judicial proceedings Note: We already discussed this in assessment.
only.
Q: A tax was assessed in September 27,
Note: Apparently, there is a conflict as to the proper 1999. The CIR filed a suit to collect
prescriptive period for collecting taxes when a return was deficiency taxes in December 27, 2009. The
filed by the taxpayer and such return is not false or CIR claims that there was a waiver of the 5-
fraudulent. Domondon says it is 3 years. Sababan,
Mamalateo, and Dimaampao says that it is 5 years. Gruba year prescriptive period and presented a
and Montero adhere to this view. 5 years, it is then! waiver dated December 17, 2005. Is the
Majority wins. waiver valid?
Q: What are the alternatives of the CIR in No. As held in REPUBLIC V. ABECEDO [M ARCH 29,
cases of a false, fraudulent return or the 1968], the waiver must be executed within the 5 year
failure to file a return in terms of collection? period. A waiver executed beyond the five-year
limitation is in effective and, as such, the CIR can no
25
As held in REPUBLIC V. RET [M ARCH 31, 1962], the longer revive the right of action.
CIR has two alternatives:
Q: What is effect of the failure of the waiver
1. Assess the tax within 10 years from the to bear the written consent of the CIR?
discovery of the falsity, fraud or failure and
then collect within 5 years by judicial or In CIR V. CA [FEBRUARY 25, 1999], the Supreme
summary proceedings Court reiterated that waiver of the five-year
2. Do not assess and instead collect the tax prescriptive period must be in writing and signed by
without assessment within 10 years from the both the BIR Commissioner and the taxpayer.
discovery of the falsity, fraud or failure by Hence, a waiver which does not have the consent of
judicial proceedings only. the CIR is invalid and without any binding effect.
Thus, when there is an assessment, the 10 year Q: How should the waiver be construed
period to collect from discovery of falsity, fraud, and when the specified period in the waiver
failure is not applicable.
refers to both assessment and collection?
Q: The CIR maintains that the prescription If the waiver refers to both assessment and
of his right to collect the amount of collection and interpreting such will in effect shorten
deficiency taxes is governed by Article 1145 the collection period, then such waiver is deemed to
of the Civil Code, which gives him 6 years. refer to assessment only and not collection (see
Is the CIR correct? REPUBLIC V. LIM DE YU APRIL 30, 1964])
No. As held in GUAGUA ELECTRIC LIGHT COMPANY V. Q: Can a letter of demand be deemed an
CIR [APRIL 24, 1967], the right to assess and collect assessment such that the 5-year period
is governed by the Tax Code and not by Article 1145
of the Civil Code. A special law (Tax Code) shall for collection shall commence from the
prevail over a general law (Civil Code). time such letter was sent?
Q: Can the prescriptive period to collect be Yes. In REPUBLIC V. LIMACO & DE GUZMAN [AUGUST
waived? 31, 1962], the Supreme Court held that a letter of
demand should be deemed an assessment if it
Yes, provided the requirements of a valid waiver as declares and fizes th tax to be payable against the
provided for in RMO No. 20-90 are present. party liable thereto and demands the settlement
thereof. Hence, the 5-year period for collection of the
tax due should commence anew from time said letter
of demand was sent to the taxpayer.
25
In the said case, the Supreme Court noted that Section 332 (no
w Section 222) does not apply in the collection of income taxes by
summary proceedings. But when the collection of income taxes is
to be effected by court action, the provision is controlling.

Q: What is the effect of pendency of

appeal on the running of the prescriptive No. In VERA V. FERNANDEZ [M ARCH 30, 1979], the
Supreme Court held that claims for taxes are
period?
collectible even after distribution of decedent’s
estate among his heirs who are liable in proportion
Under SECTION 223 OF THE TAX CODE, the running of of their share in the inheritance to the payment of
the prescriptive period to collect deficiency taxes taxes. Claims for taxes against the estate are
shall be suspended for the period during which the excepted from the statute of non-claims and are not
CIR is prohibited from beginning a distraint or levy or barred forever.
instituting a proceeding in court and for 60 days
---------------------------------------------------------------
thereafter.
2. Government Remedies
In REPUBLIC V. KER & CO. [SEPTEMBER 29, 1966], the a) Administrative Remedies
Supreme Court held that the pendency of a (i) Tax lien
taxpayer’s appeal has the effect of temporarily (ii) Compromise and Abatement
staying the hands of the CIR. The running of the (a) Authority of the Commissioner
prescriptive period is suspended. to compromise and abate taxes
(b) Compromise
In PROTECTOR’S SERVICES V. CA [APRIL 12, 2000], (c) Abatement
the Supreme Court held that the act of a taxpayer in (iii) Distraint of personal property
filing a petition before the CTA to prevent the
including garnishment
collection of the assessed deficiency tax and in
elevating the case to the Supreme Court for review (a) Summary remedy of distraint of
after the CTA dismissed the petition suspended the personal property
running of the statute of limitations. (1) Purchase by the government
at sale upon distraint
Q: An informer filed a case with the CTA (2) Report of sale to the BIR
against the taxpayer and BIR. The informer (3) Constructive distraint to
was seeking to (1) declare the taxpayer as protect the interest of the
having an assessment; and (2) as a government
consequence, to collect his informer’s (iv) Summary remedy of levy on real
reward. This case was filed by the informer property
within 3 years from the time that the (1) Advertisement and sale
taxpayer filed his return. However, apart (2) Redemption of property sold
from this action initiated by the informer, no (3) Final deed of purchaser
other action was filed by the government (v) Forfeiture to government for want
seeking to collect against the taxpayer. Has of bidder
the right to collect already prescribed? (a) Remedy of enforcement of
forfeitures
No. In PNOC V. CA [APRIL 26, 2005], the Supreme (1) Action to contest forfeiture of
Court held that the BIR is deemed to be compliant chattel
with the requirement that collection be made within (b) Resale of real estate taken for
the 5 years from time of assessment since if the taxes
informant won, the CTA would have ordered the (c) When property to be sold or
erring parties to pay the tax. At the very least, the destroyed
filing by the informer of the case would have
(d) Disposition of funds recovered in
suspended the running of the period because the
BIR is prohibited from making collection because legal proceedings or obtained
there was a pending case. from forfeiture
(vi) Further distraint or levy
Q: Is the government barred by (vii) Suspension of business operation
prescription from claiming deficiency (viii) Statutory offenses and penalties
taxes against an estate?

b) Judicial Remedies predicated on a tax lien is superior to the claim of a

(i) Civil and criminal actions private litigant predicted on a judgment. The tax lien
(a) Suit to recover tax based on attaches not only from the service of the warrant of
false and fraudulent returns distraint of personal property but from the time the
tax had become due and payable. In both cases, the
---------------------------------------------------------------
distraint was made long before the writ of execution
was issued to implement the levy on execution.
---------------------------------------------------------------
Q: What are the remedies of the government (ii) Compromise and Abatement
for the collection of taxes? (a) Authority of the Commissioner
to compromise and abate taxes
1. Administrative Remedies (b) Compromise
(c) Abatement
a. Tax lien
b. Distraint of personal property, or levy of real ---------------------------------------------------------------
property or garnishment of bank deposits
c. Sale of property Read Section 204, Tax Code
d. Forfeiture
e. Compromise and abatement ---------------------------------------------------------------
f. Penalties and fines; (b) Compromise
g. Suspension of business operations ---------------------------------------------------------------
2. Judicial Remedies
Q: What is a compromise?
a. Civil action
b. Criminal action A compromise is an agreement whereby the parties,
by making reciprocal concessions, avoid litigation or
put an end to one already commenced (see ART.
---------------------------------------------------------------
2208, CIVIL CODE)
(i) Tax lien
---------------------------------------------------------------
Q: Who may compromise tax liability?
Read Section 219, Tax Code The CIR is the only official vested with the power
and discretion to compromise civil and criminal
Q: What is a tax lien? cases arising from violations of the Tax Code. He
cannot be compelled to exercise such discretion.
It is a legal claim or charge on property, real or However, the Regional Evaluation Board may enter
personal, established by law as security in default of into a compromise on:
the payment of tax (HSBC v. Rafferty [39 Phil.
105]) a. Assessment issued by the Regional Officers
involving basic deficiency taxes of P500,000
Q: The CIR served a warrant of distraint over or less; and
four barges owned by ABC Company to b. Minor criminal violations, discovered by
satisfy various deficiency taxes. Later, the regional and district (See Section 7(c), Tax
Code)
same four barges were levied upon
execution to satisfy a judgment for unpaid
Q: Can a compromise be made after final
wages and other benefits of the employees
judgment?
of ABC Company. Which claim is superior?
No. In Rovero v. Amparo [May 5, 1952], the
The claim of the government is superior. As held in
Supreme Court stressed that a compromise is
CIR v. NLRC [November 9, 1994] reiterating the
resorted to, to avoid litigation or to end a suit already
doctrine laid down in REPUBLIC V. ENRIQUEZ
instituted. There can no longer be a compromise at
[OCTOBER 21, 1988], the claim of the government

a stage of judicial proceedings where a final be handled by the

judgment has already been rendered because there Regional Evaluation
is nothing to compromise as the Government has Board or the National
definitely and finally won the litigation. Evaluation Board on a
case-to-case basis
5. Cases which become
final and executory
Q: What are the grounds for the compromise after final judgment of
of payment of internal revenue taxes? a court where
compromise is
1. Doubtful validity of the assessment requested on the
2. Financial incapacity ground of financial
incapacity of the
Note: Refer to RR 30-2002 [December 16, 2002] for the taxpayer
instances where the tax can be compromised under these
two grounds.
(See Section 2, RR No. 30-2002)
Q: What tax cases may or may not be the
subject of a compromise? Q: What are the minimum amounts for
compromise settlements?
Subject to compromise Not subject to
compromise 1. For cases of financial incapacity, the
minimum compromise rate is 10% of the
1. Delinquent accounts 1. Withholding tax cases basis assessed tax.
2. Cases under unless the applicant- 2. For other cases (including doubtful validity),
administrative protest taxpayer invokes the minimum compromise rate is 40% of the
after issuance of the provisions of law that basic assessed tax.
FAN to the taxpayer cast doubt on the
which are still taxpayer’s obligation Q: Can the compromise offer of a taxpayer
pending in the RO, to withhold be lower than the prescribed rates?
RDO, Legal Service, 2. Criminal tax fraud
Large Taxpayer cases confirmed as Yes, but the approval by the Evaluation Board which
Service, Collection such by the CIR or his is composed of the CIR and the 4 Deputy
Service, Enforcement duly-authorized Commissioners is required.
Service and other representative
officers of the 3. Delinquent accounts Note: The Evaluation Board must also approve the
National Office with duly approved compromise if the basic tax involved exceeds P1 million.
3. Civil tax cases being schedule of
disputed before the installment payments Q: Can a void assessment serve as basis for
courts 4. Cases where the final a compromise?
4. Collection cases filed reports of
in courts reinvestigation or
No. As held in CIR V. REYES [JANUARY 27, 2006], the
5. Criminal violations reconsideration have
Supreme Court reiterated that an assessment that
other than those been issued resulting
fails to inform the taxpayer of the law and the facts
already filed in court to reduction in the
on which it is made is void. As a corollary, a void
or those involving original assessment
assessment cannot in turn be used as basis for
criminal tax fraud and the taxpayer is
perfection of a tax compromise.
agreeable to such
decision by signing
the required Q: Can criminal violations of the Tax Code
agreement form for be compromised?
the purpose. On the
other hand, other Yes, except:
protested cases shall a. those already filed in court and
b. those involving fraud.

(a) Remedy of enforcement of

--------------------------------------------------------------- forfeitures
(a) Abatement (2) Action to contest forfeiture of
--------------------------------------------------------------- chattel
(b) Resale of real estate taken for
Q: What is abatement? taxes
(c) When property to be sold or
An abatement is a diminution or decrease in the destroyed
amount of tax imposed such that to abate is to nullify (d) Disposition of funds recovered in
or reduce in value or amount.
legal proceedings or obtained
from forfeiture
Q: How is it different from a compromise?
(xi) Further distraint or levy
A compromise is marked by mutual concessions, ---------------------------------------------------------------
whereas in abatement or cancellation, no mutual
concessions between the taxpayer and the CIR are Q: What are the requisites for a valid
made (see PEOPLE V. SANDIGANBAYAN [AUGUST 16, distraint and levy?
2005].
1. The taxpayer must be delinquent
Q: What are the grounds for abatement? 2. There must be a subsequent demand
for its payment
1. If the assessment is excessive or erroneous 3. The taxpayer must fail to pay the
2. If the administration costs involved do not delinquent tax at the time required
justify the collection of the amount due
4. The period within which to collect the tax
Note: Refer to RR 13-2001 [September 27, 2001] for the
has not yet prescribed
instances where the tax can be compromised under these
two grounds. Note that RR 13-2001 was amended by RR Read Section 206, Tax Code
4-2012 [March 28, 2012]. Previously, one of the instances
is when there is late payment of the tax under meritorious
circumstances. One day late filing and remittance due to
Q: In what instances can the CIR place
failure to beat bank cut-off time fall under this instance in under constructive distraint26 the property of
RR 13-2001. RR 4-2012 deleted the same. a taxpayer?
--------------------------------------------------------------- 1. Delinquent taxpayer

(iii) Distraint of personal property 2. Taxpayer is retiring from any business
including garnishment subject to tax
(b)Summary remedy of distraint of 3. Taxpayer is intending to leave the
Philippines
personal property
4. Taxpayer is intending to remove his property
(1) Purchase by the government at therefrom
sale upon distraint 5. Taxpayer is intending to hide or conceal his
(2) Report of sale to the BIR property
(3) Constructive distraint to 6. Taxpayer is intending to perform any act
protect the interest of the tending to obstruct the proceedings for
government collecting the tax due or which may be due
(ix) Summary remedy of levy on real from him
property
(1) Advertisement and sale
(2) Redemption of property sold
(3) Final deed of purchaser 26
In a constructive distraint, the taxpayer or any person having
(x) Forfeiture to government for want possession or control of the property will sign a receipt covering
the property distrained and obligate himself to preserve the same
of bidder intact and unaltered and not to dispute the same without authority
from the CIR.

Read 207 to 217, Tax Code Note: The next steps will depend if the Bid is less than
amount of tax/ FMV of goods distrained.
Note: After reading the codal (that is, if you read it), I am
sure you’re thinking: WTF is this shit? Do not worry. Let us
simplify the discussion of Distraint and Levy. First, let us
go through some definitions. Distraint is the seizure by Bid less than amount Bid equal or more than
the government of personal property, tangible, or of tax/FMV of goods amount of tax/FMV of
intangible, to enforce the payment of taxes, to be followed distrained goods distrained
by its public sale, if the taxes are not voluntary paid.
Garnishment is the taking of personal properties usually
cash or sums of money owned by the delinquent taxpayer 7. Commissioner may 7. Officer sells the
which is in the possession of a third party. A levy refers to purchase property for goods to the highest
the seizure of real properties and interest in or rights to the National bidder for cash or
such properties for the satisfaction of taxes due from the Government (Section with the
delinquent taxpayer. Magagamit niyo yang definitions na 212, Tax Code) Commissioner’s
yan later sa local taxes and sa RPT (Oo, may distraint and 8. Property may be approval, through
levy rin dun). Now, let’s discuss the whole procedure from resold and the net commodity/ stock
Section 207 to Section 217 of the Tax Code.
proceeds shall be exchanges. (Section
remitted to the 209, Tax Code)
Q: Outline the procedure for distraint of National Treasury as 8. Excess of proceeds
personal property internal revenue. over the entire
(Section 212, Tax claim, shall be
Note: Take note of the following - RCO - Revenue Code) returned to the
Collection Officer, RDO - Revenue District officer, RRD - owner. No charge
Revenue Regional Director, and LGU- Local Government shall be imposed for
Unit
the services of the
officer (Section 209,
1. Person owing any delinquent tax to fails to pay
Tax Code)
w/in the time required
9. Within 2 days after
the sale, officer shall
Note: The authority who will do the distraint of personal
property will depend on whether the delinquent tax is more
report to the
than Php 1 million. Commissioner.
(Section 211, Tax
More than Php 1 Php 1 million or less Code)
million 10. Within 5 days after
sale, distraining
2. Commissioner 2. RDO seizes officer shall enter
seizes sufficient sufficient personal return of
personal property to property to satisfy proceedings in the
satisfy the tax, the tax, charges & records of RCO,
charge & expenses expenses of seizure RDO and RRD
of seizure (Section (Sec. 207 (A), Tax (Section 213, Tax
207 (A), Tax Code) Code) Code)
Note: If the personal property of the taxpayer is not

3. Distraining Officer accounts for the goods
sufficient to satisfy his tax delinquency, the CIR or his
distrained (Section 208, Tax Code) authorized representative shall, within 30 days after the
4. RDO posts notice in at least 2 public places in execution of the distraint, proceed with the levy on
the municipality/city where the distraint is made. taxpayer’s real property. (Section 209(B), Tax Code)
One place of posting must be at the mayor’s
office. Time of sale shall not be less than 20
days after the notice (Section 209, Tax Code)
5. Goods shall be restored to owner, if charges
are paid (Section 210, Tax Code)
6. Officer conducts public auction

Q: Outline the procedure for levy on real redeem said property the foreclosed asset of
property. by paying full amount natural persons and the
of the taxes and period within which to pay
charges (Section 215, CGT or CWT and DST on
1. Real property may be levied on before, the foreclosure of Real
simultaneously, or after the distraint of personal Tax Code) Estate Mortgage shall be
property (Section 207 (B), Tax Code) 10. The Commissioner reckoned from the date of
2. Internal revenue officer, designated by the may, after 20 days registration of the sale in
Commissioner, shall prepare a certificate with the notice, sell property the Office of the Register of
force of a nationwide legal execution (Section at public auction or at Deeds
207 B, Tax Code) private sale with
approval of the For juridical persons in an
3. Levy shall be affected by writing upon said extrajudicial foreclosure,
certificate a description of the property. Notice of Secretary of Finance.
Proceeds shall be Section 47 of the General
the levy shall be served upon the Register of Banking Law provides that
Deeds of LGU where the property is located and deposited with the its right of redemption shall
upon the owner (Section 207 B, Tax Code) National Treasury be until, but not after the
4. Within 10 days after receipt of the warrant, (Section 216, Tax registration of the certificate
levying officer shall report to the Commissioner Code) of sale with the Register of
who shall have the authority to lift the warrant of Deeds, which in no case
levy (Section 207 B, Tax Code) shall be more than 3
months after foreclosure,
5. Within 20 days after levy, officer shall post notice whichever is earlier. (RMC
at the main entrance of the municipal/city hall & No. 55-2011 [November
in public place in the barrio/district where the real 10, 2011])
estate lies for at least 30 days by and publish it
once a week for 3 weeks. Owner may prevent The right of redemption
sale by paying all charges (Section 213, Tax shall be reckoned from the
Code) approval of the executive
6. Sale shall be held at the main entrance of the judge [CIR v. UPCB
municipal/city hall, or on the premises of the [October 23, 2009])
levied property. (Section 213, Tax Code)
9. Within 1 year from
Note: The next steps will depend if there is a bidder or not sale, the owner may
OR the highest bid is sufficient or not. redeem, by paying
to the RDO the
No bidder or highest There is a bidder or amount of the taxes,
penalties, and
bid insufficient highest bid sufficient
interest thereon
from the date of
7. Officer conducting the 7. Excess of proceeds delinquency to the
sale shall forfeit the of the sale over date of sale, and
property to the claim and cost of 15% per annum
Government (Section sale shall be turned interest on purchase
215, Tax Code) over to the owner price from the date
8. Within 2 days, he (Section 213, Tax of purchase to the
shall make a return of Code) date of redemption.
the forfeiture. 8. Within 5 days after (Section 214, Tax
Register of Deeds, the sale, levying Code)
upon registration of officer shall enter 10. Owner shall not be
forfeiture shall return of the deprived of the
transfer title to the proceedings upon possession and
Government without the records of the shall be entitled to
court order. (Section RCO, RDO and the fruits until 1 year
215, Tax Code) RRD (Section 213, expires (Section
9. Within 1 year from Tax Code) 214, Tax Code)
forfeiture, the
taxpayer, may Note: The 1-year period on

Note: Levy and distraint may be repeated until the full 2. By filing an answer to the petition for
amount due, and all expenses are collected. (Section 217, review filed by the taxpayer with the
Tax Code)
CTA
---------------------------------------------------------------
Q: Which court has exclusive original
(xii) Suspension of business operation
jurisdiction in tax collection cases involving
---------------------------------------------------------------
final and executory assessments for taxes,
Read Section 115, Tax Code fees, charges and penalties?
1. The CTA if the principal amount of taxes and

Q: When may the CIR suspend the business
fees, exclusive of charge and penalties is
operation of a VAT-registered person? Php 1 million and above.
2. The proper MTC or RTC if the principal
The CIR or his authorized representative may amount of taxes and fees, exclusive of
suspend the business operation and temporarily charge and penalties, is less than Php 1
close the business of a VAT-registered person for million.
understatement of taxable sales or receipts by 30%
or more of his correct taxable sales or receipts for
Q: Assuming that the principal amount of
the taxable quarter
taxes and fees is less than Php 1 million,
Note: The duration of the suspension of business can the lower court acquire jurisdiction over
operation is for a period of not less than 5 days and shall a a tax collection case while there is a
be lifted only upon compliance of whatever requirements pending case in the CTA disputing the
imposed by the CIR in the collection order. assessment?
--------------------------------------------------------------- No. As held in YABES V. FLOJO [JULY 20, 1982], the
(iv) Statutory offenses and penalties Supreme Court held that the lower court can acquire
--------------------------------------------------------------- jurisdiction over a claim for collection of deficiency
taxes only after the assessment made by the CIR
Note: I already discussed civil penalties or surcharges and has become final and unappealable, not where there
interests in Assessment. As to statutory offenses, I will is still a pending CTA case.
include them in the discussion of criminal action.
Q: When an assessment has become final
--------------------------------------------------------------- for failure to protest, can the taxpayer still
b) Judicial Remedies raise the issue of prescription?
(i) Civil and criminal actions
(b) Suit to recover tax based on Yes. As held in CIR V. HAMBRECHT & QUIST
false and fraudulent returns PHILIPPINES [NOVEMBER 17, 2010], the Supreme
--------------------------------------------------------------- Court held that the fact that an assessment has
become final for failure of the taxpayer to file a
Read Section 220-221, Tax Code protest within the time allowed only means that the
validity or the correctness of the assessment may no
longer be questioned on appeal. However, the
Civil Actions validity of the assessment itself is a separate and
distinct issue from the issue of whether the right of
Q: What are the two ways by which the civil the CIR to collect the validly assessed tax has
tax liability of a taxpayer is enforced by the prescribed.
government through civil actions?
Q: Is a decision on a request for
1. By filing a civil case for the collection of reinvestigation a condition precedent to the
a sum of money with the proper regular filing of an action of taxes already
court assessed?

No. In REPUBLIC V. LIM TIAN TENG SONGS & CO Q: Define “willful” in the context of the third
[M ARCH 31, 1966], the Supreme Court ruled that a element of a violation of the Tax Code for
decision on a request for reinvestigation is not a failure to make or file the return?
condition precedent to the filing of an action of taxes
already assessed. Nowhere in the Tax Code is the In PEOPLE V. KINTANAR [CTA CRIM. CASE NO. 006,
CIR required to rule first on a taxpayer’s request for DECEMBER 3, 2010, affirmed by the Supreme Court
reconsideration before he can go to court for the in a minute resolution [G.R. 196340] dated
purpose of collecting the tax assessed. February 2012], the Supreme Court defined “willful”
in this light: “willful in the tax crimes statutes means
The requirement to rule on disputed assessments voluntary, intentional violation of a known legal duty,
before bringing action for collection is applicable and bad faith or bad purpose need not be shown.
only on where the assessment was actually Further, the Supreme Court stated that an act or
disputed, adducing reasons in support thereto. In omission is "willfully" done if done voluntarily and
this case, the taxpayer did not actually contest the intentionally and with specific intent to do something
assessment by stating the basis thereof. (see the law forbids, or with specific intent to fail to do
DAYRIT V. CRUZ [SEPTEMBER 26, 1988]) something the law requires to be done; that is, with
bad purpose to either disobey or disregard the law.
Criminal Actions A willful act may be described as one done
intentionally, knowingly and purposely, without
Q: Name the most common crimes justifiable excuse.
punishable under the Tax Code?
As held in PEOPLE OF THE PHILIPPINES VS. JUDY ANNE
Read Section 254-255, Tax Code SANTOS Y LUMAGUI [CTA CRIM. CASE NO. O-012,
JANUARY 16, 2012], the element of wilful failure to
supply correct and accurate information must be fully
established as a positive act or stale of mind. It
1. Attempt to evade or defeat tax (Section cannot be presumed nor attributed to mere
254) inadvertent or negligent acts. Negligence, whether
2. Failure to File return, supply correct and slight or gross, is not equivalent to the fraud with
accurate information, pay tax, withhold intent to evade the tax contemplated by the law.
and remit tax, and refund excess taxes Fraud must amount to intentional wrongdoing with
withheld on consumption (Section 255) the sole object of avoiding the tax.
Note: As to other statutory offenses, refer to Sections 253 Q: What are the elements of a violation of
to 282. Section 255 in relation to Sections 253(d)
and 256 of the Tax Code for failure of a
Q: What are the elements of a violation of
corporation to make or file a return (holding
Section 255 of the Tax Code for failure to
the corporate officers criminally liable)?
make or file a return?
1. The corporate taxpayer is required to pay
1. The accused is a person required to make tax and it failed to pay such tax at the time
or file a return required by law;
2. The accused failed to make or file the return 2. The accused is the president, general
at the time required by law manager, branch manager, treasurer,
3. The failure to make or file the return was officer-in-charge, or employee responsible
willful for the violation of the corporate taxpayer;
and
(see PEOPLE V. KINTANAR [CTA CRIM. CASE NO. 006,
DECEMBER 3, 2010]; PEOPLE OF THE PHILIPPINES VS. JUDY
3. The accused willfully fails to pay the
ANNE SANTOS Y LUMAGUI [CTA CRIM. CASE NO. O-012, corporate taxes. (PEOPLE OF THE PHILIPPINES
JANUARY 16, 2012]) VS.JOSEPH TYPINGCO [CTA CRIM. CASE NO.
0-114, M AY 16, 2012]

Q: Which court has exclusive original assessment is not necessary before a criminal
jurisdiction in criminal tax cases? charge can be filed and such criminal charge need
only be supported by a prima facie showing of failure
27
1. The CTA if the principal amount of taxes and to file a required return.
fees, exclusive of charge and penalties is
Php 1 million and above. This was likewise reiterated in Adamson v. CA
2. The proper MTC or RTC if the principal [May 21, 2009] where the Court held that there is no
amount of taxes and fees, exclusive of need for precise computation and formal
charge and penalties, is less than Php 1 assessment in order for criminal complaints can be
million. filed against the taxpayer. An assessment is not
necessary for a criminal prosecution for willful
Q: Does the acquittal of the taxpayer from attempt to defeat and evade the income tax.
the criminal action affect his liability to pay
Note: However, for criminal prosecution to proceed before
the tax? assessment, there must be a prima facie showing of a
willfull attempt to evade taxes (CIR v. Fortune Tobacco
No. In REPUBLIC V. PATANAO [JULY 21, 1967], the [June 4, 1996])
Supreme Court held that since the taxpayer’s civil
liability is not included in the criminal action, his Q: Is the filing of the criminal action an
acquittal in the criminal proceeding does not implied assessment?
necessarily entail exoneration from his liability to pay
taxes. His legal duty to pay taxes cannot be affected No. The filing of a criminal action is not an implied
by his attempt to evade taxes. Said obligation is not assessment. An assessment contains not only a
a consequence of the criminal act charged nor is it a computation of tax liabilities but also a demand for
mere civil liability arising from a crime that could be payment within the prescribed period. An affidavit,
wiped out by judicial declaration of non-existence of which was executed by revenue officers stating the
the criminal acts charged. tax liabilities of a taxpayer and attached to the
criminal complaint for tax evasion cannot be deemed
Q: Should the filing of a criminal complaint an assessment that can be questioned before the
be preceded by assessment? CTA (CIR v. Pascor Realty [June 29, 1999])
No. In case of a false or fraudulent return, Q: What is the effect of satisfaction of the
proceedings in court may be commenced without an
civil liability to the criminal liability in tax
assessment since under the Tax Code, civil and
criminal aspects may be pursued cases?
In UNGAB V. CUSI [M AY 30, 1980]¸the Supreme Court The subsequent satisfaction of civil liability by
held that while there can be no civil action to enforce payment or prescription does not extinguish the
collection before the assessment procedures taxpayer’s criminal liability.
provided in the Tax Code have been followed, there
is no requirement for the precise computation and Q: Can subsidiary imprisonment be
assessment of the tax before there can be a criminal imposed on the tax which the taxpayer is
prosecution under the Tax Code. sentences to pay?
This was clarified further in CIR V. PASCOR REALTY
It depends. Subsidiary imprisonment cannot be
AND DEVELOPMENT CORP. [JUNE 29, 1999], the
imposed in case of insolvency on the part of the
taxpayer argued that a tax assessment should
taxpayer but it may be imposed in the case of failure
precede a criminal indictment. The Supreme Court
to pay the fine imposed (see Section 280, Tax
disagreed. The Court noted that Section 222 of the
Code)
Tax Code specifically states that in cases where a
false or fraudulent return is submitted or in cases of
failure to file return, proceedings in court may be
commenced without an assessment. Further,
27
Section 205 provides that the civil and criminal The Court also stressed that a criminal complaint is instituted
aspects may be pursued simultaneously. An not to demand payment, but to penalize the taxpayer for violation
of the Tax Code.

Read Section 281, Tax Code already pending or previously

investigated
Q: What is the prescriptive period for
violations of the Tax Code? Q: Who are disqualified from availing of the
informer’s reward?
All violations of any provision of the Tax Code shall
prescribe after 5 years. 1. A BIR official or employee or any other
incumbent public official or employee;
2. Relative within the sixth (6th) civil degree of
Q: When does the prescriptive period
consanguinity of a BIR official or employee,
begin? or other public official or employee; and
3. Though already retired or otherwise
Prescription shall begin to run from: separated from service, BIR officials or
employees or other public officials who
1. The day of the commission of the violation acquired the information in the course of the
2. If the same is not known, from the discovery performance of their duties during their
and the institution of judicial proceedings for incumbency. (see RR 16-2010 [NOVEMBER
its investigation and punishment. 25, 2010])
Note: In LIM, SR. V. CA [OCTOBER 18, 1990], the Supreme Note: Now, let’s discuss another remedy of the taxpayer –
Court adopted the view of the Solicitor General to the Refunds.
effect that, in addition to the fact of discovery, there must ---------------------------------------------------------------
be a judicial proceeding for the investigation and
punishment of the tax offense before the five-year limiting
period begins. Also, b) Refund
(i) Grounds and Requisites for refund
Q: In what instances is the prescriptive (ii) Requirements for refund as laid down
period interrupted? by cases
(a) Necessity of written claim for
1. When proceedings are instituted against the refund
guilty persons (and shall run again if the (b) Claim containing a categorical
proceedings are dismissed for reasons not demand for reimbursement
constituting jeopardy) (c) Filing of administrative claim for
2. When the offender is absent from the refund and the suit/proceeding
Philippines before the CTA within 2 years
from date of payment regardless
Read Section 282, Tax Code of any supervening cause
(iii) Legal basis of tax refunds
Q: What is the reward given to persons (iv) Statutory basis for tax refund under
instrumental to the discovery of violations the Tax Code
of the Tax Code? (a) Scope of claims for refund
(b) Necessity of proof for claim or
A sum equivalent to 10% of the revenues, refund
surcharges, or fees recovered and/or fine or penalty
(c) Nature of erroneously paid
imposed and collected or P1 million, whichever is
lower. tax/illegally assessed collected
(d) Tax refund vis-à-vis Tax Credit
Entitlement to (e) Essential requisites for claim of
Informer’s Reward refund
The offender offered to Yes (v) Who may claim/apply for tax
compromise refund/tax credit
No revenue, surcharges or fees No
were actually recovered
(a) Taxpayer/withholding agents of
The information refers to case No non-resident foreign corporations

(vi) Prescriptive period for recovery of tax from date of payment regardless
erroneously or illegally collected of any supervening cause
(vii) Other consideration affecting tax ---------------------------------------------------------------
refunds
--------------------------------------------------------------- Q: What are the requirements for a claim of
a tax refund or a tax credit?
1. There is a tax collected erroneously or illegally,
Note: Before we even begin, note that the rules in Section or a penalty collected without authority, or a sum
229 both statutory and jurisprudential does NOT apply to excessively or wrongfully collected (see Section
the refund or tax credit of excess and unutilized input tax 229, Tax Code)
(VAT). Section 229 applies to the recovery of erroneously
or illegally collected internal revenue taxes. On the other 2. There must be a written claim for refund filed by
hand, the refund or tax credit of excess and unutilized the taxpayer to the CIR (see Vda. De Aguinaldo
input tax is governed by Section 112(C). So kung sinabi
recovery of input tax (sa VAT), apply Section 112(C).
v. CIR [February 26, 1965])
Kung recovery of erroneous or illegally internal revenue
tax (mostly in income taxes), apply Section Exceptions (no written claim required)
229.Remember that. Keep this mind in our discussion of
Refund here. I’ll first discuss Refund in Section 229 by a. When on the face of the return upon which
following the order in the syllabus and then later we will payment was made, such payment appears
discuss the procedure for claim of refund in Section 229 clearly to have been erroneously paid, the
and I’ll compare it with Section 112(C). Hanggang ngayon CIR may refund or credit the tax even
kung titingnan niyo ang mga kaso involving refunds,
without a written claim (Section 229, Tax
marami pa rin nagkakamali diyan. Who is to blame? Well,
ang kaso ng Aichi na we discussed under VAT.
Code)
Malalaman natin mamaya bakit.
b. A return filed showing an overpayment shall
--------------------------------------------------------------- be considered as a written claim for credit or
(i) Grounds and Requisites for refund refund. (Sec. 204(C), Tax Code)
---------------------------------------------------------------
3. The claim must be a categorical demand for
reimbursement (see Bernejo v. CIR [July 25,
Q: What are the grounds for refund or credit 1950])
of internal revenue taxes?
4. The claim for refund must be filed within 2 years
1. The tax was illegally collected – There is no law from the date of the payment of the tax
that authorizes the collection of the tax) regardless of any supervening cause (Section
2. The tax was excessively collected – There is a 229, Tax Code)
law that authorizes the collection but the tax
collected was more than what the law allows 5. The taxpayer must show proof of payment of the
3. The tax was paid through a mistaken belief that tax (See CIR v. Li Yao [December 27, 1963])
the taxpayer should pay the tax – This is a case
of solutio indebiti Note: Payment under protest is not required in order to
--------------------------------------------------------------- obtain a refund of erroneously or illegally collected internal
(ii) Requirements for refund as laid down revenue taxes. (Section 229, Tax Code)
by cases As to (3): The idea is first to afford the CIR an opportunity
(a) Necessity of written claim for to correct the action of subordinate officers and second to
refund notify the Government that such taxes have been
(b) Claim containing a categorical questioned and the notice should then be borne in mind in
estimating the revenue available for expenditure (see
demand for reimbursement Bermejo v. CIR [July 25, 1950])
(c) Filing of administrative claim for
refund and the suit/proceeding As to (5), before recovery is allowed, it must be
before the CTA within 2 years established that there was actual collection and receipt by
the government of the tax sought to be recovered and this

required factual proof (CIR v. Li Yao [December 27,

1963]) (4) For actions for refund of corporate income tax, the two-
year prescriptive period is counted from the time of actual
See PHILAM Properties Corporation vs. filing of the Final Adjustment Return or Annual Income Tax
Commissioner of Internal Revenue [CTA Case No. Return not on the date when the taxes were paid on
7912, January 12, 2012] where the CTA held that failure quarterly basis. (see CIR V. CA [JANUARY 21, 1999]). It is at
to prove that the income, related to the excess creditable this point that it can already be determined whether there
withholding being claimed as refund, was reported in the has been an overpayment of the taxpayer. (see CIR V.
income tax return would result in the denial of the claim. PHILAMLIFE [MAY 29, 1995]).
SEE ALSO PHILIPPINE BANK OF COMMUNICATIONS VS. See PRHC Property Managers. Inc. vs. Commissioner
COMMISSIONER OF INTERNAL REVENUE [CTA CASE NO. 7763, of Internal Revenue [CTA Case No. 8071, January 6,
JANUARY 20, 2012]; PHILAM INSURANCE AGENCY AND CALL 2012] where the CTA held that the reckoning of the 2-year
CENTER SERVICES, INC. VS. COMMISSIONER OF INTERNAL prescriptive period for the filing of a claim for refund of
REVENUE [CTA EB NO. 792, JANUARY 20, 2012]; HAVI FOOD excess creditable withholding tax or quarterly income tax
SERVICES PHILS., INC. VS. CIR, CTA EB NO. 800 (CTA CASE starts from the date of filing of the annual income tax
NO. 7735), JUNE 28, 2012 return
In a claim for refund of excess income tax, failure to See also MCKINSEY & CO., (PHILS.) VS. COMMISSIONER OF
present the original annual income tax return is fatal to the INTERNAL REVENUE, CTA CASE NO. 8078, JULY 30, 2012
claim. Maunsell Philippines, Inc. vs. CIR, C.T.A. EB No.
860, October 23, 2012 The period to file a claim for refund of excess creditable
withholding taxes by a tax-exempt entity is not reckoned
--------------------------------------------------------------- from the filing of the final adjustment return, but from the
time the taxes were erroneously withheld LISP-1
(c) Filing of administrative claim for LOCATORS’ ASSOCIATION INCORPORATED VS. COMMISSIONER
refund and the suit/proceeding OF INTERNAL REVENUE, CTA CASE NO. 7905, NOVEMBER 29,
before the CTA within 2 years 2012
from date of payment regardless
of any supervening cause (5) In case the taxpayer merely made a deposit, the 2-year
period is counted from the conversion of the deposit to
--------------------------------------------------------------- payment (Union Garment v. Collector [CTA Case No.
416, November 17, 1965]).
Q: What is the prescriptive period for
recovery of erroneously or illegally collected (6) For VAT, the two year prescriptive period is counted
internal revenue taxes? from the time of filing of the quarterly VAT return, i.e.
within 25 days after the close of each taxable quarter (CIR
v. Mirant [September 12, 2008]
The claim for refund must be filed within 2 years
from the date of payment of the tax regardless of (7) In case of dissolution of a corporation, the 2-year
any supervening cause (Section 229, Tax Code) prescriptive period for refund begins thirty (30) days after
the approval by SEC of its plan for dissolution MINDANAO I
Note: (1) Note Section 56 of the Tax Code which provides GEOTHERMAL PARTNERSHIP VS. COMMISSIONER OF INTERNAL
that payment is made at the time the return is filed. But REVENUE, CTA CASE NO. 8250, NOVEMBER 9, 2012
when the final adjusted return was filed earlier than the
time the return could still be filed, the 2-year period is Q: Is a RMC which extends the 2 year period
counted from the date the return was filed (CIR v. CA to file a claim for refund to 10 years valid?
[January 21, 1999])
(2) In case of payments through the withholding tax No, the RMC cannot go beyond what is provided in
system, the tax liability is deemed paid when he same falls the law and the State cannot be put into estoppel
due at the end of the tax year (Gibbs v. CIR [November (see PBCOM V. CIR [JANUARY 28, 1999])
29, 1965])
Q: What is the judicial remedy with respect
(3) If the tax is paid in installments, the two year
prescriptive period is counted from the time of the
to a refund or recovery of tax erroneously or
payment of the last installment. As held in CIR v. PALANCA illegally collected?
[OCTOBER 29, 1966], where the tax account was paid by
installment, then the computation of the 2 year prescriptive The remedy is the filing of a suit or proceeding with
period should be from the date of last installment. the CTA:

absolutely exempt from income tax regardless of the

1. Within 30 days from receipt of the denial by nature of tax, the taxpayer’s claim was barred by
the CIR of the application for refund prescription since the filing of the supplemental
2. Before the expiration of the 2 years petition (and not an original action) was not granted
prescriptive period. and therefore “it did not have any judicial effect” to
toll the running of the 2 year period. It was only
Note: The 30-day period to appeal to the CTA should be when a subsequent petition for review was filed did
within the 2-year prescriptive period the prescriptive period toll. Further, this is not a case
where the 2-year period can be considered non-
Q: What must the taxpayer do in case of a jurisdictional since there are no “exceptional or
situation where the CIR is taking time to supervening circumstances” to speak of.
decide the claim and the period of 2 years is
about to end? Q: May the 2-year prescriptive period be
suspended?
If the the 2 year period is about to lapse, the
taxpayer may already appeal to the CTA even if the Even if the 2 year prescriptive period, if applicable,
CIR has not yet made any decision on the claim for had already lapsed, the same may be suspended for
refund. In GIBBS V. COLLECTOR OF INTERNAL reasons of equity and other special circumstances.
REVENUE [FEBRUARY 29, 1960], the Supreme Court (see CIR V. PHILAMLIFE [MAY 29, 1995]; CIR v. PNB
noted that if the CIR takes time in deciding the claim [OCTOBER 25, 2005])
and the period of two years is about to end, the suit
or proceeding must be started in the CTA before the The two-year prescriptive period under Section 229
end of the 2 year period without awaiting the of the NIRC may be suspended for reasons of equity
decision of the CIR. and other special circumstances. COMMISSIONER OF
INTERNAL REVENUE VS. M ANILA ELECTRIC COMPANY,
In CIR V. SWEENEY [AUGUST 21, 1959], the Supreme INC., CTA EB NO. 773, NOVEMBER 13, 2012
Court stated that “taxpayers need not wait for the
action of the CIR on the request for refund before
Q: Name some reasons of equity and other
taking the matter to Court.”
special circumstances that jurisprudence
Note: (1) The implication of this is that a simultaneous has considered to extend the 2 year
filing of the application with the BIR for refund/credit and prescriptive period.
the institution of the suit with the CTA is allowed.
1. When the taxpayer made advance income
(2) The rule is different in the refund or tax credit of excess tax payment heeding former President
or unutilized input taxes for VAT. Sa recovery of excess or
unutilized input taxes, premature if you file the judicial
Corazon Aquino’s call and was made to
claim within the 2 year prescriptive period. Dito sa refund believe that its request for tax credit will be
of erroneously or illegally collected tax, hindi premature acted upon and favourably considering that
un! In fact, kapag hindi ka nagfile within, fatal un sa claim its carry over was unutilized since the
mo. We will discuss this later. company suffered losses for the next 4
years (see PNB V. CA [OCTOBER 25, 2005])
Q: Will the filing of a supplemental petition 2. When the taxpayer and the CIR agreed to
be sufficient to toll the prescriptive period wait for the result of another case having the
for the claim for refund? same issue (see PANAY ELECTRIC CO. V. CIR
[M AY 28, 1958])
It depends. If it was granted, it would toll the 3. When the CIR initially agreed to grant the
prescriptive period. Otherwise, it would not have the refund and later denied the same
effect of tolling the prescriptive period.
Q: If the availment of the tax credit/refund is
In FAR EAST BANK AND TRUST COMPANY V. CIR [M AY due for reasons other than the erroneous or
2, 2006], the Supreme Court held that the claim for wrongful collection of taxes, what
refund has been barred by prescription since the prescriptive period shall apply?
supplemental petition was not admitted. While
retirement funds/employment trusts are still

As held in CIR v. PNB [OCTOBER 25, 2005] citing ---------------------------------------------------------------

CIR V. PHILAMLIFE [MAY 29, 1995], availment of a tax (a) Scope of claims for refund
credit due for reasons other than the erroneous or (b) Necessity of proof for claim or
wrongful collection of taxes may have a different refund
prescriptive period. Absent any specific provision in
---------------------------------------------------------------
the Tax Code or special laws, the period would be
10 years under Article 1144 of the Civil Code.
Note: For scope of claims for refund, refer to the grounds
as discussed earlier. Also make reference to Section
--------------------------------------------------------------- 204(c) as to internal revenue stamps.As to necessity of
(iii) Legal basis of tax refunds proof, refer to the discussion on requirements for refund.
---------------------------------------------------------------
---------------------------------------------------------------
Q: What is the legal basis of tax refunds? (c) Nature of erroneously paid
tax/illegally assessed collected
Tax refunds are founded on the legal principle which ---------------------------------------------------------------
underlies quasi-contracts abhorring a person’s
unjust enrichment at the expense of another. The Q: What is the nature of a claim for tax
pertinent laws governing this principle are found in refund?
Art. 2142 and Art. 2154 of the NCC, to wit:
A claim for tax refund is in the nature of a claim for
1. Certain lawful, voluntary and unilateral acts
exemption and should be construed strictissimi juris
give rise to the juridical relation of quasi-
against the taxpayer. (see CIR V. TOKYO SHIPPING
contract to the end that no one shall be
[M AY 26, 1995])
unjustly enriched or benefited at the
expense of another (Art. 2142)
2. If something is received when there is no Q: Is a tax refund automatically granted?
right to demand it, and it was unduly
delivered through mistake, the obligation to No. As held in UNITED AIRLINES V. CIR [SEPTEMBER
return it arises. (Art. 2154) 29, 2010], the grant of a refund is founded on the
assumption that the tax return is valid, that is, the
--------------------------------------------------------------- facts stated therein are true and correct. Before
(iv) Statutory basis for tax refund under granting the refund, the CIR must determine the
proper assessment and the tax due. In this case, the
the Tax Code
CIR found that the tax return was not valid and, thus,
(a) Scope of claims for refund it was justified in denying the claim after determining
(b) Necessity of proof for claim or the proper assessment and the tax due.
refund
(c) Nature of erroneously paid
tax/illegally assessed collected Q: Who has the burden of proof for a claim
(d) Tax refund vis-à-vis Tax Credit of refunds?
(e) Essential requisites for claim of
refund Burden of proof for claim of refund rests upon the
claimant since it is strictly construed against him and
---------------------------------------------------------------
the failure to discharge said burden is fatal to his
claim (CIR v. S.C. Johnson and Son [June 25,
Q: What is the statutory basis for a tax 1999])
refund under the Tax Code?
Q: ABC Corp filed its annual income tax
See Section 204(c) and Section 229. return for 2001 showing net loss. Hence, it
argues that the tax withheld on its income
Read Section 204(c) and 229, Tax Code was not utilized against income.
Accordingly, ABC Corp filed a claim for
refund and presented its income tax return
showing the incurred losses. The CIR

argued that ABC must prove its reported PSPC then utilized the said TCCs for its
losses to be entitled to the refund. Is the CIR excise taxes and were then issued TDM (Tax
correct? Debit Memo) and ATAPs (Authority to
Accept Payment) by the BIR. However, the
No. In CIR V. ASIAN TRANSMISSION BIR assessed PSPC for delinquent excise
CORPORATION [JANUARY 26, 2011], the taxes alleging that PSPC is not a qualified
Supreme Court ruled that while it is indeed true transferee of the TCCs. CA ruled that the
that the taxpayer bears the burden to establish PSPC was not entitled to the benefit of the
the losses, the taxpayer has fulfilled this duty TCCs and thus upheld the assessment. Was
when it presented its income tax return showing the use of PSPC of the TCCs valid?
he incurred losses.
Yes. As held in PILIPINAS SHELL V. CIR [DECEMBER
--------------------------------------------------------------- 21, 2007], there is no suspensive condition for the
(d) Tax refund vis-à-vis Tax Credit validity of TCCs as they are effective immediately
--------------------------------------------------------------- and only computational errors are allowed as basis
to invalidate TCCs. Also, even if the source is
Note: We already discussed this in Income Taxes but defective, it does not affect PSPC’s right as it acted
nonetheless let us review. in good faith and the agencies approved of the use
of TCCs.
Q: Discuss the difference between tax
refund and tax credit? In CIR V. PETRON [M ARCH 21, 2012], the Supreme
Court had occasion to reiterate that TCCs are valid
and effective from their issuance and are not subject
A tax refund requires a physical return of the sum
to post-audit as a suspensive condition for their
erroneously paid by the taxpayer while a tax credit
validity.
involves the application of the reimbursable amount
against any sum that may be due and collectible
Note: However, by virtue of RR 14-2011 [JULY 29, 2011],
from the taxpayer. all Tax Credit Certificates (TCCs) issued by the BIR are no
longer transferable or assignable to any person.
Note: Ano ba ang practical implications ng difference ng
tax refund and tax credit? Isipin niyo na lang bumili ka ng
damit sa department store tapos may sira pala. Kapag yun ---------------------------------------------------------------
talaga yung gusto mong shirt, you ask for a refund. (e) Essential requisites for claim of
Babalik sa iyo yung pera tapos puwede mo itong gamitin refund
para bumili ng libro or whatever. Pero may isa ka pang ---------------------------------------------------------------
gustong shirt dun sa store na un pero mas mahal ng konti,
ipa-credit mo. Bayaran mo nalang yung kulang. That’s
Note: I already discussed this under the requirements for
how simple it is.
a claim for refund or tax credit.
Q: May a taxpayer ask for both a tax refund
and a tax credit?
---------------------------------------------------------------
(v) Who may claim/apply for tax
No. As held in PHILAM ASSET M ANAGEMENT V. CIR
[DECEMBER 14, 2005], a taxpayer may apply for refund/tax credit
either a tax refund or tax credit, but not both. The (a) Taxpayer/withholding agents of
choice of one precludes the other. non-resident foreign corporations
---------------------------------------------------------------
Note: If you avail of the tax credit, you get what is
called a Tax Credit Certificate (TCC). There is no Q: Who is the proper party to claim a tax
suspensive condition for its validity. Remember that. credit/refund?
Q: PSPC acquired some TCCs (tax Credit The proper party to seek a refund is the statutory
Certificates) through the One Stop Shop taxpayer, who is the person on whom the tax is
Inter-Agency Tax Credit and Duty Drawback imposed by law and who paid the same, even if that
Center from other BOI-registered entities.

person shifted the tax to another (see SILKAIR and the amount of tax withheld. (BANCO
SINGAPORE V. CIR [NOVEMBER 14, 2008]) FILIPINO V. CA [M ARCH 27, 2007]
Q: May a withholding agent file a claim for See also ORIX AUTO LEASING PHILIPPINES CORPORATION VS.
tax refund? NOVEMBER 28, 2012; PHILIPPINE BANK OF COMMUNICATIONS
VS. CIR, CTA CASE NO. 7915, JUNE 6, 2012; MANILA NORTH
Generally, the person entitled to claim a tax refund is TOLLWAYS CORPORATION VS. CIR, C.T.A. EB NO. 812,
the taxpayer. However, if the taxpayer does not file OCTOBER 11, 2012) WINEBRENNER & IŇIGO INSURANCE
the claim, the withholding agent may file the same. BROKERS, INC. VS. COMMISSIONER OF INTERNAL REVENUE,
In CIR V. SMART COMMUNICATIONS [AUGUST 25, CTA CASE NO. 8277, DECEMBER 19, 2012
2010], it was submitted that rule allowing the
withholding agent to file the claim is applicable only Note: In the third requisite, the taxpayer need not prove
when the withholding agent and the taxpayer are the fact of remittance to the BIR of the taxes withheld by
the various payors (withholding agents). CIR V. MIRANT
related parties. The Supreme Court disagreed and [JUNE 15, 2011]
stated that such relationship is not required. A
withholding agent has a legal right to file a claim for In a claim for refund of its excess income tax payment or
refund. First, he is considered a taxpayer under the creditable withholding taxes paid, claimant has the burden
Tax Code as he is personally liable for the of proof to establish the factual basis of his or her claim for
withholding tax as well as for deficiency tax credit or refund. Presentation of forgotten evidence is
assessments, surcharges, and penalties, should the disallowed. MIRANT NAVOTAS II CORPORATION VS. CIR, CTA
amount withheld be finally found to be less than the EB NO. 754 (CTA CASE NO. 7618), JUNE 5, 2012
amount that should have been withheld. Second, as
an agent of the taxpayer, his authority to file the
income tax return and remit the tax withheld to the
UNITED INTERNAL PICTURES V. CIR, G.R.
government includes the authority to file a claim for
refund and to bring an action for recovery of such 168331, OCTOBER 11, 2012
claim.
DOCTRINE: Failed to reconcile the discrepancy
between income payments per income tax return and
Q: Is the withholding agent who filed the the certificate of creditable tax withheld will result in
claim for tax refund obliged to remit the the denial of a claim for refund.
same to the taxpayer?
FACTS: For the same case mentioned in the preceding
number, the Court also denied the claim pertaining to the
Yes. In CIR V. SMART COMMUNICATIONS [AUGUST 25, year 1999. As found by the Court, the certificate of tax
2010], the Supreme Court ruled that while the withheld would reveal that the taxpayer earned
withholding agent has the right to recover the taxes P146,355,699.80. On the contrary, its annual income tax
erroneously or illegally collected, he nevertheless return reflects a gross income from film rentals in the
has the obligation to remit the same to the principal amount of P145,381,568.00. However, despite the
taxpayer under the principle of unjust enrichment. P974,131.80 difference, both the certificate of taxes
withheld and income tax return filed by the taxpayer for
taxable year 1999 indicate the same amount of
Q: What are the requisites for claim for tax P7,317,785.00 as creditable tax withheld. Also, taxpayer
credit or refund of a creditable withholding failed to present sufficient proof to allow the Court to trace
tax? the discrepancy between the certificate or taxes withheld
and the income tax return.
1. Claim must be filed within the two-year
HELD: The Court agreed with the position of the Office of
prescriptive period from date of payment of
the Solicitor General that the amount of income payments
the tax in the income tax return must correspond and tally to the
2. It must be shown on the return that the amount indicated in the certificate of withholding, since
income received was declared as part of there is no possible and efficacious way by which the BIR
gross income can verify the precise identity of the income payments as
3. The fact of withholding must be established reflected in the income tax return. Therefore, taxpayer’s
by a copy of a statement duly issued by the claim for tax refund for taxable year 1999 must be denied,
payor to the payee showing the amount paid since it failed to prove that the income payments subjected
to withholding tax were declared as part of the gross
income of the taxpayer.

Motion for the judicial claim is

--------------------------------------------------------------- Reconsideration or premature. The
(vi) Prescriptive period for recovery of tax New Trial to CTA Motion for
erroneously or illegally collected Division within 15 Reconsideration or
days from receipt of New Trial to CTA
---------------------------------------------------------------
decision. Division within 15
days from receipt of
Note: I have already discussed the 2-year prescriptive
period as well.
5. Appeal to CTA En decision.
Banc – within 15
Now, let’s compare the procedure for claiming a tax refund
days from receipt of 11. Appeal to CTA En
under Section 229 and that of the refund of excess or resolution. Banc – within 15
unutilized input taxes under Section 112(c). days from receipt of
6. Appeal to the SC – resolution. Motion for
Q: Outline the steps for tax refund/credit of within 15 days from Reconsideration to
receipt of resolution the CTA En Banc
erroneously or illegally collected internal
under Rule 45 within 15 days from
revenue tax under Section 229 and compare receipt of decision
it with the recovery of excess or unutilized
input tax under Section 112(C) 12. Appeal to the SC –
within 15 days from
Section 229 Section 112(c) receipt of resolution
Recovery of erroneously Recovery of excess or under Rule 45
or illegally collected unutilized input tax
internal revenue tax
Note: (1) Majority of authorities including Atty. Montero is
1. Payment – period 7. Filing and Payment of the view that with regard to refund of erroneously or
begins on the date of illegally collected tax, the CIR must act within a period of
payment of tax or 8. Administrative 120 days. That period, however, is found in Section
penalties regardless claim within 2 112(A) which applies to refunds of erroneously or illegally
of any supervening years – counted collected tax. Further, the 180 day period provided in
Section 228 applies to a protest. What should we follow?
cause from the close of the 120 or 180? Well, it doesn’t matter. In the refund of
taxable quarter when erroneously or illegally collected tax, as long as you file
2. Administrative the relevant sales your claim for refund within the 2-year period, you’re fine.
claim within 2 years were made In fact, you may simultaneously file a claim for refund and
from payment – filed a file a suit with the CTA. This brings me to my second
with the CIR 9. Submission of point.
additional and
(2) As held in the case of CIR V. AICHI FORGING COMPANY OF ASIA
3. Submission of relevant support [OCTOBER 6, 2010], non-observance of the 120-day period is fatal
additional and documents – within to the judicial claim. Thus, you cannot simultaneously file your
relevant support 60 days from filing of claim for refund of excess or unutilized input tax and file a suit
documents – within claim with the CTA. The 2 year prescriptive period applies only to the
administrative claim meaning that you should file your claim with
60 days from filing of the CIR within 2 years. As to the judicial claim, you wait for the
claim 10. Appeal to CTA 120 days to lapse.
Division – within 30
4. Appeal to CTA days from receipt of ---------------------------------------------------------------
Division – within 30 notice of denial or (vii) Other consideration affecting tax
days from receipt of from lapse of 120
refunds
notice of denial or days of inaction
from inaction of the counted from ---------------------------------------------------------------
CIR counted from submission of Note: Let’s discuss here the Irrevocability Rule under
submission of documents. The Section 76. That is found in Title II (Income Tax). It’s not
documents. Appeal appeal should NOT included in the portion of the syllabus on Income Tax. I will
should be made be made within the discuss it here because it relates to tax credit or tax
within the 2 years 2-year prescriptive refund.
prescriptive period. period. Otherwise,

Read Section 76, Tax Code payment. It opted to carry-over this excess as tax credit to
the succeeding taxable year. This was applied to the 1999
taxable year leaving again an excess income tax payment.
Q: What are the options available to the
The taxpayer then applied for a refund for this amount.
corporation when the sum of the quarterly
tax payments made during the taxable year HELD: The Supreme Court cited Section 76 of the Tax
is more than the total tax due on the entire Code, which provides that “once the option to carry-over
taxable income of that year? and apply the excess quarterly income tax against income
tax due for the taxable quarters of the succeeding taxable
years has been made, such option shall be considered
The corporation shall either: irrevocable for that taxable period and no application for
cash refund or issuance of a TCC shall be allowed
1. Pay the balance of tax still due therefore. Having chosen to carry-over the excess
2. Carry-over the excess credit quarterly income tax, the taxpayer here cannot thereafter
3. Be credited or refunded with the excess choose to apply for a cash refund or for the issuance of a
amount paid TCC for the amount representing such overpayment. The
taxpayer’s claim for refund should be denied as is option
to carry over has precluded it from claiming the refund of
Q: What is the irrevocability rule? the excess income tax payment.
Once the option to carry-over the excess and apply

the excess quarterly income tax against income tax
Q: Does the irrevocability rule apply to the
due for the taxable quarters of the succeeding
taxable years has been made, such option shall be claim of refund or issuance of TCC?
considered irrevocable for that taxable period and no
application for cash refund or issuance of a tax No. The irrevocability rule in Section 76 of the Tax
credit certificate shall be allowed. (see Section 76, Code applies only to the option to carry-over the
Tax Code and SYSTRA PHILIPPINES V. CIR excess income tax payment, and not to the claim for
[SEPTEMBER 21, 2007]) refund or issuance of a TCC. Nowhere in Section 76
was it stated that the option to claim refund or TCC,
In ASIAWORLD PROPERTIES V. CIR [JULY 29, 2010], once chosen, is irrevocable. UNITED COCONUT
the Supreme Court opined that once the taxpayer PLANTERS BANK VS. COMMISSIONER OF INTERNAL
opts to carry-over the excess income tax against the REVENUE, CTA EB CASE NO. 725, AUGUST 23, 2012;
taxes due for the succeeding taxable years (tax STABLEWOOD PHILIPPINES, INC. VS. CIR, CTA EB 751
credit), such option is irrevocable for the whole (CTA 7705)
amount of the excess income tax, thus, prohibiting
the taxpayer from applying for a refund. The Q: If the corporate taxpayer fails to signify
unutilized tax credits will remain in the taxpayer’s his intention in the Final Adjustment Return,
account and will be carried over and applied against is it barred from making a valid request for
the taxpayer’s income tax liabilities in the refund should it choose this option later on?
succeeding taxable years until fully utilized.
No. As held in PHILAM ASSET M ANAGEMENT V. CIR
See also BELLE CORPORATION V. CIR [JANUARY 14, 2011]; [DECEMBER 14, 2005], failure to indicate a choice will
CIR V. PL MANAGEMENT PHIL. [APRIL 4, 2011]; CIR V. not bar a valid request for a refund, should this
PHILAMGEN [SEPTEMBER 29, 2010]; CIR V. MCGEORGE FOOD option be chosen by the taxpayer later on.
[OCTOBER 20, 2010]; CIR VS. RHOMBUS ENERGY,
INCORPORATED, C.T.A. EB NO. 803, OCTOBER 11, 2012
Q: What is the implication when a
corporation fills out the portion “Prior
UNITED INTERNATIONAL PICTURES AB V. CIR Year’s Excess Credits” in the Final
[OCTOBER 11, 2012] Adjustment Return?
DOCTRINE: Carry-over of excess income tax payments As held in PHILAM ASSET M ANAGEMENT V. CIR
will result in the denial of a claim for refund of excess [DECEMBER 14, 2005], the fact that the corporation
income tax payment. filled out the portion “prior year’s excess credits” in
the Final Adjustment Return means that it
FACTS: The taxpayer filed its annual income tax return for categorically availed itself of the carry-over option. If
the taxable year 1998 showing an excess income tax

an application for tax refund has been or will be filed,

that portion should necessarily be blank.
Q: Is there an exception to the irrevocability

rule?
Yes. In STABLEWOOD PHILIPPINES, INC. VS. CIR, CTA

EB NO. 794, OCTOBER 08, 2012, the CTA held that If
the corporation permanently ceases its operations
before full utilization of the tax credits it opted to
carryover, it may be allowed to claim the refund of
the remaining tax credits as an exception to the
irrevocability rule under Section 76 of the NIRC of
1997, as amended. However, the dissolving
corporation must prove that the termination of its
operations is permanent in nature and that it is
cleared from any tax or other government liabilities
before a tax refund may be granted. Therefore, a
corporation contemplating dissolution must first
secure a tax clearance certificate from the
Commissioner of Internal Revenue (CIR), which
certificate shall be submitted to the Securities and
Exchange Commission (SEC) for the issuance of the
Certificate of Dissolution.

---------------------------------------------------------------
F. ORGANIZATION AND FUNCTIONS OF Q: Differentiate the power of the CIR to
THE BUREAU OF INTERNAL REVENUE interpret tax laws and the power to decide
--------------------------------------------------------------- tax cases.
Q: What are the powers and duties of the The power to interpret tax laws is under the
BIR? exclusive and original jurisdiction of the CIR, subject
to the review by the Secretary of Finance
The powers and duties of the BIR shall comprehend:
On the other hand, the power to decide tax cases,
1. The assessment and collection of all while vested also in the CIR, is subject to the
national internal revenue taxes, fees and exclusive appellate jurisdiction of the CTA.
charges
2. The enforcement of all forfeitures, penalties Q: Can the Secretary of Finance motu
and fines connected therewith proprio review a ruling of the CIR?
3. Including the execution of judgments in all
cases decided in its favor by the CTA and Yes. DOF ORDER NO. 007-02 [M AY 7, 2002] provides
the ordinary courts that the Secretary of Finance may, of his own
4. The Bureau shall give effect to and accord, review a ruling issued by the CIR.
administer the supervisory and police
powers conferred to it by this Code or other Note: The power to obtain information and to summon,
laws (see Section 2, Tax Code) examine and take testimony of persons AND the power to
make assessment and prescribe additional requirements
Q: Describe briefly the structure of the BIR? for tax administration and enforcement have already been
discussed this under Tax Remedies
The BIR is under the supervision and control of the
To delegate power
Department of Finance (DOF). It is headed by the
Commissioner of Internal Revenue and assisted by
6 Deputy Commissioners. Each region of the country
has a Revenue Regional Director. The country is
also divided into Internal Revenue districts headed
Q: What powers of the CIR are non-
by Revenue District Officers. delegable?
1. To recommend the promulgation of rules

Q: What are the powers of the CIR?
and regulations
2. Issuance of first impression rulings
1. To interpret tax laws and to decide cases 3. Compromise or abatement if the amount is
(Section 4, Tax Code) over P500,000
2. To obtain information and to summon, 4. Assign officers in charge of excisable
examine and take testimony of persons articles
(Section 5, Tax Code)
3. To make assessment and prescribe
Q: A is the assistant commissioner of the
additional requirements for tax
administration and enforcement (Section 6, BIR. Upon inquiry by ABC and XYZ
Tax Code) company on the applicable excise tax rates,
4. To delegate power (Section 7, Tax Code) A signed a letter informing ABC and XYZ of
5. To ensure the provision and distribution of the conduct of the survey, the results
forms, receipts, certificates, and appliances thereof and the applicable excise tax rates.
and acknowledgment of payment of taxes ABC and XYZ contend that that A acted
(Section 8, Tax Code) without authority and that it should be the
CIR who signed such issuance. Are ABC
To interpret tax laws and decide cases and XYZ correct?

No. Under Section 7 of the NIRC, the CIR is b) Specific provisions to be contained in
authorized to delegate to his subordinates the rules and regulations
powers vested in him except, among others, the c) Non-retroactivity of rulings
power to issue rulings of first impression. Here, the ---------------------------------------------------------------
subject matter of the letter does not involve the
exercise of the power to rule on novel issues. It
merely implemented the revenue regulations then in ---------------------------------------------------------------
force (see PARAYNO VS. LA SUERTE CIGAR AND a) Authority of Secretary of Finance to
CIGARETTE FACTORY [JUNE 11, 2009]) promulgate rules and regulations
---------------------------------------------------------------
Q: May the CIR delegate the power to
approve the filing of tax collection cases? Read Section 244, Tax Code
Yes. The CIR may validly delegate to subordinates Q: Who promulgates revenue rules and
the power to approve the filing of tax collection regulations?
cases in court. In REPUBLIC VS. HIZON [DECEMBER 13,
1999], the Supreme Court upheld the delegation of
The Secretary of Finance, upon recommendation of
that power to the Chief of Legal Division of Region
the CIR, shall promulgate all needful rules and
IV, the act having been likewise verified by the
regulations for the enforcement of tax laws.
Regional Director.
---------------------------------------------------------------
To ensure the provision and distribution of b) Specific provisions to be contained in
forms, receipts, certificates, and appliances rules and regulations
and acknowledgment of payment of taxes
---------------------------------------------------------------
Q: Give some notable powers and duties of
Q: Enumerate and define the tax-related
a Revenue Regional Director?
administrative issuances
1. Implement tax laws in the regional area
Revenue are issuances signed by the
2. Administer and enforce tax laws including
Regulations (RRs) Secretary of Finance, upon
assessment and collection of all internal
recommendation of the
revenue taxes
Commissioner of Internal
3. Issue Letters of Authority (LOA) for the
Revenue, the specify,
examination of taxpayers in the region (see
prescribe or define rules and
SECTION 11, TAX CODE)
regulations for the effective
enforcement of the provisions
Q: What is the authority given to a Revenue of the National Internal
Officer? Revenue Code (NIRC) and
related statutes.
The Revenue Officer, pursuant to a LOA, may Revenue are issuances that provide
examine taxpayers within the jurisdiction of the Memorandum directives or instructions;
district to collect the correct amount of tax or to Orders (RMOs) prescribe guideline; and
recommend the assessment of any deficiency tax. outline processes, operations,
(see SECTION 13, TAX CODE) activites, workflows, methods
and procedures necessary in
--------------------------------------------------------------- the implementation of stated
1. Rule-making authority of the Secretary of policies, goals, objectives,
Finance plans and programs of the
a) Authority of Secretary of Finance to Bureau in all areas of
promulgate rules and regulations operations, except auditing.
Revenue are rulings, opinions and

Memorandum interpretations of the

Rulings (RMRs) Commissioner of Internal Q: Explain the rule on non-retroactivity of
Revenue with respect to the rulings
provisions of the Tax Code
and other tax laws, as applied
to a specific set of facts, with
or without established
precedents, and which the General Rule: Revenue Regulations, Rulings,
Commissioner may issue from Circulars and other administrative issuances have
time to time for the purpose of no retroactive application
providing taxpayers guidance
on the tax consequences in Exception: If prejudicial to the taxpayer, they shall
specific situations. BIR have retroactive application
Rulings, therefore, cannot
contravene duly issued Exception to the Exception: Even if prejudicial to
RMRs; otherwise, the Rulings the taxpayer, they shall have retroactive effect in the
are null and void ab initio. following cases –
Revenue are issuances that publish
Memorandum pertinent and applicable 1. The taxpayer deliberately misstates or omits
Circular (RMCs) portions, as well as material facts
amplifications, of laws, rules, 2. The facts subsequently gathered are
regulations and precedents different from the facts on which the ruling
issued by the BIR and other was based
agencies/offices. 3. The taxpayer acted in bad faith
Revenue Bulletins refer to periodic issuances,
(RB) notices and official Q: If a ruling was subsequently found by the
announcements of the CIR to be null and void, does the non-
Commissioner of Internal retroactivity principle still apply?
Revenue that consolidate the
Bureau of Internal Revenue’s No. The non-retroactivity principle does not apply
positions of the Tax Code, when the ruling involved is null and void for being
relevant tax laws and other contrary to law.
issuances for the guidance of
the public. In BIR RULING NO. 370-2011 [OCTOBER 7, 2011], the
BIR Rulings are official position of the CIR affirmed its position that the Poverty Alleviation
Bureau to Queries raised by and Eradication Certificates (PEAce) Bonds are not
taxpayers and other tax-exempt and subject to a 20% FWT. Previously,
stakeholders relative to 2001 BIR Rulings have considered such instruments
clarification and interpretation as tax-exempt. The CIR concluded that no right has
of tax laws. been vested by virtue of the 2001 Rulings as they
BIR ITAD Rulings are issued by the BIR were null and void for being contrary to law.
International Tax Affairs
Division to rule on certain Q: What is the effect of RR 5-2012 [April 5,
issues relating to 2012] on rulings issued prior to January 1,
interpretations of international 1998?
tax treaty provision under
which certain taxpayers or RR 5-2012 [APRIL 5, 2012] provides that all rulings
transactions can avail of tax issued prior to January 1, 1998 will no longer have
exemptions or preferential tax any binding effect. They can no longer be invoked
rates. as basis for any current business transaction/s or as
a basis for securing legal tax opinions and rulings.
---------------------------------------------------------------
c) Non-retroactivity of rulings RMC 22-2012 [M AY 7, 2012] clarified that BIR
--------------------------------------------------------------- Rulings prior to January 1, 1998 remains valid:

1. To the taxpayer who was issued the ruling

2. Covering the specific transaction which is
subject of the ruling
Q: May a BIR ruling be invoked by a

taxpayer other than the one who requested
the same?
No. In CIR v. Filinvest Development Corp [July

19, 2011], the Supreme Court ruled that in keeping
with the caveat attendant in every BIR ruling to the
effect that it is valid only if the facts claimed by the
taxpayer are correct, a BIR ruling could be invoked
only by the taxpayer who sought the same. If the
taxpayer is not the one who, in the first instance,
sought the ruling from the BIR, he cannot invoke the
principle of non-retroactivity of BIR rulings.
---------------------------------------------------------------
2. Power of the Commissioner to suspend
the business operation of a taxpayer
---------------------------------------------------------------
Note: I already discussed this under Tax Remedies.

---------------------------------------------------------- granted by a direct mandate of the

III. LOCAL GOVERNMENT CODE Constitution
b. Limited – although directly expressed by the
---------------------------------------------------------- Constitution, the power is subject to
limitations and guidelines as the legislature
---------------------------------------------------------- may deem necessary to impose
A. LOCAL GOVERNMENT TAXATION c. Legislative in nature – the power to impose
---------------------------------------------------------- taxes is vested solely in he legislative body
of each respective LGU
--------------------------------------------------------------- d. Territorial – the same can only be exercised
1. Fundamental Principles within the territorial jurisdiction of a LGU
---------------------------------------------------------------
Q: What is the source of the local taxing
Read Section 130, LGC power of the government?
Q: What are the fundamental principles of Article X.

local government taxation? Section 5. Each local government unit shall have the
power to create its own sources of revenues and to levy
a. Uniformity taxes, fees and charges subject to such guidelines and
limitations as the Congress may provide, consistent with
b. Taxes, fees, charges and other impositions
the basic policy of local autonomy. Such taxes, fees, and
shall be equitable and based on ability to charges shall accrue exclusively to the local governments.
pay for public purposes not unjust,
excessive oppressive or confiscatory, no
contrary to law, public policy, national It is granted by the Constitution under Section 5,
economic policy, or in restraint of trade Article X of the 1987 Constitution. It is not inherent in
c. The levy and collection shall not be left to the Local Government.
any private person
d. Inures solely to the local government unit In MERALCO V. PROVINCE OF LAGUNA [M AY 5,
levying the tax 1999], the Supreme Court explained that prior to the
e. The progressivity principle must be 1987 Constitution; the taxing power of LGUs was
observed. exercised under limited statutory authority. Under
the present Constitution, the taxing power of LGUs
--------------------------------------------------------------- is deemed to exist, subject only to specific
2. Nature and Source of taxing power exceptions that the law may prescribe. Otherwise
a) Grant of local taxing power under the stated, the taxing power of LGUs is a direct grant of
local government code the Constitution, and is not a delegated power of
b) Authority to prescribe penalties for tax Congress.
violations
Note: A law which deprives LGUs of their power to tax
c) Authority to grant tax exemptions would be unconstitutional.
d) Withdrawal of exemptions
e) Authority to adjust local tax rates Q: What is the legal basis of the grant of
f) Residual taxing power of local local taxing power under the LGC?
governments
g) Authority to issue local tax ordinances The legal basis is found in Section 129 of the LGC,
--------------------------------------------------------------- to wit:
Q: What is the nature of the local taxing Read Section 129, LGC
power?
a. Direct – the power of the LGU to impose

taxes although not an inherent power is

Q: Who has the authority to prescribe Q: May the government grant tax exemption
penalties for local tax violations? to taxpayers whose previous exemption has
been withdrawn?
The Sanggunian of a LGU is authorized to prescribe
fines or other penalties for violation of tax Yes. Withdrawal of a tax exemption does not prohibit
ordinances. (see Section 516, LGC) future grants of tax exemption (PLDT v. City of
Davao [August 22, 2001])
Note: The fines or other penalties shall in no case shall be
less than P1,000 or more than P5,000 nor shall the Q: Who has the authority to adjust local tax
imprisonment be less than 1 month nor more than 6
months. The Sangguniang Barangay may prescribe a fine rates?
of not less than P100 nor more than P1,000
The Local Government Units have the authority to
Q: Who may grant local tax exemptions? adjust local tax rates. However, it should not be
more than once every 5 years and in no case shall
The LGU may, through ordinance duly approved, such adjustment exceed 10% of the rates fixed
grant tax exemptions, incentives or reliefs under under the Code.
such terms and conditions, as they may deem
necessary. Read Section 192, LGC
Read Section 192, LGC Q: What is the residual taxing power of

LGUs?
Q: What is the effect of Section 193
(Withdrawal of Tax Exemption Privileges) of LGUs may exercise the power to levy taxes, fees or
the LGC? charges on any base or subject, provided that the
taxes, fees, and charges are
Read Section 193, LGC a. Not specifically enumerated in the LGC
b. Not taxed under the provisions of the NIRC
Under Section 193, all existing tax exemption
c. Not taxes under other applicable laws
privileges granted to or presently enjoyed by all
persons whether natural or juridical including
GOCCs (except local water districts, cooperatives Read Section 186, LGC
registered under RA 6938, non-stock and non-profit
hospitals and educational institutions) were Q: Who has the authority to issue local tax
withdrawn upon effectivity of the LGC. ordinances?
In MERALCO V. PROVINCE OF LAGUNA [M AY 5, 1999], The power to impose a tax, fee, or charge or to
the Supreme Court noted that indicative of the generate revenue shall be exercised by the
legislative intent to carry out the Constitutional Sanggunian of the LGU concerned through an
mandate of vesting broad tax powers to LGUs, the appropriate ordinance (see Section 132, LGC)
LGC has effectively withdrawn tax exemptions and
incentives theretofore enjoyed by certain entities. Read Section 132, LGC
(see also NAPOCOR V. CITY OF CABANATUAN [APRIL
9, 2003]. ---------------------------------------------------------------
Q: What entities are still exempt from local 3. Local taxing authority
taxes? a) Power to create revenues exercised
through Local Government Units
b) Procedure for approval and effectivity of
a. Local Water Districts
b. Cooperatives duly registered under RA 6938
tax ordinances
c. Non-stock and non-profit hospitals ---------------------------------------------------------------
d. Educational institutions Note: As discussed above, each LGU has the power to
create its own source of revenue (see Section 129, LGC)

“To be sure, public hearings are conducted by local

Q: What is the significance of a local tax legislative bodies to allow interested parties to
ordinance? ventilate their views on a proposed law or ordinance.
These views, however, are not binding on the
What determines tax liability is the tax ordinance. legislative body and it is not compelled by law to
The LGC is simply the enabling law for the local adopt the same.”
legislative body. In YAMANE V. BA LEPANTO
CONDOMINIUM CORP [OCTOBER 25, 2005], at issue Q: Can a public hearing conducted after the
was whether the City Government of Makati can passage of a tax ordinance cure the defect
hold condominium corporations liable to pay in its enactment (for failure to hold one prior
business taxes. The Supreme Court noted that the to the enactment)?
City Treasurer did not make any reference to any
provision of the Makati City Revenue Code which No. As held in ONGSUCO V. M ALONES [OCTOBER 27,
would serve as legal authority for the collection of 2009], the Supreme Court held that a public hearing
business taxes from condominiums in the city. The conducted after the passage of a tax ordinance does
Supreme Court pointed out that in issuing a notice of not cure the defect in its enactment. The LGC
assessment, reference to the local tax ordinance is requires that public hearings be held prior to the
vital because the power of LGUs to impose local enactment by the LGU of the ordinance levying
taxes is exercised through the appropriate ordinance taxes, fees, and charges.
enacted by the Sanggunian and not by the LGC.
Q: What is the effect of non-compliance with
Q: What are the requisites of a valid local
the publication/posting requirements of tax
tax ordinance?
ordinances laid down in Section 188 of the
1. It must not contravene the Constitution or LGC?
any statute
2. It must not be unfair or oppressive Failure to follow the procedure in enactment of tax
3. It must not be partial or discriminatory ordinances renders the same null and void. The
4. It must not prohibit but may regulate trade publication requirement is mandatory.
5. It must be general and consistent with public
policy Q: Can an ordinance with has been declared
6. It must not be unreasonable (Magtajas v. void for failure to publish for 3 weeks be
Pryce Properties [234 SCRA 225]) remedied by passing another ordinance with
purports to amend the ordinance that has
Q: What must be complied with under the been declared null and void?
provisions of the LGC for a valid local tax
ordinance? No. The new ordinance is still void since it cannot
cure something which had never existed in the first
1. Public hearing is required with quorum, place as the same was void ab initio (see COCA-
voting and approval and/or veto COLA BOTTLERS V. CITY OF M ANILA [JUNE 27, 2006]).
requirements complied with
2. Publication of ordinance within 10 days from Q: Is publication/posting of an ordinance
approval for 3 consecutive days in an
fixing the assessment levels for different
newspaper of general circulation and/or
posting in at least 2 conspicuous and classes of real property in an LGU
publicly accessible places necessary?
Q: What is the nature of the public hearings Yes. In FIGUERRES V. CA [M ARCH 25, 1999], the
under Section 187 of the LGC? Supreme Court held that the publication/posting
requirement under Section 188 of the LGC must be
complied with in case of an ordinance imposing real
In HAGONOY M ARKET VENDOR ASSOCIATION V.
property taxes, as well as an ordinance fixing the
MUNICIPALITY OF HAGONOY, BULACAN [FEBRUARY 2,
assessment levels for different classes of real
2002], the discussed the nature of the public
hearings on proposed tax ordinances in this light:

property. The latter is in the nature of a tax e) Common revenue raising powers
ordinance. (i) Service fee charges
(ii) Public utility charges
Note: I will discuss the procedure in questioning the
constitutionality or legality of a tax ordinance under
(iii) Toll fees or charges
remedies. f) Community Tax
---------------------------------------------------------------
--------------------------------------------------------------- Read Sections 134-144, 146-149 and 151-

4. Scope of taxing power 164, LGC.
---------------------------------------------------------------
Q: What is the taxing power of the following
Q: What is the scope of the taxing power of LGUs: (a) province; (b) Municipalities; (c)
LGUs? Cities; and (d) Barangays?
The taxing power of LGU is limited only through the Province

guidelines expressly provided for by the legislature.
Beyond these limitations, the LGU is given a wide
array or latitude to impose taxes not pre-empted by Expressly provided in the Code:
the NIRC?
1. Local Transfer Tax (Section 135, LGC)
Q: What is the Principle of Pre-emption or 2. Business Tax on Printing and Publication
(Section 136 LGC)
Exclusionary Doctrine?
3. Local Franchise Tax (Section 137, LGC)
4. Tax on Sand, Gravel and Other Quarry
When the national government elects to tax a
Resources (Section 138, LGC)
particular area, it is impliedly withholding from the
5. Professional Tax (Section 139, LGC)
LGU the delegated power to tax the same field.
6. Amusement Tax (Section 140, LGC)
7. Tax on Route Delivery Truck or Vans
--------------------------------------------------------------- (Section 141, LGC)
5. Specific taxing power of LGUs
a) Taxing powers of provinces Municipalities
(i) Tax on transfer of real property
ownership
A municipality may levy on those taxes, fees and
(ii) Tax on business of printing and
charges not otherwise levied by provinces (see
publication Section 142, LGC)
(iii) Franchise tax
(iv) Tax on sand, gravel and other quarry Expressly provided in the Code:
services
(v) Professional ax 1. Local Business Tax (Section 143, LGC)
(vi) Amusement tax 2. Fees on business and occupation (Section
(vii) Tax on delivery truck/van 146, LGC)
b) Taxing power of cities 3. Fees on sealing and licensing of weights
c) Taxing power of municipalities and measures (Section 148, LGC)
4. Fishery Rentals, Fees and charges (Section
(i) Tax on various types of businesses
149, LGC)
(ii) Ceiling on business tax impossible on
municipalities within Metro Manila Cities
(iii) Tax on retirement of business
(iv) Rules on payment of business tax They may levy taxes which the province and
(v) Fees and charges for regulation and municipality may impose. The tax rates, fees, and
charges which the city may levy may exceed the
licensing maximum rates allowed for the province or
(vi) Situs of tax collected municipality by not more than 50% except the rates
d) Taxing powers of barangays

of professional and amusement taxes (see Section Q: May the tax be imposed on extractions
151, LGC) from private lands?
Barangays No. The tax may be imposed only to those extracted
1. Taxes on stores with fixed business from public lands or public waters within its territorial
establishments (gross receipts of P50,000 or jurisdiction. Private lands are excluded. (Province of
less for cities, P30,000 for municipalities) Bulacan v. CA [November 27, 1998])
2. Service fees for use of barangay-owned
properties and services rendered Q: ABC Mining was issued a mining lease
3. Barangay clearance contract which granted it the right to extract
4. Other fees and charges for (a) commercial and use for its purposes all mineral deposits
breeding of fighting cocks, cockpits and within the boundary lines of its mining claim
cockfighting; (b) on places of recreation with in Benguet. Later, the Provincial Treasurer
admission fees; and (c) billboards, demanded payment of sand and gravel tax
signboards and outdoor advertisements
for the quarry materials that ABC extracted.
Common only to Cities and Municipalities
ABC countered that the sand and gravel tax
applied only to commercial extractions. Is
1. Community tax ABC correct?
Common to all LGUs No. In LEPANTO CONSOLIDATED MINING COMPANY V.
1. Service fees and charges for services AMBANLOC [JUNE 29, 2010], the Supreme Court
rendered found that under the Revised Benguet Revenue
2. Public utility charges Code, only gratuitous permits were exempt from the
3. Toll fees or charges sand and gravel tax, and Lepanto’s permit was not a
gratuitous permit. Hence, Lepanto was liable to pay
the provincial sand and gravel tax.
Note: Take note of the following.
Professional Tax
Local Transfer Tax
Q: What is the situs of professional tax?
Q: What are not covered by the local
Professional tax is payable in the province where the
transfer tax of real property?
taxpayer practices his profession or where the
principal office is located in case he practices his
The sale, transfer or other disposition of real
profession in several places.
property pursuant to the Agrarian Reform Program
shall be exempt from local transfer tax.
Note: (1) The taxpayer has the option. Such person who
has paid the corresponding professional tax shall be
Business Tax on Printing and Publication entitled to practice his profession in any part of the
Philippines without being subjected to any national or local
Q: What is not covered by the business tax tax, license or fee for the practice of such profession (see
Section 139, LGC)
on printing and publication?
(2) Professional tax may be imposed by a province or city
The receipts from the printing and/or publishing of but not by a municipality or barangay
books or other reading materials prescribed by the
DepEd as school texts or references shall be (3) Professionals exclusively employed in government
exempt from the business tax. shall be exempt from payment
Tax on Sand, Gravel and Other Quarry

Resources

Amusement Tax customers outside the city. Id the imposition

valid?
Q: Is the amusement tax on admission
tickets to PBA games a national or local Yes. As held in PHILIPPINE M ATCH CO. V. CITY OF
tax? CEBU [JANUARY 18, 1978], the city can validly tax the
sales of matches to customers outside of the city as
It is a national tax. In PBA v CA [AUGUST 8, 2000], long as the orders were booked and paid for in the
the Supreme Court held that it was the National company’s branch office in the city. Those matches
Government which could collect amusement taxes can be regarded as sold in the city because the
from the PBA. While Section 13 of the Local Tax matches were delivered to the carrier in Cebu City.
Code mentions “other places of amusement,” Generally, delivery to the carrier is delivery to the
professional basketball games are definitely not buyer. A different interpretation would defeat the tax
within its scope under the principle of ejusdem ordinance and encourage tax evasion.
generis.
Q: ABC Bottlers Inc. maintained a bottling
Q: Are gross receipts derived from plant in Pavia, Iloilo but sold softdrinks in
admission tickets in showing motion Iloilo City by means of a fleet of delivery
pictures, films or movies also subject to trucks called rolling stores which went
VAT? directly to customers. Iloilo City passed an
ordinance imposing a municipal license tax
No. The Supreme Court in CIR v. SM PRIME on distributors/sellers in the area. Is ABC
HOLDINGS [FEBRUARY 26, 2010] held that although liable under the tax ordinance?
the enumeration of services subject to VAT under
Section 108 of the 1997 Tax Code is not exhaustive. Yes. In ILOILO BOTTLERS INC. V. CITY OF ILOILO
Among those included in the enumeration is the [AUGUST 19, 1988], the Supreme Court found that
“lease of motion picture films, films, tapes and the bottling company was engaged in the business
discs.” This, however, is not the same as the of selling/distributing softdrinks in Iloilo City through
showing or exhibition of motion pictures or films. its rolling stores where sales transactions with
Hence, since the showing or exhibition of motion customers were entered into and sales were
pictures or films is not in the enumeration, such is perfected and consummated by route salesmen,
not a VAT-taxable transaction. The intent of the Hence, the company was subject to municipal
legislature is not to impose VAT on persons already license tax.
covered by the amusement tax.
Local Business Tax
Tax on Route Delivery Truck or Vans
Q: Who are covered by the local business
Note: See discussion on situs of local business tax.
tax?
Q: How are the sales of route trucks and
1. Manufacturers, assemblers and producers
vans taxed? 2. Wholesalers, dealers and distributors
3. Exporters, manufacturers of essential
If the sale is made in a place with a branch office: commodities
the sale is reported in the LGU where the branch 4. Retailers (if both wholesale and retail, then
office is located. pay both taxes)
5. Contractors
If the sale is made in a place without a branch office: 6. Banks and other financial institutions
28
the sale is reported in the LGU where the sales are

withdrawn.
28
DOF LOCAL FINANCE CIRCULAR 01-93 provides for the
Q: The City of Cebu imposed a gross sales guidelines governing the power of municipalities and provinces to
tax on sales of matches stored by Philippine impose a business tax on banks and other banking institutions.
Match Co. in Cebu City but delivered to DOF LOCAL FINANCE CIRCULAR 2-93 provides for the guidelines
for insurance companies. DOF LOCAL FINANCE CIRCULAR 3-93
provides for guidelines for financing companies.

7. Peddlers the said case, the Supreme Court differentiated

8. Other business not specified gross receipts and gross revenue. Gross receipts
include money or its equivalent actually or
Note: Those already subject to tax under (1) to (7) can no constructively received in consideration of services
longer be subject to tax under (8) otherwise it will be rendered or articles sold, exchanged, or leased,
deemed as double taxation. (see City of Manila v. Coco- whether actual or constructive whereas gross
Cola Bottlers [August 4, 2009]) revenue covers money or its equivalent actually or
constructively received, including the value of
A corporation with no business operation, and is merely an services rendered or articles sold, exchanged or
investor in another corporation, is not liable for local
business tax. ORLEYTE COMPANY (PHILIPPINE BRANCH) VS.
leased, the payment of which is yet to be received.
CITY OF MAKATI AND DULCE P. CRUZ, IN HER CAPACITY AS
TREASURER OF MAKATI, CTA AC NO. 80, NOVEMBER 14, Q: What is the ceiling on business tax
2012 imposed on municipalities within Metro
Manila?
The operator of the North Expressway falls within the
classification of a contractor subject to local business tax
based on its gross receipts. MANILA NORTH TOLLWAYS The municipalities in Metro Manila may levy taxes at
CORPORATION VS. THE MUNICIPALITY OF GUIGUINTO BULACAN, rates which shall not exceed by 50% the maximum
CTA AC NO. 82, DECEMBER 03, 2012 rate prescribed in Section 143, LGC (see Section
144, LGC)
Q: What are the conditions before a
business may be subject to local business Q: What are the conditions before business
tax? may be considered officially retired?
Before a business may be subject to local business A business subject to tax shall, upon termination
tax, the business must not be subject to VAT or thereof, submit a sworn statement of its gross sales
percentage tax under the NIRC or if the business is or receipts for the current year. If he ax paid during
subject to excise, VAT or percentage tax under the the year be less than the tax due on said gross sales
NIRC, the tax rate shall not exceed 2% of gross or receipts of the current year, the difference shall
sales/ receipts of the preceding calendar year. be paid before the business is considered officially
retired (see Section 145, LGC)
Q: Can an LGU tax a condominium Q: Are the local tax payments paid for the
corporation? privilege of carrying on business in the year
paid or for having engaged in business the
No. As held by the Supreme Court in Y AMANE V. BA
LEPANTO CONDOMINIUM CORP [OCTOBER 25, 2005], previous year?
condominium corporations are not “businesses” as
the same is defined under the LGC which is a It is paid for the privilege of carrying on business in
“commercial activity regularly engaged with a view to the year paid. In MOBIL PHILIPPINES V. THE CITY
profit.” Even if a condominium corporation can levy TREASURER OF M AKATI [JULY 14, 2005], for the year
fees, these are used merely to finance the expenses 1998, Mobil paid a total of P2,262,122.48 to the City
of the condominium and nothing more. Treasurer of Makati as business taxes for the year
1998. The amount of tax as computed based on
Q: What is the tax base of the local business Mobil’s gross sales for 1998 is only P1,331,638.84.
Since the amount paid is more than the amount
tax?
computed based on Mobil’s actual gross sales for
1998, Mobile upon its retirement is not liable for
The local business tax is imposed on gross receipts.
additional taxes to the City of Makati. The Supreme
In ERICSSON TELECOMMUNICATIONS V. CITY OF PASIG
Court found that the City Treasurer erroneously
[NOVEMBER 22, 2007], Ericsson was assessed for
reated the assessment and collection of tax as if it
deficiency local business tax but countered that the
were an income tax by rendering an additional
assessment was erroneous for having been based
on is gross revenue rather than just its gross
receipts. The Supreme Court ruled that the local
business tax must be imposed on gross receipts. In

assessment of P1,331,638.84 for the revenue If there is branch/sales office in the municipality or
29
generated for the year 1998. city where the sale or transaction is made, the tax
shall accrue and shall be paid where such branch or
Q: What are the rules on payment of sales outlet is located.
business tax?
If there is no branch/sales office in the city or
a. The business taxes shall be payable for every municipality where the sale or transaction is made,
separate and distinct establishment or place the sale shall be recorded in the principal office and
where business subject to tax is conducted and the taxes shall accrue and shall be paid to such city
one line of business does not become exempt or municipality (where the principal office is located)
by being conducted with some other business
for which such tax has been paid With Recorded at Allocation
b. In cases where a person conducts or operates branch/sales
office
2 or more of the businesses subject to local
Yes Branch/sales None
business tax: office
No Principal office None
i. If both businesses are subject to the same
rate – the tax shall be computed on the Note: An office may be considered a sales office (1) if the
combined total gross sales or receipts office only accepts orders but does not issue sales
ii. If both businesses are subject to different invoice; (2) if the office does not accept orders but issues
rates – the gross sales or receipts of each sales invoices or (3) if the office accepts orders and issues
business shall be separately reported for sales invoices (see BLGF Opinion dated January 15,
the purpose of computing the tax due from 2007)
each business. (see Section 146, LGC)
Section 150(b) –
Fees on business and occupation
The following sales allocation shall apply to
manufacturers with factories, plants and plantations,
Q: May a municipality impose a professional
etc.:
tax?
If the plantation and factory are located in the same
No. The municipality may impose and collect such place
reasonable fees and charges on business and
occupation and on the practice of any profession or 1. 30% of all sales recorded in the principal
calling except professional tax which is reserved to office shall be taxable by the city or
the province. (see Section 147, LGC) municipality where principal office is located
2. 70% shall be taxable by the city or
Q: What is the situs of local business taxes municipality where
as stated in Section 150 of the LGC?
If the plantation and factory are not located in the
Section 150(a) – same place, the 70% above shall be divided as
follows
1. 60% to the city or municipality where the

factory is located
29
Another example: A corporation whose gross sales was 10 2. 40% to the city or municipality where the
million in 2008 and 20 million in 2009, the local business tax plantation is located
payable in January 2009 is based on 10 million (gross receipts for
2008) but the same is payment for the right to do business in Plantation & Allocation to Allocation to
2009. Thus, on the year of retirement, the company will only be factory in same principal factory, etc
liable if the actual local business tax on the basis of current year
location
sales is more than the local business tax paid based on previous
year’s sales. To continue the example, if the sales of the company Yes 30% 70%
are also P10 million as of the date of retirement in 2010, this No 30% The 70% above
means that the payment made in January 2010 based on the shall be divided:
2009 gross receipts is sufficient to cover the local business tax
due upon retirement.

1. Factory – 60% located but where no transactions are made, may

2. Plantation – only collect Mayor’s permit fee and other regulatory
40% fees.
If two or more
factories, etc = Q: Taxpayer has its principal office and also
70% is prorated a branch in the City of Makati. At the same
time, it has branches in the cities of
Note: Section 150(b) is only resorted to if there is no Paranaque and Cebu. The City Treasurer of
branch or sales office. In addition, the allocation shall be Makati assessed the taxpayer for deficiency
applied irrespective of whether or not the sales are made
in the locality where the factory, plant or plantation is
local business tax for sales of the
located. Paranaque branch allegedly not declared in
the City of Paranaque. The City of Makati
Q: ABC is engaged in manufacturing maintained that it had the authority to
household products. It secured the services assess business taxes on revenues not
of an independent contractor XYZ to provide properly taxed in Paranaque City and Cebu
local physical distribution facilities within City. Is the City Treasurer of Makati correct?
the specified places in the Philippines. XYZ
has a warehouse in Tacloban City and No. For purposes of collection of local taxes,
makes deliveries to ABC’s customers businesses maintaining or operating branch or
outside the city. Under the contract, ABC sales outlet elsewhere shall record the sale in
can also make deliveries of its products in the branch or sales outlet making the sale or
other places of the country from its own transaction, and the tax thereon shall accrue
warehouse in Makati. What is the situs of and shall be paid to the municipality where such
taxation of the sales made by ABC and branch or sales outlet is located. Thus, the
XYZ? revenues of the branches outside Makati should
not be part of the tax base for the determination
As held in BUREAU OF LOCAL GOVERNMENT OPINION of the local business tax to be paid in the City of
DATED M ARCH 7, 1994, the products taken from the Makati. In other words, Revenues of branches or
warehouse of PBE in Tacloban City and delivered to sales outlet elsewhere should not be part of the tax
CPI's customers outside the city should be recorded base for the determination of the local business tax
and the tax thereon paid in Tacloban City where said to be paid in the City where the principal office is
warehouse is situated. As to the deliveries or sales located. (CITY OF M AKATI AND THE OFFICE OF THE
made by CPI of products taken from its warehouse CITY TREASURER OF MAKATI CITY VS. NIPPON
in Makati to places where it does not have any EXPRESS PHILIPPINES CORPORATION [CTA AC CASE
branch, sales office, or another warehouse, the NO. 76 DATED FEBRUARY 17, 2012])
same should be recorded in Makati where its
principal office is located and the taxes due thereon ---------------------------------------------------------------
should likewise be paid to said municipality. 6. Common limitations on the taxing power
of LGUs
Q: MI is a corporation engaged in trading ---------------------------------------------------------------
books. It holds an office in Pasig where all
transactions are made. However, MI also Read Section 133, LGC
maintains a warehouse in Mandaluying
which serves as its storage area and no Q: What are the limitations on the taxing
transactions are made therein. What is the power of LGUs?
situs of taxation of the sale of MI’s books?
As provided in SECTION 133, LGUs cannot impose
As held in BUREAU OF LOCAL GOVERNMENT OPINION the following:
DATED M ARCH 29, 1993, Mi should be liable for gross
sales tax to the then Municipality of Pasig. On the a. Income tax (except on bank and financial
other hand, Mandaluyong, where the warehouse is entities)

b. DST No. As held in PROVINCE OF BULACAN V. CA

c. Estate and Donor’s taxes [NOVEMBER 27, 1998], generally, the LGU can
d. Customs Duties impose such tax even if not in LGC since Section
e. Taxes on goods passing through the LGU 186 of the Code is sweeping. However, the province
f. Taxes on agricultural and aquatic products cannot levy on minerals from private lands because
sold by marginal farmers and fisherman it is an excise tax on an article already covered by
30
g. Taxes on BOI-registered enterprises the Tax Code.
h. Excise taxes on articles under the Tax Code
and taxes on petroleum products Q: Petron maintains a depot or bulk plant at
i. Percentage tax and VAT the Navotas Fishport Complex where it
j. Taxes on gross receipts of transportation engages in the selling of diesel fuels to
contractors vessels used in commercial fishing. Navotas
k. Taxes on premium paid by way of
City levied business taxes on its sale of
reinsurance
l. Taxes on registration of motor vehicles petroleum products. Can the LGU levy the
m. Taxes on Philippine products actually business tax on the sale of petroleum?
exported
n. Taxes on Countryside and Barangay No, the LGU cannot impose any local tax on
Business Enterprises and cooperatives petroleum products. As held in PETRON CORP. V.
o. Taxes and fees on the National Government TIANGCO [APRIL 16, 2008], the prohibition with
respect to petroleum products extends not only to
As provided in SECTION 186, LGUs cannot impose excise taxes but all taxes, fees, and charges.
taxes that are specifically enumerated or taxed Section 133(h) provides for two possible bases for
under the provisions of the Tax Code. exemption: (1) excise tax on articles enumerated
under the Tax Code; and (2) taxes, fees, and
charges on petroleum products. In the latter, the
Section 133(e)
exemption refers not only to direct or excise taxes to
be levied by the LGUs on petroleum products but on
Q: Is a municipal ordinance imposing fees all types of taxes on petroleum products including
on goods (corn) that pass through a business taxes.
municipality’s territory valid?
Section 133(j)
No. As held in PALMA DEVELOPMENT CORP V.
ZAMBOANGA DEL SUR [OCTOBER 16, 2003], LGUs,
Q: What is the rationale for the exemption of
through their Sanggunian, may impose taxes for the
use of any public road such as a service fee common carriers from local taxes?
imposed on vehicles using municipal roads to a
wharf. However, Section 133(e) prohibits the As held in FIRST PHILIPPINE INDUSTRIAL CORP V. CA
imposition in the guise of wharfage, of fees as well [DECEMBER 29, 1998], the legislative intent in
as other taxes or charges in any form whatsoever on excluding from the taxing power of the LGU the
goods or merchandise. In this case, the LGU cannot imposition of business tax against common carriers
tax the goods even in the guise of police is to prevent a duplication of the so-called common
surveillance fees. carrier’s tax.
Section 133(h)
Q: The Province of Bulacan passed an

ordinance imposing tax on minerals
extracted from public lands but went on to
collect tax on minerals extracted from
private lands. Since the LGC only provides
for tax on public lands, is the action of the 30
This applies the Preemption or Exclusionary Rule wherein the
Province of Bulacan valid? national government elects to tax a particular area, impliedly
withholding from the LGU the delegated power to tax the same
field.

Section 186 General Rule: Within the first 20 days of January or

of each subsequent quarter, as the case may be
Q: Are broadcasting and telecommunication
companies liable to pay local transfer Exception: For justifiable reason or cause, the
Sanggunian may extend the time for payment
taxes?
without surcharge or penalties but only for a period
not exceeding 6 months. (See Section 167, LGC)
No. As held in both SMART COMMUNICATIONS V. THE
CITY OF DAVAO [SEPTEMBER 16, 2008] and QUEZON
CITY V. ABS-CBN BROADCASTING CORPORATION Q: What penalties are imposable on failure
[OCTOBER 6, 2008], these franchise holders are now to pay local taxes?
31
subject to VAT.
The penalty of 25% surcharge and 2% interest per
--------------------------------------------------------------- month not to exceed 36 months (or a maximum of
7. Collection of business tax 72%) may be imposed. (see Section 168, LGC)
a) Tax period and manner of payment
b) Accrual of tax Q: What are the requisites for a valid
c) Time of payment examination of books?
d) Penalties on unpaid taxes, fees or
a. In order to ascertain, assess, and collect the
charges correct amount of the tax, fee, or charge
e) Authority of treasurer in collection and b. During regular business hours
inspection of books c. Only once every tax period
--------------------------------------------------------------- d. Shall be certified to by the examining official
e. Such certificate shall be made of record in
Read Section 165 to 171, LGC the books of accounts of the taxpayer
examined.
Q: What is the tax period for local taxes
---------------------------------------------------------------
The tax period of all local taxes, fees and charges 8. Taxpayer’s Remedies
shall be the calendar year. Such taxes, fees, and a) Periods of assessment and collection of
charges may be paid in quarterly instalments (see local taxes, fees or charges
Section 165, LGC) b) Protest of assessment
c) Claim for refund of tax credit for
Note: Local taxes may be paid on an annual basis at the
option of the taxpayer. In contrast, real property taxes erroneously or illegally collected tax, fee or
must be paid annually. charge
---------------------------------------------------------------
Q: When do local taxes accrue?
Note: The bar syllabus covers only tax remedies available
General Rule: On January 1 to the taxpayer when the assessment has been made.
Allow me to discuss the remedies available prior to the
st assessment which is provided for in the LGC and the
Exception: New taxes which will accrue on the 1 Rules of Court.
day of the next quarter following effectivity of the
ordinance. Q: What are the remedies available to the
taxpayer prior to assessment?
Q: When are local taxes paid?
a. To question the constitutionality or legality of
tax ordinances or revenue measures on
appeal (see Section 187, LGC)
31
The Supreme Court ruled in both cases that the “in lieu of all (Administrative)
taxes” clause in their franchises applies only to national internal b. Petition for declaratory relief as and when
revenue taxes and not to local taxes. As such, they would have
been liable to pay local transfer taxes. However, with the advent applicable (Judicial)
of the VAT law, such franchise holders are instead liable to pay
VAT.

Q: Outline the process on how an appeal Star Daily published Ordinance No. 9503-2005 on 1 to 3
involving questions of constitutionality or February 2005. Ordinance No. 9503-2005 thus took effect
on 19 February 2005. CEPALCO filed its petition for
legality of tax ordinances. declaratory relief before the Regional Trial Court on 30
September 2005, clearly beyond the 30-day period
1. Appeal to the Secretary of Justice within 30 provided in Section 187. CEPALCO did not file anything
days from effectivity before the Secretary of Justice. Thus, the Court found that
2. The Secretary of Justice has 60 days to CEPALCO ignored the mandatory nature of the statutory
decide but an appeal does not suspend the periods.
effectivity of the ordinance
3. Within 30 days from the Secretary of Q: Is payment under protest required before
Justice’s decision or after 60 days inaction, a party may appeal to the Secretary of
an appeal may be filed with the RTC. Justice?
Q: Is compliance with the 30-60-30 day No. As held in JARDINE DAVIS INSURANCE V. ALIPOSA
period rule mandatory? [FEBRUARY 27, 2003], prior payment under protest is
not required when the taxpayer is questioning the
Yes. In REYES V. CA [DECEMBER 10, 1999], the very authority and power of the assessor to impose
Secretary of Justice dismissed an appeal assailing the assessment and of the treasurer to collect the
the constitutionality of the tax ordinances of the tax (as opposed to questioning the increase or
Municipality of San Juan on the ground that it was decrease in the tax to be paid).
filed out of time. The Supreme Court ruled that
compliance with the three separated periods is Q: What authority is given to the Secretary
mandatory. The failure of the petitioners in the case of Justice with respect to review of tax
to appeal to the Secretary within 30 days from the ordinances?
date of effectivity is fatal to their cause.
The Secretary of Justice can declare an ordinance
void for not having followed the requirements of the
Cagayan Electric Power and Light Co. v. law but he cannot replace it with his own law or he
City of Cagayan de Oro, G.R. 191761, cannot say that is is unwise. In DRILON V. LIM
November 14, 2012 [AUGUST 4, 1994], then Secretary of Justice Drilon
set aside the Manila Revenue Code on two grounds,
DOCTRINE: Failure to appeal to the Secretary of Justice namely the inclusion of certain ultra vires provisions
within the statutory period of 30 days from the effectivity of and its non-compliance with the prescribed
the ordinance is fatal to one’s cause. procedure in its enactment. In ruling that the act of
then Secretary Drilon was proper, the Supreme
FACTS: On January 10, 2005, the Sangguniang
Panlungsod of Cagayan de Oro (City Council) passed Court noted that when the Secretary alters or
Ordinance No. 9503-2005 imposing a tax on the lease modifies or sets aside a tax ordinance, he is not
orrental of electric and/ortelecommunication posts, poles allowed to substitute his own judgment for the
or towers by pole owners to other pole users at ten judgment of the LGU that enacted the measure. In
percent(10%) of the annual rental income derived from the said case, Secretary Drilon only exercised
such lease or rental. The City Council, in aletter dated 15 supervision and not control.
March 2005, informed Cagayan Electric Power and Light
Company, Inc. (CEPALCO), through its President and
Chief Operation Manager, Ms. Consuelo G. Tion, of the
Q: X, a taxpayer who believes that an
passage of the subject ordinance. On September 30, ordinance passed by the City Council of
2005, appellant CEPALCO, purportedly on pure question Pasay is unconstitutional for being
of law, filed a petition for declaratory relief assailing the discriminatory against him wants to know
validity of Ordinance No. 9503-2005 before the Regional
from you, his tax lawyer, whether or not he
Trial Court.
could file an appeal. In the affirmative, he
HELD: The Court ruled that CEPALCO failed to exhaust asks you where such appeal should be
administrative remedies. Section 5 of said ordinance made: The Secretary of Finance, the
provided that the “Ordinance shall take effect after 15 days Secretary of Justice or the CTA or the
following its publication in a local newspaper of general
circulation for at least three (3) consecutive issues.” Gold

regular courts. What would your advice be within 10 years from discovery of fraud or intent to
to your client? evade
The appeal should be made with the Secretary of Q: What is the rule on collection?
Justice. Any question on the constitutionality or
legality of a tax ordinance may be raised on appeal Collection must be within 5 years from assessment.
with the Secretary of Justice within 30 days from the
effectivity thereof (Hagonoy Market Vendor Assoc. Q: May regular court issue an injunction to
v. Municipality of Hagonoy [376 SCRA 376]) restrain LGUs from collecting taxes?
Q: Olongapo City enacted an ordinance Yes. In ANGELES CITY V. ANGELES ELECTRIC
fixing monthly rental fees for the different CORPORATION [JUNE 29, 2010], the Supreme Court
stalls in the new public market. A held that the LGC does not specifically prohibit an
questioned the validity of the said ordinance injunction enjoining the collection of local taxes (as
by filing an appeal with the Secretary of compared to the Tax Code which has an express
Justice. The Secretary deferred rendering a prohibition). Nevertheless, the Court noted that
decision on the appeal and advised A to file injunctions enjoining the collection of local taxes are
frowned upon and should therefore be exercised
his appeal with the RTC. Is the act of the
with extreme caution.
Secretary proper?
Q: What are the grounds for the suspension
No. As held in CITY OF OLONGAPO V. STALLHOLDERS
OF EAST B AJAC-B AJAC PUBLIC M ARKET [OCTOBER
of the running of the prescriptive?
19, 2000], the act of the Secretary of Justice was
tantamount to an abdication of his jurisdiction over a. The treasurer is legally prevented from the
the appeal of the ordinance. The Secretary may not assessment or collection of the tax
abdicate his authority to review tax ordinances. b. The taxpayer requests for reinvestigation
and executes a waiver in writing before the
Q: When may an action for declaratory relief expiration of the period within which to
assess or collect; and
be filed?
c. The taxpayer is out of the country or
otherwise cannot be located
When there is such an obscurity, declaratory relief
would be applicable. This remedy is open to
determine any question of construction or validity of Q: What are the remedies available to the
a tax law and/or the declaration of taxpayer’s taxpayer after assessment?
liabilities thereunder (Valley Trading v. CFI [March
4, 1989]) a. Protest of assessment (Section 195, LGC)
b. Claim for refund (Section 196, LGC)
---------------------------------------------------------------
a) Periods of assessment and collection of ---------------------------------------------------------------
local taxes, fees or charges b) Protest of assessment
--------------------------------------------------------------- ---------------------------------------------------------------
Read 194, LGC Read Section 195, LGC
Q: What are the rules on assessments? Q: Outline the procedure in contesting a

local tax assessment.
General Rule: An assessment must be made within
5 years from the date they become due. 1. Assessment notice issued by local treasurer
2. File written protest with the local treasurer
Exception: If there is fraud or intent to evade within 30 days from date of payment
payment of the tax, the assessment may be made 3. The Treasurer has to decide within 60 days

4. An appeal to the RTC is then available upon

denial or 60-day inaction by the treasurer Q: What is the rule on refunds?
5. The RTC decision is appealable to the CTA
En Banc The taxpayer must file a written claim within 2 years
6. Appeal to the SC within 15 days from receipt from the date of payment of tax or from the date
of resolution. when the taxpayer is entitled to refund.
Note: (1) Unlike in RPT, no protest under payment is ---------------------------------------------------------------

required.
9. Civil Remedies by the LGU for collection
(2) Review by RTC over denial of protest by the local
of revenues
treasurer falls within the court’s original jurisdiction. a) Local government’s lien for delinquent
NATIONAL TRANSMISSION CORPORATION VS. MUNICIPAL taxes, fees or charges
TREASURER OF LABRADOR, PANGASINAN, REPRESENTED BY b) Civil Remedies, in general
EDUALINO CASIPIT IN HIS CAPACITY AS MUNICIPAL TREASURER, (i) Administrative action
CTA AC NO. 67, JUNE 25, 2012
(ii) Judicial action
In local tax assessments, the CTA En Banc does not have ---------------------------------------------------------------
jurisdiction over cases decided by the Regional Trial Court
in the exercise of its original jurisdiction. NATIONAL POWER Read Section 172-185, LGC
CORPORATION VS. THE CITY GOVERNMENT OF TUGUEGARAO,
CTA EB CASE NO. 696 (RTC CIVIL CASE NO. 7240), JUNE 5, Q: What is the nature of a local
2012
government’s lien?
(3) What is the venue of your appeal of the denial of the
protest by the local treasurer? In NATIONAL TRANSMISSION Local taxes, fees, charges and other revenues
CORPORATION VS. THE MUNICIPALITY OF MAGALLANES, constitute a lien, superior to all liens, charges, or
AGUSAN DEL NORTE [C.T.A. AC NO. 68, JANUARY 5, 2012], encumbrances in favour of any person, enforceable
the CTA held that the local Government’s assessment for by any appropriate administrative or judicial action
business taxes and other regulatory fees is civil in nature (see Section 173, LGC)
and basically a personal action. For purposes of instituting
personal actions in court, the place where the taxpayer’s Note: The lien may only be extinguished upon full
principal office is located may also be considered as the payment of the delinquent local taxes, fees, and charges,
proper venue. including related surcharges and interest (see Section
173, LGC)
(4) The failure of the taxpayer to file and perfect its appeal
with the regional trial court within the prescribed period
deprives the Court of the jurisdiction to entertain and
Q: What are the civil remedies available to
determine the correctness of the assessment made by the the LGU for collection of revenues?
city treasurer. ACESITE (PHILIPPINES) HOTEL CORPORATION
VS. LIBERTY TOLEDO, IN HER CAPACITY AS CITY TREASURER OF a. Administrative action
THE CITY OF MANILA AND THE CITY OF MANILA [CTA, MAY 24, i. Distraint of personal property
2012]. ii. Levy upon real property
iii. Compromise
Taxpayer has 60 days from the date of receipt of the b. Judicial action
assessment to file a protest; failing which, the assessment
shall become final and executor SPC REALTY Note: Either of these remedies or both may be pursued
CORPORATION VS. MUNICIPAL TREASURER OF CAINTA, CTA concurrently or simultaneously at the discretion of the LGU
AC NO. 77, NOVEMBER 15, 2012 concerned (see Section 174, LGC)
--------------------------------------------------------------- Q: How is the administrative remedy of

c) Claim for refund of tax credit for distraint or levy exercised?
erroneously or illegally collected tax, fee or
charge By administrative action thru distraint of goods,
--------------------------------------------------------------- chattels, or effects, and other personal property or
whatever character, including stocks and other
Read Section 196, LGC securities, debts, credits, bank accounts and interest

in and rights to personal property, and by levy upon (Section 175, LGC)
real property and interest in or rights to real property.
(see Section 174, LGC)
Note: If the proceeds of the sale are insufficient other
Note: (1) The remedies of distraint and levy may be property may be distrained until the full amount due,
repeated if necessary until the full amount due including all including all expenses, is collected. (Section 175, LGC)
expenses is collected (see Section 184, LGC)
Q: Outline the procedure for distraint of real
(2) For properties exempt from distraint or levy, see property
Section 185, LGC
1. Warrant of Levy issued by the Local Treasurer
Q: Outline the procedure for distraint of (LT), which has the force of legal execution in the
personal property LGU concerned. (Section 176, LGC)
2. Warrant is mailed to or served upon the
1. Tax constitutes a lien superior to all liens and
delinquent owner (Section 176, LGC)
may only be extinguished upon payment of the
tax and the related charges. (Section 173, LGC)
3. Written notice of the levy and the warrant is
mailed/served upon the assessor and the
2. Time for payment of Local taxes expires
Registrar of Deeds of the LGU (Section 176,
3. Local Treasurer (LT), upon written notice, seizes
LGC)
sufficient personal property to satisfy the tax, and
other charges (Section 175, LGC) 4. 30 days from service of warrant, LT shall
4. LT issues a certificate which serves as warrant advertise sale of the property by:
for the distraint of personal property, (Section a. posting notice at main entrance of LGU
175, LGC) hall/building and in a conspicuous place in the
5. Officer executing the distraint accounts for the barangay where property is located and
goods, distrained (Section 175, LGC) b. by publication once a week for 3 weeks
6. Officer posts notice in office of the chief executive (Section 178, LGC)
of the LGU where the property is distrained and
Note: In cases of levy for unpaid local taxes publication is
in at least 2 other public places specifying the
once a week for 3 weeks
time & place of sale, and distrained goods. The
time of sale shall not be less than twenty (20)
5. Before the date of sale, the owner may stay the
days after the notice. (Section 175, LGC)
proceedings by paying the delinquent tax,
7. Before the sale, the goods or effects distrained
interest and the expenses of sale. (Section 178,
shall be restored to the owner if all charges are
LGC)
paid (Section 175, LGC)
6. Sale is held:
Note: The next steps in the procedure will vary depending a. at the main entrance of the LGU building, or
on whether the property distrained is disposed of within b. on the property to be sold, or
120 days from distraint. c. at any other place specified in the notice
(Section 178, LGC)
If disposed If not disposed Note: The next steps in the procedure will vary depending
on whether, on one hand, there is a bidder and on the
8. Officer sells the 8. It shall be other, there is no bidder or the highest bid is insufficient to
goods at public considered as sold cover the taxes and other charges.
auction to the highest to the LGU for the
bidder for cash. w/in amount of the If there is a bidder If there is no bidder OR
5 days, the local assessment made the highest bid is
treasurer shall report by the Committee insufficient to cover
sale to the local chief on Appraisal and to the taxes and other
executive concerned the extent of the charges
(Section 175, LGC) same amount, the
9. Excess of proceeds tax delinquencies 7. Bidder pays and 30 7. LT shall purchase
over charges shall be shall be cancelled. days after the sale, the property in
returned to the owner (Section 175, LGC) the LT shall report the behalf of the LGU
of the property sold. sale to the (Section 181, LGC)

sanggunian (Section and other charges – but for RPT, the LGU may purchase
178, LGC) Note: in cases of levy for for only one reason – there is no bidder! It’s that simple.
8. LT shall deliver to unpaid local taxes, LT may So memorize the procedure and just take note of these
purchaser certificate purchase if there is no two distinctions between levying for local taxes and
bidder or if the highest bid levying for RPT.
of sale
is insufficient (Section 181,
9. Proceeds of sale in LGC)
excess of delinquent Q: How is the remedy of judicial action
tax, interest & exercised?
8. Registrar of Deeds
expenses of sale shall transfer the
remitted to the owner The LGU concerned may institute an ordinary civil
title of the forfeited action with the regular courts for the collection of
(Section 178, LGC) property to the LGU
10. Within 1 year from delinquent taxes within 5 years from the date the
without need of a taxes, fees or charges become due (see Section
sale, owner may court order (Section
redeem upon 138 in relation to Section 194, LGC)
181, LGC)
payment of the 1. 9. Within 1 year from
delinquent tax, 2. forfeiture, the owner,
interest due, 3. may redeem the
expenses of sale property by paying
(from date of to the local treasurer
delinquency to date the full amount of
of sale) and 4. add’l the tax and the
interest of 2% per related interest and
month on the the costs of sale
purchase price from otherwise the
date of sale to date of ownership shall be
redemption. vested on the local
Delinquent owner government unit
retains possession concerned. (Section
and right to the fruits 181, LGC)
(Section 179, LGC) 10. Sanggunian
11. LT returns to the concerned may, by
purchaser/bidder the ordinance sell and
price paid plus dispose of the real
interest of 2% per property acquired
month (Section 179, under the preceding
LGC) section at public
12. If property is not auction. (Section
redeemed, the local 182, LGC)
treasurer shall
execute a deed of
conveyance to the
purchaser (Section
180, LGC)
Note: (1) In both cases, levy may be repeated until the full
amount due, including all expenses, is collected.
(2) This is important! To make our lives easier, I want you

to note that the procedure for levying real properties to
satisfy local taxes is….wait for it….the SAME as the levy
procedure for satisfying RPT. Wait hindi pa tapos! It’s the
same EXCEPT for two things: (1) Publication is once a
week for 3 weeks for local taxes while it is once a week for
2 weeks for RPT and (2) for local taxes, the LGU may
purchase levied property for two reasons– there is no
bidder OR the highest bid is insufficient to cover the taxes

---------------------------------------------------------- (7) Fertilizer actually used on a piece of land;

B. REAL PROPERTY TAXATION (8) Mines, quarries, and slag dumps, while the
matter thereof forms part of the bed, and waters
---------------------------------------------------------- either running or stagnant;
(9) Docks and structures which, though floating, are
Q: What are real property taxes? intended by their nature and object to remain at a
fixed place on a river, lake, or coast;
These are direct taxes imposed on the privilege to (10) Contracts for public works, and servitudes and
use real property such as land, building, machinery other real rights over immovable property.
and other improvements unless specifically
exempted. Note: Personal property may be classified as real property
for purposes of taxation.
Note: Before we can even talk about real property
taxation, I would have to state the obvious that this tax Q: Are the steel towers of an electric
only applies to, well, real property. In any problem company real property for the purpose of
involving real property taxation, you must first determine if
it’s real property or not. If it’s not real property, then it’s not RPT?
subject to real property taxation. Thus, I’ll discuss what are
considered real properties for purposes of RPT. No. In BOARD OF ASSESSMENT APPEALS V.
MERALCO [JAN. 31 1964], the Supreme Court held
Q: What are considered real properties? that the steel towers of MERALCO do not constitute
real property or the purpose of the real property tax.
There is no definition provided for in the LGC. The steel towers were regarded as poles and under
Reference must be made to Article 415 of the Civil its franchise Meralco's poles are exempt from
Code, to wit. taxation. Moreover, the steel towers were not
attached to any land or building. They were
removable from their metal frames.
Article 415. The following are immovable property:
Q: Define machinery.
(1) Land, buildings, roads and constructions of all
kinds adhered to the soil; Machinery embraces machines, equipment,
(2) Trees, plants, and growing fruits, while they are mechanical contrivances, instruments, appliances or
attached to the land or form an integral part of an apparatus which may or may not be attached,
immovable; permanently or temporarily, to the real property. It
(3) Everything attached to an immovable in a fixed includes the physical facilities for production, the
manner, in such a way that it cannot be separated installations and appurtenant service facilities, those
therefrom without breaking the material or which are mobile, self-powered or self-propelled,
deterioration of the object; and those not permanently attached to the real
(4) Statues, reliefs, paintings or other objects for use property which are actually, directly, and exclusively
or ornamentation, placed in buildings or on lands by used to meet the needs of the particular industry,
the owner of the immovable in such a manner that it business or activity and which by their very nature
reveals the intention to attach them permanently to and purpose are designed for, or necessary to its
the tenements; manufacturing, mining, logging, commercial,
(5) Machinery, receptacles, instruments or industrial or agricultural purposes (see Section
implements intended by the owner of the tenement 199(o), LGC)
for an industry or works which may be carried on in
a building or on a piece of land, and which tend Q: What types of machinery are subject and
directly to meet the needs of the said industry or not subject to RPT?
works;
(6) Animal houses, pigeon-houses, beehives, fish 1. Machinery that is permanently attached to
ponds or breeding places of similar nature, in case land and buildings is subject to the real
their owner has placed them or preserves them with property tax, even though this is actually,
the intention to have them permanently attached to directly, and exclusively used for religious,
the land, and forming a permanent part of it; the charitable or educational purposes.
animals in these places are included;

2. Machinery that is not permanently attached finished products for sale nor to repair
to real estate is: machineries offered to the general public for
a. Subject to the real property tax if it is business or commercial purposes
an essential and principal element considered as realty subject to RPT?
of an industry, work or activity
without which such industry, work or
No. In MINDANAO BUS CO. V. CITY ASSESSOR &
activity, cannot function;
TREASURER [SEPT. 29, 1962], the Supreme Court
b. Not subject to the real property tax if
held that for equipment to be real property, they
it is not an essential and principal
must be essential and principal elements. In
element of an industry, work or
addition, the machinery should be essential to carry
activity.
on business in a building or piece of land and this is
3. Notwithstanding rules 1 and 2, machinery of
not the case here since it was proven that the
non-stock, non-profit educational institutions
equipment was not essential because it is used only
used actually, directly, and exclusively for
for repairs which could actually be done elsewhere.
educational purposes is not subject to real
property tax. (see DOF LOCAL FINANCE
CIRCULAR 001-2002 [APRIL 25, 2002]) Q: Are the gas station equipment and
machinery (tanks, pumps, etc) permanently
Q: Define improvement. affixed by Caltex to its gas station and
pavement, albeit on leased land, considered
Improvement is a valuable addition to the property or real property subject to real property taxes
an amelioration in its condition amounting to more even if lessor does not become the owner of
than a repair or replacement of parts. (see Section the said assets?
199(m), LGC)
Yes, because they are essential to the business of
Q: What are the requisites for taxability of the taxpayer. In CALTEX V. CBAA [M AY 31, 1982],
an improvement? the Supreme Court ruled that he said equipment and
machinery, as appurtenances to the gas station
1. It must enhance the value of the property building or shed owned by Caltex and which fixtures
2. It must be separately assessable are necessary to the operation of the gas station for
3. It can be treated independently from the without them the gas station would be useless and
main property. which have been attached or affixed permanently to
the gas station site are taxable improvements and
machinery. The case of DAVAO SAWMILL CO. V.
Q: The City Assessor of CDO assessed as CASTILLO [AUGUST 7, 1935] where at issue was
taxable the machinery of Asian College of whether the property was installed by the owner
Science and Technology (ACSAT), a non- does not apply since in that case the issue was on
stock, non-profit educational institution. execution of judgment against the lessee.
Upon the issuance of DOF LOCAL FINANCE
CIRCULAR 001-2002 [APRIL 25, 2002], the City Q: Are generator sets real property for
Assessor declared the machinery as tax purposes of RPT?
exempt effective the 2nd quarter of 2002.
ACSAT argues that the exemption should No. [see BLGF OPINION DATED NOVEMBER 28, 2011]
retroact to the year 1998. Is ACSAT correct?
Yes. In BLGF OPINION DATED DECEMBER 15, 2006],

it was held that the request for retroactive effectivity
in 1998 of exemption of the subject machinery
owned by ACSAT should be given due course
Q: Are equipment/machineries in cement or

wooden platform and which were never
used as industrial equipments to produce

Q: What is the taxability of the following real property tax. (see BLGF OPINION DATED
properties of a bank: (1) vault doors; (2) AUGUST 5, 2004]
safety deposit boxes; (3) surveillance
cameras; (4) generator sets; (5) water Q: MERALCO installed two oil storage tanks
pumps; (6) uninterrupted power supply on a lot in Batangas which it leased from
equipment; (8) exhaust fans; and (9) ceiling Caltex. They are used for storing fuel oil for
fans? MERALCO’s power plants. Are the oil
storage tanks real property for purposes of
(1) Vault doors, (2) safety deposit box; and (3) RPT?
surveillance cameras should be assessed as
improvements for enhancing the utility of the bank. Yes. In MERALCO V. CBAA [M AY 31, 1982], the
(4) to (9) do not fall within the definition of machinery Supreme Court held that while the two storage tanks
subject to RPT. (see BLGF OPINION DATED M ARCH are not embedded in the land, they are to be
22, 2005] considered improvements on the land enhancing its
utility and rendering it useful to the oil industry. The
Q: What is the taxability of the following two tanks have been installed with some degree of
properties of a bank: (1) ATM Machine permanence as receptacles for the considerable
procash; (2) Cash vault door protect; (3) quantities oil needed by MERALCO for its
Security cash locker fortress; (4) Protect operations.
safe deposit boxes; (5) Security Devices; (6)
Magitek UPS; (7) Airconditioning units; (8) ---------------------------------------------------------------
Computers (CPU, printer, deskset, monitors, 1. Fundamental Principles
scanner/HP Flatbed, PC Server, modem, ---------------------------------------------------------------
etc.); (9) Phone Panasonic Wireless; (10)
Phone SNI Digital; and (11) Exhaust fans? Read Section 198, LGC
Items Nos. 2-5 should have been classified as Q: Enumerate the fundamental principles
improvement subject to real property tax as that shall guide real property taxation.
discussed above; while item Nos. 6-11 should be
classified as machinery of general purpose use thus 1. Real property shall be appraised at its
exempt from payment of real property tax. ATMs, current and fair market value
however, are correctly classified as machinery 2. Real property shall be classified for
subject to real property tax. (see BLGF OPINION assessment purposes on the basis of its
DATED FEBRUARY 17, 2005]
actual use
3. Real property shall be assessed on the
Q: What is the taxability of the following basis of a uniform classification within each
properties: (1) printing and developing LGU
machine owned by a photo center and (2) 4. The appraisal, assessment, levy and
equipment being utilized by water refilling collection of real property tax shall not be let
stations in purification process? to any private person
5. The appraisal and assessment of real
The printing and developing machine owned by the property shall be equitable.
photo center is a taxable real property considering
that the same falls within the definition of
"Machinery" without which, the work or activity of the
said photo center cannot function, and therefore, an
essential and principal element of the business of
photography. On the other hand, the equipment
being utilized by the water refilling stations thereat in
purification process also fall within the definition of
machinery and considered real property subject to

---------------------------------------------------------------
2. Nature of Real Property Tax 1. In the case of a province, at the rate not
--------------------------------------------------------------- exceeding 1% of the assessed value
2. In the case of a city or municipality within
Metro Manila, at the rate not exceeding 2%
Q: What is the nature of a real property of the assessed value
tax?
Note: The bar syllabus did not include special levies.
a. It is a direct tax Nonetheless, let’s discuss the pertinent matters. I will not
b. Indivisible single obligation provide the codal anymore. Just refer to Section 235-245,
c. Ad valorem tax based on the assessed LGC.
value of the property
d. Local tax Q: What are the special levies under the
e. Imposed on the use and not on the LGC?
ownership of the property
f. Progressive in character depending to a 2. Additional Levy for the Special Education
certain extent on the use and value of the Fund (SEF) – 1% on the assessed value of
property real property in addition to the basic RPT
(see Section 235, LGC)
Note: The ruling made by the Supreme Court in MERALCO 3. Special Levy on Idle Lands – idle lands
SECURITIES INDUSTRIAL CORP. V. CBAA [MAY 31, 1982] to shall be taxed at a rate not exceeding 5% of
the effect that RPT is a national tax was made long before the assessed value in addition to the basic
real property taxation was made part of the LGC. RPT (see Section 236, LGC)
4. Special Levy by LGUs for lands benefited
--------------------------------------------------------------- by public works (special assessment) –
3. Imposition of real property tax the special levy shall not exceed 60% of the
a) Power to levy real property tax actual cost of such project and
b) Exemption from real property tax improvements, including the costs of
acquiring land and other real property. (see
---------------------------------------------------------------
Section 240, LGC)
---------------------------------------------------------------
Q: When may idle lands be exempted from
a) Power to levy real property tax
tax?
---------------------------------------------------------------
a. Force majeure
Read Section 232 to 233, LGC b. Civil disturbance
c. Natural calamity
Q: Do all types of LGUs have the power to d. Any cause which physically or legally
impose real property taxes? prevents the owner of the property or person
having legal interest therein from improving,
No. Only provinces and cities as well as utilizing, or cultivating the same (see
municipalities within Metro Manila may impose Section 238, LGC)
RPTs. (see SECTION 200 AND 232, LGC)
Q: What are the conditions for the validity of
Municipalities outside Metro Manila and barangays a tax ordinance imposing special levy for
cannot impose RPT. public works?
Q: What are the rates of levy for purposes of 1. The ordinance shall describe the nature,
RPT? extent, and location of the project, state the
estimated cost, and specify the metes and
A province or city or municipality within Metro Manila bounds by monuments and lines (see
shall fix a uniform rate of basic property tax Section 241, LGC)
applicable to their respective localities:

2. It must state the number of annual

installments, not less than 5 years nor more No. In METRO M ANILA M ANILA INTERNATIONAL
than 10 years (see Section 241, LGC) AIRPORT AUTHORITY v. CA [JULY 20, 2006], the
3. Notice to the owners and public hearing (see Supreme Court, in resolving the issue on whether
Section 242, LGC) the lands and buildings owned by the Manila
International Airport Authority were subject to real
Note: If you want to contest a special levy, the property tax, ruled in the negative. The Supreme
interested person may appeal to the LBAA and then Court opined that since MIAA is not a GOCC but
to the CBAA following the same process as an instead as government instrumentality vested with
administrative protest (see Section 244, LGC). I’ll corporate powers or a government corporate entity.
discuss the process later. As such, it is exempt from real property tax.
--------------------------------------------------------------- However, it must be noted that previously in M ACTAN

b) Exemption from real property tax CEBU INTERNATIONAL AIRPORT AUTHORITY V. M ARCOS
--------------------------------------------------------------- [SEPTEMBER 11, 1996], the Supreme Court ruled that
MCIAA is a GOCC and since the last paragraph of
Section 234 of the LCG unequivocally withdrew the
Read Section 234, LGC exemptions from payment of RPT granted to natural
or juridical including GOCCs, MCIAA is now liable
Q: What are the properties exempt from for RPT.
RPT?
Q: Is the Philippine Fisheries Development
a. Real property owned by the Republic or any Authority (PFDA) a GOCC and, hence, now
of its political subdivisions (except when liable for RPT?
beneficial use has been granted to a taxable
person) No. In PHILIPPINE FISHERIES DEVELOPMENT
b. Charitable institutions, churches, AUTHORITY V. CA [JULY 31, 2007], the Supreme
parsonages, or convents appurtenant Court ruled that the PFDA is not a GOCC but an
thereto, mosques, nonprofit or religious instrumentality of the national government which is
cemeteries and all lands, buildings or generally exempt from payment of RPT. However,
improvements actually, directly, and said exemption does not apply to the portions of the
exclusively used for religious, charitable or properties which the PFDA leased to private
educational purposes entities.
33
c. All machineries and equipment actually,
directly and exclusively used by local water
Q: Is the GSIS liable for RPT?
districts and GOCCs engaged in supply and
distribution of water and/or generation and
No. As held in GSIS V. CITY TREASURER OF THE CITY
transmission of electric power
OF M ANILA [DECEMBER 23, 2009], the Supreme Court
d. All real property owned by duly registered
stated that the ruling in METRO M ANILA M ANILA
cooperatives
INTERNATIONAL AIRPORT AUTHORITY v. CA [JULY 20,
e. Machinery and equipment used for pollution
2006] argues for the non-tax liability of the GSIS for
control and environmental protection
32 RPT. The Court ruled that GSIS is an instrumentality
(includes infrastructure)
of the government and, as such, is not a taxable
juridical person for purposes of RPT.
Section 234(a)
Q: Is the Philippine Reclamation Authority
Q: Is the Metro Manila International Airport (PRA) a GOCC and, as such, liable for RPT?
Authority (MMIA) a GOCC which will now be
considered liable for RPT under the LGC?
32 33
Note that under RA 7942 (Philippine Mining Act of 1995), Note that under Section 234 the exemption to the government
pollution control devices exempted from RPT include and its political subdivisions does not apply to properties whose
“infrastructure.” beneficial use has been granted to a taxable person

No. In PHILIPPINE RECLAMATION AUTHORITY V. CITY commercial purposes. Are these exempt
OF PARANAQUE [JULY 18, 2012], the Supreme Court from real property taxes?
ruled that PRA is not a GOCC. Much like the MIAA,
PPA, UP, PFDA, GSIS and BSP, it is considered a
government instrumentality exercising corporate No. In LUNG CENTER OF THE PHILIPPINES V. QUEZON
powers but which are not considered GOCCs as CITY [433 SCRA 119], the Supreme Court held that
they are neither a stock (for not having the authority the hospital was not exempt from real property tax
to distribute dividends), not a non-stock corporation on the portions of its property not actually, directly,
(for not having members) corporation. In addition, and exclusively used for charitable purposes. Thus,
the Constitution likewise provides that a GOCC is those leased out for commercial purposes are
created under two conditions: (a) established for a subject to real property tax. Those used by the
common good and (b) meets the test of economic hospital even if used for paying patients remain
viability. While test (a) is complied with, the PRA was exempt from real property taxes.
undoubtedly not created to engage in economic or
commercial activities as it is the only entity engaged Q: ABC Association is a non-stock, non-
in reclamation which was described as essentially a profit organization owned by XYZ Hospital
public service. Thus, PRA is not liable for RPT. in Cebu City. XYZ likewise owns the XYZ
Medical Arts Center. The City Assessor
Q: Is the Light Rail Transit Authority (LRTA) assessed the XYZ Medical Arts Center
a GOCC, and, as such, liable for RPT? Building with the assessment level of 35%
for commercial buildings (instead of the
Yes. Although not expressly stating that LRTA is a 10% special assessment imposed on XYZ
GOCC, the Supreme Court in LIGHT RAIL TRANSIT hospital and its buildings). Was the medical
AUTHORITY V. CBAA [OCTOBER 12, 2000] stated that
arts center built to house its doctors a
the LRTA is clothed with corporate status and
corporate powers in the furtherance of its proprietary separate commercial building?
objectives. It operates much like any private
corporation engaged in the mass transport industry. No. The Supreme Court in CITY ASSESSOR OF CEBU
As such, it is liable for RPT. CITY V. ASSOCIATION OF BENEVOLA DE CEBU INC.
[JUNE 8, 2007] ruled that the fact alone that doctors
Q: ABC Company owned two parcels of land holding clinics in the separate medical center are
consultants of the hospital and the ones who treat
in Pasig City. Portions of the properties are
the patients takes way the medical center from being
leased to different business establishments. categorized as commercial. The Supreme Court
Being part of ill-gotten wealth of the classified the medical arts center building as
Marcoses, the owner of ABC voluntarily “special” for the following reasons: (1) the medical
surrendered ABC Company to the Republic arts center was an integral part of the hospital; (2)
through the PCGG. Now, Pasig City seeks to the medical arts center facility was incidental to and
impose RPT on the properties of ABC. Are reasonably necessary for the operations of the
the properties of ABC liable for RPT? hospital; and (3)
charging rentals for the offices used by its accredited
It depends. In PASIG CITY V. REPUBLIC [AUGUST 24, physicians was a practical necessity and could not
2011], the Supreme Court held that the portions of be equated to a commercial venture.
the properties not leased to taxable entities are
exempt from RPT while the portions leased to Section 234(c)
taxable entities are subject to RPT.
Q: What are the requisites to claim
Section 234(b) exemption from RPT for machineries and
equipment used by LWDs and GOCCs?
Note: Remember our discussions in General Principles of
Taxation
1. The machineries and equipment are
actually, directly, and exclusively used by
Q: The Philippine Lung Center leased the LWDs and GOCCs
portions of its real property out for

2. The LWDs and GOCCs claiming exemption and/or actually uses the machineries and
must be engaged in the supply and equipment for generation and transmission
distribution of water and/or generation and of power. The CBAA affirmed. Are the
transmission of electric power. properties exempt from RPT?
Q: FELS entered into a lease contract with No. NAPOCOR’s basis for exemption which is
NAPOCOR over two engine power barges at Section 243(c) provides that the machinery and
Balayan Bay Batangas. The lease contract equipment used for generation and transmission of
stipulated that NAPOCOR shall be power must be actually, directly and exclusively
responsible for all taxes (including RPT on used by the GOCC. The machineries and equipment
the barges), fees and charges that FELS here are owned by BPPC, subject only to the
may be liable except income tax of FELS transfer of these properties to NAPOCOR after the
and its employees and construction permit lapse of the 15-year period agreed upon. BPPC’s
use of the machineries and equipment are actual,
and environmental fees. FELS was assessed
direct and immediate while NAPOCOR’s is
for RPT and the LBAA upheld the contingent and, at this stage of the BOT Agreement,
assessment stating that while the barges not sufficient to support its claim for exemption (see
may be classified as personal property, they NAPOCOR V. CBAA [JANUARY 30, 2009]).
are considered real property for RPT
purposes because they are installed at a Similarly, in NAPOCOR V. PROVINCE OF QUEZON
specific location with a character of [JULY 15, 2009], at issue was whether NAPOCOR
permanency. Are the power barges subject as a GOCC can claim exemption under Section 234
to RPT? of the LGC for the taxes due from the Mirant
Pagbilao Corporation whose tax liabilities the
Yes. First, Article 415(9) of the Civil Code provides NAPOCOR has contractually assumed under the
that “docks and structures which, though floating, BOT Agreement where Mirant would build and
are intended by their nature and object to remain at finance a power plant and transfer the same to
a fixed place on a river, lake or coast. Barges fall NAPOCOR after 25 years without compensation.
under this provision. Second, FELS cannot claim The Supreme Court ruled that NAPOCOR does not
exemption given that the requirement is that to be have the legal interest that the law requires to give it
exempt the machineries and equipment must be personality to protest the tax imposed by law on
actually, directly and exclusively used by GOCCs Mirant. Further, the machinery and equipment must
engaged in the generation of power. Since the actually, directly and exclusively be used by the
agreement between FELS and NAPOCOR is that GOCC. Here, NAPOCOR’s use is merely contingent
FELS will own and operate the barges and not
NAPOCOR. (see FELS ENERGY . PROVINCE OF Section 234(e)
BATANGAS [FEBRUARY 16, 2007]).
Q: ABC Mining operates a Siltation Dam and
Q: FPPC entered into a BOT Agreement with Decant System. The Provincial Assessor of
NAPOCOR for the construction of a Marinduque assessed the same for RPT. Is
powerplant. Under the agreement BPPC was the subject property exempt from RPT?
created to own, manage and operate the
powerplant. The BOT Agreement provided The answer would be yes in light of SECTION 91 OF
that after a period of time, the power plant RA 7942 IN RELATION TO SECTION 3(AM) which
shall be transferred to NAPOCOR without includes “infrastructure” in the definition of pollution
payment of any compensation and that control devices exempt from RPT.
NAPOCOR shall be responsible for payment
Nonetheless, it must be noted that in PROVINCIAL
of RPT. BPCC was assessed for RPT. ASSESSOR OF M ARINDUQUE V. CA [APRIL 30, 2009],
34
NAPOCOR filed a petition to declare the

properties exempt from RPT. The LBAA
ruled that the properties were not exempt as
this is only available to a GOCC which owns 34
The Supreme Court pointed out that the disputed assessment
notice took effect on 1 January 1995. The governing law was the

the Supreme Court ruled that the tax exemption of Q: Prior to the LGC, XYZ telecom was
machineries and equipment used for pollution exempted from paying RPT under its
control and environmental protection is based on original franchise. Years after the effectivity
usage, i.e., direct, immediate and actual application of the LGC, Congress passed a law
of the property itself to the exempting purpose. Here,
amending XYZ’s franchise and contained a
the Supreme Court found that the subject property
was not a machinery used for pollution control, but a reenactment of the tax provision in XYZ’s
structure adhering to the soil and intended for original franchise granting it RPT
pollution control. exemption. Is XYZ liable for RPT?
Note: It must be noted that, by virtue of Section 234 of No. As held in CITY GOVERNMENT OF QUEZON CITY V.
the LGC, any exemption from RPT previously granted or BAYAN TELECOMMUNICATIONS [M ARCH 6, 2006], the
presently enjoyed by all persons, whether natural or Supreme Court held that the RPT exemption
juridical, including all GOCCs were withdrawn upon the enjoyed by Bayantel under its original franchise, but
effectivity of the LGC. We have to note that Congress has subsequently withdrawn by force of Section 234 of
the power to exempt an entity again from RPT the LGC, has been restored by the new law which
notwithstanding the withdrawal made by the LGC.
amended its original franchise.
Q: ABC Telecom was granted a 25-year

---------------------------------------------------------------
franchise to install, operate and maintain
4. Appraisal and assessment of real
telecommunications system throughout the
property tax
Philippines under a law which states that
a) Rule on appraisal of real property at fair
“The grantee shall be liable to pay the same
market value
taxes on its real estate, building, and
b) Declaration of real property
personal property exclusive of this
c) Listing of real property in assessment
franchise.” As they were not being issued a
rolls
Mayor’s permit, ABC Telecom paid RPT
d) Preparation of schedules of fair market
under protest. ABC argued that the phrase
value
“exclusive of this franchise” means that
(i) Authority of assessor to take evidence
only the real properties not used in
(ii) Amendment of schedule of fair market
furtherance of its franchise are subject to
value
RPT. Is ABC’s contention correct?
e) Classes of real property
No, the properties of ABC whether or not used in its f) Actual use of property as basis of
telecommunications business is subject to RPT. In assessment
DIGITAL TELECOMMUNICATIONS PHILIPPINES INC. V. g) Assessment of real property
CITY GOVERNMENT OF BATANGAS [DECEMBER 11, (i) Assessment levels
2008], the Supreme Court held that the phrase (ii) General Revisions of assessments
“exclusive of this franchise” qualifies the term and property classification
“personal property.” This means that the legislative (iii) Date of effectivity of assessment or
franchise, which is an intangible personal property, reassessment
shall not be subject to taxes. This is to put franchise (iv) Assessment of property subject to
grantees in parity with non-franchisees as the latter
back taxes
obviously do not have franchises which may
potentially be subject to RPT. There is nothing in the (v) Notification of new or revised
law which expressly or even impliedly exempts the assessment
company from RPTC. Finally, the company cannot h) Appraisal and assessment of machinery
rely on the BGLF opinion as they have no authority ---------------------------------------------------------------
to rule on claims for RPT exemption.
Note: In most of these items, I will simply provide the
codal provisions as they are self-explanatory. I will focus
on the important matters.
1991 LGC. All references to RA No. 7942, which came into effect
only on 14 April 1995, were all out of place.
---------------------------------------------------------------

a) Rule on appraisal of real property at fair (i) Authority of assessor to take evidence
market value (ii) Amendment of schedule of fair market
--------------------------------------------------------------- value
---------------------------------------------------------------
Read Section 201, LGC
Q: How is real property appraised?
Q: When is the schedule of FMVs prepared?
All real property, whether taxable or exempt, shall be
appraised at the current and FMV prevailing in the The schedule of FMVs shall be prepared before any
locality where the property is situated (see Section general revision of property assessment is made
201, LGC).
Note: FMV is the price at which a property may be sold by Q: Who prepares the schedule of FMVs?
a seller who is not compelled to sell and bought by a buyer
not compelled to buy. The provincial, city and the municipal assessors of
the municipalities within Metro Manila prepares the
--------------------------------------------------------------- schedule of FMV for the different classes of real
b) Declaration of real property property situated in their respective LGUs for
--------------------------------------------------------------- enactment by ordinance of the Sanggunian
concerned.
Read 202-204, LGC Note: (1) The schedule of FMV shall be published in a
newspaper of general circulation in the province, city or
Q: What is the purpose of a tax declaration? municipality concerned or the posting in the provincial
capitol or other places as required by the law.
A tax declaration only enables the assessor to
(2) The proposed FMVs of real property in a LGU as well
identify the property for purposes of determining the
as the ordinance containing the schedule must be
assessment levels. It does not bind the assessor published in full for 3 consecutive days in a newspaper of
when he makes the assessment. local circulation where available, within 10 days of its
approval and posted in at least 2 prominent places in the
Q: Are tax declarations conclusive evidence provincial capitol, city, municipal, or barangay hall for a
of ownership? minimum of 3 consecutive weeks (Figuerres v. CA
[March 25 ,1999])
As a rule, tax declarations are not conclusive

evidence of ownership. However, as held in Q: What are the different approaches in
TABUENA V. CA [M AY 6, 1991], the rule admits of an estimating the FMV of real property for RPT
exception: tax receipts and tax declarations become purposes?
strong evidence of ownership acquired by
prescription when accompanied by proof of actual 1. Sales Analysis Approach – the sales price paid in
possession of the property. actual market transactions is considered by
taking into account valid sales data accumulated
--------------------------------------------------------------- from among the Register of Deeds, notaries
c) Listing of real property in assessment public, appraisers, brokers, dealers, bank
rolls officials, and various sources stated under the
--------------------------------------------------------------- LGC
2. Income Capitalization Approach – the value of an
income-producing property is no more than the
Read Section 205, LGC 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
d) Preparation of schedules of fair market the property
value

3. Reproduction cost approach – the formal

approach used exclusively in appraising man- Agricultural Is land devoted principally to the
made improvements such as buildings and other Land planting of trees, raising of crops,
structures, based on such data as materials and livestock and poultry, dairying, salt
labor costs to reproduce a new replica of the making, inland fishing and similar
aquaculture activities and other
improvement (Allied Banking Corp v. Quezon agricultural activities and is not
City Government [October 11, 2005] citing classified as mineral, timber,
Local Assessment Regulations No. 1-92) residential, commercial or industrial
land
Note: An ordinance whereby the “parcels of land sold, Commercial Is land devoted principally for the
ceded, transferred and conveyed for remuneratory Land object of profit and is not classified
consideration after the effectivity of this revision shall be as agricultural, industrial, mineral,
subject to real estate tax based on the actual amount timber or residential land
reflected in the deed of conveyance or the current Industrial Land Is land devoted principally to
approved zonal valuation of the BIR prevailing at the time industrial activity as capital
of sale, cession, transfer and conveyance, whichever is investment and is not classified as
higher, as evidenced by the certificate of payment of the agricultural, commercial, timber,
CGT issued therefore” is invalid being contrary to public mineral or residential land
policy and for restraining trade (see Allied Banking Corp Mineral Lands Are lands in which minerals exist in
v. Quezon City Government [October 11, 2005]) sufficient quantity or grade to justify
the necessary expenditures to
--------------------------------------------------------------- extract and utilize such minerals
(i) Authority of assessor to take evidence
--------------------------------------------------------------- Q: What are the special classes of real
property under the LGC?
All lands, buildings, and other improvements
actually, directly and exclusively:
---------------------------------------------------------------
(ii) Amendment of schedule of fair market 1. Used for hospitals, cultural or scientific
value purposes
--------------------------------------------------------------- 2. Owned and used by local water districts
3. Owned and used by GOCCs rendering
Read Section 214, LGC essential public services in
a. Supply and distribution of water;
b. Generation and transmission of
--------------------------------------------------------------- electric power
e) Classes of real property
--------------------------------------------------------------- ---------------------------------------------------------------
f) Actual use of property as basis of
Read Section 215 to 216, LGC assessment
---------------------------------------------------------------
Q: What are the classes of real property for Read Section 217, LGC
assessment purposes?
Q: The real property of Mr. and Ms. X,
4. Residential situated in a commercial area in front of the
5. Agricultural
public market, was declared in their tax
6. Commercial
7. Industrial declaration as residential because it is used
8. Mineral as their family residence. However, when
9. Special the spouses left for the US to stay there
permanently with their children, the property
Residential Is land principally devoted to has been rented to a single proprietor
Land habitation engaged in sale of appliances and

agricultural products. The Provincial

assessor reclassified the property as Q: What is the procedure in computing real
commercial for tax purposes. Mr. and Ms. X property tax?
appealed to the LBAA and argued that the
tax declaration classifying their property as 1. Ascertain the assessment level of the
residential is binding. Is the contention of property
the spouses correct? 2. Multiply the market value by the applicable
assessment level of the property
No. The law focuses on the actual use of the 3. Find the tax rate which corresponds to the
property for classification, valuation and assessment class (use) of the property and multiply the
purposes regardless of ownership. Section 217 of assessed value by the applicable tax rates.
the LGC provides that “real property shall be
classified, valued, and assessed on the basis of its Otherwise stated:
actual use regardless of where located, whoever
owns it, and whoever uses it.”
---------------------------------------------------------------
g) Assessment of real property
(i) Assessment levels
(ii) General Revisions of assessments
---------------------------------------------------------------
and property classification
(ii) General Revisions of assessments
(iii) Date of effectivity of assessment or
and property classification
reassessment
---------------------------------------------------------------
(iv) Assessment of property subject to
back taxes
(v) Notification of new or revised Read Section 219, LFC
assessment
--------------------------------------------------------------- Q: What are the steps to be followed for the
mandatory conduct of general revision of
Q: Define assessment. real property assessments under Section
219 of the LGC?
Assessment is the act or process of determining the
value of a property or proportion thereof subject to 1. Preparation of the Schedule of FMVs
tax, including the discovery, listing, classification, 2. The enactment of Ordinances
and appraisal of properties. a. Levying an annual ad valorem tax
on real property and an additional
tax accruing to the SEF
Q: Define assessment level. b. Fixing the assessment levels to be
applied to the market values of the
It is the percentage applied to the FMV of the real property real properties
to determine the taxable value of the property . c. Providing necessary appropriation
to defray expenses incident to
Note: I will do away with the different values here. I’ll general revision of real property
discuss instead how the assessed value is arrived at. So assessments
for the different percentages, please refer to Section 218 d. Adopting the Schedule of FMVs
of the LGC. prepared by the assessors (see
LOPEZ V. CA [FEBRUARY 19, 1999]
Q: Define assessed value
Note: This is not included in the Syllabus but just note that
It is the FMV of the real property multiplied by the the following are the instances where he assessor shall
assessment level. It is synonymous with “taxable make a valuation of real property: (1) the real property is
declared and listed for taxation purposes for the first time;
value”
(2) there is an ongoing general revision of property

classification and assessment; or (3) a request is made by (i) Issuance of notice of delinquency for
the person in whose name the property is declared. (see real property tax assessment
Section 220, LGC)
(ii) Local government’s lien
--------------------------------------------------------------- (iii) Remedies in general
(iii) Date of effectivity of assessment or (iv) Resale of real estate taken for taxes,
reassessment fees, or charges
--------------------------------------------------------------- (v) Further levy until full payment of
amount due
Read Section 221, LGC ---------------------------------------------------------------
---------------------------------------------------------------
---------------------------------------------------------------
(iv) Assessment of property subject to a) Date of accrual of real property tax and
special levies
back taxes
--------------------------------------------------------------- ---------------------------------------------------------------
Read Section 222, LGC Read Section 246, LGC
--------------------------------------------------------------- ---------------------------------------------------------------
(v) Notification of new or revised b) Collection of tax
assessment (i) Collecting authority
--------------------------------------------------------------- (ii) Duty of assessor to furnish local
treasurer with assessment rolls
Read Section 223, LGC (iii) Notice of time for collection of tax
---------------------------------------------------------------
---------------------------------------------------------------
h) Appraisal and assessment of machinery Read 247 to 249, LGC
--------------------------------------------------------------- ---------------------------------------------------------------
c) Periods within which to collect real
property tax
Read Section 224-225, LGC
---------------------------------------------------------------
---------------------------------------------------------------
Read 270, LGC
5. Collection of real property tax
a) Date of accrual of real property tax and
Q: What is the rule on assessment of RPT?
special levies
b) Collection of tax
General Rule: The assessment must be made
(i) Collecting authority within 5 years from the date they become due
(ii) Duty of assessor to furnish local
treasurer with assessment rolls Exception: If there is fraud or intent to evade taxes,
(iii) Notice of time for collection of tax assessment may be made within 10 years from
c) Periods within which to collect real discovery of fraud or intent to evade.
property tax
d) Special rules on payment Q: What is the rule on collection of RPT?
(i) Payment of real property tax in
installments Collection of RPT must be made within 5 years from
(ii) Interests on unpaid real property tax assessment
(iii) Condonation of real property tax
e) Remedies of LGUs for collection of real
property tax

Q: In what instances is the running of the ---------------------------------------------------------------

prescriptive period be suspended?
---------------------------------------------------------------
1. Treasurer is legally prevented from (i) Issuance of notice of delinquency for
assessing/ collecting real property tax assessment
2. Taxpayer requests for reinvestigation and
---------------------------------------------------------------
executes waiver
3. Taxpayer is out of the country or cannot be
located Read Section 254, LGC
--------------------------------------------------------------- In real estate taxation, the unpaid tax attaches to the

d) Special rules on payment property and is chargeable against the taxable
(i) Payment of real property tax in person who had actual or beneficial use and
installments possession of it regardless of whether or not he is
(ii) Interests on unpaid real property tax the owner. (NATIONAL GRID CORPORATION OF THE
PHILIPPINES VS. CENTRAL BOARD OF ASSESSMENT
(iii) Condonation of real property tax
APPEALS [CTA EB NO. 801, JANUARY 29, 2013])
---------------------------------------------------------------
---------------------------------------------------------------
Read Section 250, 255, 276-277 LGC
(ii) Local government’s lien
---------------------------------------------------------------
Q: In what instances can there be a condonation
or reduction of RPT?
1. General failure of crops
2. Substantial decrease in the price of Q: What is the Local Governments Lien?
agricultural or agri-based products
3. Calamity The basic RPT constitutes as a lien on the property
4. When public interest so requires subject to tax, superior to all liens, charges or
encumbrances in favor of any person, irrespective of
Note: (1) In the case of (1) to (3), the condonation is done the owner or possessor thereof, enforceable by
by the Sanggunian concerned by ordinance and upon administrative or judicial action and may only be
recommendation of the Local Disaster Coordinating
Council. In the case of (4), only the President may
extinguished by payment of the tax and related
exercise this power. interests and expenses.
(2) In EXECUTIVE ORDER 27 [FEBRUARY 28, 2011], the In TESTATE ESTATE OF CONCORDIA LIM V. CITY OF
President under the power given to him by Section 227 of M ANILA [FEBRUARY 21, 1990], the Supreme Court
the LGC reduced the RPT payable in Quezon by held that unpaid real estate taxes attaches to the
independent power producers under BOT contracts with property and is chargeable against the taxable
GOCCs and condoned the penalties and surcharges of person who had actual or beneficial use and
such RPT payables. possession of it, regardless of whether or not he is
the owner.
---------------------------------------------------------------
e) Remedies of LGUs for collection of real ---------------------------------------------------------------
property tax (iii) Remedies in general
(i) Issuance of notice of delinquency for (iv) Resale of real estate taken for taxes,
real property tax assessment fees, or charges
(ii) Local government’s lien (v) Further levy until full payment of
(iii) Remedies in general amount due
(iv) Resale of real estate taken for taxes, ---------------------------------------------------------------
fees, or charges
(v) Further levy until full payment of Read Section 256 to 269, LGC
amount due

Q: What are the remedies available to the d. by publication once a week for 2 weeks
LGU for the collection of RPT? (Section 260, LGC)
1. Administrative action thru levy of real Note: In cases of levy for unpaid local taxes publication is
once a week for 3 weeks
property
a. Distraint of personal property
b. Lien on property subject to tax 7. Before the date of sale, the owner may stay the
c. Levy on real property tax proceedings by paying the delinquent tax,
2. Judicial action interest and the expenses of sale.
8. Sale is held:
Note: The above remedies are concurrent and a. at the main entrance of the LGU building, or
simultaneous b. on the property to be sold, or
c. at any other place specified in the notice
Q: When is there levy on real property?
Note: The next steps in the procedure will vary depending
After the expiration of the time required to pay the on whether there is a bidder or not.
tax levied, the real property subject to tax may be
levied upon. If there is a bidder If there is no bidder
Note: (1) The remedies of and levy may be repeated if 9. Bidder pays and 9. LT shall purchase
necessary until the full amount due including all expenses 30 days after the the property in
is collected (see Section 265, LGC) sale, the LT shall behalf of the LGU
report the sale to (Section 263, LGC)
(2) Notice and publication for sale, as well as the legal the sanggunian
requirements for a tax delinquency sale are mandatory 10. LT shall deliver Note: in cases of levy for
and failure to comply can invalidate the sale. (De Knecht to purchaser unpaid local taxes, LT may
v. CA; De Knecht v. Sayo [290 SCRA 223]) certificate of sale purchase if there is no
11. Proceeds of sale bidder or if the highest bid
Q: Outline the procedure for levy on real is insufficient (Section 181,
in excess of LGC)
property delinquent tax,
interest & 10. Registrar of Deeds
Note: Owner means owner or administrator of real expenses of sale
property or any person having legal interest thereto. shall transfer the
remitted to the title of the forfeited
owner (Section property to the LGU
1. Tax constitutes a lien on the property superior to 260, LGC) without need of a
all liens and may only be extinguished upon 12. Within 1 year court order (Section
payment of the tax and charges. (Section 257, from sale, owner 263, LGC)
LGC) may redeem 11. Within 1 year from
2. Time for payment of real property taxes expires upon payment of forfeiture, the owner,
(Section 258, LGC) the 1. delinquent may redeem the
3. Warrant of Levy issued by the Local Treasurer tax, 2. interest property by paying
(LT), which has the force of legal execution in the due, 3. to the local treasurer
LGU concerned. (Section 258, LGC) expenses of sale the full amount of
4. Warrant is mailed to or served upon the (from date of the tax and the
delinquent owner (Section 258, LGC) delinquency to related interest and
5. Written notice of the levy and the warrant is date of sale) and the costs of sale
mailed/served upon the assessor and the additional otherwise the
Registrar of Deeds of the LGU (Section 258, interest of 2% ownership shall be
LGC) per month on vested on the local
6. 30 days from service of warrant, LT shall the purchase government unit
advertise sale of the property by: price from date concerned. (Section
c. posting notice at main entrance of LGU of sale to date of 263, LGC)
hall/building and in a conspicuous place in the redemption. 12. Sanggunian
barangay where property is located and Delinquent concerned may, by

owner retains ordinance sell and general law. Thus, the period shall be counted from
possession and dispose of the real the date of annotation of the sale.
right to the fruits property acquired
(Section 261, under the preceding Q: Discuss the remedy of civil action for
LGC) section at public collection of real property tax.
13. LT returns to the auction. (Sectiton
purchaser/bidder 264, LGC)
the price paid The civil action for the collection of real property tax
plus interest of shall be filed by the local treasurer in any court of
2% per month competent jurisdiction within 5 or 10 years wherein
(Section 261, real property taxes may be collected. (see Section
LGC) 266, LGC)
14. If property is not
redeemed, the ---------------------------------------------------------------
local treasurer 6. Refund or credit of real property tax
shall execute a a) Payment under protest
deed of b) Repayment of excessive collections
conveyance to ---------------------------------------------------------------
the purchaser
(Section 262, Note: I will discuss payment under protest and refund
LGC) under Taxpayer’s Remedies.
Note: (1) In both cases, levy may be repeated until the full
amount due, including all expenses, is collected. (Section
---------------------------------------------------------------
265, LGC) 7. Taxpayer’s remedies
a) Contesting an assessment of value of real
(2) Again recall what I said in the levying procedure for property
local taxes. The procedure for levying real properties to (i) Appeal to the Local Board of
satisfy local taxes is the SAME as the levy procedure for
satisfying RPT EXCEPT for two things: (1) Publication is Assessment Appeals
once a week for 3 weeks for local taxes while it is once a (ii) Appeal to the Central Board of
week for 2 weeks for RPT and (2) for local taxes, the LGU Assessment Appeals
may purchase levied property for two reasons– there is no (iii) Effect of payment of tax
bidder OR the highest bid is insufficient to cover the taxes
and other charges – but for RPT, the LGU may purchase
b) Payment of real property tax under
for only one reason – there is no bidder! It’s that simple. protest
So memorize the procedure and just take note of these (i) File protest with local treasurer
two distinctions between levying for local taxes and (ii) Appeal to the Local Board of
levying for RPT. Assessment Appeals
(iv) Appeal to the CTA
Q: What is the redemption period for tax (v) Appeal to the Supreme Court
delinquent properties sold at public --------------------------------------------------------------
auction?
Note: This outline creates the impression that contesting
Under the LGC, the redemption period is within 1 an assessment and payment under protest are two
year from the date of sale. different remedies of the taxpayer. That is wrong! They’re
part of the same process. The distinction should instead
However, in CITY M AYOR OF QUEZON CITY V. RCBC be made on whether the taxpayer is questioning the
[AUGUST 3, 2010], the Supreme Court ruled that validity of the tax ordinance (in such case, the assessment
while the LGC provides that the one year period would be illegal or void) or is disputing the correctness,
reasonableness or excessiveness of the assessment.
begins from the date of sale on which date the
delinquent tax is and other fees are paid, the local If the taxpayer is questioning the validity of the tax
tax ordinance of Quezon City provides that the ordinance, the taxpayer may either question the legality of
period is reckoned from the date of annotation of the a tax ordinance before the DOJ Secretary under Section
sale. To reconcile the two conflicting laws, the Court 187 of the LGC or question the constitutionality of the
applied the rule that a special law prevails over a

ordinance before the Regular Courts. In this case,

payment under protest is not required. 1. Pay the tax under protest and annotation of
“paid under protest” in receipt
If the taxpayer is questioning the correctness,
reasonableness or excessiveness of the assessment, the
2. File written protest with local treasurer within
taxpayer will resort to administrative remedies. In this 30 days from payment of the tax
case, payment under protest is required. 3. Treasurer to decide within 60 days from
receipt of the protest
Let’s now discuss the administrative remedies. 4. From treasurer’s decision or inaction, appeal
to the LBAA within 60 days
Read Section 226 to 231, LGC 5. LBAA to decide within 120 days
6. Appeal LBAA decision to CBAA within 30
Q: Who may contest the assessment of real days from receipt of adverse decision
property? 7. CBAA appealable to CTA en banc within 30
days from receipt of the adverse decision of
In order for a taxpayer to have legal standing to the CBAA
contest an assessment to the LBAA, he must be a 8. Appeal to SC within 15 days from receipt of
person having legal interest in the property. adverse decision of CTA
In NAPOCOR V. PROVINCE OF QUEZON [JULY 15, Note: (1) In (4), if the treasurer’s decision is in favor of the
2009], the Supreme Court stated that legal interest taxpayer, he may now apply for a tax refund or tax credit.
is defined as interest in property or a claim
cognizable at law, equivalent to that of a legal owner Q: What is the effect of an appeal on
who has legal title to the property. A review of the assessments?
provisions of the 1991 LGC on real property taxation
shows that the phrase “person having legal interest An appeal on assessments of real property shall, in
in the property” has been repeatedly adopted and no case, suspend the collection of the corresponding
used to define an entity: realty taxes on the property involved as assessed by
the provincial or city assessor, without prejudice to
1. in whose name the real property shall be subsequent adjustment depending upon the final
listed, valued, and assessed; outcome of the appeal. (see Section 231, LGC)
2. who may be summoned by the local
assessor to gather information on which to Q: Can the RTC issue an injunction against
base the market value of the real property; the collection of RPT if there is a pending
3. who may protest the tax assessment before appeal with the LBAA?
the LBAA and may appeal the latter’s
decision to the CBAA; Yes. In TALENTO V. ESCALADA, JR. [JUNE 27, 2008],
4. who may be liable for the idle land tax, as the Supreme Court held that as a general rule,
well as who may be exempt from the same; appeal shall not suspend the collection of RPT.
5. who shall be notified of any proposed However, an exception to the rule is where the
ordinance imposing a special levy, as well taxpayer has shown a clear and unmistakable right
as who may object the proposed ordinance; to refuse or hold in abeyance the payment of RPT.
6. who may pay the real property tax; In this case, the taxpayer showed that the
7. who is entitled to be notified of the warrant assessments covered more than 10 years, the
of levy and against whom it may be assessment included items which should properly be
enforced; excluded, and the subject assessment should take
8. who may stay the public auction upon effect on January 1 the following year. Further, the
payment of the delinquent tax, penalties and filing of a bond was deemed to have been in
surcharge; and compliance with Section 11 of RA 9282.
9. who may redeem the property after it was
sold at the public auction for delinquent Payment under Protest
taxes.
Q: Enumerate the process in contesting a
RPT assessment.

Q: Is payment a pre-requisite to protest an Yes. By claiming an exemption from realty taxation,

assessment for RPT? NAPOCOR is simply raising the question of the
correctness of the assessment. As such real
Yes. SECTION 252 OF THE LGC provides that no property taxes must be paid prior to the making of
protest shall be entertained unless the taxpayer first the protest. On the other hand, if the taxpayer is
pays the tax. questioning the authority of the local assessor to
assess RPT, it is not necessary to pay the RPT prior
Q: When is payment under protest not to the protest. A claim for tax exemption, whether full
required? or partial, does not question the authority of the local
assessor to assess RPT (NAPOCOR v. Province of
Quezon [January 25, 2010])
Prior payment under protest is applicable only if the
issue is anchored on the correctness,
reasonableness or excessiveness of assessment, Refund or Credit of RPT
hence, considered a question of fact
Prior payment under protest is not required when the
taxpayer is questioning the very authority and power Q: What is the rule on refunds of RPT?
of the assessor to impose the assessment and of
the treasurer to collect the tax as opposed to The taxpayer must file the written claim within 2
questioning the increase/decrease in the tax to be years from the date of payment of tax or from the
paid. (see JARDINE DAVIES INSURANCE BROKERS, INC. date when the taxpayer is entitled to reduction or
36
V. ALIPOSA [FEBRUARY 27, 2003]). adjustment.
Q: Can the taxpayer file a case directly to The provincial treasurer has 60 days to decide the
the RTC if it claims that it was questioning claim for tax refund or credit
the authority of the treasurer to assess and
not only the amount of the assessment? Q: What is the remedy available if the claim
for tax refund or credit is denied?
No. In OLIVARES V. JOEY M ARQUEZ [SEPTEMBER 22,
2004], it was found that the taxpayer raised issues Follow steps 4 to 8 in the procedure in contesting an
on prescription, double taxation, and tax exemption. RPT assessment.
In such case, the correctness of the assessment
must be dealt with and the treasurer has initial
jurisdiction and his decision is appealable to the
35
LBAA. Payment under protest is required.
Q: The Province of Quezon assessed Mirant for

unpaid real property taxes. NAPOCOR, which
entered a BOT with Mirant, protested the
assessment before the LBAA, claiming the
entitlement to tax exemption under Sec. 234 of
the LGC. The RPT assessed were not paid prior
to the protest. LBAA dismissed NAPOCOR’s
petition for failure to make a payment under
protest. Is NAPOCOR required o make a payment
under protest?
35
Unlike in JARDINE DAVIES INSURANCE BROKERS, INC. V. ALIPOSA
[FEBRUARY 27, 2003], the taxpayer in this case should make a
payment under protest as the issues included correctness of the
36
assessment. Supervening cause doctrine applies.

---------------------------------------------------------- ---------------------------------------------------------------
IV. TARIFF AND CUSTOMS CODE C. Purpose for imposition
---------------------------------------------------------- ---------------------------------------------------------------
--------------------------------------------------------------- Q: What is the purpose of imposing a tax on

A. Tariff and duties, defined imported articles?
---------------------------------------------------------------
They are imposed to:
Q: Define tariff.
1. Raise government revenues
2. Protect consumers and manufacturers, as well
Tariff is the list or schedule of articles on which a
as, Philippine products.
duty is imposed upon the importation into the
country with the rates at which they are severally
taxed. Derivatively, it is the system of imposing ---------------------------------------------------------------
duties or taxes on the importation of foreign D. Flexible tariff clause
merchandise. ---------------------------------------------------------------
Read Section 401, TCC
Q: Define customs duties.
Q: What is the flexible tariff clause?
Customs duties is the name given to taxes on the
importation and exportation of commodities, the tariff The flexible tariff clause is a provision in the TCC
or tax assessed upon merchandise imported from or which implements the constitutionally delegated
exported to, a foreign country. (Nestle v. CA [July power to the Congress to further delegate to the
6, 2001]) President of the Philippines, in the interest of
national economy, general welfare, and/or national
Note: Tariff and customs duties are used interchangeably. security upon recommendation of the NEDA:
--------------------------------------------------------------- a. Increase, reduce or remove existing

B. General Rule: all imported articles are protective rates of import duty, provided that
subject to duty the increase should not be higher than
1. Importation by government taxable 100% ad valorem
--------------------------------------------------------------- b. Establish import quota or to ban imports of
any commodity
c. To impose additional duty on all imports not
exceeding 10% ad volorem, whenever
necessary
Q: What is the rule on imported articles?
---------------------------------------------------------------
As a general rule, all imported articles shall be E. Requirements of importation
subject to duty even though previously exported
1. Beginning and ending of importation
from the Philippines.
2. Obligations of importer
a) Cargo manifest
b) Import entry
c) Declaration of correct weight or value
Q: What is the rule on government
d) Liability for payment of duties
importations?
e) Liquidation of duties
f) Keeping of records
All importations of the government for is own use or
that of its subordinate branches or instrumentalities, ---------------------------------------------------------------
or corporations, agencies or instrumentalities owned
or controlled by the government shall be subject to ---------------------------------------------------------------
duties. 1. Beginning and ending of importation
---------------------------------------------------------------

arrived within the limits of the port of entry. (see

Read Section 1201 to 1202, TCC SECTION 205, TCC)
Q: When does importation begin and when Q: When are imported articles deemed have
does it end? been “withdrawn” from the warehouse in
the PH for consumption?
Importation begins when the conveying vessel or
aircraft enters the jurisdiction of the Philippines with Imported articles shall be deemed "withdrawn" from
intention to unlade therein. the warehouse in the Philippines for consumption
when the specified form is properly filed and
Importation is deemed terminated upon payment of accepted, together with any related documents
the duties, taxes, and other charges due upon the required by any provisions of this Code and/or
agencies or secured to be paid at the port of entry regulations to be filed with such form at the time of
and he legal permit for withdrawal shall have been withdrawal, by the customs official designated to
granted. receive the withdrawal entry and any duties, taxes,
fees and/or other lawful charges required to be paid
Note: Why is important to know when importation begins at the time of withdrawal have been deposited with
and ends? The jurisdiction of the BoC to enforce the the customs official designated to receive such
provisions of the TCC including seizure and forfeiture also payment.” (see SECTION 205, TCC)
begins from the beginning of imporation. Thus, the BoC
obtains jurisdiction over imported articles only after
importation has begun. On the other hand, the BoC loses Q: What is meant by “entry” in relation to
jurisdiction to enforce the TCC and to make seizures and the TCC?
forfeitures after importation is deemed terminated.
Entry has a three-fold meaning:
Q: When does the BoC acquire exclusive a. The documents filed at the customs house
jurisdiction over imported goods for the b. The submission and acceptance of the
purpose of enforcing customs laws? documents; and
c. Customs declaration forms or customs entry
From the moment imported goods are actually in the forms required to be accomplished by
possession or control of the Customs authorities, passengers of incoming vessels or
even if no warrant for seizure or detention had passenger planes as envisaged under
previously been issued by the Collector of Customs Section 2505 of the TCC. (Failure to Declare
in connection with the seizure and forfeiture Baggage) (Jardeleza v. People [February
proceedings. (see SUBIC BAY METROPOLITAN 6, 2006])
AUTHORITY V. RODRIGUEZ [APRIL 23, 2010])
Q: A flight attendant arrived from Singapore.
Read Section 205, TCC Upon her arrival she was asked whether she
has anything to declare. She answered
Q: When are imported articles deemed to none, and she submitted her “Customs
have “entered” the PH for consumption? Baggage Declaration Form” which she
accomplished and signed with nothing or
Imported articles shall be deemed "entered" in the written on the space for items to be
Philippines for consumption when the specified entry declared. When her bag was examined some
form is properly filed and accepted, together with pieces of jewelry were found concealed
any related documents required by the provisions of within the lining of the bag. She was then
this Code and/or regulations to be filed with such convicted of violating Section 3601 for
form at the time of entry, at the port or station by the unlawful importation. She now appeals
customs official designated to receive such entry claiming that the lower court erred in
papers and any duties, taxes, fees and/or other convicting her under Section 3601 when the
lawful charges required to be paid at the time of
facts alleged both in the information and
making such entry have been paid or secured to be
paid with the customs official designated to receive those shown by the prosecution constitute
such monies, provided that the article has previously the offense under Section 2505 “Failure to

Declare Baggage” of which she was

acquitted. Is she correct? Read Section 1204, TCC
No. Section 2505 does not define a crime. It merely e. Liquidation of duties
provides the administrative remedies which can be f. Keeping of records
resorted to by the BoC when seizing dutiable articles
found in the baggage of any person arriving in the Liquidation means the final computation or
Philippines which is not included in the ascertainment of the duties to be imposed on the
accomplished baggage declaration submitted to the imported articles. It is akin to an assessment of
customs authorities and he administrative penalties internal revenye taxes under the NIRC where the tax
that such person must pay for the release of such liability of the taxpayer is definitely determined.
goods if not imported contrary to law. Such (Pilipinas Shell v. CoC [June 18, 2009])
administrative penalties are independent of any
criminal liability for smuggling that may be imposed Read Section 1601 to 1604, TCC
under Section 3601. (Jardeleza v. People
[February 6, 2006]) ---------------------------------------------------------------
F. Importation in violation of TCC
--------------------------------------------------------------- 1. Smuggling
2. Obligations of importer 2. Other fraudulent practices
a) Cargo manifest ---------------------------------------------------------------
b) Import entry
c) Declaration of correct weight or value Q: Define smuggling.
d) Liability for payment of duties
e) Liquidation of duties Smuggling is an act of any person who shall
f) Keeping of records fraudulently import or bring into the Philippines or
--------------------------------------------------------------- assist in so doing, any article, contrary to law or shall
receive, conceal, buy or sell or in any manner
Q: What are the obligations of the importer? facilitate the transportation, concealment or sale of
such article after importation knowing the same to
a. Cargo Manifest have been imported contrary to law. It includes the
exportation of articles in a manner contrary to law.
A cargo manifest is the document used in shipping, (see Section 3519, TCC)
containing the list of the contents, value, origin,
carrier and destination of the goods to be shipped. Read Section 3601, TCC
Read Section 1105, TCC Q: How is smuggling committed?
b. Import Entry Smuggling is committed by any person who:
An import entry is a declaration to the BoC showing a. Fraudulently imports or brings into the
particulars of the imported articles that will enable country any article contrary to law
the customs authorities to determine the correct b. Assists in so doing any article contrary to
duties and internal revenue taxes due on the law
importation. It is also known as Marine Entry and c. Receives, conceals, buys, sells, or in any
Internal Revenue Declaration manner facilitates the transportation,
concealment, or sale of such goods after
Read Section 1301 to 1307, TCC importation knowing the same to have been
imported contrary to law (Rodriguez v. CA
c. Declaration of Correct Weight Value [September 18, 1995])
The commission of smuggling through the first type

Read Section 1402 and 2523, TCC transpired when the shipments of 3x40 container
vans were declared to contain “Used Truck
d. Liability for payment of duties

Replacement Parts”, when in truth and in fact, the 3. Conditionally-free importation

shipment contained fifteen units of Sportage and ---------------------------------------------------------------
Galloper. (PEOPLE OF THE PHILIPPINES VS. ROEL
PAQUIT SAYSON, CTA CRIM CASE NO. O-094, Q: What are the classes of importation
DECEMBER 12, 2012) under the TCC?
Note: Mere possession of alleged smuggled goods is
prima facie evidence of guilt of the smuggling unless the 1. Dutiable Importation (Section 100, TCC)
defendant could explain that his possession is lawful. 2. Prohibited Importations (Section 101 and
1207, TCC)
Q: Is payment a defense in smuggling? 3. Conditionally-Free Importations (Section
105, TCC)
No. The law expressly provides that “payment of the 4. Drawbacks (Section 106, TCC)
tax due after apprehension shall not constitute a
valid defense in any prosecution under this section.” Q: What are dutiable importations?
Q: What are the other fraudulent practices They refer to those imported articles subject to duty
against customs revenue aside from and not otherwise exempted by the TCC or other
unlawful importation? special laws.
Read Section 3602, TCC Read Section 100, TCC
1. Entry of imported articles or exported article Q: What are prohibited importations?

by means of any false or fraudulent
practices, invoice, declaration, affidavit, or They refer to those articles that are cannot be
other documents imported into the PH because they are contrary to
2. Entry of goods at less than their true weights policy, morals, laws, etc.
or measures or upon a classification as to
quality or value Examples include:
3. Payment of less than the amount due
4. Filing any false or fraudulent claim for the 1. Dynamite, gunpowder, ammunition and
payment of drawback or refund of duties explosives, other weapons (except when
upon the exportation of merchandise authorized by law)
5. Filing any affidavit, certificate or other 2. Written or printed articles advocating or
document ot secure to him or to others the inciting treason, rebellion, or insurrection
payment of any drawback, allowance or 3. Written or printed articles, etc of an obscene
refund of duties on the exportation of or immoral character
merchandise greater than that legally due 4. Articles, instruments, drugs and substances
thereon designed for unlawful abortion
5. Devices used in gambling or the distribution
Note: In PEOPLE OF THE PHILIPPINES VS. MARIVIC BRIONES, of money, cigarettes, or other articles when
DAVID BANGA, BENJAMIN VALIC, CTA CRIM CASE NO. 0- such distribution is dependent on chance
158, JULY 23, 2012, the CTA held that in the prosecution 6. Lottery and sweepstakes tickets (Except
for violation of Section 3602 of the Tariff and Customs of those authorized)
the Philippines, in relation to Article 172 of the Revised 7. Any article manufactured in gold, silver or
Penal Code, it must prove beyond reasonable doubt that other precious metals when there is no
the accused in conspiracy with the other accused, made
or attempted to make an entry of the alleged imported
indication of the actual fineness of quality
article through the filing of the said Import Entry at the 8. Adulterated or misbranded articles of food
Bureau of Customs and drugs
9. Marijuana, opium and other narcotics
--------------------------------------------------------------- 10. Opium pipes and parts thereof
G. Classification of goods 11. All other articles and parts prohibited by law
or rules and regulations
1. Taxable importation
2. Prohibited importation

Read Section 101, TCC Q: X and his wife Y, Filipino living in the
Philippines went on a 3-month pleasure trip
Q: What are conditionally-free importations? around the world during the months of
June, July, and August 2002. In the course
They refer to those articles which are allowed to be of their trip, they accumulated some
imported into the PH but subject to conditions. personal effects which were necessary,
appropriate and normally used in leisure
Examples include: trips as well as souvenirs in non-
commercial quantities. Are they “returning
1. Articles for repair, re-conditioning to be re-
exported within 6 months (requires a bond) residents” for purposes of Section 105 of
2. Personal effects for balikbayans excluding the TCC?
cars, and must not be commercial quantity
and no exceeding P2,000 (can be brought in No. The term “returning residents” refers to nationals
90 days after arrival) who have stayed in a foreign country for a period of
3. Articles to be donated to relief organizations at least 6 months (see Section 105(f), TCC). Due to
(must be certified by DSWD, DepEd) their limited duration of stay abroad, X and Y are not
4. Samples not for commercial sales, including considered as “returning residents” but they are
medicines (but must not be available in PH) merely considered as travelers or tourists who
5. Economical, technical, vocational, scientific, likewise enjoy the benefit of conditionally-free
philosophical, historical, cultural importation (see Section 105(g), TCC)
books/publications and bibles
Q: What are drawbacks?
They refer to refunds or tax credits of duties paid on
Q: Jacob after serving a 5-year tour of duty goods that are being exported or used in the
37
as military attaché in Jakarta, Indonesia production of manufactured exports
returned to the Philippines bringing with
Examples include:
him his personal effects, including a
personal computer and a car. Would Jacob 1. Fuel used for propulsion of vessels engaged
be liable for taxes on these items? in trade with foreign countries or coastwise
trade
No. Jacob will be exempted provided he complies 2. Petroleum Oils or Oils obtained from
with the requirements under Section 105 of the TCC. bituminous minerals, crude eventually used
The requirements are: for generation of electric power and
manufacture of city gas
a. The car must have been ordered or 3. On certain articles made from imported
purchased prior to the receipt by the articles subject to certain conditions.
Philippine mission or consulate of the recall
order Q: What are freely importable commodities?
b. The car is registered in his name
c. The exemption shall apply only to the value Under Section 7(1) of Central Bank Circular no.
of the car 1389, “freely importable commodities” are those
d. The exemption shall apply to the aggregate importations which are neither regulated nor
value of his personal and household effects prohibited and may be effected without the prior
not exceeding 30% of the total amount approval of or clearance from any government
received by him as salary and allowances agency. UNIMEX MICRO-ELECTRONICS GMBH VS.
during his assignment but not to exceed 4
years
e. He must not have availed of the exemption
more oftener than once every four years 37
Section 106(e), TCC provides that “Claims for refund or tax
(see last para. Section 105, TCC) credit eligible for such benefits shall be paid or granted by the
Bureau of Customs to claimants within sixty (60) days.”

REPUBLIC OF THE PHILIPPINES, CTA CASE NO. 8412, b. Specific customs duties
NOVEMBER 14, 2012
Q: What are ad valorem customs duties?
---------------------------------------------------------------
H. Classification of duties These are customs duties that are computed on the
1. Ordinary/Regular duties basis of value (see Section 201, TCC)
a) Ad valorem; methods of valuation
(i) Transaction value Q: What are the methods of determining
(ii) Transaction value of identical dutiable values?
goods
(iii) Transaction value of similar goods Read Section 201-205, 1313 TCC
(iv) Deductive value
(v) Computed value The methods of determining the dutiable value are
(vi) Fallback value as follows (by order of preference):
b) Specific
1. Transaction value – an ad valorem rate of
2. Special duties duty equivalent to the price actually paid or
a) Dumping duties payable for the goods when sold for export
b) Countervailing duties to the Philippines, as adjusted;
c) Marking duties
d) Retaliatory/discriminatory duties 2. Transaction value of identical goods –
e)Safeguard duties the transaction value of identical goods sold
--------------------------------------------------------------- for export to the Philippines and exported at
or about the same time as the goods being
--------------------------------------------------------------- valued; “identical goods” shall mean goods
1. Ordinary/Regular duties which are the same in all respects, including
physical characteristics, quality and
a) Ad valorem; methods of valuation
reputation, discounting minor differences in
(i) Transaction value appearances;
(ii) Transaction value of identical
goods 3. Transaction value of similar goods – the
(iii) Transaction value of similar goods transaction value of similar goods sold for
(iv) Deductive value export to the Philippines and exported at or
(v) Computed value about the same time as the goods being
(vi) Fallback value valued; “similar goods” shall mean goods
b) Specific which, although not alike in all respects,
--------------------------------------------------------------- have like characteristics and like component
materials which enable them to perform the
same functions and to be commercially
Q: What are ordinary or regular duties?
interchangeable;
These are axes that are imposed or assessed upon 38
4. Deductive value – an amount based on
merchandise from or exported to a foreign country
the unit price at which the imported gods or
for the purpose of raising revenue. They may also
identical or similar imported goods are sold
be imposed to serve as protective barriers which
in the Philippines, in the same condition as
would prevent the entry of merchandise that would
when imported, in the greatest aggregate
compete with locally manufactured items. They are
quantity, at or about the time of importation
also referred to as tariff barriers
of the goods being valued, to persons not
related to the persons from whom they buy
Q: What are the kinds of ordinary or regular such goods, as adjusted;
duties?
Ordinary or regular court duties may be:

a. Ad valorem customs duties or 38
Methods four and five may be reversed.

5. Computed value – the aggregate value of 2. Special duties

the cost or value of materials and fabrication a) Dumping duties
or other processing employed in producing b) Countervailing duties
the imported goods, amount for profit c) Marking duties
andNgeneral expenses, freight, insurance
d) Retaliatory/discriminatory duties
fees and other transportation expenses for
the importation of the goods, among others; e)Safeguard duties
and ---------------------------------------------------------------
6. Fallback value – an amount determined by Q: What are special duties?

using other reasonable means and on the
basis of data available in the Philippines. These are additional import duties imposed on
specific kinds of imported articles under certain
Note: The transaction value is the primary method of conditions. It cannot be applied without the regular
determining dutiable value. If the transaction value of the customs duties. It can only be applied in the
imported article could not be determined using the above, presence of a special order from government
the alternative methods should be used one after the officers.
other.
Q: What are the kinds of special duties?
Q: Define transaction value
The following are special duties:
It is the price actually paid/payable when exported to
PH adjusted by adding the following: 1. Anti-Dumping (Section 301, TCC)
2. Countervailing (Section 302, TCC)
1. Commissions, cost of containers, packing 3. Marking (Section 303, TCC)
cost, cost of tools, engineering, artwork if 4. Discriminatory (section 304, TCC)
supplied free of charge, royalties 5. Safeguard Duties (RA 8800)
2. Value of subsequent resale accruing to the
seller Read Section 301, TCC
3. Cost of transport & loading/unloading
charges from port of exportation to port of Q: What is an anti-dumping duty?
entry in PH (costs within PH already
excluded)
It is a special duty imposed on the importation of a
4. Insurance.
product, commodity or article of commerce into the
Philippines at less than its normal value when
Q: When is transaction value (method one) destined for domestic consumption in the exporting
not used? country which is the difference between the export
39
price and the normal value of such product,
1. Buyer imposes restrictions on sale or use of commodity or article. (see Section 301(s)(1), TCC)
goods (except if imposed by law,
geographical limits, not affect value of Q: What are the requisites for the imposition
goods) of anti-dumping duty?
2. Sale is subject to some
condition/consideration which cannot be The requisites are the following:
valued
3. Part of subsequent resale accrues to seller a. Where the product, commodity or article of
and amount undeterminable commerce
4. Buyer and seller are related i. Is exported into the Philippines
a. business partners
b. holds 5% equity
c. common control 39
th Normal value for purposes of imposing the anti-dumping duty is
d. relatives up to 4 degree 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 (see Section 301(s)(3),
TCC, as amended by RA 8752)

ii. At a price less than its normal value (2) The countervailing duty is equivalent to the bounty
iii. When destined for domestic consumption (cash award paid to an exporter), subsidy (fiscal
incentives, not in the form of cash award, to encourage
b. And such exportation manufacturers or exporters) or subvention (any assistance
other than bounty or subsidy).
i. Is causing or
ii. Is threatening to cause material injury to a (3) The imposing authority for the countervailing duties is
domestic industry the DTI Secretary in the case of non-agricultural product,
iii. Materially retards the establishment of a commodity, or article or the DA Secretary in the case of
domestic industry producing like product agricultural product, commodity or article.
(see Section 301(a), TCC, as amended by
RA 8752) Read Section 303, TCC
Note: (1) The imposing authority for the anti-dumping duty
is the DTI Secretary in the case of non-agricultural Q: What is a marking duty?
product, commodity, or article or the DA Secretary in the
case of agricultural product, commodity or article. A marking duty are the additional customs duties
imposed on foreign articles (or its containers if the
(2) Even when all the requirements for the imposition have article itself cannot be marked) not marked in any
been fulfilled, the decision on whether or not to impose a official language in the Philippines in a conspicuous
definitive anti-dumping duty remains the prerogative of the place as legibly, indelibly and permanently in such
Tariff Commission
manner as to indicate to an ultimate purchaser in the
(3) In the determination of whether to impose the anti- Philippines the name of the country of origin. (See
dumping duty, the Tariff Commission may consider among Section 303, TCC)
others, the effect of imposing an anti-dumping duty on the
welfare of the consumers and/or the general public, and Q: What are the exceptions to marking of
other related local industries articles?
(4) The amount of anti-dumping duty that may be imposed
1. The article is incapable of being marked
is the difference between the export price and the normal
value of such product, commodity, or article. 2. The article cannot be marked prior to importation
to the Philippines without injury
Read Section 302, TCC 3. The article cannot be marked prior to importation
to the Philippines except at an expense
economically prohibitive of its importation
4. The marking of the container of such article will
Q: What is a countervailing duty? reasonably indicate the origin of such article
5. The article is of a crude substance
It is a special duty imposed on the importation of a 6. Such article is for the use of the importer and not
product, commodity or article of commerce into the intended for sale in its imported or other form
Philippines when the same is granted directly or 7. Such article is to be processed in the Philippines
indirectly by the government in the country of origin by the importer or for his own account and not for
or exportation any kind or form of specific subsidy the purpose of concealing the origin of such
upon the production, manufacture or exportation of article
such product, commodity or article, and the 8. The ultimate purchaser by the Character of the
importation of such subsidized product, commodity article necessarily know the country of origin of
or article has caused or threatens to cause material such article
injury to a domestic industry or has materially 9. Such article was produced more than 20 years
retarded the growth or prevents the establishment of prior to its importation into the Philippines
a domestic industry as determined by the Tariff 10. Such article cannot be marked after importation
Commission. (see Section 302, TCC, as amended except at an expense economically prohibitive
by RA 8751) and the failure to mark the article before
importation was not due to any purpose of the
Note: (1) The countervailing duty shall be in addition to importer, producer, seller or shipper to avoid
any ordinary duties, taxes, and charges imposed by law
on such imported product or article
compliance.
Note: (1) Only the CoC may impose marking duties

2. Taxpayer
(2) The marking duty is equivalent to 5% ad valorem a) Protest
b) Abandonment
Read Section 304, TCC c) Abatement and Refund
---------------------------------------------------------------
Q: What is a discriminatory duty?
---------------------------------------------------------------
It is an additional customs duty imposed upon
1. Government
articles wholly or in part, the growth or product of, or
imported in a vessel of any foreign country a) Administrative/extrajudicial
whenever the President shall find as a fact that such (i) Search, seizure, forfeiture, arrest
country: b) Judicial
(i) Rules on appeal including jurisdiction
a. Directly or indirectly upon any Philippine product ---------------------------------------------------------------
unreasonable charge, exaction, regulation or
limitation which is not equally enforced upon like Q: What are the remedies of the
articles of other foreign countries government?
b. Discriminates in fact against the commerce of the
Philippines as o place the Philippines at a a. Administrative/Extrajudicial Remedies
disadvantage compared with the commerce of b. Judicial Remedies
any foreign country (See Section 304, TCC)
Q: When does the BoC normally avail itself
Note: It is the President who imposes the discriminatory
duties.
of the administrative remedy instead of the
judicial remedy and vice versa?
Q: What are safeguard measures?
a. Administrative Remedy when the goods to which
the tax lien attaches, regardless of ownership is
Safeguard measures are emergency measures
still in the custody or control of the government.
including tariffs to protect domestic industries and
In the case, however, of importations which are
producers from increased imports which inflict or
prohibited or undeclared, the remedy of seizure
could inflict serious injury on them.
and forfeiture may still be exercised even if the
Note: (1) The CTA is vested with jurisdiction to review
goods are no longer in its custody
decisions of the DTI Secretary imposing safeguard b. Judicial Remedy when the goods are properly
measures as provided under RA 8800, the Safeguard released and thus beyond the reach of a tax lien,
Measures Act (see Southern Cross Cement the government can seek payment of the tax
Corporation v. Philippine Cement Manufacturers Corp liability through judicial action since the tax
[July 8, 2004]) liability of the importer constitutes a personal debt
to the government, therefore, enforceable by
(2) The imposing authority for the safeguard measures is action.
the DTI Secretary in the case of non-agricultural product,
commodity, or article or the DA Secretary in the case of
agricultural product, commodity or article. ---------------------------------------------------------------
a) Administrative/extrajudicial
(3) The DTI Secretary cannot impose the safeguard (i) Search, seizure, forfeiture, arrest
measures if the Tariff Commission does not favorably ---------------------------------------------------------------
recommend its imposition.
Q: What are the extrajudicial (or
---------------------------------------------------------------
administrative remedies) available to the
I. Remedies
government?
1. Government
a) Administrative/extrajudicial 1. Enforcement of tax lien (Section 1204 and
(i) Search, seizure, forfeiture, arrest Section 1508, TCC)
b) Judicial 2. Seizure and forfeiture (Section 2201-2212,
(i) Rules on appeal including jurisdiction 2301-2317, 2530-2536, TCC)

Customs officers may seize any vessel, aircraft,

Read Section 1024, 1058, NCC cargo, article, animal or other movable property
when the same is subject to forfeiture or liable for
Q: What is a tax lien in relation to the TCC? any time as imposed under the TCC and related
rules and regulations. (see Section 2205, TCC)
The liability for duties, taxes, fees and other charges
Note: The BoC may conduct search and seizures even
of an importer constitutes a lien upon the articles without the benefit of a warrant issued by a judge upon
imported which may be enforced while such articles probable cause except if the search is to be conducted in
are in custody or subject to the control of the a dwelling.
government.
Q: When is a warrant of seizure issued by
The Collector shall hold the delivery of any article the CoC?
imported or consigned to an importer whenever such
importer has an outstanding and demandable The CoC upon probable cause that the articles are
account with the BoC. If subsequently authorized by imported or exported or are attempted to be
the Commissioner and upon notice, the Collector imported or exported, in violation of the TCC shall
may sell such importation or a portion thereof to issue a warrant of seizure.
cover the outstanding account of the importer.
Note: (1) If the search and seizure is to be conducted in a
--------------------------------------------------------------- dwelling place, then a search warrant should be issued by
(i) Search, seizure, forfeiture, arrest the regular courts and not the BoC.
---------------------------------------------------------------
(2) The rules on warrantless search and seizures also
Note: This how seizure and forfeiture works. First, the apply such as in search and seizures of motor vehicles
articles are seized by the customs authorities. A warrant of and vessels. In such cases, no warrants issued by the
BoC or regulars is required.
seizure is used for said purpose. In the case of a search in
a dwelling, a search warrant from the regular courts would
have to be procured. Second, the Collector upon making (3) If the smuggled goods are seized by virtue of a court
any seizure shall issue a Warrant of Detention. The warrant, they should be surrendered to the court that
articles may be released if a bond is filed except if there is issued the warrant not to the BoC because the goods are
prima facie evidence of fraud in their importation in which in custodia legis.
case the seized articles may not be released by a bond.
Then the forfeiture proceedings take place. The only issue (4) The payment of customs duties, taxes does not
is whether the seized goods should be forfeited. The case necessarily render as irregular and improper the issuance
can be compromised or be subject of a settlement. The of a warrant of seizure
Collector may either issue a Declaration of Forfeiture or
rule that the seized articles are not subject to forfeiture. Read Section 2530-2536, TCC
Thus, either the importer or the government can be
aggrieved by said decision. If the importer is aggrieved, he Q: What are the requisites for forfeiture of
may file an administrative protest to the CoC and if denied,
he can proceed to the CTA and so on. If the government is imported goods?
aggrieved, there is automatic review by the CoC and then
by the DOF Secretary. If said bodies decide in favor of the a. Wrongful making by the owner, importer,
government, the importer may proceed to the CTA and so exporter or consignee of any declaration or
on. Tada! It’s not that complicated. affidavit or the wrongful making or delivery
by the same person of any invoice, letter or
This is how I’ll organize the discussion below. First, I’ll paper – all touching on the importation or
discuss seizure and arrest and provide the related
provisions. Second, I’ll discuss what properties are subject
exportation of merchandise
to forfeiture. Third, I’ll discuss the forfeiture proceeding b. The falsity of such declaration, affidavit,
itself and which body has jurisdiction over the same. invoice, letter or paper
c. An intention on the part of the
Read Section 2201-2212, TCC importer/consignee to evade the payment of
the duties due (Republic v. CA [October 2,
2001])
Q: What is the power of seizure and arrest?
Read Section 2530 to 2536, TCC

Danny, the truck owner, did not have a

Q: What properties are subject to forfeiture certificate of public convenience to operate
under the TCC? his trucking business. Danny did not know
that the shipment of garlic was illegally
See Section 2530, TCC. imported. Can the CoC of the port seize and
forfeit the truck as an instrument in the
Note: Under Section 2530(a), it is not necessary that the
vessel or aircraft must itself carry the contraband. The
smuggling?
complementary if collateral use of the vessel or aircraft for
the smuggling operation is sufficient for it to be deemed to Yes, the CoC of the port can seize and forfeit the
have been used in smuggling. truck as an instrument of the smuggling since the
same was used unlawfully in the importation of
Q: What properties are not subject to smuggled articles. The mere carrying of such articles
forfeiture? on board the truck in commercial quantities shall
subject the truck to forfeiture, since it was no being
used as a duly authorized common carrier, which
See Section 2531, TCC.
was chartered or leased as such (see Section
2530(a), TCC)
Q: Are common carriers subject to
forfeiture? Further, although forfeiture of the vehicle will not be
affected if it is established that the owner thereof
As a general rule, they are not subject to forfeiture. had no knowledge of or participation in the unlawful
However, if the owner has knowledge of its use in act, there arises a prima facie presumption of
smuggling and was a consenting party, it may be knowledge or participation if the owner is not in the
forfeited. business for which the conveyance is generally
used. Thus, not having a certificate of public
Pursuant to Section 2530 of the Tariff and Customs convenience to operate a trucking business, he is
Code of the Philippines, the mere carrying or holding legally deemed no to have been engaged in the
on board of smuggled articles shall subject the trucking business (see Section 2531, TCC)
vessel to forfeiture. However, the vessel is not
subject to forfeiture if it is engaged as duly Read Section 2301-2317, TCC
authorized common carrier and as such carrier it is
not chartered or leased. THE COMMISSIONER OF Note: I will reserve the discussion of the administrative
CUSTOMS AND THE UNDERSECRETARY OF FINANCE VS. protest (in the case of an aggrieved importer) and
GOLD M ARK SEA CARRIERS, INC., CTA EB NO. 825, automatic review of the CoC (in the case of the aggrieved
DECEMBER 24, 2012 government) when I discuss Protest under the Remedies
of the Taxpayer. For now, I will limit it to the administrative
proceeding.
Q: When is there prima facie knowledge by
the owner of the common carrier? Q: Discuss the administrative proceeding of
forfeiture from issuance of warrant of
There is prima facie knowledge by the owner of the
common carrier of its use in smuggling: detention to declaration of forfeiture.
1. Collector issues warrant for detention of

a. If the conveyance was used for smuggling at
property (if owner or importer desires to
least twice before
secure release of property for legitimate use,
b. If the owner is not in the business for which
Collector may surrender subject property
the conveyance is generally used
upon filing of sufficient bond)
c. If the owner is not in a position to own such
2. Collector immediately reports seizure to
conveyance
COC and Chairman of COA
3. Collector gives owner or importer or his
Q: In smuggling a shipment of garlic, the agent written notice of seizure and
smugglers used an eight-wheeler truck opportunity to be heard
which they hired for the purpose of taking 4. Collector causes preparation of list and
out the shipment from the customs zone. particular description of property seized, as

well as appraisal and classification of the prevent smuggling and other frauds upon
same customs
5. Collector, after hearing and in writing, makes c. To render effective and efficient the
a declaration of forfeiture or fixes amount of collection of import and export duties due he
fine or takes such action as may be proper State which enables the government to carry
out its functions
Note: As a result of (5), the aggrieved owner or imported d. The issuance by regular courts of
may file what is called an administrative protest. In said preliminary injunction in seizure and
protest, he is essentially questioning the decision of the forfeiture proceedings before the BoC may
Collector before CoC. In some cases, instead of a arouse suspicion that the issuance or grant
declaration of forfeiture, it is the government who is
aggrieved. In such case, automatic review shall apply. See
was for consideration other than the strict
discussion under Administrative Protest. merits of the case (see Zuno v. Cabredo
[402 SCRA 75])
Q: Who has jurisdiction to hear and e. Under the doctrine of primary jurisdiction,
determine questions touching on the the BoC has exclusive administrative
jurisdiction to conduct searches and
seizure and forfeiture of dutiable goods?
seizures and forfeitures of contraband
without interference from the courts. It could
The CoC sitting in seizure and forfeiture proceedings
conduct search and seizures without need of
has exclusive jurisdiction to hear and determine all
a judicial warrant except if the search is to
questions touching on the seizure and forfeiture of
be conducted in a dwelling place.
dutiable goods.
As held in SUBIC BAY METROPOLITAN AUTHORITY V. Q: What is the nature of customs seizure
RODRIGUEZ [APRIL 23, 2010], the Collector of and forfeiture cases?
Customs has exclusive jurisdiction over seizure and
forfeiture proceedings and the regular courts cannot They are administrative and civil in nature and are
interfere with his exercise thereof or enjoin or directed against the res or the imported articles and
interfere with it. The regular courts are precluded entail the determination of the legality of the
from assuming cognizance over such matters even importation. These are actions in rem. Thus, it is of
through petitions for certiorari, prohibition, or no defense that the owner of the vessel sought to be
mandamus. forfeited had no actual knowledge that his property
is used illegally. The absence or lack of actual
The RTC must defer to the exclusive original knowledge of such use is a defense personal to the
jurisdiction of the BOC in such proceedings. This is owner himself, which cannot in any way absolve the
known as the doctrine of primary jurisdiction. vessel from the liability of forfeiture (CoC v. Manila
Star Ferry [October 21, 1993])
Q: What is the rationale for the exclusive In CORNELIO Q. CASIDO V. REPUBLIC OF THE
customs jurisdiction doctrine? PHILIPPINES, AND HON. NAPOLEON L. MORALES
[C.T.A. CASE NO.8087, FEBRUARY 8, 2012], the CTA
a. RTCs have no jurisdiction to replevin a held that forfeiture of seized goods by the BOC is an
property which is subject to seizure or action in rem against the goods and not against the
forfeiture proceedings for violation of the owner. Absence of knowledge or participation of the
TCC. Otherwise, actions for forfeiture of owner in the unlawful act does not absolve the
property for violation of the Customs laws vessel/goods from forfeiture
could easily be undermined by the simple
Note: (1) The issue is limited to whether the imported
device of replevin (see Dela Fuente v. De goods should be forfeited and disposed of in accordance
Veyra [120 SCRA 455]) with law for violation of the TCC (see Transglobe
b. The doctrine of exclusive customs International v. CA [January 25, 1999])
jurisdiction over customs cases to the
exclusion of the RTC is anchored upon the (2) Forfeiture of seized goods in the BoC is a proceeding
policy of placing no unnecessary hindrance against the goods and not against the owner (Asian
on the government’s drive, not only to Terminals v. Bautista-Ricafort [October 27, 2006])

Q: May forfeiture cases be compromised? from receipt refers to his decisions on administrative tax
protests.
Yes. Subject to the approval of the Secretary of
Unless an appeal is made to the CTA in the manner and
Finance, the CoC may compromise any case arising within the period prescribed by law, the action or ruling of
under the TCC or other laws or part of laws enforced the CoC shall be final and conclusive (Pilipinas Shell v.
by the BoC involving the imposition of fines, CoC [June 18, 2009])
surcharges, and forfeitures (see Section 2306,
TCC) Note that the CTA has jurisdiction only over decisions of
the CoC in cases involving seizures, detention or release
Q: May forfeiture cases be settled? of property affected, not the decision of the Collector.
Yes. Settlement of cases by payment of fine or I will discuss this more in relation to administrative
redemption of forfeited property is allowed. There tax protests.
are, however, exceptions:
---------------------------------------------------------------
a. The importation is absolutely prohibited 2. Taxpayer
b. The surrender of the property to the a) Protest
person offering to redeem would be b) Abandonment
contrary to law c) Abatement and Refund
c. When there is fraud ---------------------------------------------------------------
Note: The above enumeration are also the instances
where there is no right of redemption of seized and ---------------------------------------------------------------
forfeited articles (see Transglobe International v. CA a) Protest
[January 25, 1999]). ---------------------------------------------------------------
--------------------------------------------------------------- Read Section 2308 to 2315, TCC

b) Judicial
(i) Rules on appeal including jurisdiction Q: What is an administrative tax protest?
---------------------------------------------------------------
A tax protest case, under the TCC, involves a
Read Section 2401, TCC protest of the liquidation of import entries. In other
words, it is a protest which questions the legality or
Q: What are the judicial remedies that may correctness of assessed customs duties.
be availed of by the Government?
Q: Is payment prior to protest required?
a. Civil Action
b. Criminal Action Yes. No protest shall be considered unless payment
of the amount due has first been made and the
Note: Such actions shall be brought in the name of the corresponding docket fee (see Section 2308, TCC).
Government of the Philippines and shall be conducted by
customs officers but no action shall be filed in court Q21.1. Discuss the procedure for
without the approval of the CoC. customs protest from issuance of
warrant of detention to appeal to
--------------------------------------------------------------- the Supreme Court.
(i) Rules on appeal including jurisdiction
--------------------------------------------------------------- 1. Collector issues warrant for detention of
property (if owner or importer desires to
Read Section 2042, TCC secure release of property for legitimate use,
Collector may surrender subject property
Note: The Decision of the CoC in cases involving liability upon filing of sufficient bond)
for customs duties, fees, or other money charges, that 2. Collector immediately reports seizure to
must be appealed to the CTA in Division within 30 days COC and Chairman of COA

3. Collector gives owner or importer or his NORTHERN ISLANDS COMPANY, INC., CTA CASE NO. 8068,
agent written notice of seizure and JUNE 6, 2012
opportunity to be heard
4. Collector causes preparation of list and ---------------------------------------------------------------
particular description of property seized, as b) Abandonment
well as appraisal and classification of the ---------------------------------------------------------------
same
5. The Collector, after hearing and in writing, Read Sections 1801-1802, TCC
can either make a declaration of forfeiture
(owner or importer is aggrieved) or rule Q: What is abandonment?
otherwise (government is aggrieved).
Abandonment is the renunciation by an importer of
If the owner or If the government is all his interests and property rights in imported
importer is aggrieved aggrieved by the articles (see Section 1801, TCC)
by the decision of the decision of the
Collector: Collector:
Q: When is an article deemed abandoned?
1. Protest to the 1. Automatic review by
1. Importer expressly signifies in writing to the
Collector within 15 COC
Collector his intention to abandon (express
days 2. Automatic review by
abandonment)
2. If aggrieved by the DOF Secretary
2. When the importer fails to file an entry within
decision or action of 3. If owner or importer
30 days (not extendible) from the date of
the collector upon is aggrieved by
discharge of the last package or having filed
protest, appeal to the decision of COC or
such entry, fails to claim the imported
Commissioner within DOF Secretary
articles within 15 days (not extendible) from
15 days after 4. Appeal to CTA
the date of posting of the notice to claim
notification in writing Division within 30
such importation (implied abandonment)
by the Collector of his days from notice
action or decision 5. Appeal to CTA En Note: Both the Import Entry Declaration (IED) and Import
3. Appeal to CTA Banc Entry and Internal Revenue Declaration (IEIRD) should be
Division within 30 6. Appeal to SC by filed within 30- days from he date of discharge of the last
days from notice certiorari within 15 package from the vessel or aircraft. When the importer
4. Appeal to CTA En days fails to file the entry within the said period, he shall be
Banc deemed to have renounced all his interest and property
5. Appeal to SC by rights to the importations and these should be considered
certiorari within 15 impliedly abandoned in favor of the government (Chevron
Philippines v. CoC [August 11, 2008])
days
Q: What are the effects of abandonment?
Note: Automatic review is intended to protect the interests
of the Government in the collection of taxes and customs a. Any person who abandons an article shall
duties in seizure and protest cases. Without such be deemed to have renounced all his
automatic review, nether the CoC or the DOF Secretary interests and property rights therein.
would know about the decision of the Collector of Customs b. An abandoned article shall ipso facto be
favoring the taxpayer. The power to decide seizure and deemed the property of the Government.
protest cases may be abused if no checks are instituted. c. It does not relieve the owner from any
Automatic review is necessary because nobody is
expected to appeal the decision of the Collector which is
criminal liability
favorable to the taxpayer and adverse to the government d. If the abandoned articles are transferred to a
(Yaokasin v. CoC [180 SCRA 591]). Remember the customs bonded warehouse, he operator
lifeblood theory! shall be liable for the payment of duties and
taxes in the case of losses of the stored
The CTA does not have jurisdiction on rulings of the abandoned imported articles (see R.V.
Secretary of Finance over seizure and forfeiture Marzan v. CA [March 4, 2004])
proceedings which do not involve assessment of any
duties. 3-D INDUSTRIES, INC. VS. SECRETARY OF FINANCE AND

---------------------------------------------------------------
c) Abatement and Refund
---------------------------------------------------------------
Read Sections 1701-1708, TCC
Q: What is abatement?
Abatement is the reduction or non-imposition of

customs duties on certain impored materials as a
result of damage incurred during voyage; deficiency
in contents of packages; loss or destruction of
articles after arrival; or death or injury of animals.
Note: The general rule is that no abatement of duties shall

be made on account of damage incurred or deterioration
suffered during voyage of importation and duties will be
assessed on the actual quantity imported (see Section
1701, TCC).
Q: What are the instances where the

Collector may abate or refund the amount of
duties accruing or paid by the importer?
(exceptions to the general rule)
1. Damage incurred during voyage

2. Missing package
3. Deficiency in contents of packages
4. Articles lost or destroyed after arrival
5. Dead or injured animals
6. Refund of Excess payments (made due to
manifest clerical errors)
Q: What is the procedure for claiming

refund?
1. The taxpayer shall make his claim for refund

of duties in writing and forward it to the
Collector for verification
2. If the Collector found the claim to be correct,
he shall certify it to the CoC with his
recommendation
3. If found correct by the CoC, he shall cause
the same to be paid. (see Section 1708,
TCC)

---------------------------------------------------------- b. Decisions, resolutions or orders on MRs or MNTs

V. JUDICIAL REMEDIES (CTA) of the Court in Division in the exercise of its
exclusive original jurisdiction over:
----------------------------------------------------------
i. Tax Collection cases
Note: The rules here are those found in R.A. 1125, as
amended by RA 9282. Some sources and answers to past
ii. Cases involving criminal offenses arising
bar questions may still contain rules applicable to R.A. from violations of the NIRC or TCC and
1125 before its amendment. So make sure you have an other laws administered by the BIR or BOC
updated codal and reference material.
c. Decisions, resolutions or orders of the RTCs in
--------------------------------------------------------------- the exercise of its appellate jurisdiction over:
A. Jurisdiction of the Court of Tax Appeals
1. Exclusive appellate jurisdiction i. Local tax cases
ii. Tax Collection cases
2. Criminal cases
iii. Criminal offenses arising from violations of
--------------------------------------------------------------- the NIRC or TCC and other laws
administered by the BIR or BOC
Note: The CTA is composed of a Presiding Justice and 8
associate justices organized into three divisions.
d. Decisions of the CBAA in the exercise of its
appellate jurisdiction over cases involving
---------------------------------------------------------------
assessment and taxation of real property
1. Exclusive Appellate Jurisdiction originally decided by the provincial or city board
a.) Cases within the jurisdiction of the court of assessment appeals.
en banc
b) Cases within the jurisdiction of the court (see Section 2, Rule 4, A.M. No. 05-11-07-CTA)
in divisions
--------------------------------------------------------------- Read Section 3(a), Rule 4, RRCTA
Note: This refers to the exclusive jurisdiction to “review by Q: What are the cases within the exclusive
appeal” of the CTA en banc and CTA in division.
appellate jurisdiction to review by appeal of
the CTA in division?
Read Section 2, Rule 4, RRCTA
a. Decisions of the CIR
Q: What are the cases within the exclusive
appellate jurisdiction to review by appeal of i. In cases involving disputed assessments,
the CTA en banc? refunds of internal revenue taxes, fees or
other charges, penalties in relation thereto;
a. Decisions or resolutions on MRs or MNTs of the or
Court in Division in the exercise of its exclusive ii. Other maters arising under the NIRC or
appellate jurisdiction over: other laws administered by the BIR
i. Cases arising from administrative agencies b. Inaction by the CIR where the NIRC provides a
ii. Local tax cases decided by the RTCs in the specific period of action
exercise of their original jurisdiction
iii. Tax collection cases decided by RTCs in i. In cases involving disputed assessments,
the exercise of their original jurisdiction refunds of internal revenue taxes, fees or
involving final and executory assessments other charges, penalties in relation thereto,
for taxes, fees, charges, and penalties, or
where the principal amount of taxes and ii. Other matters arising under the NIRC or
penalties claimed is less than P1,000,000 other laws administered by the BIR
iv. Criminal offenses arising from violations of
the NIRC or TCC and other laws c. Decisions, orders or resolutions of the RTCs in
administered by the BIR or BOC local tax cases decided or resolved by them in
the exercise of their original jurisdiction

statement that the action is final. The rationale is

d. Decisions of the Commissioner of Customs that to let the taxpayer defer the period is to unduly
put in his hand the collection of taxes.
i. In cases involving liability for customs
duties, fees, or other money charges, Q: A taxpayer received on 15 Jan 1996 an
seizure, detention or release of property assessment for internal revenue tax
affected, fines, forfeitures of other penalties deficiency. On 10 Feb 1996, the taxpayer
in relation thereto; or filed a petition for review with the CTA.
ii. Other matters arising under the Customs
Should the CTA entertain the appeal?
Law or other laws administered by the
Bureau of Customs
No. Before the taxpayer can avail of a judicial
remedy, he must first exhaust administrative
e. Decisions of the Secretary of Finance on
remedies by filing a protest within 30 days from
customs cases elevated to him automatically for
receipt of the assessment. An assessment by the
review from decisions of the Commissioner of
BIR is not the CIR’s decision from which a petition
Customs which are adverse to the Government
for review may be filed with the CTA. Rather, it is the
under Section 2315 of the TCC
action taken by the CIR in response to the
taxpayer’s protest on the assessment that would
f. Decisions of the DTI Secretary in the case of
constitute the appealable decision.
non-agricultural product, commodity or article and
the DA Secretary in case of agricultural product,
commodity or article, involving dumping and Q: ABC Corp. received an income tax
countervailing duties under Sections 301 and 302 deficiency from the BIR. ABC filed a protest
of the TCC and safeguard measures under the and submitted to the BIR all relevant
Safeguard Measures Act (RA 8800) where either supporting documents. The CIR did not
party may appeal the decision to impose or not to formally rule on the protest. Thereafter, ABC
impose said duties was served summons and a copy of the
complaint for collection of the tax deficiency
(see Section 3(a), Rule 4, A.M. No. 05-11-07-CTA) filed by the BIR with the RTC. ABC filed a
Note: Any dispute or controversy involving national
petition for review before the CTA. The BIR
internal revenue taxes or customs duties not falling within contends that the petition is premature
the purview of the exclusive appellate jurisdiction of the since there was no formal denial of the
CTA must fall within the jurisdiction of the regular courts. A protest of ABC. Is the BIR’s contention
taxpayer’s suit impugning he constitutionality of a tax correct?
statute, for example, even if involving the NIRC or TCC
would fall within the jurisdiction of the regular courts.
No. The CTA has jurisdiction because the action of
Q: When is a decision of the CIR appealable the CIR qualifies as an appeal from the CIR’s
decision on the disputed assessment. When the CIR
to the CTA?
decided to collect the tax assessed without first
deciding on he taxpayer’s protest, the effect of his
First view: The appealable decision is the one
action of filing a judicial action for collection is a
which categorically stated that the CIR’s action on
decision of denial of the protest, in which event the
the disputed assessment is final. [COMMISSIONER OF
taxpayer may file an appeal with the CTA (Republic
INTERNAL REVENUE VS. UNION SHIPPING CORPORATION
v. Lim Tian Teng & Sons [16 SCRA 584])
(M AY 21, 1990)]
Second view: There is no need for a categorical

statement. So long as the tenor of the decision is
that the dispute of the taxpayer is denied, it is
appealable. (see SURIGAO ELECTRIC V. CTA [JUNE
28, 1974])
A survey of cases would indicate that the second

view is followed. There is no need for a categorical

Q: Name some communications sent by the enforce its collection without further notice.” In
CIR to taxpayers that are deemed addition, the letter contained a notation indicating
appealable to the CTA. that petitioner’s request for reconsideration had
been denied for lack of supporting documents.
As provided in Surigao ELECTRIC V. CTA [JUNE 28,
1974]: Q: AA Corp received a FAN for contractor’s
tax. It protested the assessments.
1. a letter which stated the result of the Thereafter, AA requested for the
investigation requested by the taxpayer and cancellation of the assessments. 4 years
the consequent modification of the passed and nothing happened. CIR then
assessment; issued 2 warrants of distraint to collect the
2. letter which denied the request of the taxes. One year later, CIR answered and
taxpayer for the reconsideration
denied AA’s request for cancellation. The
cancellation, or withdrawal of the original
assessment CIR, in its answer to AA’s request for the
3. a letter which contained a demand on the cancellation of the assessments, requested
taxpayer for the payment of the revised or the taxpayer to pay the deficiency taxes
reduced assessment; and within ten days from receipt of the demand;
4. a letter which notified the taxpayer of a otherwise, the Bureau would enforce the
revision of previous assessments warrants of distraint. He closed his demand
letter with this paragraph: “This constitutes
Q: Is the final demand letter issued by the our final decision on the matter. If you are
BIR reiterating the demand for immediate not agreeable, you may appeal to the Court
payment considered a final decision of Tax Appeals within 30 days from receipt
appealable to the CTA? of this letter.” What is the reckoning point of
the appeal period to the CTA – the issuance
Yes. As held in CIR v. ISABELA CULTURAL CORP of the warrant of distraint or the letter
[JULY 11, 2001], the letter is deemed as the CIR’s embodying the final demand of payment??
final act since failure to comply therewith exposes
the property to distraint and levy. The Supreme The reviewable decision is the latter letter where the
Court stated that a final demand letter from BIR, CIR clearly directed the taxpayer to appeal to the
reiterating to the taxpayer the immediate payment of CTA and not the warrants of levy and distraint. No
a tax deficiency assessment previously made, is amount of quibbling or sophistry can blink the fact
tantamount to a denial of the taxpayer’s request for that said letter, as its tenor shows, embodies the
reconsideration. Such letter amounts to a final Commissioner's final decision. He even directed the
decision on a disputed assessment and is thus taxpayer to appeal it to the Tax Court. The directive
appealable to the CTA. is in consonance with this Court's dictum that the
Commissioner should always indicate to the
In OCEANIC WIRELESS NETWORK VS. COMMISSIONER taxpayer in clear and unequivocal language what
OF INTERNAL REVENUE [DECEMBER 9, 2005], the constitutes his final determination of the disputed
Supreme Court reiterated that a demand letter for assessment. That procedure is demanded by the
payment of delinquent taxes may be considered a pressing need for fair play, regularity and orderliness
decision on a disputed or protested assessment. in administrative action. (see ADVERTISING
The determination on whether or not a demand letter ASSOCIATES, INC. VS. COURT OF APPEALS [DECEMBER
is final is conditioned upon the language used or the 26, 1984])
tenor of the letter being sent to the taxpayer. In this
case, the letter of demand dated January 24, 1991, Q: U Corp was assessed deficiency income
unquestionably constitutes the final action taken by taxes (FAN). U Corp protested the
the BIR on petitioner’s request for reconsideration assessment. BIR, without ruling on the
when it reiterated the tax deficiency assessments
protest, issued a warrant of distraint and
due from petitioner, and requested its
payment. Failure to do so would result in the levy. U Corp requested reinvestigation and
“issuance of a warrant of distraint and levy to reconsideration of issuance of the warrant.

Thereafter, BIR filed a collection suit to jurisdiction. The CIR argued that the
collect the taxes. U Corp then filed a petition Revenue District Officer who signed the
for review with the CTA, on the theory that letter which became the basis of the instant
its period to appeal only began to run from petition, cannot be deemed an alter ego of
its receipt of summons in the civil collection the CIR for purposes of issuing a final
case. BIR argued the appeal was filed out of decision on Festo’s protest under a
time, as the period began to run when the delegated authority. As such, the subject
warrant of distrant and levy was issued. letter is not the CIR's final decision on
Who is correct? Festo’s protest; thus, the 30 day period to
file an appeal was yet to commence,
U Corp is correct. Under the circumstances, the CIR rendering the instant petition premature. Is
didn’t clearly signify his final action on the disputed the contention of the CIR correct?
assessment. Thus, it was only when U Corp
received the summons on the civil suit for collection Yes, the appeal to the CTA was premature. As held
of deficiency income that the period to appeal in FESTO HOLDINGS, INC. VS. COMMISSIONER OF
commenced to run. The request for reinvestigation INTERNAL REVENUE [CTA CASE NO. 8226,
and reconsideration was in effect considered denied SEPTEMBER 2, 2011], the Revenue District Officer
by the CIR when the latter filed a civil suit for who issued the letter cannot be considered as the
collection of deficiency income. [COMMISSIONER OF CIR's decision appealable to this Court, in the
INTERNAL REVENUE VS. UNION SHIPPING CORPORATION absence of any proof that the former was authorized
(M AY 21, 1990)] to decide and act in behalf of the latter on the protest
of a taxpayer. Nowhere is it provided that a Revenue
Q: The City of Makati received assessment District Officer can issue decisions that are
notices imposing deficiency taxes. Makati appealable to this Court. Therefore, there being no
protested. The BIR stated that the decision of the CIR in the present case, this Court
assessments were already final and cannot take cognizance of the present case.
executory. Nonetheless, Makati requested
for another reinvestigation. The Revenue Q: Is the denial by the BIR of the protest on
officer and deputy Commissioner granted the PAN (not the FAN) appealable to the
this request. Did the reinvestigation of the CTA?
case reversed the finality of the
assessments? No, the denial of the CIR must be on the protest of
the FAN. In ALLIED BANKING CORPORATION VS.
No. Only the Commissioner of Internal Revenue has COMMISSIONER OF INTERNAL REVENUE [FEBRUARY 5,
the power to reverse, revoke or modify any existing 2010], the Supreme Court ruled that it is the Formal
ruling of the Bureau of Internal Revenue (“BIR”), Letter of Demand and Assessment Notice (FAN) that
which power cannot be delegated. In assessment must be administratively protested or disputed within
cases, a reopening/reinvestigation after a final 30 days, and not the PAN.
decision on disputed assessment has been issued
must be initiated by the commissioner. Otherwise, Q: BIR issued a PAN to AB Corp for
the reopening / reinvestigation is without authority deficiency DST. AB protested the PAN.
and failure to appeal the final decision on disputed Thereafter, BIR sent a FAN to AB Corp. The
assessment to CTA would render the assessment letter provided: “It is requested that the
final and executory. Here, the reinvestigation was above deficiency tax be paid immediately
merely granted by a revenue officer and a deputy upon receipt hereof, inclusive of penalties
commissioner. (see CITY OF M AKATI VS. incident to delinquency. This is our final
COMMISSIONER OF INTERNAL REVENUE [CTA CASE decision based on investigation. If you
NO. 641, SEPTEMBER 16, 2011])
disagree, you may appeal the final decision
within thirty (30) days from receipt hereof,
Q: The CIR filed a Motion to Dismiss the
otherwise said deficiency tax assessment
Petition for Review commenced by Festo
shall become final, executory and
Holdings on the ground of lack of

demandable.” Thereafter, AB immediately Yes. The appellate jurisdiction of the CTA is not
filed a petition for review with the CTA. limited to cases which involve decisions of the
Should the petition be dismissed? Commissioner of Internal Revenue on matters
relating to assessments or refunds. The second part
No. Ordinarily, the procedure is that it’s the FAN that of the provision covers other cases that arise out of
must be administratively protested, as a prerequisite the NIRC or related laws administered by the
to subsequently filing a PFR with the CTA. However, Bureau of Internal Revenue. The wording of the
the SC ruled in this case that the CIR was estopped provision is clear and simple. It gives the CTA the
from claiming the need for a protest. AB Corp can’t jurisdiction to determine if the warrant of distraint
be blamed for not filing a protest against the FAN and levy issued by the BIR is valid and to rule if the
since the language used and the tenor of the PAN Waiver of Statute of Limitations was validly effected.
indicate that it is the final decision of the CIR on the
matter. The CIR is required to indicate, in a clear This is not the first case where the CTA validly ruled
and unequivocal language, whether his action on a on issues that did not relate directly to a disputed
disputed assessment constitutes his final assessment or a claim for refund. In Pantoja v.
determination thereon in order for the taxpayer David, we upheld the jurisdiction of the CTA to act
concerned to determine when his or her right to on a petition to invalidate and annul the distraint
appeal to the tax court accrues. Thus, CIR is now orders of the Commissioner of Internal Revenue.
estopped from claiming that he did not intend the Also, in Commissioner of Internal Revenue v. Court
PAN to be a final decision. Moreover in the Formal of Appeals, the decision of the CTA declaring
Letter of Demand with Assessment Notices, CIR several waivers executed by the taxpayer as null
used the word “appeal” instead of “protest”, and void, thus invalidating the assessments issued
“reinvestigation”, or “reconsideration”. Although by the BIR, was upheld by this Court. (see
there was no direct reference for petitioner to bring PHILIPPINE JOURNALISTS INC. VS. COMMISSIONER OF
the matter directly to the CTA, it cannot be denied INTERNAL REVENUE [DECEMBER 16, 2004])
that the word “appeal” under prevailing tax laws
refers to the filing of a Petition for Review with the Q: The CIR, pursuant to the NIRC, issued a
CTA (see ALLIED BANKING CORPORATION VS. RMO imposing a 5% lending investor’s tax
COMMISSIONER OF INTERNAL REVENUE [FEBRUARY 5, on pawnshops. The RMO identified
2010]) pawnshops as a lending investor due to
the nature of its activities. Leal, a pawnshop
Q: What “other matters” are cognizable by owner, filed with the RTC a petition for
the CTA? prohibition that sought to stop the CIR from
implementing the RMO. CIR filed a motion to
The “other matters” cognizable by the CTA should
dismiss. CIR alleged RTC had no
be of the same nature, kind or class as the matters
specifically enumerated as within its jurisdiction. jurisdiction over the matter. Did the RTC
have jurisdiction over the action to nullify
Q: Sec 7(a)(1) of RA 1125 as amended by RA the RMO?
9262 provides that the CTA has exclusive
No, the CTA had exclusive jurisdiction. The
appellate jurisdiction to review by appeal
questioned is actually a ruling or opinion of the CIR
the decisions of the Commissioner of in implementing the Tax Code with regard taxability
Internal Revenue in cases involving of pawnshops. The RMO was issued pursuant to
disputed assessments, refunds of internal CIR’s powers under Section 244 of the NIRC
revenue taxes, fees or other charges, (providing for the power of the Commissioner of
penalties in relation thereto, or other Internal Revenue to make rulings or opinions in
matters arising under the National Internal connection with the implementation of the provisions
Revenue or other laws administered by the of internal revenue laws, including ruling on the
Bureau of Internal Revenue. Does the CTA classification of articles of sales and similar
also have jurisdiction to determine the purposes). Thus, the petition should have been filed
with the CTA. (see COMMISSIONER OF INTERNAL
validity of warrants of distraint/levy and the
REVENUE VS. LEAL [NOVEMBER 18, 2002])
waiver of statute of limitations?

Similarly, in the case of ASIA INTERNATIONAL Note: See also EGIS PROJECTS S.A. VS. THE SECRETARY OF
AUCTIONEERS, INC. VS. PARAYNO (DECEMBER 18, FINANCE AND COMMISSIONER OF INTERNAL REVENUE [CTA
2007], several RR’s and RMO’s were also CASE NO. 8413, JANUARY 29, 2013] where the CTA held
considered as rulings/opinions of the CIR on the tax that the issue on the constitutionality or validity of RMO
Nos. 72-2010 and 1-2000 or its relevant provisions is
treatment of motor vehicles sold at public auction beyond the jurisdiction of the CTA, but of the regular
within the SSEZ. They were deemed issued courts.
pursuant to the power of the CIR to interpret
provisions of the NIRC. Thus, when an action to SMART COMMUNICATIONS, INC. VS. MUNICIPALITY OF MALVAR,
annul such RRs/RMOs was filed with the RTC, SC BATANGAS, CTA EB NO. 767 (CTA AC NO. 58), JUNE 26,
held that such was improper, as it was the CTA that 2012, where the CTA held that the issue on the validity or
had exclusive jurisdiction constitutionality of Ordinance is not within the jurisdiction
of the CTA, but with the regular courts.
Q: A was assessed for income tax
However, in NEGROS CONSOLIDATED FARMERS ASSOCIATION
deficiency. The taxpayer failed to file a MULTI-PURPOSE COOPERATIVE VS. COMMISSIONER OF
protest and thus the said assessment has INTERNAL REVENUE [CTA CASE NO. 7994; FEBRUARY 17,
become final and unappealable. Thereafter, 2012], the CTA held that it has jurisdiction to rule on the
the taxpayer filed a petition for review to the validity of a rule or regulation issued by the Bureau of
CTA arguing that the right of the CIR to Internal Revenue. This case should not be controlling in
light of the SC ruling in British American Tobacco.
collect the assessed tax has prescribed. The
CIR contends that the CTA has no ---------------------------------------------------------------
jurisdiction because when the law says that 2. Criminal Cases
the CTA has jurisdiction over “other a) Exclusive original jurisdiction
matters” it presupposes that the tax b) Exclusive appellate jurisdiction in
assessment has not become final and criminal cases
unappealable. Is the CIR’s contention ---------------------------------------------------------------
correct?
Note: This applies to CTA in Divisions. Note that, with
No. The fact that an assessment has become final regard to criminal cases, the CTA en banc has exclusive
for failure of the taxpayer to file a protest within the appellate jurisdiction over the decisions or resolutions on
time allowed only means that the validity or MRs or MNTs of the Court in Division in the exercise of its
correctness of the assessment may no longer be exclusive appellate jurisdiction or in the exercise of its
questioned on appeal. However, the validity of the exclusive original jurisdiction over criminal offenses arising
assessment itself is a separate and distinct issue from violations of the NIRC or TCC and other Tax Laws.
from the issue of whether the right of the CIR to
collect the validly assessed tax has prescribed. This Read Section 3(b) and 3(a), Rule 4, RRCTA
issue of prescription, being a matter provided for by
the NIRC, is well within the jurisdiction of the CTA to Q: What are the criminal cases within the
decide. (Commissioner of Internal Revenue v. exclusive original jurisdiction of the CTA?
Hambrecht & Quist Philippines, Inc., [November
17, 2010]) The CTA shall exercise exclusive original jurisdiction
over all criminal cases where the principal amount
Q: Does the CTA have jurisdiction relative to involved of taxes and fees is P1,000,000 or more,
matters involving the constitutionality of exclusive of charges and penalties, arising from
regulations issued by the BIR? violations of the NIRC, TCC and other laws
administered by the BOC or the BIR.
No. The doctrine in ASIA INTERNATIONAL
AUCTIONEERS V. PARAYNO [DECEMBER 18, 2007] Q: What are the criminal cases within the
which ruled that the CTA has such jurisdiction has exclusive original jurisdiction of the regular
been reversed in BRITISH AMERICAN TOBACCO V. courts?
CAMACHO [AUGUST 20, 2008]. The regular courts
have jurisdiction to rule upon the constitutionality of The regular courts have original jurisdiction in
a tax law or a regulation issued by the BIR. offenses and felonies where:

a. The principal amount of taxes and fees, exclusive ---------------------------------------------------------------

of charges and penalties, claimed is less than a) Who may appeal, mode of appeal, effect
P1,000,000 of appeal
b. There is no specified amount claimed ---------------------------------------------------------------
Q: What are the criminal cases within the Q: Who may appeal in the CTA?
exclusive appellate jurisdiction of the CTA?
Read Section 11, RA 1125 and Section 3,
a. Appeals from judgments, resolutions or orders of Rule 8, RRCTA
the RTCs in tax cases originally decided by them
in their respective territorial jurisdiction; and
a. A party adversely affected by a decision, ruling,
b. Petitions for review of the judgments, resolutions
or the inaction of:
or orders of the RTCs in the exercise of their
i. CIR
appellate jurisdiction over tax cases originally
ii. CoC
decided by the MeTCs, MTCs or MCTCs.
iii. DOF Secretary
iv. DTI Secretary
Note: (1) The same rules apply with regard to the
exclusive jurisdiction of the CTA in division over tax v. DA Secretary
collection cases. vi. RTC (in the exercise of its original
jurisdiction)
(2) As held in YABES V. FLOJO [JULY 20, 1982], the
Supreme Court held that the lower courts can acquire b. A party adversely affected by a decision or
jurisdiction over a claim for collection of deficiency taxes resolution of a Division on a MR or MNT
only after the assessment made by the CIR has become
final and unappealable, not where there is still a pending c. A party adversely affected by a decision or ruling
CTA case. of the CBAA and the RTC in the exercise of their
appellate jurisdiction.
--------------------------------------------------------------- Q: What are the different modes of appeal?
B. Judicial Procedures
1. Judicial action for collection of taxes Read Section 4, Rule 8, RRCTA
a) Internal revenue taxes
b) Local taxes a. Petition for review under Rule 42 to be acted
upon the CTA in division with respect to a
i) Prescriptive period
decision, ruling or inaction of:
--------------------------------------------------------------- i. CIR (on disputed assessments or claim for
refund of internal revenue taxes erroneously
Note: This has been thoroughly discussed under Tax
or illegally collected)
Remedies and Local Government Taxation. I will not
discuss them anymore. ii. CoC
iii. DOF Secretary
--------------------------------------------------------------- iv. DTI Secretary
v. DA Secretary
2. Civil Cases
vi. RTC (in the exercise of their original
a) Who may appeal, mode of appeal, effect jurisdiction)
of appeal
i) Suspension of collection of tax Period to file: 30 days
a) Injunction not available to restrain
collection b. Petition for review under Rule 43 to be acted
ii) Taking of evidence upon the CTA en banc with respect to a decision
iii) Motion for reconsideration or new trial or resolution of the Court in Division on a MR or
40
b) Appeal to the CTA, en banc MNT.
c) Petition for review on certiorari to the
Supreme Court
--------------------------------------------------------------- 40
In cases falling under the exclusive appellate jurisdiction of the
CTA en banc, a petition for review of a decision or resolution of

Period to file: 15 days. It may be extended to an SM Land v. City of Manila, G.R. No.
additional period not exceeding 15 days. 197151, October 22, 2012
c. Petition for review under Rule 43 to be acted DOCTRINE: The 30-day period to appeal decisions of the
upon by the CTA en banc with respect to the RTC to the CTA is extendible
decisions or rulings of:
FACTS: On the strength of the provisions of Tax
i. CBAA Ordinance Nos. 7988 and 8011, whichamended
ii. RTCs (in the exercise of their appellate Ordinance No. 7794, also known as the Revenue Code of
Manila, the City of Manila assessed petitioners/taxpayers,
jurisdiction)
together with their other sister companies, increased rates
of business taxes for the year 2003 and the first to third
Period to file: 30 days quarters of 2004. The companies filed under protest and
later filed an application for refund and later a complaint
Q: CC Corp filed a petition in the RTC to for refund with the Regional Trial Court (RTC). The RTC
nullify an ordinance enacted by the City of granted the claim for refund. Respondent City of Manila
filed a petition for review with the CTA, after the latter
Manila. RTC dismissed the petition. CC Corp
granted its request for extension of time to file the petition
filed a petition for review with CTA. It was for review. One of the issues presented before the Court
argued that the petition for review was filed was whether the 30-day period provided by law within
out of time. Can the 30 day period to file a which to appeal decisions of the RTC to the CTA may be
petition for review to the CTA of an adverse extended.
decision or ruling of the RTC (in the HELD: According to the Court, “Section 11 of Republic Act
exercise of its original jurisdiction) be No. 9282 does state that the Petition for Review shall be
extended? filed with the CTA following the procedure analogous to
Rule 42 of the Revised Rules of Civil Procedure. Section
Yes. As held in CITY OF M ANILA VS. COCA-COLA 1, Rule 42 of the Revised Rules of Civil Procedure
provides that the Petition for Review of an adverse
BOTTLERS PHILIPPINES, INC. [AUGUST 4, 2009], it is
judgment or final order of the RTC must be filed with the
clear from the Section 3 of the Revised Rules of the Court of Appeals within: (1) the original 15-day period from
CTA that to appeal an adverse decision or ruling of receipt of the judgment or final order to be appealed; (2)
the RTC to the CTA, the taxpayer must file a Petition an extended period of 15 days from the lapse of the
for Review with the CTA within 30 days from receipt original period; and (3) only for the most compelling
of said adverse decision or ruling of the RTC. It must reasons, another extended period not to exceed 15 days
be pointed out that the rule is silent as to whether from the lapse of the first extended period. Following by
the 30 day period can be extended or not. However, analogy, Section 1, Rule 42 of the Revised Rules of Civil
Section 11 of Republic Act No. 9282 does state that Procedure, the 30-day original period for filing a Petition
for Review with the CTA under Section 11 of Republic Act
the Petition for Review shall be filed with the
No. 9282, as implemented by Section 3 (a), Rule 8 of the
CTA following the procedure analogous to Rule 42 Revised Rules of the CTA, may be extended for a period
of the Revised Rules of Civil Procedure. Following of 15 days. No further extension shall be allowed
by analogy Section 1, Rule 42 of the Revised Rules thereafter, except only for the most compelling reasons, in
of Civil Procedure, the 30-day original period for which case the extended period shall not exceed 15 days
filing a Petition for Review with the CTA under
Section 11 of Republic Act No. 9282, as In MUNICIPALITY OF CAINTA, RIZAL VS. BRILLANTE
implemented by Section 3(a), Rule 8 of the Revised REALTY CORPORATION [CTA AC NO. 88, JANUARY 02,
Rules of the CTA, may be extended for a period 2013], the CTA held that the thirty-day period to
of 15 days. No further extension shall be allowed appeal an adverse decision of the Regional Trial
thereafter, except only for the most compelling Court to the Court of Tax Appeals may be extended
reasons, in which case the extended period shall not for a period of 15 days, subject to filing of motion for
exceed 15 days. extension before the CTA and payment of
appropriate fees.
the Court in Division must be preceded by the filing of a timely MR

or MNT with the Division. (see Section 1, Rule 8, RRCTA)

Q: Does a Motion for Reconsideration of the

decision of the CIR toll the 30 day period to Note: (1) The CTA may issue injunction only in the
exercise of its appellate jurisdiction. CIR vs. J.C. Yuseco
appeal the denial of the protest of the FAN [G.R. No. L-12518, October 28, 1961]
to the CTA?
(2) The prohibition on the issuance of a writ of injunction to
No. A motion for reconsideration of the denial of the enjoin the collection of taxes is applied only to national
administrative protest does not toll the 30-day period internal revenue taxes, not to local taxes. ANGELES CITY V.
to appeal to the CTA. (see FISHWEALTH CANNING ANGELES ELECTRIC CORPORATION [JUNE 29, 2010]
CORPORATION VS. COMMISSIONER OF INTERNAL
REVENUE [JANUARY 21, 2010]) (3) TROs and injunctions issued by courts other than the
CTA against the BIR should be annulled and cancelled for
lack of jurisdiction [see RMO 042-10 [MAY 4, 2010].)
---------------------------------------------------------------
i) Suspension of collection of tax ---------------------------------------------------------------
a) Injunction not available to restrain ii) Taking of evidence
collection ---------------------------------------------------------------
---------------------------------------------------------------
Q: When may the CTA receive evidence?
Q: Does the perfection of an appeal suspend
the collection of taxes? (effect of an appeal) Read Section 2, Rule 12, RRCTA
No appeal taken to the CTA shall suspend the The Court may receive evidence in the following
payment, levy, distraint and/or sale of any of the cases:
taxpayer’s property for the satisfaction of his tax
liability. However, when in the opinion of the CTA a. In all cases falling within the original jurisdiction
the collection of the tax may jeopardize the interest of the CTA in division pursuant to Section 3, Rule
of the Government and/or the taxpayer, the Court at 4 of the RRCTA
any stage of the proceedings may suspend or b. In appeals in both civil and criminal cases where
restrain the collection of the tax and require the the Court grants a new trial pursuant to Section
taxpayer either to deposit the amount claimed or to 2, Rule 53 and Section 12, Rule 124 of the Rules
file a surety bond for no more than double the of Court
amount with the Court.
Q: Who are authorized to take evidence?
Note: Nonetheless, during the pendency of the appeal, the
taxpayer may still enter into a compromise settlement of
his tax liability for as long as any of the grounds for a Read Section 3-4, Rule 12, RRCTA
compromise (doubtful validity of assessment and financial
incapacity) is present. A compromise of a tax liability is The following are authorized:
possible at any stage of litigation even during appeal
(Pampanga Sugar Co. v. CIR [114 SCRA 496]) a. Any justice of the court when
i. The determination of a question of fact
Q: May the CTA issue an injunction to enjoin arises at any stage of the proceedings or
the collection of taxes by the BIR? ii. The taking of an account is necessary
iii. The determination of an issue of fact
Yes. When a decision of the CIR on a tax protest is requires the examination of a long account
appealed to the CTA, such appeal does not suspend
the payment, levy, distraint and/or sale of any of the b. Any court official for the sole purpose of marking
taxpayer’s property. However, when in the opinion of comparison with the original and identification by
the CTA the collection of the tax may jeopardize the witnesses of the received documentary evidence
interest of the Government and/or the taxpayer, the
Court at any stage of the proceedings may suspend
or restrain the collection of the tax and require the
taxpayer either to deposit the amount claimed or to
file a surety bond for no more than double the
amount with the Court.

--------------------------------------------------------------- Q: Who may file an appeal to the CTA en

iii) Motion for reconsideration or new trial banc?
---------------------------------------------------------------
a. A party adversely affected by a resolution of
Read Section 1, 4 and 5, Rule 15 a Division of the CTA on a MR or MNT may
file a petition for review with the CTA en
banc
Q: Who may file a MR or MNT? b. A party adversely affected by a decision or
ruling of the CBAA or the RTC in the
Any aggrieved party may seek a reconsideration or exercise of their appellate jurisdiction
new trial of any decision, resolution or order of the
court Note: You cannot directly appeal a decision or order of a
Division to the CTA en banc. You must first file a timely
Note: (1) The period to file the MR or MNT is 15 days. MR or MNT. (see Section 1, Rule 8, RRCTA)
(2) No second MR or MNT is allowed (see Section 7, Q: Is a prior MR required before filing a
Rule 15, RRCTA) Petition for Review of a decision of a CTA
division?
Note, however, that a Motion for Reconsideration filed on
the Amended Decision of the Court in Division is not a
second motion for reconsideration, which is a proscribed
Yes. The mandatory provisions of Rule 8, Section 1
under Section 7, Rule 15 of the CTA Rules, in relation to of the Revised Rules of the Court of Tax
Section 2, Rule 52 of the 1997 Rules of Civil Procedure, Appeals requiring that “the petition for review of a
as amended. MIRANT (NAVOTAS II) CORPORATION VS. decision or resolution of the Court in
COMMISSIONER OF INTERNAL REVENUE, CTA EB CASE NO. Division must be preceded by the filing of a timely
783, JULY 18, 2012 motion for reconsideration or new trial with the
Division.” The word "must" clearly indicates the
Q: What is the effect of the filing of the MR mandatory -- not merely directory -- nature of a
or MNT? requirement.” The rules are clear. Before the CTA
En Banc could take cognizance of the petition for
The filing of the MR or MNT shall suspend the review concerning a case falling under its exclusive
running of the period within which an appeal may be appellate jurisdiction, the litigant must sufficiently
perfected show that it sought prior reconsideration or moved
for a new trial with the concerned CTA division. (see
COMMISSIONER OF CUSTOMS VS. M ARINA SALES, INC.
Q: What are the grounds for the filing of a
[NOVEMBER 22, 2010])
MR or MNT?
Q: Juday was criminally charged in the CTA
a. Fraud, accident, mistake or excusable negligence for filing a fraudulent income tax return.
(FAME) which ordinary prudence could not have
Thereafter, she filed a motion to quash in
guarded against and by reason of which such
aggrieved party has probably been impaired in the CTA 1st division. The MTQ was denied.
his rights or MR was also denied. She then filed a motion
b. Newly discovered evidence which he could not, for extension of time to file her petition for
with reasonable diligence, have discovered and review in CTA en banc. Thereafter, she filed
produced at the trial and which, if presented, her petition for review with CTA en banc.
would probably alter the result CTA en banc denied both the petition for
extension, and the petition for review, on the
--------------------------------------------------------------- theory that the denial of the motion to quash
b) Appeal to the CTA, en banc was an interlocutory order, and therefore,
--------------------------------------------------------------- unappealable. Was the dismissal by CTA en
banc proper?
Read Section 18, RA 1125
Yes. CTA en banc did not err in denying petitioner’s
Motion for Extension of Time to File Petition for

Review. Petitioner cannot file a Petition for Review ---------------------------------------------------------------

with the CTA en banc to appeal the Resolution of C. Criminal Cases
the CTA First Division denying her Motion to Quash. a) Institution and prosecution of criminal
The Resolution is interlocutory and, thus, actions
unappealable. Even if her Petition for Review is to
i) Institution of civil action in criminal
be treated as a petition for certiorari, it is dismissible
for lack of merit. (see JUDY ANNE L. SANTOS VS. action
PEOPLE OF THE PHILIPPINES AND BUREAU OF INTERNAL b) Appeal and period to appeal
REVENUE [AUGUST 26, 2008]) i) Solicitor General as counsel for the
people and government officials sued in
--------------------------------------------------------------- their official capacity
c) Petition for review on certiorari to the c) Petition for review on certiorari to the
Supreme Court Supreme Court
--------------------------------------------------------------- ---------------------------------------------------------------
Read Section 19, RA 1125 and Section 1, ---------------------------------------------------------------

Rule 16, RRCTA a) Institution and prosecution of criminal
actions
Q: Who may file an appeal to the Supreme i) Institution of civil action in criminal
Court? action
---------------------------------------------------------------
Any party adversely affected by a decision or ruling
of the Court en banc may appeal to the Supreme Read Section 2, Rule 9, RRCTA
Court.
Q: How are criminal actions instituted?
Q: What is the mode of appeal from the CTA
en banc to the Supreme Court? All criminal actions before the CTA in Division in the
exercise of its original jurisdiction shall be instituted
The mode of appeal is a petition for review on by the filing of an information in the name of the
certiorari under Rule 45. People of the Philippines.
Q: ABC Corporation, engaged in the retail of Note: (1) The institution of the criminal action shall
medicines and other pharmaceutical drugs filed a interrupt the running of the period of prescription
claim for TCC pertaining to the 20% sales discounts
granted to senior citizens. The CTA denied the claim (2) For violations of the NIRC and other laws enforced by
for insufficiency of evidence. Thus, ABC filed its the BIR, the CIR must approve the filing
petition for review before the SC. Instead of filing a
(3) For violations of the TCC and other laws enforced by
reply to the comments of respondent, ABC filed a the BOC, the CoC must approve their filing
motion to withdraw praying that the case be
dismissed without prejudice. According to BAC, the
amount of tax credit being claimed would just be
Read Section 2, Rule 9, RRCTA
included in its future claims for issuance of TCC. The
CIR argues that the decision of the CTA became
final and executory and thus the tax credit could no Q: Who shall prosecute the criminal action?
longer be claimed in the future. Is the contention of
the CIR correct? The criminal actions shall be conduced and
prosecuted under he direction and control of the
Yes. By withdrawing the appeal the taxpayer is public prosecutor
deemed to have accepted the decision of the CTA.
Note: For violations of the NIRC and other laws enforced
And since the CTA had already denied taxpayer’s
by the BIR and violations of the TCC and other laws
request for the issuance of TCC for insufficiency of enforced by the BoC, the prosecution may be conducted
evidence, it may no longer be included in taxpayer’s by their respective duly deputized legal officers.
future claim. (Central Luzon Drug Corporation v.
CIR [March 2, 2011] ).

Read Section 12, Rule 9, RRCTA c) Petition for review on certiorari to the
Supreme Court
Q: Is the civil action deemed instituted with ---------------------------------------------------------------
the criminal action?
Note: Same rule as in Civil Cases.
Yes. The criminal action and corresponding civil
action for the recovery of civil liability for taxes and ---------------------------------------------------------------
penalties shall be deemed jointly instituted in the C. Taxpayer’s suit impugning the validity of
same proceeding. The filing of the criminal action tax measures or acts of taxing authorities
shall necessarily carry with it the filing of the civil ---------------------------------------------------------------
action. No right to reserve the filing of such civil
action separately from the criminal action shall be Q: What is a taxpayer’s suit?
allowed.
A taxpayer’s suit is a case where the act
--------------------------------------------------------------- complained of directly involves the illegal
b) Appeal and period to appeal disbursement of public funds derived from taxation.
i) Solicitor General as counsel for the
people and government officials sued in Q: Distinguish a taxpayer’s suit from a
their official capacity citizen’s suit?
---------------------------------------------------------------
Taxpayer’s Citizen’s Suit
Read Section 9, Rule 9, RRCTA Suit
Definition Case where the Case in which is in the
act complained of nature of a public right,
Q: What are the modes of appeal with directly involves if not the duty of every
respect to criminal cases? the illegal citizen, to institute in
disbursement of protection of the
a. Notice of Appeal pursuant to Sections 3(a) and 6, public funds general public
Rule 122 of the Rules of Court to the CTA in Plaintiff Plaintiff is The plaintiff is but a
Division with respect to an appeal from criminal affected by the mere instrument of
expenditure of public concern.
cases decided by the RTC in the exercise of its
the public funds
original jurisdiction
b. Petition for Review under Rule 43 to the CTA En
Q: How is the concept of locus stand
Banc with respect to criminal cases decided by
i) CTA in Division in the exercise of its applied in a taxpayer’s suit?
appellate jurisdiction
ii) RTC in the exercise of its appellate Locus standi is a right of appearance in a court of
jurisdiction justice on a given question. It is the personal and
substantial interest in the case, such that the party
Note: In both cases, the period to file is 15 days. has sustained or will sustain direct injury as a result
of a challenged act. In order to challenge the
constitutionality of tax measures or illegal
Read Section 10, Rule 9, RRCTA expenditures of public money, the taxpayer must
have locus standi.
Q: Who shall act as a representative of the
People and the Government? Q: What are the requisites of a taxpayer’s
suit? (for taxpayer’s to have locus standi to
The Solicitor General shall represent the People and sue)
government officials sued in their official capacity in
all cases brought to the CTA in the exercise of its As laid down in ANTI-GRAFT LEAGUE V. SAN JUAN
appellate jurisdiction. [260 SCRA 251], the requisites of a taxpayer’s suit
are:
---------------------------------------------------------------

1. Public funds are disbursed by a political A constitutional question is ripe for adjudication
subdivision or instrumentality and in doing so, a when the government act being challenged has a
law is violated or some irregularity is committed; direct adverse effect on the individual challenging it.
and; As a general rule, a taxpayer must show that he
2. Petitioner is directly affected by the alleged ultra would be prejudiced or benefited by the suit which
vires act questions the validity of the collection of taxes or the
manner of expenditure of funds collected from
Hence, in LOZADA V. COMELEC [120 SCRA 337], it taxation. Personal injury or benefit must be shown
was held that the petitioner’s action for mandamus for judicial controversy to be ripe for judicial
to compel the COMELEC to hold a special collection determination
is not considered a taxpayer’s suit because it does
not involve public expenditure. Further, there is no NOTE: However, it must be noted that where the public
allegation that tax money is spent illegally. Also, in interest requires the resolution of the constitutional issues
JOYA V. PCGG [225 SCRA 568], the Supreme Court raised by the taxpayer, the doctrine of “ripe for judicial
held that such was not a taxpayer’s suit because the determination is within the Court’s discretion to set aside
ABAKADA GURO PARTY-LIST V. PURISIMA [G.R. NO.
case did not involve a misapplication of public funds. 166715, AUGUST 14, 2008]
In fact, the paintings and antique silverware alleged
to have been public properties were acquire from ========== END OF REVIEWER ============
private sources and not with public money.
Thank you for using my reviewer. Again, if you
Q: Must a taxpayer be a party to a find it useful, please share it to others. Also, if
government contract so that it can it’s not so much to ask, pray that my girlfriend
challenge the validity of a disbursement of and I do well and pass the bar exams.
public funds?
Ateneo Law Batch 2013 and all the other
barristers who will come to possess this
No. The prevailing doctrine in taxpayer’s suit is to reviewer, good luck to us all. AMDG.
allow taxpayers to question contracts entered into by
the national government or GOCCs allegedly in For comments, corrections, and suggestions,
contravention of law. A taxpayer need not be a party please email me at pmreyestax@gmail.com.
to the contract to challenge its validity (ABAYA V.
EBDANE [515 SCRA 720])
Q: How is the doctrine of transcendental Prayer to St. Joseph of Cupertino for

importance applied to a taxpayer’s suit? success in Examinations
As a general rule, only those with locus standi may O Great St. Joseph of Cupertino who while
impugn the tax measure or illegal imbursement of
public funds. However, the Supreme Court has
on earth did obtain from God the grace to be
discretion to entertain a taxpayer’s suit and brush asked at your examination only the
aside lack of locus standi where the issues are of questions you knew, obtain for me a like
such transcendental importance in keeping with the favour in the examinations for which I am
court’s duty to determine if public officers have not now preparing. In return I promise to make
abused the discretion given to them KILOSBAYAN V. you known and cause you to be invoked.
GUINGONA [G.R. 113375, MAY 5, 1994]
Through Christ our Lord.
NOTE: However, while the taxpayer need not suffer
personal damage if matter is of transcental important, he
must prove damage to others. [JUMAMIL V. CAFÉ [G.R. NO. St. Joseph of Cupertino, Pray for us.
144570, SEPTEMBER 1, 2005] Amen.
Q: How is “ripeness for judicial

determination” applied in a taxpayer’s suit?

TAX AUDIT AND INVESTIGATIONS:
ASSESSMENT PROCESS AND TAXPAYERS’ REMEDIES
Atty. Pierre Martin D. Reyes

ASSESSMENT PROCESS

1. Letter of Authority from BIR
The Letter of Authority (LoA) is an official document given to a A LOA ISSUED TO COVER AN AUDIT OF
Revenue Officer which empowers him to examine and scrutinize a “UNVERIFIED PRIOR YEARS” IS INVALID
Taxpayer’s books of accounts and other accounting records, in order
to determine the taxpayer’s correct internal revenue tax liabilities (CIR A letter of authority should cover a taxable
v. Sony Philippines, G.R. No. 178697, November 17, 2010). period not exceeding one taxable year. If the
BIr intends to audit a taxpayer for more than
The LoA is issued by (1) the Commissioner of Internal Revenue) or one taxable year, it should indicate the specific
his duly authorized representatives after a return has been filed; or by years. (RMO 43-90). If a LoA was issued to
the Regional Director for all audit cases within his jurisdiction except cover “unverified prior years,” it is invalid and
any assessment made on the basis of that is
in cases involving civil or criminal tax fraud under the jurisdiction of
likewise invalid. (CIR v. Sony Philippines, G.R.
the Tax Fraud Division of the Enforcement Service and in policy cases No. 178697, November 17, 2010)
under audit by Special Teams in the National Office (RMC No. 36-99)
The LoA must be served within 30 days from its issuance. Otherwise, it shall become null and void. The LoA can be
revalidated through the issuance of a new LoA. (RMO No. 38-88). Revalidation can be done only once if the LoA was
issued by the Regional Office and twice if issued by the National Office.
2. Tax Audit of Taxpayer
General Rule: A Taxpayer’s books of accounts A Revenue Officer has only 120 days from the date of receipt of
shall be subjected to examination and inspection the LoA to conduct the audit and submit the required report of
only once for a taxable year. investigation. If the Revenue Officer finds no deficiency, the audit
ends. If there is any deficiency, the Revenue Officer submits his
Exceptions: report to the Revenue District Office (RDO) and the case is
1. CIR determines that fraud, irregularities, or endorsed to the Revenue Regional Office (RRO) or CIR
mistakes were committed by the taxpayer;
2. Taxpayer himself requests a re-investigation or NO MORE NOTICE OF INFORMAL CONFERENCE
re-examination of his books of accounts;
3. To verify compliance with withholding and other Previously, under RR 12-99 (September 6, 1999), a taxpayer shall
internal revenue taxes receive what is called a “Notice of Informal Conference” and a copy of
4. To verify capital gains tax liabilities of the
the tentative findings. The taxpayer may agree or disagree with the
taxpayer
5. CIR exercise power to obtain information relative findings. If the taxpayer is not amenable, there will be an Informal
to the examination of other taxpayers (Secs. 5 Conference with provides the taxpayer an opportunity to air his side.
and 235, NIRC) RR 18-2013 (November 28, 2013) dispenses with the requirement of
an informal conference.
3. Preliminary Assessment Notice

If the BIR finds no sufficient basis to assess the taxpayer, the case is dismissed. However, if there is sufficient basis, a
Preliminary Assessment Notice (PAN) is issued, showing in detail, the facts and the law, rules and regulations, or
jurisprudence on which the proposed assessment is based.
The taxpayer must respond to the PAN within 15 days from date of receipt of the PAN. Otherwise, he shall be
considered in default and a Formal Letter of Demand and Final Assessment Notice (FLD/FAN) shall be issued
calling for the payment of the taxpayer’s deficiency tax liability, inclusive of the applicable penalties.
If the taxpayer responds that he/it disagrees with the findings of deficiency tax or taxes, FLD/FAN shall be issued
within fifteen (15) days from filing/submission of the taxpayer’s response, calling for payment of the taxpayer's
deficiency tax liability, inclusive of the applicable penalties .RR 12-99 (September 6, 1999), as amended by RR 18-
2013 (November 28, 2013)
1

DISTINCTION BETWEEN A DEFICIENCY ASSESSMENT AND A JEOPARDY ASSESSMENT
Deficiency Assessment is an assessment made by the BIR Jeopardy Assessment is a tax assessment which was
after the conduct of an investigation or audit when it finds that assessed without the benefit of a complete or partial audit by
the tax return filed by the taxpayer contains an under- an authorized revenue officer who has reason to believe that
declaration of income or when the taxpayer does not at all file the assessment and collection of a deficiency tax will be
a tax return jeopardized by delay because of the taxpayer’s failure to
comply with audit and investigation requirements to present his
books of accounts and/or pertinent records or substantiate all
or any of the deductions, exemptions, or credits claimed in his
return
PRESCRIPTIVE PERIOD TO ASSESS TAXPAYER WHEN PAN IS NOT REQUIRED

Assessment must be made within 3 years from the last day Generally, a PAN must be issued by the BIR
prescribed by law for the filing of the tax return. If the return was before issuing the FLD/FAN. (CIR v. Metro Star
filed beyond the period prescribed by the law, the 3-year period Superama, G.R. No. 185371, December 8, 2010)
shall be counted from the day the return was filed (Section 203,
NIRC), In the following cases, a PAN is not required:
However, in the case of a false or fraudulent return with intent to 1. Assessment is purely mathematical error
evade tax or of failure to file a return, the tax may be assessed 2. Excise tax on excisable article not paid
within 10 years from discovery of the falsity, fraud, or omission. 3. Discrepancy between tax withheld and
remitted
Any assessment made beyond the prescriptive period is invalid 4. Goods imported by tax-exempt entity are sold
(Tupaz v. Ulep, G.R. No. 127777, October 1, 1999), to a taxable entity
5. Claim for refund is filed when it was previously
The prescriptive period of assessment may be extended if the carried over.
taxpayer executed a Waiver of the Statute of Limitations
REQUIREMENTS OF A WAIVER OF THE STATUTE OF LIMITATIONS
A waiver of the statute of limitations under the Tax Code must conform strictly with the provisions of RMO 20-90 (April 4,
1990) in order to be valid and binding. Philippine Journalist v. CIR, G.R. No. 162852, December 16, 2004
As provided in RMO No. 20-90:
1. The waiver must be in the proper form

2. The waiver shall be signed by the taxpayer himself or his duly authorized representative.
3. Signature of the proper authority indicating that the BIR has accepted and agreed to the waiver
4. The date of the acceptance by the BIR should be indicated. Both the date of execution by the taxpayer and the date
of the acceptance by the BIR 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.
5. The waiver must be executed in 3 copies, the original to be attached to the docket, the second copy for the taxpayer
and the third copy for the Office accepting the waiver. Taxpayer must be furnished a copy of the waiver in order to
perfect the agreement since the waiver is not a mere unilateral act
4. Formal Letter of Demand and Final Assessment

Notice
The Formal Letter of Demand and Final Assessment Notice (FLD/FAN) shall be issued by the CIR or his duly
authorized representatives. The FLD/FAN calling for payment of the taxpayer’s deficiency tax or taxes, shall state the
facts, the law, rules and regulations, or jurisprudence on which the assessment is based. Otherwise, the assessment
will be void. RR 12-99 (September 6, 1999), as amended by RR 18-2013 (November 28, 2013).
It is important to note that while RR 18-2013 requires the PAN to state the facts, the law, rules and regulations or
jurisprudence on which the proposed assessment is based, failure to comply with such does not render the PAN void.
This is because the PAN is not the final assessment contemplated by the Tax Code which can be protested. The only
2

consequence of failure to file a reply to the PAN is that the taxpayer shall be considered in default and the BIR can
now make a final assessment.
The requirement that the FAN must first state the facts and the law on which the assessment is based is not merely a
procedural requirement but a substantive requirement which determines the taxpayer’s ability to protest. (CIR v.
Gonzalez, G.R. No. 177279, October 13, 2010; CIR v. Reyes, G.R. No. 159694 & G.R. No. 163581, January 27,
2006).
The FLD/FAN calls for the payment of the taxpayer’s deficiency tax liability, inclusive of the applicable penalties
(additions to the tax).
ADDITIONS TO THE TAX
SURCHARGES INTEREST
25% surcharge 20% deficiency interest
It is imposed when there is: It is imposed when there is any deficiency in the tax
due. It shall be assessed from the date prescribed for
1. Failure to file a return and pay tax due thereon its payment until the payment thereof. (Section 249,
2. Filing with unauthorized revenue office
IRC)
3. Failure to pay deficiency tax within time prescribed
in assessment notice
4. Failure to pay full or part of the amount shown in 20% delinquency interest
ITR required to be filed or the full amount of tax
due for which no return is required to be filed on or It is imposed when there is:
before the date prescribed for its payment (Section
248, NIRC) 1. Failure to pay the amount of tax due on any return
required to be filed
50% surcharge 2. Failure to pay the amount of tax due for which no
return is required
It is imposed when there is: 3. Failure to pay a deficiency tax or surcharge or
interest thereon
1. Willful neglect to file the return within the period
prescribed It shall be assessed from the due date appearing on
2. False or fraudulent return is willfully made (Section the notice and demand of the CIR until the payment
248, NIRC) thereof. (Section 249, NIRC)
Not e: RR 18-2013 (November 28, 2013) provides that the deficiency tax assessed shall be paid by the taxpayer within the time
prescribed in the notice and demand, otherwise, the taxpayer shall be liable for delinquency interest. Previously, under RR 12-
99 (September 6, 1999), the taxpayer shall be liable only for civil penalties or surcharges.
PROTEST

5. Protest the Letter of Demand/Final Assessment Notice

The taxpayer or its authorized representative or tax agent may protest It is the FLD/FAN that must be
administratively against the aforesaid FLD/FAN within thirty (30) days administratively protested or disputed within
from date of receipt thereof. The taxpayer protesting an assessment 30 days, and not the PAN (Allied Banking
may file either a written request for reconsideration or reinvestigation. Corp. v. CIR, G.R. No. 175097, February 5,
2010)
RR 12-99 (September 6, 1999), as amended by RR 18-2013
(November 28, 2013).
3

FORMS OF PROTEST
A Request for Reconsideration refers to a plea of re- A Request for Reinvestigation refers to a plea of re-
evaluation of an assessment on the basis of existing records evaluation of an assessment on the basis of newly discovered
without need of additional evidence. It may involve both a or additional evidence that a taxpayer intends to present in the
question of fact or of law or both. (RR 12-85) reinvestigation. It may also involve a question of fact or of law
or both. (RR 12-85)
Note: It is the request for reinvestigation acted upon which suspends the prescriptive period to collect. A request for
reconsideration does not toll the prescriptive period BPI v. CIR, G.R. No. 139736, October 17, 2005
The taxpayer shall state in his protest (1) the nature of protest whether reconsideration or reinvestigation, specifying
newly discovered or additional evidence he intends to present if it is a request for reinvestigation, (2) date of the
assessment notice, and (3) the applicable law, rules and regulations, or jurisprudence on which his protest is based,
otherwise, his protest shall be considered void and without force and effect. RR 12-99 (September 6, 1999), as
amended by RR 18-2013 (November 28, 2013).
General Rule: SUBMISSION OF RELEVANT SUPPORTING

DOCUMENTS
No prior payment of assessed internal revenue tax is required
when protested or disputed. For requests for reinvestigation, the taxpayer shall
submit all relevant supporting documents in support
Exceptions: of his protest within sixty (60) days from date of filing
of his letter of protest, otherwise, the assessment
1. If there are several issues involved in the FLD/FAN but
shall become final. The term “relevant supporting
the taxpayer only disputes or protests against the validity
of some of the issues raised
documents” refer to those documents necessary to
2. If there are several issues involved in the disputed support the legal and factual bases in disputing a tax
assessment and the taxpayer fails to state the facts, the assessment as determined by the taxpayer. The sixty
applicable law, rules and regulations, or jurisprudence in (60)-day period for the submission of all relevant
support of his protest against some of the several issues supporting documents shall not apply to requests for
on which the assessment is based reconsideration.
EFFECT IF TAXPAYER DOES NOT FILE A VALID PROTEST

If the taxpayer fails to file a valid protest against the FLD/FAN within thirty (30) days from date of receipt thereof, the
assessment shall become final, executory and demandable. RR 12-99 (September 6, 1999), as amended by RR 18-2013
(November 28, 2013).
5. Final Decision on Disputed Assessment

The Final Decision on Disputed Assessment (FDDA) of the Commissioner or his duly authorized representative shall
state the (1) facts, the applicable law, rules and regulations, or jurisprudence on which such decision is based,
otherwise, the decision shall be void, and (2) that the same is his final decision.
PERIOD FOR THE CIR TO ACT ON THE PROTEST
The CIR or his duly authorized representative may act on the taxpayer’s protest within one hundred eighty (180) days
counted from the date of filing of the protest in case of a request reconsideration or within 180 days from the date of
submission by the taxpayer of the required documents in support of his protest in case of a request for investigation.
RR 12-99 (September 6, 1999), as amended by RR 18-2013 (November 28, 2013).
There are three actions that can be done by the CIR with regard to the protest of the taxpayer:
4

GRANT THE PROTEST DENY THE PROTEST NO ACTION

This means that the request This means that the request for The CIR may opt not to take
for reconsideration or reconsideration or any action at all. In such
reinvestigation, as the case reinvestigation, as the case may case, the FLD/FAN stands.
may be is granted. be is denied. The FLD/FAN
stands.
Not e: In case of denial of protest or inaction by the CIR, the judicial remedy of appeal is now available to the taxpayer.
APPEALS

IF PROTEST IS DENIED OR NOT ACTED UPON BY THE CIR’S DULY AUTHORIZED REPRESENTATIVE
DENIAL OF PROTEST INACTION
1. Appeal to the Court of Tax Appeals (CTA) within 1. Appeal to the CTA within thirty (30) days after the
thirty (30) days from date of receipt of the said expiration of the one hundred eighty (180)-day
decision period; or
2. Elevate his protest through request for 2. Await the final decision of the Commissioner’s duly
reconsideration to the Commissioner within thirty authorized representative on the disputed
(30) days from date of receipt of the said decision. assessment.
No request for reinvestigation shall be allowed in
administrative appeal and only issues raised in the
decision of the Commissioner’s duly authorized
representative shall be entertained by the
Commissioner.
IF PROTEST IS DENIED OR NOT ACTED UPON BY THE CIR
DENIAL OF PROTEST INACTION
The taxpayer may appeal to the CTA within thirty (30) 1. Appeal to the CTA within thirty (30) days from after
days from date of receipt of the said decision. the expiration of the one hundred eighty (180)-day
Otherwise, the assessment shall become final, period; or
executory and demandable. 2. Await the final decision of the Commissioner on the
disputed assessment and appeal such final
decision to the CTA within thirty (30) days after the
A motion for reconsideration of the Commissioner’s receipt of a copy of such decision.
denial of the protest or administrative appeal, as the
case may be, shall not toll the thirty (30)-day period to The option here is mutually exclusive and resort to one
appeal to the CTA. See also Fishwealth Canning bars the application of the other. See also Lascona
Corp. v. CIR, G.R. No. 179343, January 21, 2010 Land v. CIR, G.R. No. 171251, March 5, 2012
5

The CTA in division has the exclusive appellate jurisdiction to review the decision of the CIR in cases involving disputed
assessments and inaction by the CIR where the NIRC provides a specific period of action. Republic Act No. 1125, as amended
by Republic Act No. 9282; A.M. No. 05-11-07-CTA (Revised Rules of the Court of Tax Appeals)
REMEDY IF THE DECISION OF THE CTA IN DIVISION IS ADVERSE TO TAXPAYER

File a Motion for Reconsideration or New Trial with the CTA in division within 15 days from receipt of decision. The taxpayer
cannot appeal directly to the CTA en banc without seeking a prior reconsideration or moved for a new trial with the concerned
CTA division. A.M. No. 05-11-07-CTA (Revised Rules of the Court of Tax Appeals)
Appeal to the CTA en banc within 15 days. It may be extended to an additional period not exceeding 15 days from receipt of
decision. A.M. No. 05-11-07-CTA (Revised Rules of the Court of Tax Appeals)
Appeal to the Supreme Court within 15 days from receipt of decision. A.M. No. 05-11-07-CTA (Revised Rules of the Court of
Tax Appeals)
6
PM REYES BAR REVIEWER ON TAXATION
SUPPLEMENT FOR THE 2014 BAR

Note: This covers significant and relevant G.R. No. 198759, July 1, 2013, the
Supreme Court jurisprudence on taxation law Supreme Court held that the rule in the
from January 31, 2013 to March 31, 2014. Silkair case does is inapplicable to a case
where the party to which the economic
Possessors may reproduce and distribute this burden is shifted is provided an exemption
supplement provided my name remains clearly from both direct and indirect taxes. In
associated with my work and no alterations in Silkair, the Court held that the the proper
the form and content of this supplement are party to question, or seek a refund of, an
made. No stamping is allowed. 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
GENERAL PRINCIPLES burden thereof to another.
---------------------------------------------------------
In this case, the Supreme Court held that the
Q. What is a tax amnesty? abovementioned rule should not apply to
instances where the law clearly grants the
A. A Tax amnesty refers to the articulation of party to which the economic burden of the
the absolute waiver by a sovereign of its right tax is shifted an exemption from both direct
to collect taxes and power to impose and indirect taxes. In which case, the latter
penalties on persons or entities guilty of must be allowed to claim a tax refund even if
violating a tax law. Tax amnesty aims to it is not considered as the statutory taxpayer
grant a general reprieve to tax evaders who under the law.
wish to come clean by giving them an
opportunity to straighten out their records. The Court applied the Maceda case, where it
(CS Garments, Inc. v. Commissioner upheld the National Power Corporation’s
of Internal Revenue, G.R. No. (NPC) claim for a tax refund since its own
182399, March 12, 2014) charter specifically granted it an exemption
from both direct and indirect taxes.
Note: Amnesty taxpayers may immediately
enjoy the privileges and immunities under a The Supreme Court held that the propriety
Tax Amnesty Law, provided they fulfill the of a tax refund claim is hinged on the kind of
suspensive conditions imposed therein. (CS exemption which forms its basis. If the law
Garments, Inc. v. Commissioner of confers an exemption from both direct or
Internal Revenue, G.R. No. 182399, indirect taxes, a claimant is entitled to a tax
March 12, 2014) refund even if it only bears the economic
burden of the applicable tax. On the other
Q. ABC Petroleum sold XYZ Airlines hand, if the exemption conferred only applies
petroleum fuel. ABC Petroleum to direct taxes, then the statutory taxpayer is
passed on the related excise tax to regarded as the proper party to file the refund
XYZ Airlines. Now, XYZ Airlines claim.
sought to refund the said excise taxes
on the basis of the tax exemption Q. ABC Petroleum sold to various
privileges provided for in its international airlines petroleum fuel.
franchise. The CIR argues that XYZ ABC Petroleum is prohibited from
Airlines has no personality to file the passing on the said excise taxes to the
subject tax refund claim because it is international airlines as the latter are
not the statutory taxpayer. Does XYZ exempt from excise tax under Section
Airlines have personality to file the 135. Thus, ABC Petroleum sought to
refund? refund the said excise taxes. The BIR
argues that pursuant to the
A. Yes. In Philippine Airlines v. Philippine Acetylene case, a tax
Commissioner of Internal Revenue, exemption being enjoyed by the buyer
1


cannot be the basis of a claim for tax ---------------------------------------------------------
exemption by the manufacturer or INCOME TAX
seller of the goods for any tax due to ---------------------------------------------------------
it as the manufacturer or seller. Can
ABC Petroleum refund the said Q. XYZ Bank Philippines remitted to
excise taxes? XYZ Bank Germany an amount
representing the 15% branch profit
A. Yes. In Commissioner of Internal remittance tax on its regular banking
Revenue v. Pilipinas Shell, G.R. No. unit net income to XYZ Germany.
188497, February 19, 2014 , the Supreme Realizing that it made an
Court held that a petroleum company, as the overpayment of BPRT, XYZ
statutory taxpayer who is directly liable to pay Philippines filed with the BIR an
the excise tax on its petroleum products, is administrative claim for refund and at
entitled to a refund or credit of the excise the same time requested from the
taxes it paid for petroleum products sold to International Tax Affairs Division
international carriers, the latter having been (ITAD) a confirmation of its
granted exemption from the payment of said entitlement to the preferential tax
excise tax under Sec. 135 (a) of the NIRC. rate of 10% under the RP-Germany
Tax Treaty. The BIR denied the
The Court maintained that Section 135 (a), in claim on the ground that the
fulfillment of international agreement and application for a tax treaty relief was
practice to exempt aviation fuel from excise not filed with ITAD prior to the
tax and other impositions, prohibits the payment by the former of its BPRT
passing of the excise tax to international and actual remittance of its branch
carriers who buys petroleum products from profits to DB Germany, or prior to
local manufacturers/sellers such as its availment of the preferential rate
respondent. However, the Court agreed that of ten percent (10%) under the RP-
there was a need to reexamine the effect of Germany Tax Treaty provision. The
denying the domestic manufacturers/sellers’ CIR contends that the XYZ
claim for refund of the excise taxes they Philippines violated the fifteen (15)
already paid on petroleum products sold to day period mandated under Section
international carriers, and its serious III paragraph (2) of Revenue
implications on our Government’s Memorandum Order (RMO) No. 1-
commitment to the goals and objectives of 2000. Will the failure to strictly
the Chicago Convention. comply with RMO No. 1-2000
deprive persons or corporations of
Under the basic international law principle of the benefit of a tax treaty?
pacta sunt servanda, we have the duty to
fulfill our treaty obligations in good faith. A. No. In Deutsche Bank AG Manila v.
This entails harmonization of national Commissioner of Internal Revenue,
legislation with treaty provisions. In this case, G.R. No. 188550, August 19, 2013 , the
Sec. 135(a) of the NIRC embodies our Supreme Court held that the noncompliance
compliance with our undertakings under the with the 15-day period for prior application
Chicago Convention and various bilateral air should not operate to automatically divest
service agreements not to impose excise tax entitlement to the tax treaty relief especially in
on aviation fuel purchased by international claims for refund.
carriers from domestic manufacturers or
suppliers. Construction of the tax exemption Our Constitution provides for adherence to
provision in question should give primary the general principles of international law as
consideration to its broad implications on our part of the law of the land. The time-honored
commitment under international agreements. international principle of pacta sunt servanda
demands the performance in good faith of
2


treaty obligations on the part of the states
that enter into the agreement. Every treaty in The obligation to comply with a tax treaty
force is binding upon the parties, and must take precedence over the objective of
obligations under the treaty must be RMO No. 1-2000. Logically, noncompliance
performed by them in good faith. More with tax treaties has negative implications on
importantly, treaties have the force and effect international relations, and unduly
of law in this jurisdiction. discourages foreign investors. While the
consequences sought to be prevented by
A state that has contracted valid international RMO No. 1-2000 involve an administrative
obligations is bound to make in its procedure, these may be remedied through
legislations those modifications that may be other system management processes, e.g., the
necessary to ensure the fulfillment of the imposition of a fine or penalty. But we cannot
obligations undertaken.” Thus, laws and totally deprive those who are entitled to the
issuances must ensure that the reliefs granted benefit of a treaty for failure to strictly comply
under tax treaties are accorded to the parties with an administrative issuance requiring
entitled thereto. The BIR must not impose prior application for tax treaty relief.
additional requirements that would negate
the availment of the reliefs provided for under Q. What are the requirements for a claim
international agreements. More so, when the for refund of excess creditable
RP-Germany Tax Treaty does not provide withholding tax?
for any pre-requisite for the availment of the
benefits under said agreement. A. A taxpayer claiming for a tax credit or refund
of creditable withholding tax must comply
Likewise, it must be stressed that there is with the following requisites:
nothing in RMO No. 1-2000 which would
indicate a deprivation of entitlement to a tax 1) The claim must be filed with the CIR
treaty relief for failure to comply with the 15- within the two-year period from the date
day period. We recognize the clear intention of payment of the tax;
of the BIR in implementing RMO No. 1- 2) It must be shown on the return of the
2000, but the CTA’s outright denial of a tax recipient that the income received was
treaty relief for failure to strictly comply with declared as part of the gross income; and
the prescribed period is not in harmony with 3) The fact of withholding is established by
the objectives of the contracting state to a copy of a statement duly issued by the
ensure that the benefits granted under tax payor to the payee showing the amount
treaties are enjoyed by duly entitled persons paid and the amount of tax withheld.
or corporations.
(Commissioner of Internal Revenue
Bearing in mind the rationale of tax treaties, v. TeaM (Philippines) Operations
the period of application for the availment of Corporation, G.R. No. 185728,
tax treaty relief as required by RMO No. 1- October 16, 2013 )
2000 should not operate to divest entitlement
to the relief as it would constitute a violation ---------------------------------------------------------
of the duty required by good faith in VALUE-ADDED TAX
complying with a tax treaty. The denial of the ---------------------------------------------------------
availment of tax relief for the failure of a
taxpayer to apply within the prescribed Q. What are the requirements for a claim
period under the administrative issuance for VAT refund?
would impair the value of the tax treaty. At
most, the application for a tax treaty relief A. A claim for refund or tax credit for unutilized
from the BIR should merely operate to input VAT may be allowed only if the
confirm the entitlement of the taxpayer to the following requisites concur, namely:
relief.
3


1) The taxpayer is VAT-registered; for the four quarters of taxable year 2001. The
2) The taxpayer is engaged in zero-rated or petitioner did not reflect any zero-rated sales
effectively zero-rated sales; from its power generation in its four quarterly
3) The input taxes are due or paid; VAT returns, which indicated that it had not
4) The input taxes are not transitional input made any sale of electricity. Had there been
taxes; zero-rated sales, it would have reported them
5) The input taxes have not been applied in the returns. Indeed, it carried the burden
against output taxes during and in the not only that it was entitled under the
succeeding quarters; substantive law to the allowance of its claim
6) The input taxes claimed are attributable to for refund or tax credit but also that it met all
zero-rated or effectively zero-rated sales; the requirements for evidentiary
7) For zero-rated sales under Section substantiation of its claim.
106(A)(2)(1) and (2); 106(B); and 108(B)(1)
and (2), the acceptable foreign currency Although the petitioner has correctly
exchange proceeds have been duly contended here that the sale of electricity by a
accounted for in accordance with the rules power generation company like it should be
and regulations of the Bangko Sentral ng subject to zero- rated VAT under Republic
Pilipinas; Act No. 9136, its assertion that it need not
8) Where there are both zero-rated or prove its having actually made zero-rated
effectively zero- rated sales and taxable or sales of electricity by presenting the VAT
exempt sales, and the input taxes cannot official receipts and VAT returns cannot be
be directly and entirely attributable to any upheld.
of these sales, the input taxes shall be
proportionately allocated on the basis of Q. What are the rules on the
sales volume; and determination of the prescriptive
9) The claim is filed within two years after period for filing a tax refund or credit
the close of the taxable quarter when such of unutilized input VAT as provided
sales were made in Section 112 of the 1997 Tax Code?
( Luzon Hydro Corporation v. A. In Mindanao II Geothermal

Commissioner of Internal Partnership v. Commissioner of
Revenue, G.R. No. 188260, Internal Revenue, and Mindanao I
November 13, 2013) Geothermal Partnership v.
Commissioner of Internal Revenue, 1
Q. ABC Hydro Corporation, is a the Supreme Court provided the following
renewable power generation rules on prescriptive periods involving VAT:
company. It filed a claim for refund to
cover its unutilized input VAT 1) An administrative claim must be filed with
corresponding to the four quarters of the CIR within two years after the close of
taxable year 2001. It, however, did the taxable quarter when the zero-rated or
not produce evidence showing that it effectively zero-rated sales were made.
had zero-‐rated sales for the four quarters 2) The CIR has 120 days from the date of
of taxable year 2001. Should ABC’s claim submission of complete documents in
be denied? support of the administrative claim within
which to decide whether to grant a refund
A. Yes. In Luzon Hydro Corporation v. or issue a tax credit certificate. The 120-
Commissioner of Internal Revenue, day period may extend beyond the two-
G.R. No. 188260, November 13, 2013 , year period from the filing of the
the Supreme Court held that petitioner did administrative claim if the claim is filed in
not competently establish its claim for refund the later part of the two-year period. If the
or tax credit. The petitioner did not produce 120-day period expires without any
evidence showing that it had zero-rated sales
1
G.R. Nos. 193301 and 194637, March 11, 2013.
4


decision from the CIR, then the B. 120+30 Day Period
administrative claim may be considered to
be denied by inaction. 1) The taxpayer can file an appeal in one of
3) A judicial claim must be filed with the two ways: (1) file the judicial claim within
CTA within 30 days from the receipt of thirty days after the Commissioner
the CIR’s decision denying the denies the claim within the 120-day
administrative claim or from the period, or (2) file the judicial claim within
expiration of the 120-day period without thirty days from the expiration of the 120-
any action from the CIR. day period if the Commissioner does not
4) All taxpayers, however, can rely on BIR act within the 120-day period.
Ruling No. DA-489- 03 from the time of 2) The 30-day period always applies,
its issuance on 10 December 2003 up to its whether there is a denial or inaction on
reversal by this Court in Aichi on 6 the part of the CIR.
October 2010, as an exception to the 3) As a general rule, the 30-day period to
mandatory and jurisdictional 120+30 day appeal is both mandatory and
periods. jurisdictional. (Aichi and San Roque)
4) As an exception to the general rule,
(See Commissioner of Internal Revenue premature filing is allowed only if filed
v. San Roque Power Corporation, G.R. between 10 December 2003 and 5
No. 187485, Taganito Mining October 2010, when BIR Ruling No.
Corporation v. Commissioner of DA-489-03 was still in force. (San
Internal Revenue, G.R. No. 196113, Roque)
Philex Mining Corporation v. 5) Late filing is absolutely prohibited, even
Commissioner of Internal Revenue, during the time when BIR Ruling No.
G.R. No. 197156, February 12, 2013 ) DA-489-03 was in force. (San Roque)
Otherwise presented, the Supreme Court in A taxpayer can file his administrative claim
Commissioner of Internal Revenue v. for refund or issuance of tax credit certificate
Mindanao II Geothermal Partnership, anytime within the two- year prescriptive
G.R. No. 191498, January 15, 2014 period. If he files his claim on the last day of
summarized the rules as follows: the two-year prescriptive period, his claim is
still filed on time. The Commissioner will
A. Two-Year Prescriptive Period then have 120 days from such filing to decide
the claim. If the Commissioner decides the
1) It is only the administrative claim that claim on the 120th day or does not decide it
must be filed within the two-year on that day, the taxpayer still has 30 days to
prescriptive period. (Aichi) file his judicial claim with the CTA. (Team
2) The proper reckoning date for the two- Energy Corporation v.
year prescriptive period is the close of the Commissioner of Internal Revenue,
taxable quarter when the relevant sales G.R. No. 190928, January 13, 2014 )
were made. (San Roque)
3) The only other rule is the Atlas ruling, (See Commissioner of Internal
which applied only from 8 June 2007 to Revenue v. Visayas Geothermal
12 September 2008. Atlas states that the Power Company, G.R. No. 181276,
two- year prescriptive period for filing a November 11, 2013 )
claim for tax refund or credit of
unutilized input VAT payments should Q. What is the reckoning date of the
be counted from the date of filing of the two-year prescriptive period to file
VAT return and payment of the tax. (San the administrative claim for refund?
Roque)
A. The reckoning date is the close of the taxable
quarter when the relevant sales were made.
5


amount. Under the VAT System, there is no
The Atlas doctrine, which held that claims claim or issue that the input VAT is
for refund or credit of input VAT must “excessively” collected, that is, that the input
comply with the two-year prescriptive period VAT paid is more than what is legally due.
under Section 229 (date of filing of return and The person legally liable for the input VAT
payment of tax) should be effective only from cannot claim that he overpaid the input VAT
its promulgation on 8 June 2007 until its by the mere existence of an “excess” input
abandonment on 12 September 2008 in VAT. The term “excess” input VAT simply
Mirant. The Atlas doctrine was limited to the means that the input VAT available as credit
reckoning of the two-year prescriptive period exceeds the output VAT, not that the input
from the date of payment of the output VAT. VAT is excessively collected because it is
Prior to the Atlas doctrine, the two-year more than what is legally due. Thus, the
prescriptive period for claiming refund or taxpayer who legally paid the input VAT
credit of input VAT should be governed by cannot claim for refund or credit of the input
Section 112(A) following the verba legis rule. VAT as “excessively” collected under Section
The Mirant ruling, which abandoned the 229.
Atlas doctrine, adopted the verba legis rule,
thus applying Section 112(A) in computing Any suggestion that the “excess” input VAT
the two-year prescriptive period in claiming under the VAT System is an “excessively”
refund or credit of input VAT. collected tax under Section 229 may lead
taxpayers to file a claim for refund or credit
(Commissioner of Internal Revenue v. for such “excess” input VAT under Section
Mindanao II Geothermal 229 as an ordinary tax refund or credit
Partnership, G.R. No. 191498, outside of the VAT System.
January 15, 2014 )
From the plain text of Section 229, it is clear
Q. What is the distinction between an that what can be refunded or credited is a tax
‘excess input VAT” and an that is “erroneously, x x x illegally, x x x
“excessively collected” tax? excessively or in any manner wrongfully
collected.” In short, there must be a wrongful
A. The input VAT is not “excessively” collected payment because what is paid, or part of it, is
as understood under Section 229 because at not legally due. As the Court held in Mirant,
the time the input VAT is collected Section 229 should “apply only to instances of
the amount paid is correct and erroneous payment or illegal collection of
proper. The input VAT is a tax liability of, internal revenue taxes.” Erroneous or
and legally paid by, a VAT-registered seller of wrongful payment includes excessive
goods, properties or services used as input by payment because they all refer to payment of
another VAT-registered person in the sale of taxes not legally due. Under the VAT
his own goods, properties, or services. This System, there is no claim or issue that the
tax liability is true even if the seller passes on “excess” input VAT is “excessively or in any
the input VAT to the buyer as part of the manner wrongfully collected.”
purchase price. The second VAT- registered
person, who is not legally liable for the input (Commissioner of Internal Revenue v.
VAT, is the one who applies the input VAT San Roque Power Corporation, G.R.
as credit for his own output VAT. No. 187485, Taganito Mining
Corporation v. Commissioner of
In a claim for refund or credit of “excess” Internal Revenue, G.R. No. 196113,
input VAT under Section 110(B) and Section Philex Mining Corporation v.
112(A), the input VAT is not “excessively” Commissioner of Internal Revenue,
collected as understood under Section 229. G.R. No. 197156, February 12, 2013 )
At the time of payment of the input VAT the
amount paid is the correct and proper Q. What is the effect of failure to comply
6


with the 120-day waiting period in a day period to appeal to the CTA. (CBK
claim for refund of input taxes? Power Limited v. Commissioner of
Internal Revenue, G.R. Nos. 198729-
A. Failure to comply with the 120-day waiting 30, January 15, 2014 )
period violates a mandatory provision of law.
It violates the doctrine of exhaustion of In Nippon Express (Philippines)
administrative remedies and renders the Corporation v. Commissioner of
petition premature and thus without a cause Internal Revenue, G.R. No. 196907,
of action, with the effect that the CTA does March 13, 2013 , the petition failed because
not acquire jurisdiction over the taxpayer’s the judicial claim of petitioner was filed on
petition. April 25, 2003, only one day after it submitted
its administrative claim to the CIR.
The charter of the CTA expressly provides Petitioner failed to wait for the lapse of the
that its jurisdiction is to review on appeal requisite 120-day period or the denial of its
“decisions of the Commissioner of Internal claim by the CIR before elevating the case to
Revenue in cases involving x x x refunds of the CTA by a petition for review. As its
internal revenue taxes.” judicial claim was filed during which strict
compliance with the 120+30-day period was
When a taxpayer prematurely files a judicial required, the Court cannot but declare that
claim for tax refund or credit with the CTA the filing of the petition for review with the
without waiting for the decision of the CTA was premature and that the CTA had
Commissioner, there is no “decision” of the no jurisdiction to hear the case.
Commissioner to review and thus the CTA
as a court of special jurisdiction has no Q. Is the 30-day period within which to
jurisdiction over the appeal. file the judicial claim required to fall
within the 2-year prescriptive period?
The charter of the CTA also expressly
provides that if the Commissioner fails to A. The 30-day period need not necessarily fall
decide within “a specific period” required within the two-year prescriptive period for
by law, such “inaction shall be deemed a the following reasons:
denial” of the application for tax refund or
credit. It is the Commissioner’s decision, or 1) Section 112(A) clearly, plainly, and
inaction “deemed a denial,” that the taxpayer unequivocally provides that the taxpayer
can take to the CTA for review. Without a “may, within two (2) years after the close of
decision or an “inaction x x x deemed a denial” the taxable quarter when the sales were
of the Commissioner, the CTA has no made, apply for the issuance of a tax credit
jurisdiction over a petition for review. certificate or refund of the creditable input
tax due or paid to such sales.” In short, the
(Commissioner of Internal Revenue v. law states that the taxpayer may apply
San Roque Power Corporation, G.R. with the Commissioner for a refund or
No. 187485, Taganito Mining credit “within two (2) years,” which means
Corporation v. Commissioner of at anytime within two years. Thus, the
Internal Revenue, G.R. No. 196113, application for refund or credit may be
Philex Mining Corporation v. filed by the taxpayer with the
Commissioner of Internal Revenue, Commissioner on the last day of the two-
G.R. No. 197156, February 12, 2013 ) year prescriptive period and it will still
strictly comply with the law. The two- year
The 30-day period to appeal to the CTA is prescriptive period is a grace period in
dependent on the 120-day period and favor of the taxpayer and he can avail of
compliance with both periods is the full period before his right to apply for
jurisdictional. The period of 120 days is a a tax refund or credit is barred by
prerequisite for the commencement of the 30- prescription.
7


2) Section 112(C) provides that the his administrative claim within the two-
Commissioner shall decide the application year prescriptive period.
for refund or credit “within one hundred
twenty (120) days from the date of The theory that the 30-day period must fall
submission of complete documents in within the two-year prescriptive period
support of the application filed in adds a condition that is not found in the
accordance with Subsection (A).” The law. It results in truncating 120 days from
reference in Section 112(C) of the the 730 days that the law grants the
submission of documents “in support of taxpayer for filing his administrative claim
the application filed in accordance with with the Commissioner. This Court
Subsection A” means that the application cannot interpret a law to defeat, wholly or
in Section 112(A) is the administrative even partly, a remedy that the law
claim that the Commissioner must decide expressly grants in clear, plain, and
within the 120-day period. In short, the unequivocal language.
two- year prescriptive period in Section
112(A) refers to the period within which (Commissioner of Internal Revenue
the taxpayer can file an administrative v. San Roque Power Corporation,
claim for tax refund or credit. Stated G.R. No. 187485, Taganito Mining
otherwise, the two-year prescriptive Corporation v. Commissioner of
period does not refer to the filing of the Internal Revenue, G.R. No. 196113,
judicial claim with the CTA but to the Philex Mining Corporation v.
filing of the administrative claim with the Commissioner of Internal
Commissioner. As held in Aichi, the Revenue, G.R. No. 197156,
“phrase ‘within two years x x x apply for February 12, 2013 )
the issuance of a tax credit or refund’ refers
to applications for refund/credit with the It is only the administrative claim that
CIR and not to appeals made to the must be filed within the two-year
CTA.” prescriptive period; the judicial claim need
3) If the 30-day period, or any part of it, is not fall within the two-year prescriptive
required to fall within the two-year period. (Commissioner of Internal
prescriptive period (equivalent to 730 Revenue v. Mindanao II
days), then the taxpayer must file his Geothermal Partnership, G.R. No.
administrative claim for refund or credit 191498, January 15, 2014 )
within the first 610 days of the two-year
prescriptive period. Otherwise, the filing Q. ABC argues that the judicial claim is
of the administrative claim beyond the first seasonably filed so long as it is filed
610 days will result in the appeal to the after the 120-day waiting period but
CTA being filed beyond the two-year before the lapse of the two-year
prescriptive period. Thus, if the taxpayer prescriptive period under Section
files his administrative claim on the 611th 112(A). In other words, a taxpayer
day, the Commissioner, with his 120-day may file an appeal with the CTA after
period, will have until the 731st day to the expiration of the 120-day period,
decide the claim. If the Commissioner in which case the 30-day period does
decides only on the 731st day, or does not not apply. Is this contention correct?
decide at all, the taxpayer can no longer
file his judicial claim with the CTA A. No. The 30-‐day period applies not only to
because the two-year prescriptive period instances of actual denial by the CIR of the
(equivalent to 730 days) has lapsed. The claim for refund or tax credit, but to cases
30-day period granted by law to the of inaction by the CIR as well.
taxpayer to file an appeal before the CTA
becomes utterly useless, even if the The taxpayer can file the appeal in one of two
taxpayer complied with the law by filing ways: (1) file the judicial claim within thirty
8


days after the Commissioner denies the claim
within the 120-day period, or (2) file the ( Commissioner of Internal Revenue
judicial claim within thirty days from the v. San Roque Power Corporation,
expiration of the 120-day period if the G.R. No. 187485, Taganito Mining
Commissioner does not act within the 120- Corporation v. Commissioner of
day period. Internal Revenue, G.R. No. 196113,
Philex Mining Corporation v.
(Commissioner of Internal Revenue v. Commissioner of Internal Revenue,
Mindanao II Geothermal G.R. No. 197156, October 8, 2013)
Partnership, G.R. No. 191498,
January 15, 2014 ) Note: Thus, in Procter & Gamble Asia
PTE Ltd. v. Commissioner of Internal
Q. Should the 120+30 day period rule be Revenue, G.R. No. 202071, February 19,
given only prospective effect given 2014 , the Petitioner was able to claim the
that the manner by which the BIR benefit of BIR Ruling No. DA-489-03 as the
and the CTA actually treated the judicial claims were filed on October 2, 2006
120+30 day period constitutes an and December 29, 2006.
operative fact?
In Team Energy Corporation v.
A. No. The general rule is that a void law or Commissioner of Internal Revenue,
administrative act cannot be the source of G.R. No. 197760, January 13, 2014 ,
legal rights or duties. petitioner filed its judicial claim on April 18,
2007 or after the issuance of BIR Ruling No.
The doctrine of operative fact is an exception DA-489-03 on December 10, 2003 but before
to the general rule, such that a judicial October 6, 2010, the date when the Aichi case
declaration of invalidity may not necessarily was promulgated. Thus, even though
obliterate all the effects and consequences of petitioner's judicial claim was prematurely filed
a void act prior to such declaration without waiting for the expiration of the 120-day
mandatory period, the CTA may still take
Clearly, for the operative fact doctrine to cognizance of the instant case as it was filed
apply, there must be a “legislative or executive within the period exempted from the 120-30-day
measure,” meaning a law or executive mandatory period.
issuance, that is invalidated by the court.
From the passage of such law or In Commissioner of Internal Revenue v.
promulgation of such executive issuance until Team Sual Corporation, G.R. No.
its invalidation by the court, the effects of the 194105, February 5, 2014 , Team Sual filed
law or executive issuance, when relied upon its judicial claim for refund/tax credit of its
by the public in good faith, may have to be unutilized input VAT with the CTA on April 1,
recognized as valid. In the present case, 2002 – more than a year before the issuance of
however, there is no such law or executive BIR Ruling No. DA-489-03. Accordingly,
issuance that has been invalidated by the Team Sual cannot benefit from the declaration
Court except BIR Ruling No. DA-489-03. laid down in BIR Ruling No. DA-489-03. As
stressed by the Court in San Roque, prior to the
The doctrine of operative fact was applied by issuance of BIR Ruling No. DA-489-03, the
the Supreme Court when it recognized the BIR held that the 120-day period was
simultaneous filing during the period mandatory and jurisdictional, which is the
between 10 December 2003, when BIR correct interpretation of the law.
Ruling No. DA-489-03 was issued, and 6
October 2010, when this Court promulgated In Republic of the Philippines v. GST
Philippines, G.R. No. 190872, October 17,
Aichi declaring the 120+30 day periods
2013, it was held that GST can benefit from
mandatory and jurisdictional, thus reversing
BIR Ruling No. DA-489-03 with respect to its
BIR Ruling No. DA-489-03.
claims for refund of unutilized excess input VAT
9


for the second and third quarters of taxable year v. Commissioner of Internal Revenue,
2005 which were filed before the CIR on G.R. No. 184266, November 11, 2013 , the
November 18, 2005 but elevated to the CTA on Petitioner’s judicial claim was filed on 24 July
March 17, 2006 before the expiration of the 120- 2002, when the 120+30 day mandatory periods
day period (March 18, 2006 being the 120th day). were already in the law and BIR Ruling No.
BIR Ruling No. DA-489-03 effectively shielded DA-489-03 had not yet been issued, Petitioner
the filing of GST's judicial claim from the vice of does not have an excuse for not observing the
prematurity. 120+30 day period. Failure of petitioner to
observe the mandatory 120-day period is fatal to
GST's claims, however, for the four quarters of its claim and rendered the CTA devoid of
taxable year 2004 and the first quarter of taxable jurisdiction over the judicial claim.
year 2005 should be denied for late filing of the
petition for review before the CTA. GST filed In Commissioner of Internal Revenue v. Dash
its VAT Return for the first quarter of 2004 on Engineering, G.R. No. 184145, December 11,
April 16, 2004. Reckoned from the close of the 2013, the Supreme Court held that respondent's
first taxable quarter of 2004 on March 31, 2004, judicial claim for refund must be denied for
the administrative claim filed on June 9, 2004 having been filed late. Although respondent
was well within the required two-year filed its administrative claim with the BIR on
prescriptive period from the close of the taxable August 9, 2004 before the expiration of the two-
quarter, the last day of filing being March 31, year period in Section l 12(A), it undoubtedly
2006. The CIR then had 120 days from June 9, failed to comply with the 120+30-day period in
2004, or until October 7, 2004, to decide the Section l l 2(D) (now subparagraph C) which
claim. Since the Commissioner did not act on requires that upon the inaction of the CIR for
the claim within the said period, GST had 30 120 days after the submission of the documents
days from October 7, 2004, or until November in support of the claim, the taxpayer has to file
6, 2004, to file its judicial claim. However, GST its judicial claim within 30 days after the lapse of
filed its petition for review before the CTA only the said period. The 120 days granted to the
on March 17, 2006, or 496 days after the last day CIR to decide the case ended on December 7,
of filing. In short, GST was late by one year and 2004. Thus, DEPI had 30 days therefrom, or
131 days in filing its judicial claim. until January 6, 2005, to file a petition for review
with the CTA. Unfortunately, DEPI only
For the second quarter of taxable year 2004, sought judicial relief on May 5, 2005 when it
GST filed its administrative claim on August 12, belatedly filed its petition to the CTA, despite
2004. The 120-day period from the filing of such having had ample time to file the same, almost
claim ended on December 10, 2004, and the 30th four months after the period allowed by law. As
day within which to file a judicial claim fell on a consequence of DEPI's late filing, the CTA
January 9, 2005. However, GST filed its did not properly acquire jurisdiction over the
petition for review before the CTA only on claim.
March 17, 2006, or 432 days after the last day of
filing. GST was late by one year and 67 days in In Commissioner of Internal Revenue v.
filing its judicial claim. Toledo Power Company, G.R. No.
183880, January 20, 2014 Respondent’s
For the third and fourth quarters of taxable year judicial claims for refund of its unutilized input
2004, GST filed its administrative claims on VAT covering the third and fourth quarters of
th
February 18, 2005. The 120 day, or June 18, 2001 were filed on October 24, 2003 and January
2005, lapsed without any action from the CIR. 22, 2004, respectively.
Thus, GST had 30 days therefrom, or until July
18, 2005, to file its judicial claim, but it did so As held in the San Roque ponencia, strict
only on March 17, 2006, or 242 days after the last compliance with the 120+30 day mandatory and
day of filing. GST was late by 242 days in filing jurisdictional periods is not necessary when the
its judicial claim. judicial claims are filed between December 10,
2003 (issuance of BIR Ruling No. DA-489-03
In Applied Food Ingredients Company which states that the taxpayer need not wait for
10


the 120-day period to expire before it could seek
judicial relief) to October 6, 2010 (promulgation Q. ABC Corporation filed a claim for
of the Aichi doctrine). refund of unutilized input taxes. ABC
Corporation changed its name to
Clearly, therefore, Respondent’s refund claim of DEF Corporation. Thus, the official
unutilized input VAT for the third quarter of receipts presented beared the name of
2001 was denied for being prematurely filed with DEF Corporation instead of ABC
the CTA, while its refund claim of unutilized Corporation. The BIR contends that
input VAT for the fourth quarter of 2001 may be ABC failed to comply with the VAT
entertained since it falls within the exception invoicing requirements as the use of
provided in the Court’s most recent rulings. the business name “DEF” by ABC
was never approved by the SEC. Is
Q. What is the effect non-compliance the BIR’s contention correct?
with the documentary and evidentiary
requirements for a VAT refund claim? A. Yes. In Bonifacio Water Corporation
v. The Commissioner of Internal
A. No. In J.R.A Philippines v. Revenue, G.R. No. 175142, July 22,
Commissioner of Internal Revenue , 2013, , the Supreme Court held that the
the Supreme Court held that failure to change of petitioner’s name to “Bonifacio
comply with the invoicing requirements GDE Water Corporation,” being
provides sutt1cient ground to deny a claim for unauthorized and without approval of the
tax refund or tax credit. A claim for tax SEC, and the issuance of official receipts
refund or tax credit, the applicant must prove under that name which were presented to
not only entitlement to the claim but also support petitioner’s claim for tax refund,
compliance with all the documentary and cannot be used to allow the grant of tax
evidentiary requirements therefor. refund or issuance of a tax credit certificate in
petitioner’s favor. The absence of official
Q. ABC Corporation filed a claim for receipts issued in its name is tantamount to
refund of unutilized input taxes. The non- compliance with the substantiation
BIR contends that ABC failed to requirements provided by law.
comply with the VAT invoicing
requirements as the words “zero- ---------------------------------------------------------
rated” was merely stamped and not -
pre-printed. Is the BIR’s contention JUDICIAL REMEDIES (CTA)
correct? ---------------------------------------------------------
-
A. No. In Commissioner of Internal Q. May the Supreme Court motu
Revenue v. Toledo Power Company, proprio determine if the CTA has
G.R. No. 183880, January 20, 2014 , the jurisdiction over a claim for refund?
Supreme Court held that the words “zero-
rated” appeared on the VAT invoices/official A. Yes. In Commissioner of Internal
receipts presented by the Repondent in Revenue v. Silicon Philippines, G.R.
support of its refund claim. Although the No. 169778, March 12, 2014 , the
same was merely stamped and not pre- Supreme Court held that the CTA is a court
printed, the same is sufficient compliance of special jurisdiction. As such, it can only
with the law, since the imprinting of the word take cognizance of such matters as are
“zero-rated” was required merely to
clearly within its jurisdiction. However,
distinguish sales subject to 12% VAT, those although the parties have not raised the
that are subject to 0% VAT (zero-rated) and issue of jurisdiction, nevertheless, the
exempt sales, to enable the Bureau of Supreme court Court may motu proprio
Internal Revenue to properly implement and determine whether or not the CTA has
enforce the other VAT provisions of the Tax jurisdiction over respondent’s judicial
Code. claim for refund taking into consideration,
11


the factual and legal allegations contained
in the pleadings filed by both parties and
found by the court a quo.
*** Nothing else follows ***
GOOD LUCK ATENEAN BARRISTERS!

ATENEO 100% ONE BIG FIGHT!
12

1
2014 BAR TIPS ON TAXATION LAW

GENERAL PRINCIPLES ITAD. The BIR denied the claim on the ground
that the application for a tax treaty relief was
Q: Who is the proper party to question or seek a not filed with ITAD prior to the payment by the
refund of indirect taxes? former of its BPRT and actual remittance of its
branch profits to Deutsche Bank Germany, or
The proper party to question or seek a refund prior to its availment of the preferential rate of
of an indirect tax is the statutory taxpayer, the ten percent (10%) under the RP-Germany Tax
person on whom the tax is imposed by law and Treaty. Is the BIR correct?
who paid the same even if he shifts the burden
thereof to another. (Silkair v. CIR, G.R. No. The noncompliance with the 15-day period
No. 166482, January 25, 2012; Diageo for prior application should not operate to
Philippines v. CIR, G.R. No. 183553, automatically divest entitlement to the tax treaty
November 12, 2012) relief especially in claims for refund as it would
constitute a violation of the duty required by
N.B. But take note of the next case: good faith in complying with a tax treaty. Every
treaty in force is binding upon the parties, and
Q: Caltex sold petroleum fuel and passed on the obligations under the treaty must be performed
excise tax to PAL. Now, PAL seeks to refund by them in good faith. Thus, laws and issuances
the said excise taxes on the basis of the tax must ensure that the reliefs granted under tax
exemption privileges provided for in its treaties are accorded to the parties entitled
franchise, which exempts it from both direct thereto. The BIR must not impose additional
and indirect taxes. The CIR argues that PAL requirements that would negate the availment
has no personality to file the claim because it is of the reliefs provided for under international
not the statutory taxpayer. Is the CIR’s agreements. More so, when the RP-Germany
contention correct? Tax Treaty does not provide for any pre-
requisite for the availment of the benefits under
No. Where the law clearly grants the party to said agreement. At most, the application for a
which the economic burden of the tax is shifted tax treaty relief from the BIR should merely
an exemption from both direct and indirect operate to confirm the entitlement of the
taxes, such party must be allowed to claim a tax taxpayer to the relief. (Deutsche Bank AG
refund even if it is not considered as the Manila v. Commissioner of Internal
statutory taxpayer under the law. The propriety Revenue, G.R. No. 188550, August 19,
of a tax refund claim is hinged on the kind of 2013)
exemption which forms its basis. If the law
confers an exemption from both direct or INCOME TAX
indirect taxes, a claimant is entitled to a tax
refund even if it only bears the economic Q: What is the income tax treatment of an
burden of the applicable tax. On the other OFW?
hand, if the exemption conferred only applies to
direct taxes, then the statutory taxpayer is An individual citizen of the Philippines who is
regarded as the proper party to file the refund working and deriving income from abroad as an
claim. (Philippine Airlines v. overseas contract worker is taxable only on
Commissioner of Internal Revenue, G.R. income from sources within the Philippines.
No. 198759, July 1, 2013) Thus, income arising out of overseas
employment is income from sources without the
Q: Deutsche Bank Manila remitted to Deutsche Philippines and is exempt from income tax.
Bank Germany an amount representing the Further, income earnings from business
15% branch profit remittance tax (BPRT) on its activities or properties of an overseas contract
regular banking unit net income. Believing that worker in the Philippines are income from
it should be entitled to the preferential rate of sources within the Philippines and, as such, they
10% under the RP-Germany Tax Treaty, are subject to income tax. (RR 1-2011)
Deutsche Bank Manila filed a claim for refund
and a Tax Treaty Relief Application with the

2

Q: Are director’s bonuses subject to withholding tax. Note, however, that this case
withholding tax on compensation? did not rule on the validity of RM 65-2012 and
did not deal with the issue of VAT.
Yes. For taxation purposes, a director is
considered an employee under Section 5 of Q: What are the conditions for the exemption of
Revenue Regulation No. 12-86. An individual, capital gains tax on the sale by a natural person
performing services for a corporation, whether of his principal residence?
as an officer and director or merely as a director
whose duties are confined to attendance at and 1. The 6% capital gains tax due shall be
participation in the meetings of the Board of deposited in an account with an authorized
Directors, is an employee. The non-inclusion of agent bank under an Escrow Agreement. It
the names of some of petitioner’s directors in can only be released upon showing that the
the company’s Alpha List does not ipso facto proceeds have been fully utilized within 18
create a presumption that they are not months.
employees of the corporation, because the 2. The proceeds from the sale, exchange or
imposition of withholding tax on compensation disposition must be fully utilized in
hinges upon the nature of work performed by acquiring or constructing his new principal
such individuals in the company. (First residence within 18 calendar months from
Lepanto Taisho Insurance v. date of its sale. Proof must be submitted.
Commissioner of Internal Revenue, G.R. 3. The tax exemption may be availed of only
No. 197117, April 10, 2013) once every 10 years
4. The historical cost or adjusted basis of his
Q: Are association dues, membership fees, and old principal residence sold, exchanged
other assessments/charges collected by a disposed shall be carried over to the cost
condominium corporation subject to income tax basis of his new principal residence
and withholding tax 5. If there is no full utilization of the proceeds
of sale, exchange or disposition of his old
Yes. Association dues, membership fees, et al. principal residence, he shall be liable for
paid to the condominium corporation forms deficiency capital gains tax of the utilized
part of gross income of the said corporation portion. (RR 13-99, as amended by RR
subject to income tax and withholding tax. This 14-2000)
is because a condominium corporation
furnishes its members and tenants with benefits, Q: The shares of stock of ABC corporation is a
advantages, and privileges in return for such publicly listed company. Its public ownership
payments. They constitute as income payments level however fell below the mandatory
or compensation for beneficial services minimum public ownership of 10%. ABC sold
provided to members and tenants. (RMC 65- shares of stock to Mr. X. What is the income tax
2012) treatment of the said transaction?
N.B. The same is also subject to VAT as they It is subject to capital gains tax. Generally, a
constitute income payment or compensation for percentage tax of ½ of 1% is imposed on the
the beneficial services it provides to members gross selling price of shares of stock if they are
and tenants. listed and sold, exchanged or transferred
through the facilities of the local stock
Note that in Officemetro Philippines, Inc. exchange. (RR 06-2008)
v. CIR, CTA Case No. 8382, June 3,
2014, the CTA ruled that However, if traded through the stock exchange,
association/condominium dues, membership a sale of shares by companies not complying
fees, et al., which are merely held in trust and with the 10% minimum public float shall be
are to be used solely for administrative expenses subject to capital gain tax (RR 16-2012)
in implementing their purposes and from which
the corporation could not realize any gain or
profit, must not be subject to income and to Q: Are campaign expenditures tax-exempt?

3

Central Luzon Drug Corporation, G.R.
It depends. In order for the campaign No. 159647, April 15, 2005, where the
expenditure to be tax-exempt, it must be fully Court held that the 20% discount required by
utilized. If it is not fully utilized, it is subject to the law to be given to senior citizens was a tax
income tax. These contributions are intended to credit and not merely a tax deduction from the
finance the operation expenditures of a gross income or gross sale of the establishment
candidate. Any unexpended balance from any concerned. This ruling, however, was based on
contribution to a candidate or party shall be Section 4 of Republic Act No. 7432, which
subject to income tax. Further, if the candidate provides establishments may claim the discount
fails to include certain campaign expenditures as a tax credit. Note that Republic Act No.
in the Statement of Expenditures to be filed 9257, which amended Republic Act No. 7432,
with the COMELEC, such amounts will be now provides that establishments may claim the
automatically subjected to income tax. (RR 7- discounts as a tax deduction. Republic Act No.
2011) 9994 retains this treatment of the 20% senior
citizen’s discount as a tax deduction.
N.B. Contributions given to candidates or
political parties are not subject to donor’s tax Q: ABC Law Firm availed of deductions in
(Section 13, RA 7166). computing its net income. May Atty. Z, a
partner, claim deductions from his share in the
Q: What is the effect of the taxpayer’s failure to net income?
submit a “Sworn Declaration of Loss” on the
deductibility of casualty losses as allowed under It depends. If the GPP availed of the itemized
Section 30(d) of the Tax Code? deductions in computing its net income, a
partner may still claim itemized deductions
A: The Sworn Declaration of loss is a mandated from his share in the net income of the
substantiation requirement under RR 12-77. partnership. However, if the GPP availed of
The failure to submit the said declaration of loss OSD, the partner can no longer claim (RR 2-
will result in the disallowance of the casualty 2010 amending RR 16-2008)
loss claimed in the taxpayer's income tax return.
The Sworn Declaration of Loss is necessary to Q:Filinvest Development Corporation (FDC)
forewarn the BIR that it had suffered a loss extended advances in favour of its affiliate. The
whose extent it would be claiming as a BIR assesses FDC for deficiency income by
deduction of its tax liability, and thus enable the unilaterally imputing an “arm’s length” interest
BIR to conduct its own investigation of the rate on its advances. FDC disputes this by
incident leading to the loss. (H. Tambunting saying the CIR lacks authority to impute
Pawnshop v. Commissioner of Internal theoretical interest and the rule is that interests
Revenue, GR No. 173373, July 29, cannot be demanded in the absence of a
2013) stipulation to that effect. Is FDC’s contention
correct?
Q: Is the 20% Senior Citizens’ discount a tax
credit or a tax deduction? Yes. Despite the seemingly broad power of the
CIR to distribute, apportion and allocate gross
The 20% Senior Citizen Discount is a tax income under Section 50, the same does not
deduction. The 20% sales discount shall be include the power to impute theoretical interest
treated as a tax deduction and no longer as a even with regard to controlled taxpayers’
tax credit. (Carlos Superdrug Corp v. transactions. This is true even if the CIR is able
Department of Social Welfare and to prove that the interest expense was in fact
Development, G.R. No. 166494, June claimed by FDC. The term in the definition of
29, 2007; M.E. Holding Corporation v. gross income that even those income “from
Court of Appeals, G.R. No. 160193, whatever source derived” is covered still
March 3, 2008) requires that there must be actual or at least
probable receipt or realization of the time of
N.B. This reverses the ruling in CIR v. gross income sought to be apportioned,

4

distributed or reallocated. Finally, under the insofar as its revenues from paying patients are
Civil Code, no interest shall be due unless concerned. Such revenue is subject to income
expressly stipulated in writing. (CIR v. tax at 10% under Section 27(B). (CIR v. St.
Filinvest Development Corporation, July Lukes Medical Center, September 26,
19, 2011) 2012)
N.B. But take note that the decision was made Q: May a withholding agent file a claim for tax
prior to the issuance of RR 2-2013 (Transfer refund?
Pricing Guidelines). There is a transfer pricing
issue where one associated enterprise, entitled Yes. Generally, the person entitled to claim a
to income tax exemptions, is being used to tax refund is the taxpayer. However, if the
allocate income away from a company subject taxpayer does not file the claim, the withholding
to regular income taxes. The arm’s length agent may file the same. A withholding agent
principle requires the transaction with a related has a legal right to file a claim for refund. First,
party to be made under comparable conditions he is considered a taxpayer under the Tax Code
and circumstances as a transaction with an as he is personally liable for the withholding tax
independent party. Thus, The BIR has the as well as for deficiency assessments,
authority to review controlled transactions surcharges, and penalties, should the amount
among associated enterprises and to allocate or withheld be finally found to be less than the
distribute their income and deductions in order amount that should have been withheld.
to determine the appropriate revenues and Second, as an agent of the taxpayer, his
taxable income of the associated enterprises authority to file the income tax return and remit
involved in controlled transactions. (Section the tax withheld to the government includes the
50, NIRC; RR 2-2013) authority to file a claim for refund and to bring
an action for recovery of such claim. (CIR v.
Q: St. Lukes Medical Center is a hospital Smart Communications, G.R. No.
organized as a non-stock and non-profit 179045-46, August 25, 2010)
corporation. It admits both paying and non-
paying patients. The CIR claimed that St. Lukes N.B. While the withholding agent has the right
was liable for income tax at 10% as provided to recover the taxes erroneously or illegally
under Section 27(B) of the NIRC. St. Lukes collected, he nevertheless has the obligation to
argues that it is a non-stock, non-profit remit the same; otherwise, he would be unjustly
institution for charitable and social welfare enriching himself at the expense of the principal
purposes exempt from income tax under taxpayer from whom the taxes were withheld,
Section 30(E) and (G) of the NIRC. Decide. and from whom he derives his legal right to file
a claim for refund. (CIR v. Smart
St. Lukes cannot claim full tax exemption under Communications, G.R. No. 179045-46,
Section 30 because it has paying patients and August 25, 2010)
this is notwithstanding the fact that it is a non-
profit hospital. For Section 27(B) to apply, the Q: A taxpayer was not able to withhold on
hospital must be non-profit which means that no certain income payments. During the audit
net income or asset accrues to or benefits any investigation, the taxpayer made payments of
member or specific person and all the activities withholding tax. Will he be able to claim the
of the hospital are non-profit. On the other same as a deduction from gross income?
hand, Section 30(E) and (G), while providing
for an exemption is qualified by the last No. No deduction shall be allowed
paragraph which, in turn, provides that notwithstanding payments of withholding tax at
activities conducted for profit shall be taxable. the time of the audit investigation or
Section 30(E) and (G) requires that an reinvestigation/reconsideration in case where
institution be operated exclusively for charitable no withholding was made. The taxpayer shall be
purposes to be completely exempt from income liable to pay the deficiency withholding tax
tax. In this case, however, St. Lukes is not (including interest and surcharge) and the
operated exclusively for charitable purposes

5

deficiency income tax as a result of creditable withholding tax must comply with
the disallowed deduction. (RR No. 12-2013) the following requisites:
N.B. Previously, if the withholding tax, including 1) The claim must be filed with the CIR
interest and surcharges, is paid at the time of within the two-year period from the date
audit and investigation, the deduction may still of payment of the tax;
be allowed 2) It must be shown on the return of the
recipient that the income received was
Q: Section 52(c) of the NIRC requires a declared as part of the gross income; and
corporation contemplating dissolution to first 3) The fact of withholding is established by
secure a tax clearance from the BIR. Does this a copy of a statement duly issued by the
requirement apply to a bank placed under payor to the payee showing the amount
liquidation by the Monetary Board of the BSP? paid and the amount of tax withheld.
(Commissioner of Internal
No. Section 52(C) of the 1997 Tax Code does Revenue v. TeaM (Philippines)
not apply to a bank ordered placed under Operations Corporation, G.R.
liquidation by the Monetary Board. Further, a No. 185728, October 16, 2013 )
tax clearance is not a requisite to the approval
of the project of distribution of the assets of the
ESTATE TAX
bank under liquidation by PDIC. (Philippine
Deposit Insurance Corporation vs.
Commissioner of Internal Revenue, G.R. Q: What are the responsibilities of the
No. 172892, June 13, 2013) heir/administrator/executor in filing the estate
tax return?
Q: What is the irrevocability rule?
A notice of death required to be given to the
Once the option to carry-over the excess and BIR:
apply the excess quarterly income tax against
income tax due for the taxable quarters of the 1. In all cases of transfers subject to tax; or
succeeding taxable years has been made, such 2. Where, though exempt from tax, the
option shall be considered irrevocable for that gross value of the estate exceeds
taxable period and no application for cash P20,000.
refund or issuance of a tax credit certificate
shall be allowed. (Section 76, NIRC; United If required, the notice of death shall be given
International Pictures AB v. CIR, G.R.
No. 166381, October 11, 2012) 1. Within 2 months after the death of the
decedent; or
N.B. The irrevocability rule in Section 76 of the 2. Within a like period after the executor
Tax Code applies only to the option to carry- or administrator or executor qualifies as
over the excess income tax payment, and not to such. (RMC 34-2013)
the claim for refund or issuance of a TCC.
Nowhere in Section 76 was it stated that the The estate tax return is required to be filed:
option to claim refund or TCC, once chosen, is
irrevocable. (United Coconut Planters 1. In all cases of transfers subject to estate
Bank vs. Commissioner of Internal tax; or
Revenue, CTA EB Case No. 725, August 2. Where, though exempt from estate tax,
23, 2012) the gross value of the estate exceeds two
hundred thousand pesos (P
Q: What are the requirements for a 200,000.00); or
3. Where, regardless of the gross value, the
claim for refund of excess creditable
estate consists of registered or
withholding tax?
registrable property such as real
property, motor vehicle, shares of stocks
A taxpayer claiming for a tax credit or refund of
or other similar property for which a

6

clearance from the Bureau of Internal associations that are subject to income tax. They
Revenue (BIR) is required as a are likewise subject to VAT (RMC 53-2013)
prerequisite for the transfer of
ownership thereof in the name of the VALUE-ADDED TAX
transferee.
Q: What are the requirements for a
The estate tax return and the payment of claim for VAT refund?
estate tax shall be made:
A claim for refund or tax credit for unutilized
1. The heirs/ authorized representative/ input VAT may be allowed only if the following
administrator/ executor shall file the requisites concur, namely:
estate tax return and pay the
corresponding estate tax with the
1) The taxpayer is VAT-registered;
Authorized Agent Bank (AAB), Revenue
2) The taxpayer is engaged in zero-rated or
Collection Officer (RCO) or duly
effectively zero-rated sales;
authorized Treasurer of the city or
3) The input taxes are due or paid;
municipality in the Revenue District
Office having jurisdiction over the place 4) The input taxes are not transitional input
of domicile of the decedent at the time taxes;
of his death. 5) The input taxes have not been applied
2. In case of a non-resident decedent, with against output taxes during and in the
executor or administrator in the succeeding quarters;
Philippines, the estate tax return shall be 6) The input taxes claimed are attributable to
filed with the AAB of the RDO where zero-rated or effectively zero-rated sales;
such executor/administrator is 7) For zero-rated sales under Section
registered or is domiciled, if not yet 106(A)(2)(1) and (2); 106(B); and 108(B)(1)
registered with the BIR. and (2), the acceptable foreign currency
3. For non-resident decedent with no exchange proceeds have been duly
executor or administrator in the accounted for in accordance with the rules
Philippines, the estate tax return shall be and regulations of the Bangko Sentral ng
filed with the AAB under the jurisdiction Pilipinas;
of RDO No. 39–South Quezon City. 8) Where there are both zero-rated or
(RMC No. 34-2013) effectively zero- rated sales and taxable or
exempt sales, and the input taxes cannot
DONOR’S TAX be directly and entirely attributable to any
of these sales, the input taxes shall be
Q: Are gratuitous gifts, donations, and other proportionately allocated on the basis of
contributions received by Homeowner’s sales volume; and
Associations subject to donor’s tax? 9) The claim is filed within two years after
the close of the taxable quarter when such
Yes. Gifts, donations, and other contributions sales were made ( Luzon Hydro
received by the Associations are subject to Corporation v. Commissioner of
payment of donor’s tax. Endowments or gifts Internal Revenue, G.R. No.
received by such associations are not exempt 188260, November 13, 2013)
from donor’s tax considering that gifts to
Associations are not qualified for exemption Q: Luzon Hydro Corporation, is a renewable
under Section 101(A)(3) of the NIRC (RMC power generation company. It filed a claim for
53-2013) refund to cover its unutilized input VAT
corresponding to the four quarters of taxable
N.B. If the donation is onerous as they are in year 2001. It, however, did not produce
exchange for goods, services and use of evidence showing that it had zero-rated sales for
properties, these are income on the part of the the four quarters of taxable year 2001. Should
ABC’s claim be denied?

7

Yes. To be able to claim refund on the basis of Q: May unutilized input VAT be treated as a
zero-rated sales, taxpayer must prove the deductible expense for income tax purposes?
existence of zero-rated sales though its VAT
returns and receipts issued for such zero-rated No. The unutilized creditable input taxes
sales. Here, Luzon Hydro Corp did not produce attributable to zero-rated sales can only be
evidence showing that it had zero-rated sales for recovered through the application for refund or
the four quarters of taxable year 2001. It did tax credit. Nowhere in the Tax Code is there a
not reflect any zero-rated sales from its power specific provision expressly providing for
generation in its four quarterly VAT returns, another mode of recovering unapplied input
which indicated that it had not made any sale of taxes, particularly that unapplied input taxes
electricity. (Luzon Hydro Corporation v. may be treated outright as deductible expense
Commissioner of Internal Revenue, G.R. for income tax purposes. (BIR Ruling No.
No. 188260, November 13, 2013) 123-2013; RMC 57-2013)
Q: What are the rules on prescriptive periods N.B. Previously, taxpayers were allowed to
involving VAT? deduct unutilized input VAT as expense in the
following cases: (a) when the two-year
1) An administrative claim must be filed with prescriptive period has lapsed without any claim
the CIR within two years after the close of for refund or credit; (b) when the claim for
the taxable quarter when the zero-rated or refund or credit was denied; and (c) when the
effectively zero-rated sales were made. claim for refund is still pending with the BIR but
2) The CIR has 120 days from the date of voluntarily withdrawn by the taxpayer. (BIR
submission of complete documents in Ruling [DA-(VAT-01) 121-10])
support of the administrative claim within
which to decide whether to grant a refund Q: What is the effect non-compliance with the
or issue a tax credit certificate. The 120- documentary and evidentiary requirements for a
day period may extend beyond the two- VAT refund claim?
year period from the filing of the
administrative claim if the claim is filed in Failure to comply with the invoicing
the later part of the two-year period. If the requirements provides sutt1cient ground to
120-day period expires without any deny a claim for tax refund or tax credit. In a
decision from the CIR, then the claim for tax refund or tax credit, the applicant
administrative claim may be considered to must prove not only entitlement to the claim but
be denied by inaction. also compliance with all the documentary and
3) A judicial claim must be filed with the evidentiary requirements therefor. (J.R.A
CTA within 30 days from the receipt of Philippines v. Commissioner of Internal
the CIR’s decision denying the Revenue, G.R. No. 171307, August 28,
administrative claim or from the 2013)
expiration of the 120-day period without
any action from the CIR. Q: What is the difference between a VAT
4) All taxpayers, however, can rely on BIR invoice and a VAT receipt?
Ruling No. DA-489- 03 from the time of
its issuance on 10 December 2003 up to Only a VAT invoice might be presented to
its reversal by this Court in Aichi on 6 substantiate a sale of goods or properties while
October 2010, as an exception to the only a VAT receipt could substantial a sale of
mandatory and jurisdictional 120+30 day services. The two are not interchangeable.
periods. (CIR v. San Roque Power (Kepco Philippines v. CIR, G.R. No.
Corporation, G.R. No. 187485, 181858, November 24, 2010)
Taganito Mining Corporation v.
CIR, G.R. No. 196113, Philex Q: What is the effect on a taxpayer’s claim for
Mining Corporation v. CIR, G.R. refund or tax credit of failure to print the word
No. 197156, February 12, 2013) “zero-rated” on the VAT invoices and official
receipts?

8

The absence of the word “zero-rated” on the No. There is nothing in the NIRC which
invoices and receipts of a taxpayer will result in indicates that prior payment of taxes is
the denial of the claim for tax refund. (Western necessary for the availment of the transitional
Mindanao Power Corporation v. CIR, input tax credit. All that is required is for the
G.R. No. 181136, June 13, 2012; taxpayer to file a beginning inventory with the
Eastern Telecommunications v. CIR, BIR. (Fort Bonifacio Developmen
G.R. No. 168856, August 29, 2012) Corporation v. CIR, G.R. No. 173425,
January 22, 2013)
Q: What is the effect on the claim for refund or
tax credit if the words “zero-rated” was merely ORGANIZATION AND FUNCTION
stamped and not pre-printed? OF THE BIR
It is not fatal to the claim. Although the same Q: May the CIR, pursuant to her power to
was merely stamped and not pre-printed, the obtain information under Section 5(B) of the
same is sufficient compliance with the law, since NIRC, be provided certified copies of the
the imprinting of the word “zero-rated” was SALNs of all incumbent justices of the Supreme
required merely to distinguish sales subject to Court and CTA?
12% VAT, those that are subject to 0% VAT
(zero-rated) and exempt sales, to enable the
No. First, the request of the CIR lacks sufficient
Bureau of Internal Revenue to properly
basis. Second, the power of the CIR to obtain
implement and enforce the other VAT
information is limited by the Constitution and
provisions of the Tax Code. (Commissioner
by law. Section 5(B) does not authorize the
of Internal Revenue v. Toledo Power
acquisition of information or an investigation
Company, G.R. No. 183880, January
prior to an assessment of tax deficiency. It
20, 2014)
should never be construed to authorize an
unbridled search in the hope that something
Q: Bonifacio Water Corporation filed a claim
inculpatory would be stumbled upon. The
for refund of unutilized input taxes. It changed
power of the CIR to obtain information is
its name to Bonifacio GDE Water Corporation.
limited only to acquiring documents used in
Thus, the corporation started using this new connection with the filing of a return or those
corporate name in its official receipts used in the ordinary course of business to
notwithstanding the fact that the SEC has not enable the CIR to arrive at an assessment.
yet approved the same. What is the effect on Without a prima facie showing of fraud, the
the claim for refund? SALNs of members of the Judiciary are not
covered. (A.M. No. 09-8-6-SC Re: Request
The change of petitioner’s name to “Bonifacio for Copies of SALNs of Justices of the SC
GDE Water Corporation,” being unauthorized and Officers and Employees of the
and without approval of the SEC, and the Judiciary and A.M. No. 14-4-01-CTA Re:
issuance of official receipts under that name Request for Copies of SALNs of Justices
which were presented to support petitioner’s of the CTA)
claim for tax refund, cannot be used to allow
the grant of tax refund or issuance of a tax TAX REMEDIES
credit certificate in petitioner’s favor. The
absence of official receipts issued in its name is
Q: Must there be a prior payment of the amount
tantamount to non- compliance with the
offered as compromise settlement before a
substantiation requirements provided by law.
taxpayer’s application for compromise can be
(Bonifacio Water Corporation v. The
processed?
Commissioner of Internal Revenue, G.R.
No. 175142, July 22, 2013)
Yes. The compromise offer shall be paid by the
taxpayer upon filing of the application for
Q: Is prior payment of taxes necessary for the
compromise settlement. No application for
availment of transitional input tax?
compromise settlement shall be processed

9

without the full settlement of the offered the BIR should be before the expiration
amount. (RR 9-2013) of the period of prescription or before
the lapse of the period agreed upon in
Q: When does the government’s right to assess case a subsequent agreement is
prescribe? executed.
7. The taxpayer must be furnished a copy
General Rule: The government’s right to assess of the waiver as accepted by the BIR in
prescribes in 3 years from the date of the last order to perfect the agreement since the
day of filing. waiver is not a mere unilateral act, but a
bilateral agreement between the parties.
However:
1. If the return is filed after such date, the Q: What is the effect of failure to conform to the
3 year period is reckoned from date of requirements of a waiver of the statute of
actual filing limitations?
2. If the return is filed before the last day,
then considered as filed on last day. A waiver of the statute of limitations under the
Tax Code must conform strictly with the
Exceptions: provisions of Revenue Memorandum Order No.
20-90 in order to be valid and binding.
1. False return (Philippine Journalists Inc. v. CIR , G.R.
2. Fraudulent return No. 162852, December 16, 2004).
3. Failure to file a return
The period to assess and collect taxes may only
In such cases, the tax may be assessed or a be extended upon a written agreement between
proceeding in court for collection may be filed the CIR and the taxpayer executed before the
without assessment at any time within 10 years expiration of the 3-year period. RMO 20-90 and
from discovery of the falsity, fraud, or omission. RDAO 05-01 lay down the procedure for the
(Section 222, NIRC) proper execution of the waiver. If not followed,
any assessment issued by the BIR beyond the 3-
Q: What are the requirements for a valid waiver year period is void. (CIR v. Kudos Metal
of the statute of limitations? Corp, G.R. No. 178087, May 5, 2010)
1. The waiver must be in the prescribed Q: What is the effect of partial payment on the
form attached as Annex A. There should validity of the waiver?
be no deviation from this form.
2. The waiver must indicate the specific Partial payment of the assessment issued within
kind of tax and the amount due. the extended period to assess as provided in the
3. The waiver must specify a definite Waiver of Defense of Prescription is an implied
agreed date between the BIR and the admission of the validity of the waiver. (RCBC
taxpayer within which the former may v. CIR, GR No. 170257, September 7,
assess and collect revenue taxes. 2011)
4. The waiver shall be signed by the
taxpayer himself or his duly authorized Q: What is the effect if the PAN was not issued
representative. In the case of a prior to the FAN?
corporation, the waiver must be signed
by any of its responsible officials. If the PAN is not issued before the FAN and the
5. The waiver shall be signed by the taxpayer only received the latter, it is
Commissioner of Internal Revenue or tantamount to denial of due process. The
his duly authorized representative, and taxpayer must be informed of the facts and laws
the date of acceptance of the BIR must upon which the assessment is made. It is not
be indicated. merely a formal requirement but a substantive
6. Both the date of execution by the one. However, the law recognizes several
taxpayer and the date of acceptance by exceptions wherein the PAN need not be

10

issued. (CIR v. Metro Star Superama, GR additional evidence. It may involve both a
No. 185371, Dec. 8, 2010) question of fact or of law or both
2. Request for Reinvestigation – refers to a plea
Q: BIR issued a PAN to Allied Bank for for reevaluation of an assessment on the
deficiency DST. Allied Bank protested the PAN. basis of newly discovered evidence or
Thereafter, BIR sent a FAN to Allied Bank. The additional evidence that a intends to present
letter provided: “It is requested that the above in the investigation. It may also involve a
deficiency tax be paid immediately upon receipt question of fact or law or both
hereof, inclusive of penalties incident to
delinquency. This is our final decision based on N.B. For requests for reinvestigation, the
investigation. If you disagree, you may appeal taxpayer shall submit all relevant supporting
the final decision within thirty (30) days from documents in support of his protest within sixty
receipt hereof, otherwise said deficiency tax (60) days from date of filing of his letter of
assessment shall become final, executory and protest, otherwise, the assessment shall become
demandable.” Thereafter, Allied bANK final.
immediately filed a petition for review with the
CTA. Should the petition be dismissed? Q: What is the difference between a request for
reinvestigation and a request for
No. Ordinarily, the procedure is that it’s the reconsideration for purposes of tolling the
FAN that must be administratively protested, as running of the prescriptive period?
a prerequisite to subsequently filing a PFR with
the CTA. However, the SC ruled in this case It is the request for reinvestigation acted upon
that the CIR was estopped from claiming the which suspends the prescriptive period to
need for a protest. Allied Bank can’t be blamed collect. A request for reconsideration does not
for not filing a protest against the FAN since the toll the prescriptive period (RR 18-2013; BPI
language used and the tenor of the PAN v. CIR, G.R. No. 139736, October 17,
indicate that it is the final decision of the CIR 2005)
on the matter. The CIR is required to indicate,
in a clear and unequivocal language, whether Q: What is the taxpayer’s remedy if the protest
his action on a disputed assessment constitutes is denied by CIR’s duly authorized
his final determination thereon in order for the representative?
taxpayer concerned to determine when his or
her right to appeal to the tax court accrues. 1. Appeal to the Court of Tax Appeals
Thus, CIR is now estopped from claiming that (CTA) within thirty (30) days from date
he did not intend the PAN to be a final decision. of receipt of the said decision; or
Moreover in the Formal Letter of Demand with 2. Elevate his protest through request for
Assessment Notices, CIR used the word reconsideration to the Commissioner
“appeal” instead of “protest”, “reinvestigation”, within thirty (30) days from date of
or “reconsideration”. Although there was no receipt of the said decision. (RR 18-
direct reference for petitioner to bring the 2013)
matter directly to the CTA, it cannot be denied
that the word “appeal” under prevailing tax N.B. No request for reinvestigation shall be
laws refers to the filing of a Petition for Review allowed in administrative appeal and only issues
with the CTA (Allied Banking Corporation raised in the decision of the Commissioner’s
vs. Commissioner of Internal Revenue, duly authorized representative shall be
G.R. No. 175097, February 5, 2010) entertained by the Commissioner. (RR 18-
2013)
Q: What are the two forms of protest?
Q: What are the remedies of the taxpayer if the
1. Request for Reconsideration – refers to a protest is not acted upon by CIR’s duly
plea for reevaluation of an assessment on the authorized representative?
basis of existing records without need of

11

1. Appeal to the CTA within thirty (30) hired who prepared and filed the ITRs. Is
days after the expiration of the one Gloria guilty?
hundred eighty (180)-day period; or
2. Await the final decision of the Yes, Gloria is guilty. First, her sole reliance on
Commissioner’s duly authorized her husband to file their ITRs is not a valid
representative on the disputed reason to justify her non-filing considering that
assessment. (RR 18-2013) she knew that she and her husband are
mandated by law to file their ITRs. Second, an
Q: What is the remedy of the taxpayer if the experienced businesswoman ought to know and
protest is denied by the CIR? understand all the matters concerning her
business. This includes knowledge and
The taxpayer may appeal to the CTA within awareness of her tax obligation in connection
thirty (30) days from date of receipt of the said with her business. Further, there are no
decision. Otherwise, the assessment shall affirmative acts on her part to make sure that
become final, executory and demandable. (RR her obligation to file her ITRs have been fully
18-2013) complied with. She does not know how much
was her tax obligation and she did not even
Q: Will a motion for reconsideration of the bother to inquire or determine the facts
denial of the protest toll the 30-day period to surrounding the filing of her ITRs. Such neglect
appeal to the CTA? or omission is tantamount to “deliberate
ignorance” or “conscious avoidance.”(People
No. A motion for reconsideration of the v. Gloria Kintanar, CTA EB Crim. No.
Commissioner’s denial of the protest or 006, Dec. 3, 2010, as affirmed by the
administrative appeal, as the case may be, shall Supreme Court in a minute resolution
not toll the thirty (30)-day period to appeal to GR 196340, February 2012)
the CTA. (RR 18-2013; Fishwealth
Canning Corp. v. CIR, G.R. No. Q: Judy Ann, an actress, was charged with
179343, January 21, 2010) violation of Section 255 of the NIRC for failure
to supply correct and accurate information.
Q: What are the remedies of the taxpayer in Judy Ann contends that since she started
case of the inaction of the CIR on the protested working, it was her Manager who is in charge
assessment? of filing her returns and paying her taxes. Her
Manager hired an accountant for the
1. File a petition for review with the CTA preparation of her returns. Judy Ann stated her
within 30 days after the expiration of intention to settle the case were not for the
the 180-day period; or opposition by her Manager and her counsel. Is
2. Await the final decision of the Judy Ann guilty?
Commissioner on the disputed
assessment and appeal such final No. The element of willful failure to supply
decision to the CTA within 30 days correct and accurate information must be fully
from the receipt of a copy of such established as a positive act or stale of mind. It
decision. (RR 18-2013; Lascona cannot be presumed nor attributed to mere
Land Co. v. CIR, G.R. No. inadvertent or negligent acts. She is only
171251, March 5, 2012) negligent and such is not enough to convict her.
Negligence, whether slight or gross, is not
Q: Gloria is a distributor of beauty and wellness equivalent to the fraud with intent to evade the
products. She was charged with violation of tax contemplated by the law. Fraud must
Section 255 of the NIRC for failure to make or amount to intentional wrongdoing with the sole
file her Income Tax Return (ITR). Gloria object of avoiding the tax. Further, the intention
contends that she has no personal knowledge of to settle the case were it not for the opposition
the actual filing of her returns because it was of her manager and her counsel negates any
her husband, Benjamin, who files their ITRs. motive to commit fraud. (People v. Judy Ann
Benjamin claims that it was the accountant he Santos, CTA Crim. Case No. O-012,

12

January 16, 2013) presupposes that the tax assessment has not
become final and unappealable. Is the CIR’s
COURT OF TAX APPEALS contention correct?
Does the CTA have jurisdiction over a Petition No. The fact that an assessment has become
for Certiorari seeking the nullification of an final for failure of the taxpayer to file a protest
interlocutory order of an RTC judge involving a within the time allowed only means that the
claim for refund of local taxes? validity or correctness of the assessment may no
longer be questioned on appeal. However, the
Yes. The power of the CTA includes that of validity of the assessment itself is a separate and
determining whether or not there has been distinct issue from the issue of whether the right
grave abuse of discretion amounting to lack or of the CIR to collect the validly assessed tax has
excess of jurisdiction on the part of the RTC in prescribed. This issue of prescription, being a
issuing interlocutory order in cases falling matter provided for by the NIRC, is well within
within the exclusive appellate jurisdiction of the the jurisdiction of the CTA to decide.
tax court. The CTA is vested with jurisdiction to (Commissioner of Internal Revenue v.
issue writs of certiorari in these cases. The Hambrecht & Quist Philippines, Inc.,
authority of the CTA to take cognizance of G.R. No. 169225, November 17, 2010)
petitions for certiorari questioning interlocutory
orders issued by the RTC in a local tax case is Q: May the 30-day period to appeal the
included in the powers granted by the decisions of the RTC to the CTA be extended?
Constitution as well as inherent in the exercise
of its appellate jurisdiction. (The City of Yes. Section 11 of Republic Act No. 9282 does
Manila vs. Hon. Caridad H. Grecia- state that the Petition for Review shall be filed
Cuerdo, G.R. No. 175723, February 2, with the CTA following the procedure
2014) analogous to Rule 42 of the Revised Rules of
Civil Procedure. Section 1, Rule 42 of the
Does the CTA have jurisdiction to rule upon Revised Rules of Civil Procedure provides that
the validity and constitutionality of the the Petition for Review of an adverse judgment
issuances of the BIR? or final order of the RTC must be filed with the
Court of Appeals within: (1) the original 15-day
No. The CTA’s jurisdiction to resolve tax period from receipt of the judgment or final
disputes in general does not include cases order to be appealed; (2) an extended period of
where the validity or constitutionality of a law, 15 days from the lapse of the original period;
or a rule or regulation issued by the and (3) only for the most compelling reasons,
administrative agency in the performance of its another extended period not to exceed 15 days
quasi-legislative function is challenged. (Egis from the lapse of the first extended period.
Projects S.A. vs. The Secretary of Following by analogy, Section 1, Rule 42 of the
Finance and Commissioner of Internal Revised Rules of Civil Procedure, the 30-day
Revenue, CTA Case No. 8413, January original period for filing a Petition for Review
29, 2013; British American Tobacco v. with the CTA under Section 11 of Republic Act
Camacho , G.R. No. 163583, August 20, No. 9282, as implemented by Section 3 (a),
2008) Rule 8 of the Revised Rules of the CTA, may be
extended for a period of 15 days. No further
Q: A was assessed for income tax deficiency. extension shall be allowed thereafter, except
The taxpayer failed to file a protest and thus the only for the most compelling reasons, in which
said assessment has become final and case the extended period shall not exceed 15
unappealable. Thereafter, the taxpayer filed a days (SM Land v. City of Manila, G.R.
petition for review to the CTA arguing that the No. 197151, October 22, 2012; Metro
right of the CIR to collect the assessed tax has Manila Shopping Mecca Corp., et al. v.
prescribed. The CIR contends that the CTA has Ms. Liberty M. Toledo, in her official
no jurisdiction because when the law says that capacity as the City Treasurer of Manila,
the CTA has jurisdiction over “other matters” it and the City of Manila, G.R. No.

13

190818, June 5, 2013) Marina Sales, Inc. G.R. No. 183868,
November 22, 2010)
Q: May the CTA issue an injunction to enjoin
the collection of taxes by the BIR? N.B. No second MR or MNT is allowed
(Section 7, Rule 15, RRCTA)
Yes. When a decision of the CIR on a tax
protest is appealed to the CTA, such appeal LOCAL GOVERNMENT TAXATION
does not suspend the payment, levy, distraint
and/or sale of any of the taxpayer’s property. Q: May LGCs impose amusement taxes
However, when in the opinion of the CTA the notwithstanding the fact that they are, in
collection of the tax may jeopardize the interest essence, percentage taxes?
of the Government and/or the taxpayer, the
Court at any stage of the proceedings may Yes. Section 133 (i) of the Local Government
suspend or restrain the collection of the tax and Code (LGC) prohibits the levy by local
require the taxpayer either to deposit the government units (LGUs) of percentage tax
amount claimed or to file a surety bond for no except as otherwise provided by the LGC.
more than double the amount with the Court. Percentage Tax is a tax measured by a certain
percentage of the gross selling price or gross
N.B. The CTA may issue injunction only in the value in money of goods sold, bartered or
exercise of its appellate jurisdiction. (CIR vs. imported; or of the gross receipts or earnings
J.C. Yuseco, G.R. No. L-12518, October derived by any person engaged in the sale of
28, 1961) services. Since amusement taxes are fixed at a
certain percentage of the gross receipts incurred
Further, the prohibition on the issuance of a by certain specified establishments, they are
writ of injunction to enjoin the collection of actually percentage taxes. However, provinces
taxes is applied only to national internal are not barred from levying amusement taxes
revenue taxes, not to local taxes. However, the even if amusement taxes are a form of
Supreme Court noted that such injunctions percentage taxes. Section 140 of the LGC
enjoining the collection of local taxes are carves a clear exception to the general rule in
frowned upon. (Angeles City v. Angeles Section 133. Section 140 of the Local
Electric Corporation, G.R. No. 166134, Government Code (LGC) expressly allows for
June 29, 2010) the imposition by provinces of amusement taxes
on “the proprietors, lessees, or operators of
Q: Is a prior Motion for Reconsideration with theaters, cinemas, concert halls, circuses,
the Division required before the filing a Petition boxing stadia, and other places of
for Review with the CTA en banc? amusement.” (Pelizloy Realty Corporation
vs. The Province of Benguet, G.R. No.
Yes. The mandatory provisions of Rule 8, 183137, April 10, 2013)
Section 1 of the Revised Rules of the Court of
Tax Appeals requiring that “the petition for Q: What is the effect of filing the appeal to the
review of a decision or resolution of the Court Secretary of Justice beyond the 30-day period
in Division must be preceded by the filing of provided for in Section 187 of the LGC?
a timely motion for reconsideration or new trial
with the Division.” The word "must" clearly The appeal will be dismissed. Failure to appeal
indicates the mandatory -- not merely directory -- to the Secretary of Justice within the statutory
nature of a requirement.” The rules are period of 30 days from the effectivity of the
clear. Before the CTA En Banc could take ordinance is fatal to one’s cause. (Cagayan
cognizance of the petition for review concerning Electric Power and Light Co. v. City of
a case falling under its exclusive appellate Cagayan de Oro, G.R. 191761,
jurisdiction, the litigant must sufficiently show November 14, 2012)
that it sought prior reconsideration or moved
for a new trial with the concerned CTA
division. (Commissioner of Customs vs.

14

REAL PROPERTY TAX are not allowed by law. (Secretary of
Finance v. Court of Tax Appeals
Q: Who is liable to pay real property taxes? and Kutangbato Conventional
Trading, G.R. No. 168137, August
In real estate taxation, the unpaid tax attaches 7, 2013)
to the property and is chargeable against the
taxable person who had actual or beneficial use Q: Who has jurisdiction to hear and determine
and possession of it regardless of whether or questions touching on the seizure and forfeiture
not he is the owner. (GSIS v. City of of dutiable goods?
Treasurer of Manila, G.R. No. 186242,
December 23, 2009) The Collector of Customs has exclusive
jurisdiction over seizure and forfeiture
Q: The Province of Quezon assessed Mirant for proceedings and the regular courts cannot
unpaid real property taxes. NAPOCOR, which interfere with his exercise thereof or enjoin or
entered a BOT with Mirant, protested the interfere with it. The regular courts are
assessment before the LBAA, claiming the precluded from assuming cognizance over such
entitlement to tax exemption under Sec. 234 of matters even through petitions for certiorari,
the LGC. The RPT assessed were not paid prior prohibition, or mandamus. The rule that the
to the protest. LBAA dismissed NAPOCOR’s RTC must defer to the exclusive original
petition for failure to make a payment under jurisdiction of the BOC in cases involving
protest. Is NAPOCOR required o make a seizure and forfeiture of goods is
payment under protest? absolute. (Subic Bay Metropolitan
Authority, G.R. No. 160270, April 23,
Yes. By claiming an exemption from realty 2010)
taxation, NAPOCOR is simply raising the
question of the correctness of the assessment. ***nothing else follows***
As such real property taxes must be paid prior
to the making of the protest. On the other hand, Study as if everything depended on you;
if the taxpayer is questioning the authority of pray as if everything depended on God
the local assessor to assess RPT, it is not
necessary to pay the RPT prior to the protest. A
claim for tax exemption, whether full or partial, Prayer to St. Joseph of Cupertino for success
does not question the authority of the local in Examinations
assessor to assess RPT (NAPOCOR v.
O Great St. Joseph of Cupertino who while on
Province of Quezon, G.R. No. 171586,
earth did obtain from God the grace to be
January 25, 2010) asked at your examination only the questions
you knew, obtain for me a like favour in the
TARIFF AND CUSTOMS DUTIES examinations for which I am now preparing. In
return I promise to make you known and cause
Q: What are the classifications of imports? you to be invoked.

1. “Freely importable commodities” or Through Christ our Lord.

those commodities which are neither
St. Joseph of Cupertino, Pray for us.
“regulated” nor “prohibited” and the Amen.
importation of which may be effected
without any prior approval of or
clearance from any government agency;
2. “Regulated commodities” or those
commodities the importation of which
require clearances/permits from
appropriate government agencies; and
3. “Prohibited commodities” or those
commodities the importation of which

TAXATION LAW
QUESTIONS AND ANSWERS ON SIGNIFICANT SUPREME COURT
JURISPRUDENCE AND BIR ISSUANCES FOR THE 2015 BAR
ATTY. PIERRE MARTIN D. REYES
This covers the significant and relevant Supreme taxes pursuant to Section 21 of the Revenue
Court jurisprudence on taxation law and BIR Code. Section 21 imposes a tax on a person
issuances from March 31, 2014 to March 31, who sold goods and services in the course of
2015. trade or business based on a certain
percentage of his gross sales or receipts in the
GENERAL PRINCIPLES preceding calendar year. The taxpayers
contend the imposition of the tax under
Q. What is a tax amnesty? Section 21 constituted double taxation
because they were already paying local
A. A tax amnesty is a general pardon or the business taxes pursuant to Section 15 or
intentional overlooking by the State of its Section 17. Is there double taxation?
authority to impose penalties on persons
otherwise guilty of violation of a tax law. It A. Yes. Firstly, because Section 21 of the
partakes of an absolute waiver by the Revenue Code of Manila imposed the tax on
government of its right to collect what is due a person who sold goods and services in the
it and to give tax evaders who wish to relent course of trade or business based on a certain
a chance to start with a clean slate. A tax percentage of his gross sales or receipts in the
amnesty, much like a tax exemption, is never preceding calendar year, while Section 15
favored or presumed in law. The grant of a and Section 17 likewise imposed the tax on a
tax amnesty, similar to a tax exemption, must person who sold goods and services in the
be construed strictly against the taxpayer and course of trade or business but only identified
liberally in favor of the taxing authority. (LG such person with particularity, namely, the
Electronics Philippines v. CIR, G.R. No. wholesaler, distributor or dealer (Section
165451, December 3, 2015) 15), and the retailer (Section 17), all the
taxes – being imposed on the privilege of
Q. Can a claimant have personality to file a tax doing business in the City of Manila in order
refund even if it only bears the economic to make the taxpayers contribute to the city’s
burden of the tax? revenues – were imposed on the same
subject matter and for the same purpose.
A. Yes. The Supreme Court has held that the Secondly, the taxes were imposed by the
propriety of a tax refund claim is hinged on same taxing authority (the City of Manila)
the kind of tax exemption upon which the and within the same jurisdiction in the same
refund calim is based. If the law confers an taxing period (i.e., per calendar year).
exemption from both direct or indirect taxes, Thirdly, the taxes were all in the nature of
a claimant is entitled to a tax refund even if it local business taxes. (Nursery Care
only bears the economic burden of the Corporation v. Treasurer of Manila, G.R. No.
applicable tax. On the other hand, if the 180651, July 30, 2014).
exemption conferred only applies to direct
taxes, then the statutory taxpayer is regarded INCOME TAX
as the proper party to file the refund claim.
(CIR v. PAL, G.R. Nos. 212536-37, August Q. What are deemed de minimis benefits?
27, 2014)
A. As provided in RR No. 3-98, as last amended
Q. The City of Manila assessed and collected by RR No. 1-2015, the following are
taxes from certain taxpayers pursuant to considered as de minimis benefits granted to
either Section 15 (Tax on Wholesalers, each employee:
Distributors, or Dealers) or Section 17 (Tax
on Retailers). The City imposed additional
Page 1 of 27
NOTICE
This material supplements the author’s 2013 Bar Reviewer, 2014 Bar Supplement, and Tax Audit Primer.
No portion of the supplement may be copied or reproduced without the written permission of the author.
Possessors may reproduce and distribute this supplement provided the name of the author remains clearly
associated with my work and no alterations in the form and content of this supplement are made. No
stamping is allowed.
TAXATION LAW
a) Monetized unused vacation leave credits Q. What is now the threshold amount of the 13th
of private employees not exceeding ten month pay and other benefits excluded from
(10) days during the year; gross income pursuant to Section 32(B) of
b) Monetized value of vacation and sick the Tax Code?
leave credits paid to government officials
and employees; A. RA No. 10653 increased the ceiling from
c) Medical cash allowance to dependents of Thirty Thousand Pesos (P30,000) to Eighty
employees, not exceeding Seven Two Thousand Pesos (P82,000).
Hundred Fifty Pesos (P750) per
employee per semester or One Hundred RR 3-2015, which implements RA 10653,
Twenty Five (P125) per month; clarifies that the threshold amount of
d) Rice subsidy of One Thousand Five P82,000 shall only apply to the following;
Hundred (P1,500) or one (1) sack of 50
kg. rice per month amounting to not 1. Thirteenth-month pay equivalent to the
more than P1,500; mandatory one month basic salary of
e) Uniform and clothing allowance not officials and employees of the
exceeding Five Thousand Pesos (P5,000) government, (whether national or local),
per annum; including government-owned or -
f) Actual medical assistance, e.g. medical controlled corporations, and or private
allowance to cover medical and offices received after the 12th-month pay;
healthcare needs, annual medical check- and
up, maternity assistance, and routine 2. Other benefits, such as Christmas bonus,
consultations, not exceeding Ten productivity-incentive bonus, loyalty
Thousand Pesos (P10,000) per annum; award, gifts in cash or in kind and other
g) Laundry allowance not exceeding Three benefits of similar nature actually
Hundred Pesos (P300) per month; received by officials and employees of
h) Employees achievement awards, e.g. for both government and private offices.
length of service or safety achievement,
with an annual monetary value not Q. What are the conditions that must be met in
exceeding Ten Thousand Pesos order to exempt interest income from long-
(P10,000); term deposit or investments from income
i) Gifts given during Christmas and major taxes?
anniversary celebrations not exceeding
Five Thousand Pesos (P5,000) per A. The following conditions must be met:
employee per annum;
j) Daily meal allowance for overtime work 1. The depositor or investor is an individual
and night/graveyard shift not exceeding citizen (resident or non-resident) or
Twenty-Five Percent (25%) of the basic resident alien or non-resident alien
minimum wage per region basis. engaged in the trade or business in the
k) Benefits received by an employee by Philippines;
virtue of a collective of a collective 2. The long-term deposits or investment
bargaining agreement (CBA) and certificates should be under the name of
productivity incentive schemes provided the individual and not under the name of
that the total annual monetary value the corporation or the bank or the trust
received from both CBA and productivity department/unit of the bank;
incentive schemes combined do not 3. The long-term deposits or investments
exceed ten thousand pesos (P10,000) per must be in the form of savings, common
employee per taxable year. or individual trust funds, deposit
Page 2 of 27
NOTICE
TAXATION LAW
substitutes, investment management well as the requirements mentioned

accounts and other investments above;
evidenced by certificates in such form 3. The common or individual trust account
prescribed by the Bangko Sentral ng or investment management account must
Pilipinas (BSP); hold on to such underlying investment in
4. The long-term deposit or investments continuous and uninterrupted period for
must be issued by banks only and not by at least five (5) years. (RMC No. 7-2015)
other entities or individuals;
5. The long-term deposits or investments Q. Fort Bonifacio Development Corporation
must have a maturity period of not less (FBDC) transferred some of its real
than five (5) years; properties to the Bases Conversion and
6. The long-term deposits or investments Development Authority (BCDA), in
must be in denominations of Ten redemption of its preferred shares held by
Thousand Pesos (P10,000) and other BCDA. What is the income tax treatment on
denominations as may be prescribed by the said redemption?
the BSP;
7. The long-term deposits or investments A. When preferred shares are redeemed for
should not be terminated by the original retirement in accordance with its nature, the
investor before the fifth (5th) year, capital gain or capital loss derived upon
otherwise they shall be subjected to the redemption shall be recognized on the basis
graduated rates of 5%, 12% or 20% on of the difference between the amount/value
interest income earnings; and received at the time of redemption and the
8. Except those specifically exempted by law cost of the preferred shares. The capital gain
or regulations, any other income such as or capital loss shall be subject to the regular
gains from trading, foreign exchange gain income tax rate under the Tax Code, as
shall not be covered by income tax amended, on individual taxpayers or to the
exemption. corporate income tax rate under the Tax
Code, in case of corporations.
For the interest income derived by
individuals investing in common or Here, on the part of BCDA, any gain realized
individual trust funds or investment by it on the redemption of shares by FBDC
management accounts to be exempt from shall be subject to corporate income tax and
income tax, the following additional consequently, to creditable withholding tax.
characteristics/conditions must all be On the part of FBDC, the transaction is not
present: subject to income tax considering that the
redeeming corporation does not realize any
1. The investment of the individual investor gain or loss on the redemption of its shares.
in the common or individual trust fund or (RMC No. 3-2014 citing Section 9, RR 6-
investment management account must be 2008)
actually held/managed by the bank for
the named individual at least five (5) Q. What is the income tax treatment of stock
years without interruption. option plans?
2. The underlying investments of the
common or individual trust account or A. A stock option is an option granted by a
investment management accounts must person, natural or juridical, to a person or
comply with the requirements of Section entity entitling said person or entity to
22(FF) of the Tax Code, as amended, as purchase shares of stock of a corporation,
which may or may not be the shares of stock
Page 3 of 27
NOTICE
TAXATION LAW
of the grantor itself, at a specific price to be the exercise price to the grantor and
exercise at a specific date or a period. Stock the latter is obligated to deliver the
options are “shares of stock” as defined stocks to the owner of the option, the
under the Tax Code and are taxable as such. tax treatment is as follows:
The grant, sale, transfer, or exercise of a
stock option may result to taxable events as i. If the option was granted by an
follows: employer involving the
employer’s own shares of stock
1. Grant of Option or shares it owns, upon the
exercise of the option by a rank-
a. If the option was granted due to an and-file employee, an additional
employer-employee relationship compensation equivalent to the
where the grantor is the employer difference of the book
and the grantee is the employee, and value/fair market value of the
no payment was received for the shares, whichever is higher, at
grant of said option, on the year an the time of the exercise of the
option was granted, the grantor stock option and the price fixed
cannot claim deductions for the grant on the grant date, shall be
of the stock option. recognized and subject to
b. If the option was granted for a price, income tax and consequently,
the full price of the option shall be to withholding tax on
considered capital gains, and shall be compensation.
taxed as such. ii. However, if the employee
occupies a supervisory or
2. Sale or transfer of option managerial position, the
difference of the book
a. The sale is treated as a sale, barter, or value/fair market value of the
exchange of shares of stock not listed shares, whichever is higher, at
on the stock exchange. Thus, any the time of the exercise of the
grant of an option for consideration, stock option and the price fixed
or transfer of the option is subject to on the grant date, shall be
capital gains tax. treated as fringe benefit subject
b. If the option was granted without to fringe benefit tax.
consideration, the cost base of the iii. If the option was granted to a
option for purposes of computing the supplier of goods or services,
capital gains shall be zero. the difference of the book
c. If the option is transferred by the value/fair market value of the
grantee/subsequent owner without shares, whichever is higher, at
any consideration, the same be shall the time of the exercise of the
treated as a donation of shares of stock option and the price fixed
stock subject to donor’s tax. The basis on the grant date, shall be
shall be the fair market value of the recognized as additional
option at the time of donation. consideration for the services
rendered or goods supplied by
3. Exercise of option said supplier, and shall be
subject to the relevant
a. In an equity-settlement option (where withholding tax at source and
the grantee/subsequent owner pays other applicable taxes.
Page 4 of 27
NOTICE
TAXATION LAW
iv. If the option was granted to a foreign governments. (CIR v. Meralco, G.R.
person, natural or juridical, No. 181459, June 9, 2014)
who is not an employee, or a
supplier of goods or services to Q. Differentiate between the tax treatment of
the grantor, the difference of capital gains of individuals and corporations
the book value/fair market from the sale of real properties.
value of the shares, whichever is
higher, at the time of the A. Capital gains of individuals and corporations
exercise of the stock option and from the sale of real properties are taxed
the price fixed on the grant differently. Individuals are taxed on capital
date, shall be considered a gains from sale of all real properties located
donation subject to donor’s tax. in the Philippines and classified as capital
assets. For corporations, the National
b. In a cash-settlement option, the same Internal Revenue Code of 1997 treats the
rules apply. The only difference is that sale of land and buildings, and the sale of
cash-settled options do not require machineries and equipment, differently.
actual delivery of the stocks. Instead, Domestic corporations are imposed a 6%
the market value, at exercise date, of capital gains tax only on the presumed gain
the stock is compared to the exercise realized from the sale of lands and/or
price, and the difference if in a buildings. The National Internal Revenue
favorable direction is paid by the Code of 1997 does not impose the 6% capital
grantor to the holder of the option. gains tax on the gains realized from the sale
(RMC 79-2014) of machineries and equipment. Therefore,
only the presumed gain from the sale of
Q. MERALCO obtained a loan from petitioner’s land and/or building may be
Norddeutsche Landesbank Girozentrale subjected to the 6% capital gains tax. The
(NORD/LB) Singapore Branch, which is a income from the sale of petitioner’s
foreign government-owned financing machineries and equipment is subject to the
institution of Germany. Under the loan provisions on normal corporate income tax.
agreement, the income received by (SMI-ED Philippines v. Commissioner of
NORD/LB, by way of MERALCO’s interest Internal Revenue, G.R. No. 175410,
payments, shall be paid in full without November 12, 2014)
deductions, as MERALCO shall bear the
obligation of paying and remitting to the BIR Q. The Republic, through the Department of
the final withholding tax. MERALCO paid Public Works and Highways (DPWH), filed
and remitted to the BIR the corresponding a complaint for expropriation against a
final withholding taxes. Is the income derived property owner before the RTC. In addition
by NORD/LB subject to income tax? to the order to pay just compensation, the
RTC likewise ordered DPWH to pay the
A. No. NORD/LB is owned, controlled or property owner consequential damages,
enjoying refinancing from the Federal which shall include the value of the transfer
Republic of Germany, a foreign government. tax necessary for the transfer of the subject
Section 32(B)(7)(a) of the Tax Code, as property from the name of the owner to that
amended, exempts from income tax income of the Republic. The Republic contends that
derived from investments in the Philippines the transfer taxes, in the nature of Capital
in loans by financing institutions owned, Gains Tax and Documentary Stamp Tax,
controlled, or enjoying refinancing from necessary for the transfer of the subject
property are liabilities of the property owner
Page 5 of 27
NOTICE
TAXATION LAW
and not the Republic. Is the Republic NGO represented that all income derived
correct? from the Bonds, inclusive of premium on
redemption and gains on the trading of the
A. Yes. Pursuant to Sections 24(D) and 56(A)(3) same, are exempt from all forms of taxation
of the 1997 National Internal Revenue Code, as confirmed by BIR Rulings. RCBC then
capital gains tax due on the sale of real sold the government bonds in the secondary
property is a liability for the account of the market. However, in 2011, the BIR issued
seller. It has been held that since capital gains BIR Ruling No. 370-2011 declaring that the
tax is a tax on passive income, it is the seller, PEACe Bonds being deposit substitutes are
not the buyer, who generally would shoulder subject to the 20% final withholding tax.
the tax. As far as the government is Pursuant to this ruling, the Secretary of
concerned, therefore, the capital gains tax Finance directed the Bureau of Treasury to
remains a liability of the seller since it is a tax withhold a 20% final tax from the face value
on the seller's gain from the sale of the real of the PEACe Bonds upon their payment at
estate. (Republic v. Soriano, G.R. No. maturity on October 18, 2011. Is the
211666, February 25, 2015) discount or interest income arising from the
PEAce bonds subject to the 20% final
Q. In 2001, the Caucus of Development NGO withholding tax?
Networks (CODE-NGO) with the assistance
of its financial advisors, requested an A. No. The term ‘deposit substitutes’ shall mean
approval from the Department of Finance for an alternative form of obtaining funds from
the issuance by the Bureau of Treasury of 10- the public other than deposits, through the
year zero-coupon treasury bonds. The said issuance, endorsement, or acceptance of debt
bonds would initially be purchased by a instruments for the borrower’s own account,
special purpose vehicle on behalf of CODE- for the purpose of relending or purchasing of
NGO and then repackaged and sold at a receivables and other obligations, or
premium to investors as Poverty Eradication financing their own needs or the needs of
and Alleviation Certificates or PEACe their agent or dealer. The term 'public' means
Bonds. The net proceeds from the sale will be borrowing from twenty (20) or more
used to endow a permanent fund to finance individual or corporate lenders at any one
meritorious activities and projects of time). Based on this definition, the number of
accredited non-government organizations lenders is determinative of whether a debt
(NGOs) throughout the country. The BIR instrument should be considered a deposit
issued BIR Ruling No. 020-2001 which substitute and consequently subject to the
confirmed that the PEACe Bonds would not 20% final withholding tax.
be classified as deposit substitutes and would
not be subject to the corresponding BIR Ruling No. 370-2011 is void because it
withholding tax. This was reiterated in completely disregarded the 20 or more
subsequent rulings. During the auction, lender rule. The transactions executed for the
RBCB which participated on behalf of sale of the PEACe Bonds are: (1) the issuance
CODE-NGO was declared the winning of the Bonds by the Bureau of Treasury to
bidder having tendered the lowest bids. RCBC/CODE-NGO; and (2) the sale and
RCBC entered into an underwriting distribution by RCBC (underwriter) on
agreement with CODE-NGO whereby RBCB behalfof CODE-NGO of the PEACe Bonds to
was appointed as the Issue Manager and undisclosed investors. It may seem that there
Lead Underwriter for the offering of the was only one lender — RCBC on behalf of
PEACe Bonds. In the agreement, CODE- CODE-NGO — to whom the PEACe Bonds
were issued at the time of origination.
Page 6 of 27
NOTICE
TAXATION LAW
withholding agents. (Banco de Oro v.

However, a reading of the underwriting Republic, G.R. No. G.R. No. 198756,
agreement and RCBC term sheet reveals that January 13, 2015)
the settlement dates for the sale and
distribution by RCBC Capital (as underwriter Q. What are the substantiation requirements of
for CODE-NGO) of the PEACe Bonds to donors claiming donations and contributions
various undisclosed investors would fall on to accredited non-stock, non-profit
the same day, October 18, 2001, when the corporation/NGO as deductions from their
PEACe Bonds were supposedly issued to taxable business income?
CODE-NGO/RCBC. In reality, therefore, the
entire borrowing received by the Bureau of A. The donors must submit Certificate/s of
Treasury in exchange for the PEACe Bonds Donation indicating the following:
was sourced directly from the undisclosed
number of investors to whom RCBC 1. Actual receipt by the accredited non-
Capital/CODE-NGO distributed the PEACe stock, non-profit corporation/NGO of
Bonds — all at the time of origination or the donation or contribution and date of
issuance. However, the number of investors receipt thereof; and
to which the PEACe Bonds were sold to by 2. The amount of the charitable donation or
RCBC is not known. Should there have been contribution, if in cash; if property,
a simultaneous sale to 20 or more whether real or personal, the acquisition
lenders/investors, the PEACe Bonds are cost of the said property. (RMC No. 86-
deemed deposit substitutes and RCBC 2014 citing Section 8, RR No. 13-98)
Capital/CODE-NGO would have been
obliged to pay the 20% final withholding tax RMC 86-2014 now provides a Certificate of
on the interest or discount from the PEACe Donation (BIR Form 2322) which consists of
Bonds. Further, the obligation to withhold two parts – a donee certification and a
the 20% final tax on the corresponding donor’s statement of values. The first part is
interest from the PEACe Bonds would a certification by the donee that it has
likewise be required of any lender/investor received on the date indicated the subject
had the latter turned around and sold said matter of the donation. The second part
PEACe Bonds, whether in whole or part, requires the donor to execute a statement
simultaneously to 20 or more lenders or which provides descriptions, acquisition
investors. costs, and net book values of the properties
donated as reflected in the financial
It must be noted, however, that interest statements of the donor. The statement must
income received by individuals from long- be accompanied by deed of sale/bill of sale to
term deposits or investments with a holding prove the acquisition cost of the properties.
period of not less than five (5) years is
exempt from the final tax. Thus, should the Q. RMO No. 1-2000 provides that any availment
PEACe Bonds be found to be within the of the tax treaty relief shall be preceded by an
coverage of deposit substitutes, the proper application by filing BIR Form No. 0901
procedure was for the Bureau of Treasury to (Application for Relief from Double
pay the face value of the PEACe Bonds to the Taxation) with ITAD at least 15 days before
bondholders and for the Bureau of Internal the transaction i.e. payment of dividends,
Revenue to collect the unpaid final royalties, etc., accompanied by supporting
withholding tax directly from RCBC documents justifying the relief. Is the prior
Capital/CODE-NGO, or any lender or application for an ITAD ruling pursuant to
investor if such be the case, as the RMO No. 1-2000 necessary before a
Page 7 of 27
NOTICE
TAXATION LAW
taxpayer can avail of the preferential tax rates

under income tax treaties entered into by the 1. The payment of compensation, salaries,
Philippines with other countries? or honorarium to its trustees or
organizers;
A. No. The Philippine Constitution provides for 2. The payment of exorbitant or
adherence to the general principles of unreasonable compensation to its
international law as part of the law of the employees;
land. The time-honored international 3. The provision of welfare aid and financial
principle of pacta sunt servanda demands the assistance to its members. An
performance in good faith of treaty organization is not exempt from income
obligations on the part of the states that enter tax if its principal activity is to receive and
into the agreement. In this jurisdiction, manage funds associated with savings
treaties have the force and effect of law. The and investment programs, including
obligation to comply with a tax treaty must pension or retirement programs. This
take precedence over the objective of RMO does not cover a society, order,
No. 1-2000. Not only is the requirement association, or non-stock corporation
illogical, but it is also an imposition that is not under Section 30(C) of the Tax Code
found at all in the applicable tax treaties. The providing for the payment of life,
BIR should not impose additional sickness, accident, and other benefits
requirements that would negate the exclusively to its members or their
availment of the reliefs provided for under dependents;
international agreements, especially since 4. Donation to any person or entity
said tax treaties do not provide for any (exception donations made to other
prerequisite at all for the availment of the entities formed for the purpose/purposes
benefits under said agreements. It bears similar to its own;
reiterating that the application for a tax treaty 5. The purchase of goods or services for
relief from the BIR should merely operate to amounts in excess of the fair market
confirm the entitlement of the taxpayer to the value of such goods or value of such
relief. So long as the taxpayer requests for services from an entity in which one or
confirmation before it filed its administrative more of its trustees, officers, or
claim for refund, the same should be deemed fiduciaries has an interest; and
substantial compliance with RMO No. 1- 6. When upon dissolution and satisfaction
2000. (CBK Power Company Limited v. CIR, of all liabilities, its remaining assets are
G.R. No. 193383-84 and G.R. No. 193407- distributed to its trustees, organizers,
08, January 15, 2015) officers or members. Its assets must be
dedicated to its exempt purpose.
Q. What are considered “inurements” prohibited Accordingly, its constitute documents
under Section 30 of the NIRC? must expressly provide that in the event
of dissolution, its assets shall be
A. In order for an entity to qualify as a non-stock distributed to one or more entities
and/or non-profit corporation/ association/ formed for the purpose/purposes similar
organization exempt from income tax under to its own, or to the Philippine
Section 30 of the Tax Code, as amended, its government for public purpose (RMC 51-
earnings or assets shall not inure to the 2014)
benefit of any of its trustees, organizers,
officers, members, or any specific person. Q. Distinguish income tax from withholding tax.
The following are considered “inurements”
of such nature: A. Income tax is different from withholding tax.
Page 8 of 27
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Income tax is the “tax on all yearly profits professional partnerships. RMC No. 3-2012
arising from property, professions, trades or sufficiently discussed that income payments
offices, or as a tax on a person’s income, made to a GPP in consideration of its
emoluments, profits and the like. On the professional services are not subject to
other hand, withholding tax is a method of income tax and consequently to withholding
collecting income tax in advance. “In the taxes. (RMC No. 60-2014)
operation of the withholding tax system, the
payee is the taxpayer, the person on whom Q. Is the Special Allowance for the Judiciary
the tax is imposed, while the payor, a (SAJ) of court officials and employees
separate entity, acts no more than an agent of subject to income tax?
the government for the collection of the tax
in order to ensure its payment. Obviously, A. Yes. In fact, the Supreme Court issued A.M.
the amount thereby used to settle the tax No. 12-4-6-SC which approves the
liability is deemed sourced from the proceeds withholding and remittance of the correct
constitutive of the tax base. (LG Electronics amount of tax as required to be deducted and
Philippines v. CIR, G.R. No. 165451, withheld from the Special Allowance for the
December 3, 2015) Judiciary (SAJ) of officials and employees, as
well as the withholding tax of the
Q. What document shall withholding agents corresponding taxes from the following:
require from all individuals and entities
claiming exemption from income taxes and 1. The monthly SAJ of incumbent justices,
consequently withholding taxes? judges, and judiciary officials with the
equivalent rank of a Court of Appeals
A. Concerned withholding agents shall require justice or Regional Trial Court judge;
all individuals and entities claiming such 2. The monthly special allowance in an
exemption to provide a copy of a valid, amount equivalent to the SAJ being
current, and subsisting tax exemption received by judiciary officials not
certificate or ruling. The tax exemption included in item no. 1; and
certificate or ruling must explicitly recognize 3. The additional allowance from the
the grant of tax exemption, as well as the surplus of the SAJ Fund that may be
corresponding exemption from imposition of authorized to be given to judiciary
withholding tax. Failure on the part of the officials and employees who are not
taxpayer to present said tax exemption direct beneficiaries under RA 9227
certificate or ruling shall subject him to the (RMC 58-2014)
payment of the appropriate taxes. On the
other hand, the withholding agent’s failure to DONOR’S TAX
withhold notwithstanding the lack of tax
exemption certificate or ruling shall cause the Q. Philamlife owns 498,590 shares in Philam
imposition of penalties. (RMC No. 8-2014) Care Health Systems. To divest itself of
interests in the health maintenance
Q. Does the requirement to present tax organization industry, Philamlife sold the
exemption certificate or ruling pursuant to said shares to STI Investments at a price
RMC No. 8-2014 apply to general lower than their book value. The BIR
professional partnerships? contends that donor’s tax became imposable
on the price difference. Philamlife argues
A. No. The requirement to present tax that the same is not subject to donor’s tax as
exemption certificate or ruling pursuant to there was no donative intent. Is the
RMC No. 8-2014 does not apply to general Philamlife correct?
Page 9 of 27
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(RMC No. 3-2014)

A. No. The absence of donative intent, if that be
the case, does not exempt the sales of stock Q. What are the rules on the determination of the
transaction from donor's tax since Sec. 100 prescriptive period for filing a tax refund or
of the Tax Code categorically states that the credit of unutilized input VAT as provided in
amount by which the fair market value of the Section 112 of the 1997 Tax Code?
property exceeded the value of the
consideration shall be deemed a gift. Thus, A. In Mindanao II Geothermal Partnership v.
even if there is no actual donation, the Commissioner of Internal Revenue, and
difference in price is considered a donation Mindanao I Geothermal Partnership v.
by fiction of law. Pursuant to RR 6-2008, Commissioner of Internal Revenue, G.R. Nos.
“fair market value” shall be, in the case of 193301 and 194637, March 11, 2013, the
shares of stock not listed and traded in the Supreme Court provided the following rules
local stock exchanges, the book value of the on prescriptive periods involving VAT:
shares of stock as shown in the financial
statements duly certified by an independent 1. An administrative claim must be filed with
certified public accountant nearest to the the CIR within two years after the close of
date of sale shall be the fair market value. The the taxable quarter when the zero-rated or
difference between the book value and the effectively zero-rated sales were made.
selling price in the sales transaction is taxable 2. The CIR has 120 days from the date of
donation subject to donor’s tax. (Philippine submission of complete documents in
American Life and General Insurance support of the administrative claim within
Company v. The Secretary of Finance and which to decide whether to grant a refund
Commissioner of Internal Revenue, G.R. No. or issue a tax credit certificate. The 120-
210987, November 24, 2014) day period may extend beyond the two-year
period from the filing of the administrative
VALUE-ADDED TAX claim if the claim is filed in the later part of
the two-year period. If the 120-day period
Q. Fort Bonifacio Development Corporation expires without any decision from the CIR,
(FBDC) transferred some of its real then the administrative claim may be
properties to the Bases Conversion and considered to be denied by inaction.
Development Authority (BCDA), in 3. A judicial claim must be filed with the CTA
redemption of its preferred shares held by within 30 days from the receipt of the
BCDA. Is the transfer of the subject real CIR’s decision denying the administrative
properties subject to VAT? claim or from the expiration of the 120-day
period without any action from the CIR.
A. Yes. In general, the sale of real properties 4. All taxpayers, however, can rely on BIR
held primarily for sale to customers or held Ruling No. DA-489- 03 from the time of its
for lease in the ordinary course of trade or issuance on 10 December 2003 up to its
business of the seller shall be subject to VAT. reversal by this Court in Aichi on 6 October
The transfer of the real properties of FBDC 2010, as an exception to the mandatory
to BCDA to redeem its shares although not and jurisdictional 120+30 day periods.
occurring in the regular conduct or in the
course of FBDC’s trade or business and is a (Miramar Fish Company Inc. v. CIR, G.R. No.
transaction which is not done with regularity, 185432, June 4, 2014; Visayas Geothermal
is nevertheless subject to VAT the same being Power Company v. CIR, G.R. No. 197525,
considered a transaction “deemed sale” June 4, 2014; CIR v. Mindanao II Geothermal
under Section 106(B)(1) of the Tax Code Partnership, G.R. No. 189440, June 18, 2014;
Page 10 of 27
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TAXATION LAW
Taganito Mining Corporation v. CIR, G.R. No.

197591, June 18, 2014; San Roque Power Note: The shift from “inaction deemed a
Corporation v. CIR, G.R. No. 205543, June denial” to “inaction as a decision of denial in
30, 2014; CIR v. CE Luzon Geothermal itself” is significant. This means that the
Power Company, G.R. No. 190198, taxpayer can no longer expect a decision
September 17, 2014; CNK Power Company from the BIR after the lapse of the 120-day
Limited v. CIR, G.R. No. 202066 and G.R. period. Since the CIR’s inaction is a decision
No. 205353, September 30, 2014; CIR v. in itself, the BIR is barred from further
Aichi, G.R. No. 183421, October 22, 2015; processing the claim.
CIR v. Burmeistor, G.R. No. 190021, October
22, 2014; Taganito Mining Corporation v. RMC 54-2014 also provides that in case the
CIR, G.R. No. 198076, November 19, 2014; taxpayer has already filed a petition for
AT&T Communications Services Phils., Inc. v. review with the CTA, the CIR loses
CIR, G.R. No. 185969, November 19, 2014; jurisdiction over the administrative claim.
Taganito Mining Corporation v. CIR, G.R. No. The CIR can still evaluate internally the claim
201195, November 26, 2014; CBK Power but only for the purpose of intelligently
Company Limited v. CIR, G.R. No. 198928, opposing the taxpayer’s judicial claim.
December 3, 2014; Mindanao II Geothermal
Partnership v. CIR, G.R. No. 204745, Q. What is the exception to the rule that the two-
December 8, 2014; Panay Power Corporation year prescriptive period within which the
v. CIR, G.R. No. 203351, January 21, 2015; administrative claim must be filed should be
Nippon Express (Philippines) Corporation v. counted from the close of the taxable quarter
CIR, G.R. No. 185666, February 4, 2015; when the relevant sales were made?
Northern Mindanao Power Corporation v.
CIR, G.R. No. 185115, February 18, 2015; A. Reckoning the two-year period from the date
Cargill Philippines, Inc. v. CIR, G.R. No. of payment of the output tax is allowed if the
203774, March 11, 2015) claim is filed between 8 June 2007 and 12
September 2008, when the Atlas Doctrine
Q. In a refund of unutilized input taxes, is the was still in effect. (Visayas Geothermal
inaction of the Commissioner “deemed a Power Company v. CIR, G.R. No. 197525,
denial” or a decision denying the claim? June 4, 2014; AT&T Communications
Services Phils., Inc. v. CIR, G.R. No.
A. Previously, it was held as an “inaction is 185969, November 19, 2014)
deemed a denial.” However, the Supreme
Court has unequivocally stated that the CIR’s Note: Previously, in Atlas Consolidated
inaction within the 120-day period is a Mining v Commissioner of Internal Revenue,
decision in itself. When the 120-day period G.R. Nos. 141104 & 148763, June 8, 2007,
lapses and there is inaction on the part of the the Supreme Court held that the two-year
CIR, the taxpayer must no longer wait for the prescriptive period should be reckoned from
CIR to decide. The inaction is already a the date of the return and payment of the tax
decision denying the refund claim. due, which should be made within twenty
Consequently, the taxpayer must file his (20) days from the end of each quarter. The
appeal within 30 days from the lapse of the Atlas doctrine was abandoned in
120-day period. (Rohm Apollo Commissioner of Internal Revenue v Mirant
Semiconductor Philippines v Commissioner Pagbilao Corporation, G.R. No. 172129,
of Internal Revenue, G.R. No. 168950, September 12, 2008, where the Supreme
January 14, 2015) Court held that the two-year period should be
reckoned from the close of the taxable
Page 11 of 27
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TAXATION LAW
quarter where the relevant sales were made. unutilized input VAT?
The Mirant ruling adopted the verbal legis
rule, thus applying Section 112(A) in A. Section 113 of the NIRC of 1997, as
computing the two-year prescriptive period amended, categorically provides that a VAT-
in claiming refund or credit of input VAT. registered entity, like petitioner, shall issue a
duly registered VAT invoice or official
Q. A taxpayer filed a claim for refund or tax receipt, which must contain “a statement that
credit of unutilized input VAT. The CIR the seller is a VAT-registered person.” Non-
argued that the 120-day period for her to compliance is fatal to the claim. (Miramar
decide has not yet commenced as the Fish Company Inc. v. CIR, G.R. No. 185432,
taxpayer failed to submit the complete June 4, 2014)
documents as enumerated in RMO 53-98. Is
the CIR’s contention correct? Note: In claims for refund of unutilized input
VAT, it is required that the taxpayer prove
A. No. The CIR’s reliance on RMO 53-98 is that it is first and foremost a VAT-registered
misplaced. There is nothing in Section 112 of entity. If the taxpayer is not VAT-registered,
the NIRC, RR 3-88 or RMO 53-98 itself that then the claim for refund will fail.
requires submission of the complete
documents enumerated in RMO 53-98 for a To recall, a claim for refund or tax credit for
grant of a refund or credit of input VAT. The unutilized input VAT may be allowed only if
subject of RMO 53-98 states that it is a the following requisites concur, namely:
“Checklist of Documents to be Submitted by
a Taxpayer upon Audit of his Tax Liabilities 1. The taxpayer is VAT-registered;
x x x.” Even assuming that RMO 53-98 2. The taxpayer is engaged in zero-rated or
applies, it specifically states that some effectively zero-rated sales;
documents are required to be submitted by 3. The input taxes are due or paid;
the taxpayer “if applicable.” If the taxpayer 4. The input taxes are not transitional input
indeed failed to submit the complete taxes;
documents in support of its application, the 5. The input taxes have not been applied
CIR could have informed the taxpayer of its against output taxes during and in the
failure. In this case, the CIR did not inform succeeding quarters;
the taxpayer of the document it failed to 6. The input taxes claimed are attributable
submit, even up to the present petition. (CIR to zero-rated or effectively zero-rated
v. Team Sual Corporation, G.R. No. 205055, sales;
July 18, 2014) 7. For zero-rated sales under Section
106(A)(2)(1) and (2); 106(B); and
Note: RMC 54-2014 states that an 108(B)(1) and (2), the acceptable foreign
application for VAT refund/tax credit must currency exchange proceeds have been
be accompanied by complete supporting duly accounted for in accordance with
documents as enumerated in Annex A the rules and regulations of the Bangko
provided in said circular. The taxpayer will Sentral ng Pilipinas;
now also have to execute a statement under 8. Where there are both zero-rated or
oath attesting to the completeness of the effectively zero- rated sales and taxable or
submitted documents. exempt sales, and the input taxes cannot
be directly and entirely attributable to any
Q. What is the effect of the absence of the of these sales, the input taxes shall be
statement that the seller is a VAT-registered proportionately allocated on the basis of
person to the claim for refund or tax credit of sales volume; and
Page 12 of 27
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9. The claim is filed within two years after subsidiary ledger. Here, the claim for refund
the close of the taxable quarter when is for the full amount of the input VAT on the
such sales were made importation, rather than for an amortized
amount, thus the claim must fail. (Taganito
Q. What is the effect of the absence and non- Mining Corporation v. CIR, G.R. No.
printing of the word “zero-rated” in the 201195, November 26, 2014)
taxpayer’s invoices to the claim for refund or
tax credit of unutilized input VAT? Note: Capital goods or properties refers to
goods or properties with estimated useful life
A. The absence or non-printing of the word greater than 1 year and which are treated as
“zero-rated” in the taxpayer’s invoices is fatal depreciable assets under Sec. 34(F) of the tax
to its claim for the refund and/or tax credit Code, used directly or indirectly in the
representing its unutilized input VAT production or sale of taxable goods or
attributable to its zero-rated sales. (Miramar services.
Fish Company Inc. v. CIR, G.R. No. 185432,
June 4, 2014; Eastern Telecommunications Q. ABC Corporation purchased from the
Philippines v. CIR, G.R. No. 183531, March government in 1995 portion of the Fort
25, 2015) Bonifacio reservation, now known as the
Fort Bonifacio Global City. No VAT on the
Q. Is there a difference between an invoice and sale of the land was passed on by the
official receipt for purposes of government to ABC. On January 1, 1996,
substantiation? Republic Act 7716 took effect, which
extended the coverage of the VAT to sale of
A. A VAT invoice is necessary for every sale, real properties held primarily for sale to
barter or exchange o f goods or properties customers or held for lease in the ordinary
while a VAT official receipt properly pertains course of business. In September 1996, ABC
to ever; lease of goods or properties, and submitted to the BIR an inventory of all its
every sale, barter or exchange of services. In real properties, claiming that it is entitled to
other words, the VAT invoice is the seller's the transitional input tax credit on said
best proof of the sale of the goods or services inventories. ABC started selling Global City
to the buyer while the VAT receipt is the lots in October 2006. For the 1st quarter of
buyer's best evidence of the payment of 1997, ABC paid output taxes on the sale of
goods or services received from the seller. lots after deducting input taxes. Realizing
(Nippon Express (Philippines) Corporation that the transitional input taxes were not
v. CIR, G.R. No. 185666, February 4, 2015; applied against the output VAT, which would
Northern Mindanao Power Corporation v. have resulted to no net output VAT liability
CIR, G.R. No. 185115, February 18, 2015) (the transitional input taxes being higher),
FBDC filed a claim for refund for the VAT
Q. ABC Mining Corporation purchased and payment. The BIR argues that (1)
imported dump trucks. ABC filed a claim for transitional input tax is limited to
refund of the full input VAT relating to its improvements to real properties; and (2)
importation of said dump trucks, treated as there should have been prior payment of
capital goods. Will ABC’s claim prosper? taxes. Is the BIR correct?
A. No. The claim will not prosper because the A. No. There is nothing in the law that prohibits
law requires that the related input VAT be the inclusion of real properties, together with
properly amortized over the estimated useful the improvements thereon, in the beginning
life of the capital goods in the taxpayer’s
Page 13 of 27
NOTICE
TAXATION LAW
inventory of goods, materials and supplies, human consumption, there must be a

based on which inventory the transitional showing the same is unfit for human
input tax credit is computed. Further, there consumption or that the ingredient cannot be
is nothing in the law that indicates that prior used for the production of food for human
payment of taxes is necessary for the consumption as certified by the Food and
availment of the transitional input tax credit. Drug Administration. (RMC 55-2014 as
All that is required is for the taxpayer to file amended by RMC No. 66-2014)
a beginning inventory with the BIR. (Fort
Bonifacio Development Corporation v CIR, Note: The list of specific feed ingredients is
G.R. Nos. 175707, 180035, and 181092, exclusive as of the date of issuance of RMC
November 19, 2014) No. 66-2014. The BIR is not precluded from
adding to the list which would necessitate the
Note: The same issues have been passed issuance of another RMC. (RMC No. 78-
upon in Fort Bonifacio Development 2014)
Corporation v CIR, G.R. No. 173425,
January 22, 2013; Fort Bonifacio TAX REMEDIES
Development Corporation v CIR, G.R. No.
173425, September 4, 2012; Fort Bonifacio Q. The BIR issued a Final Assessment Notice
Development Corporation v CIR, G.R. Nos. against a taxpayer for deficiency expanded
158885 and 170680, October 2, 2009; Fort withholding tax for the taxable year 1994. It
Bonifacio Development Corporation v CIR, merely contained a tabulation of the alleged
G.R. Nos. 158885 and 170680, April 2, deficiency taxes due. Only the resulting
2009. interest, surcharge and penalty were
provided with legal basis. Is the assessment
Q. What is the value-added tax treatment of the valid?
sale or importation of livestock and poultry
feeds or ingredients? A. No. Section 228 of the Tax Code provides that
the taxpayer shall be informed in writing of
A. Only livestock and poultry feeds or the law and the facts on which the assessment
ingredients used in the manufacture of is made. Otherwise, the assessment is void.
finished feeds are exempted from VAT. The (CIR v. United Salvage and Towage (Phils.),
sale or importation of ingredients which may Inc., G.R. No. 197515, July 2, 2014)
also be used for the production of food for
human consumption shall be subject to VAT. Q. The BIR issued a Letter of Authority to
Thus, for the sale or importation of any of the examine the books of account and other
following feed ingredients: accounting records of the taxpayer for
income and withholding taxes for the period
1. Whey powder 1997 to 1999. BIR then sent a Notice of
2. Skimmed milk powder Informal Conference. Attached thereto is a
3. Lactose Summary Report containing an explanation
4. Buttermilk powder of the legal and factual bases for the
5. Whole milk powder
deficiency assessment. The taxpayer
6. Palm Olein
requested for copies of working papers
indicating how the deficiency withholding
and such other feed ingredients used in the
taxes were computed. The BIR promptly
manufacture of finished feeds which may
responded in a letter-reply. Thereafter, the
hereinafter be determined by competent
taxpayer received a PAN which contained the
authority to have possible utilization for
Page 14 of 27
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TAXATION LAW
computations of its deficiency income and three (3) years by virtue of Batas Pambansa
withholding taxes. Attached to the PAN was Blg. 700. Thus, the BIR has three (3) years
the detailed explanation of the particular from the date of actual filing of the tax return
provision of law and revenue regulation to assess a national internal revenue tax or to
violated. The taxpayer replied to the PAN. commence court proceedings for the
The BIR replied in a letter explaining the collection thereof without an assessment.
factual and legal bases of the deficiency However, when it validly issues an
assessment and denying the reply. A FAN assessment within the three (3)-year period,
and demand letter were then issued, it has another three (3) years within which to
unaccompanied by any written explanation collect the tax due by distraint, levy, or court
of the legal and factual bases of the deficiency proceeding. The assessment of the tax is
taxes assessed against the taxpayer. Is the deemed made and the three (3)-year period
assessment valid? for collection of the assessed tax begins to
run on the date the assessment notice had
A. Although the FAN and demand letter issued been released, mailed or sent to the taxpayer.
to the taxpayer were not accompanied by a In this case, the Preliminary Collection Letter
written explanation of the legal and factual was issued only on February 21, 2002,
bases of the deficiency taxes assessed against despite the fact that the FAN was issued as
the petitioner, the records showed that the early as January 9, 1996. Clearly, five (5) long
BIR in its letter responded to the taxpayer’s years had already lapsed, beyond the three
reply to the PAN, explaining at length the (3)-year prescriptive period, before collection
factual and legal bases of the deficiency tax was pursued by the BIR. (CIR v. United
assessments. Considering the foregoing Salvage and Towage (Phils.), Inc., G.R. No.
exchange of correspondence and documents 197515, July 2, 2014)
between the parties, the requirement of
Section 228 was substantially complied with. Note: It must be noted that in this case, no
The BIR had fully informed the taxpayer in evidence was formally offered to prove when
writing of the factual and legal bases of the the taxpayer filed its returns and paid the
deficiency taxes assessment, which enabled corresponding EWT for taxable year 1992.
the latter to file an "effective" protest. Further, it must be emphasized that there are
Petitioner's right to due process was thus not conflicting views on the proper prescriptive
violated. (Samar-I Electric Cooperative v. period for the collection of national internal
CIR, G.R. No. 193100, December 10, 2014) revenue taxes in case a regular return is filed.
Some hold the view that the prescriptive
Q. On January 9, 1996, the BIR issued a Final period is five (5) years while others opine that
Assessment Notice against the taxpayer for it is three (3) years.
deficiency expanded withholding tax for the
taxable year 1992, 1994, and 1998. The BIR Q. On June 16, 1989, the taxpayer received a
issued a Preliminary Collection Letter for the final assessment notice issued by the BIR,
deficiency EWT for the taxable year 1992 on finding the taxpayer liable for deficiency
February 21, 2002. The BIR argues that its documentary stamp tax for the taxable year
right to collect the EWT for taxable year 1985. The taxpayer filed a protest on June
1992 has not yet prescribed. Is the BIR 23, 1989 requesting for reinvestigation
correct? and/or reconsideration. The BIR denied the
request for reconsideration on August 4,
A. No. The statute of limitations on assessment 1998. On January 4, 1998, the taxpayer filed
and collection of national internal revenue its petition for review before the CTA. The
taxes was shortened from five (5) years to taxpayer argued that the assessment may be
Page 15 of 27
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TAXATION LAW
invalidated because the statute of limitations three years from 19 April 1989, the date the
on collection had already expired. The CIR former received the assessment of the CIR, to
contended that the issue of prescription collect the tax. Within that time frame,
cannot be raised for the first time on appeal. however, neither a warrant of distraint or
Further, the CIR alleged that even assuming levy was issued, nor a collection case filed in
that the issue of prescription can be raised, court. Is the taxpayer correct?
the protest letter interrupted the prescriptive
period to collect. Is the CIR correct? A. Yes. The Bureau of Internal Revenue (BIR)
issued the assessment for deficiency DST on
A. No. If the pleadings or the evidence on 19 April 1989, when the applicable rule was
record show that the claim is barred by Section 319(c) of the National Internal
prescription, the court is mandated to Revenue Code of 1977, as amended. In that
dismiss the claim even if prescription is not provision, the time limit for the government
raised as a defense. Under the then to collect the assessed tax is set at three years,
applicable Section 319(c) [now, 222(c)] of to be reckoned from the date when the BIR
the National Internal Revenue Code (NIRC) mails/releases/sends the assessment notice
of 1977, as amended, any internal revenue to the taxpayer. Further, Section 319(c)
tax which has been assessed within the states that the assessed tax must be collected
period of limitation may be collected by by distraint or levy and/or court proceeding
distraint or levy, and/or court proceeding within the three-year period. In this case, the
within three years following the assessment records do not show when the assessment
of the tax. The assessment of the tax is notice was mailed, released or sent to the
deemed made and the three-year period for taxpayer. Nevertheless, the latest possible
collection of the assessed tax begins to run on date that the BIR could have released, mailed
the date the assessment notice had been or sent the assessment notice was on the
released, mailed or sent by the BIR to the same date that the taxpayer received it, 19
taxpayer. In this case, although there was no April 1989. Assuming therefore that 19 April
allegation as to when the assessment notice 1989 is the reckoning date, the BIR had three
had been released, mailed or sent to BPI, still, years to collect the assessed DST. However,
the latest date that the BIR could have the records show that there was neither a
released, mailed or sent the assessment warrant of distraint or levy served on the
notice was on the date BPI received the same taxpayer’s properties nor a collection case
on 16 June 1989. Counting the three- year filed in court by the BIR within the three-year
prescriptive period from 16 June 1989, the period. (China Banking Corporation v. CIR,
BIR had until 15 June 1992 to collect the G.R. No. 172509, February 4, 2015)
assessed DST. (BPI v. CIR, G.R. No.
181836, July 9, 2014) Q. Does a request for reinvestigation suspend
the running of the prescriptive period to
Q. On April 19, 1989, the BIR issued a FAN collect?
finding the taxpayer liable for deficiency DST
for the taxable years 1982 to 1986. On May A. No. A request for reinvestigation alone will
8, 1989, the taxpayer filed its protest. On not suspend the statute of limitations. Two
December 6, 2001, the BIR rendered a things must concur: there must be a request
decision denying the protest. The taxpayer for reinvestigation and the CIR must have
elevated the same to the CTA arguing that granted it. (China Banking Corporation v.
the right of the BIR to collect the assessed CIR, G.R. No. 172509, February 4, 2015)
DST is already barred by prescription. The
taxpayer contends that the government had
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Q. In tax assessment cases, can the defense of A. RMO No. 20-90 provides the following
prescription be raised for the first time on requirements:
appeal before the Supreme Court?
(1) The waiver must be in the prescribed
A. Yes. Though the established rule in remedial form. There should be no deviation from
law that the defense of prescription must be this form. The phrase “but not after “
raised at the trial court has also been applied which indicates the expiry date of the
for tax cases, and thus,, as a rule, the failure period agreed upon to assess/collect
to raise the defense of prescription at the should be filled up;
administrative level prevents the taxpayer (2) The waiver shall be signed by the
from raising it at the appeal stage, itis not taxpayer himself or his duly authorized
absolute. When the pleadings or the evidence representative. In the case of a
on record show that the claim is barred by corporation, the waiver must be signed by
prescription, the court must dismiss the claim any of its responsible officials. In case the
even if prescription is not raised as a defense. authority is delegated by the taxpayer to a
(China Banking Corporation v. CIR, G.R. representative, such delegation should be
No. 172509, February 4, 2015) in writing and duly notarized;
(3) The waiver should be duly notarized;
Q. ABC Corporation was dissolved by (4) The waiver shall be signed by the
shortening its corporate term. As a result Commissioner of Internal Revenue or his
thereof, ABC moved out of its address in Las duly authorized representative, and the
Pinas City and transferred to Calamba date of acceptance of the BIR should be
Laguna. ABC sent a notice of dissolution to indicated;
the BIR as well as an update of information (5) Both the date of execution by the
contained in its BIR Certificate of taxpayer and the date of acceptance by
Registration. ABC was assessed for the BIR should be before the expiration
deficiency income taxes. The Final of the period of prescription or before the
Assessment Notice was sent via registered lapse of the period agreed upon in case a
mail to ABC’s former address in Las Pinas subsequent agreement is executed; and
City. Is the assessment valid? (6) The waiver must be executed in three
copies, the original copy to be attached to
A. No. The taxpayer’s right to due process is the docket of the case, the second copy
violated when there is no valid notice of for the taxpayer and the third copy for the
assessment sent to it. Here, the CIR was Office accepting the waiver. The taxpayer
aware of the new address and yet sent the must be furnished a copy of the waiver as
assessment to the taxpayer’s former address. accepted by the BIR. The fact of receipt
As a consequence thereof, the running of the by the taxpayer of his copy must be
three-year period was not suspended and had indicated in the original copy to show that
already prescribed. (Commissioner of the taxpayer was notified of the
Internal Revenue v BASF Coating + Inks acceptance of the BIR and the perfection
Phils., Inc., G.R. No. 198677, November 26, of the agreement. (CIR v. Stanley Works
2014) Sales (Phils.), Inc., G.R. No. 187589,
December 3, 2014, citing Philippine
Q. What are the requirements of a valid waiver Journalist v. CIR, G.R. No. 162852,
of defense of prescription or the statute of December 16, 2004)
limitations?
Q. What is the expenditure method in proving
tax fraud?
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taxes that should have been paid in lieu of the

A. The expenditure method is a method of taxes paid. Determining the proper category
reconstructing a taxpayer’s income by of tax that should have been paid is not an
deducting the aggregate yearly expenditures assessment. It is an incidental matter
from the declared yearly income. The theory necessary for the resolution of the principal
of this method is that when the amount of the issue, which is whether the taxpayer is
money that a taxpayer spends during a given entitled to the refund. (SMI-ED Philippines
year exceeds his reported or declared income v. Commissioner of Internal Revenue, G.R.
and the source of such money is unexplained, No. 175410, November 12, 2014)
it may be inferred that such expenditures
represent unreported or undeclared income. Q. What are the three essential conditions for
(BIR v. Court of Appeals & Spouses Manly, the grant of a claim for refund of creditable
G.R. No. 197590, November 24, 2014) withholding income tax?
Q. Can the date of issuance of a BIR Ruling A. The three essential conditions are:
confirming the tax-exemption status of a
taxpayer be used as the reckoning point of 1. The claim is filed with the Commissioner
the prescriptive period for recovery of of Internal Revenue within the two-year
erroneously or illegally assessed or collected period from the date of payment of the
internal revenue taxes? tax;
2. It is shown on the return of the recipient
A. No. The claim for refund must be filed within that the income payment received was
two (2) years from the date of payment of the declared as part of the gross income; and
tax regardless of any supervening cause that 3. The fact of withholding is established by
may arise after payment. While the a copy of a statement duly issued by the
prescriptive period of two (2) years payor to the payee showing the amount
commences to run from the time that the paid and the amount of the tax withheld
refund is ascertained, the propriety thereof is therefrom. (CIR v. Team (Philippines)
determined by law (in this case, from the date Operations Corporation, G.R. No.
of payment of tax), and not upon the 179260, April 2, 2014)
discovery by the taxpayer of the erroneous or
excessive payment of taxes. The issuance of Q. What is the competent proof to establish the
the BIR of a Ruling declaring the tax-exempt fact that the creditable taxes were withheld?
status of a taxpayer, if at all, is merely
confirmatory in nature. Such ruling is not the A. The certificate of creditable tax withheld at
operative act from which an entitlement of source is the competent proof to establish the
refund is determined. (CIR v. Meralco, G.R. fact that taxes are withheld. It is not
No. 181459, June 9, 2014) necessary for the person who executed and
prepared the certificate of creditable tax
Q. May the Court of Tax Appeals determine, in withheld at source to be presented and to
a claim for refund of taxes allegedly testify personally to prove the authenticity of
erroneously paid, whether there are taxes the certificates. It must be noted that upon
that should have been paid in lieu of the taxes presentation of a withholding tax certificate
paid? complete in its relevant details and with a
written statement that it was made under the
A. Yes. In an action for the refund of taxes penalties of perjury, the burden of evidence
allegedly erroneously paid, the Court of Tax then shifts to the Commissioner of Internal
Appeals may determine whether there are Revenue to prove that (1) the certificate is
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not complete; (2) it is false; or (3) it was not competent, relevant and part of the records.
issued regularly. (CIR v. PNB, G.R. No. (Winebrenner & Inigo Insurance Brokers,
180290, September 29, 2014) Inc., G.R. No. 206526, January 28, 2015)
Q. Is proof of actual remittance of the withheld The taxpayer need not submit the quarterly
taxes required before the taxpayer may claim returns to show that it did not carry-over the
for a refund of creditable withholding tax? excess withholding tax to the succeeding
quarter. When the taxpayer is able to
A. No. Proof of actual remittance of the establish prima facie its right to the refund by
withheld taxes is not required before the testimonial and object evidence, it is the BIR
taxpayer may claim for a tax refund/tax that should present rebuttal evidence to shift
credit certificates. It is not a requirement for the burden of evidence back to the taxpayer.
claiming a tax refund of creditable Indeed, the BIR ought to have its own copies
withholding taxes. (CIR v. Team of the taxpayer’s quarterly returns on file, on
(Philippines) Operations Corporation, G.R. the basis of which it could rebut the
No. 179260, April 2, 2014; CIR v. PNB, taxpayer’s claim that it did not carry over its
G.R. No. 180290, September 29, 2014) unutilized and excess creditable withholding
taxes for the immediately succeeding
Q. The BIR contends that, in a refund of excess quarters. The BIR's failure to present such
creditable withholding taxes, the taxpayer vital document during the trial in order to
must present its quarterly returns because bolster its contention against the taxpayer’s
such quarterly returns would show that it did claim for the tax refund is fatal. (CIR v. Team
not carry-over the excess withholding tax to (Philippines) Energy Corporation, G.R. No.
the succeeding quarter. Is the BIR correct? 188016, January 14, 2015)
A. No. Proving that no carry-over has been Q. Gotesco, a corporation engaged in the real
made does not absolutely require the estate business, secured a loan from PNB
presentation of the quarterly ITRs. Requiring with a six-hectare property as collateral.
that the ITR or the FAR of the succeeding Gotesco defaulted on its loan obligations.
year be presented to the BIR in requesting a Thus, PNB foreclosed the mortgaged
tax refund has no basis in law and property. A certificate of sale was issued in
jurisprudence. First, Section 76 of the Tax favor of PNB. As it prepared for the
Code does not mandate it. Second, Section 5 consolidation of its ownership over the
of RR 12-94, amending Section 10(a) of RR property, PNB withheld and remitted to the
6-85, merely provides that claims for refund BIR withholding taxes equivalent to 6% of
of income taxes deducted and withheld from the bid price. Thereafter, PNB filed an
income payments shall be given due course administrative claim for the refund of excess
only (1) when it is shown on the ITR that the withholding taxes. PNB explained that it it
income payment received is being declared should have applied the five percent (5%)
part of the taxpayer’s gross income; and (2) creditable withholding tax rate on the sale of
when the fact of withholding is established by ordinary asset, considering that Gotesco is
a copy of the withholding tax statement, duly primarily engaged in the real estate business.
issued by the payor to the payee, showing the While PNB was able to establish the fact of
amount paid and the income tax withheld tax withholding and the remittance thereof to
from that amount. Any document, other than the BIR, the CTA found that PNB failed to
quarterly ITRs may be used to establish that present evidence to prove that Gotesco did
indeed the non-carry over clause has been not utilize the withheld taxes to settle its tax
complied with, provided that such is
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liabilities. On Motion for Reconsideration,

PNB eventually offered as evidence the Q. What is the irrevocability rule?
Income Tax Return of Gotesco to show that
the excess withholding tax payments were A. Once the option to carry-over and apply the
not used by Gotesco to settle its tax liabilities. excess quarterly income tax against income
The CTA denied the Motion for tax due for the taxable quarters of the
Reconsideration and insisted that, to succeeding taxable years has been made,
sufficiently prove that Gotesco did not utilize such option shall be considered irrevocable
the creditable taxes withheld, the PNB for that taxable period and no application for
should have likewise presented the cash refund or issuance of a tax credit
Certificate of Creditable Tax Withheld at certificate shall be allowed therefor. (CIR v.
Source (BIR Forms No. 2307) issued to Team (Philippines) Operations Corporation,
Gotesco in relation to the creditable taxes G.R. No. 179260, April 2, 2014, citing
withheld reported in its tax returns. Is the Section 76, Tax Code)
BIR Form 2307 necessary?
LOCAL GOVERNMENT TAXATION
A. The submission of BIR Forms 2307 is to
prove the fact of withholding of the excess Q. In 1993, the City Council of Manila enacted
creditable withholding tax being claimed for the Manila Revenue Code. Section 21(B) of
refund. This is clear in the provision of said Code imposed a local business tax on
Section 58.3, RR 2-98, as amended, and in the gross receipts of keepers of garages, cars
various rulings of the Court. In the words of for rent or hire driven by the lessee,
Section 2.58.3, RR 2-98, “That the fact of transportation contractors, persons who
withholding is established by a copy of a transport passenger or freight for hire, and
statement duly issued by the payor common carriers by land, air, or water.
(withholding agent) to the payee showing the Common carriers assailed the validity of
amount paid and the amount of tax withheld Section 21(B) of the Manila Revenue Code.
therefrom.” Is Section 21(B) valid?
Hence, the probative value of BIR Form
2307, which is basically a statement showing A. No. Section 21(B) of the Manila Revenue
the amount paid for the subject transaction Code is null and void. Although the power to
and the amount of tax withheld therefrom, is tax is inherent in the State, the same is not
to establish only the fact of withholding of the true for the LGUs to whom power must be
claimed creditable withholding tax. There is delegated by Congress and must be exercise
nothing in BIR Form No. 2307, which would within the guidelines and limitation that
establish either utilization or non-utilization, Congress may provide. And among the
as the case may be, of the creditable common limitations on the taxing power of
withholding tax. While perhaps it may be LGUs is Section 133(j) of the LGC, which
necessary to prove that the taxpayer did not clearly and unambiguously proscribes LGUs
use the claimed creditable withholding tax to from imposing a tax on the gross receipts of
pay for his/its tax liabilities, there is no basis transportation contractors and common
in law or jurisprudence to say that BIR Form carriers. The contention of the City of Manila
No. 2307 is the only evidence that may be that Section 143(h) of the LGC has
adduced to prove such non-use. (Philippine empowered it to impose local business tax on
National Bank v. CIR, G.R. No. 206019, any business subject to excise, value-added,
March 18, 2015) or percentage tax under the Tax Code), such
as common carriers, must fail. First, Section
133(j) of the LGC prevails over Section
Page 20 of 27
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143(h) of the LGC as the former is a specific The EPIRA also created the Power Sector
provision that explicitly limits the LGUs’ Assets and Liabilities Management
power to tax while Section 143(h) defines a Corporation (PSALM) and transferred to it
general power. Specific provisions prevail all of the NPC’s generation assets, which
over general ones. Second, such construction includes the plants in Bataan. Clearly, NPC
gives effect to both Section 133(j) and had ceased running said business. Further,
Section 143(h) of the LGC. Third, Section the EPIRA transferred all existing liabilities
5(b) of the LGC provides that any tax of NPC to PSALM, which would include its
ordinance or revenue measure shall be unpaid liabilities for local franchise tax.
strictly construed against the local Consequently, such tax is collectible from
government unit enacting it. Fourth, PSALM. (National Power Corporation v.
exemption of transportation contractors and Provincial Government of Bataan, G.R. No.
common carriers from local business tax is 180654, April 21, 2014)
consistent with the intent of our laws, which
is to prevent the duplication of the so-called Q. Must a writ of execution be issued before a
common carriers tax. (City of Manila v Hon. taxpayer may be allowed to avail of its tax
Colet and Malaysian Air System, G.R. No. refund or tax credit of local taxes as affirmed
120051, December 10, 2014) by a court judgment which has become final
and executory?
Q. The National Power Corporation (NPC)
received a notice of franchise tax delinquency A. No. It is not the intention of the law to
from the Provincial Government of Bataan. burden the taxpayer with going through the
The assessment is based on NPC’s sale of process of execution under the Rules of Civil
electricity that it generated from two power Procedure before it may be allowed to avail
plants in Bataan. The province once again its tax credit as affirmed by a court judgment.
sent notices of tax due. NPC replied that it The issuance of a Writ of Execution is
had ceased to be liable after the enactment of superfluous, because the court judgment can
Electric Power Industry Act (EPIRA), which neither be considered a judgment for a
relieved NPC of its functions of generating specific sum of money susceptible of
and supplying electricity. The province execution by levy or garnishment under
proceeded to levy on the properties that NPC Section 9, Rule 39 of the Rules of Court nor
used to own. Is NPC liable for the franchise a special judgment under Section 11, Rule 39
tax? thereof. Instead of moving for the issuance
of a writ of execution, the taxpayer should
A. No. The EPIRA transferred to the National merely request for the approval of the local
Transmission Corporation (TRANSCO) the government unit in implementing the tax
NPC’s electric transmission function. Thus, refund or tax credit, whichever is
the NPC ceased to operate said business in appropriate. The local government unit has
Bataan. Since the local franchise tax is two options: (1) to pay the taxpayer the
imposed on the privilege of operating a amount as tax refund; or (2) to issue a tax
franchise, such tax is not the liability of NPC, credit certificate in the same amount which
but instead of TRANSCO. The province may be credited by the taxpayer from its
cannot likewise levy on the transmission future tax liabilities due to the local
facilities to satisfy the assessment against government unit. (Coca-Cola Bottlers
NPC because the same is now owned by Philippines v. City of Manila, G.R. No.
TRANSCO. 197561, April 7, 2014)
Page 21 of 27
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Q. In the imposition of the surcharge on local which includes “real property owned by the
taxes due and unpaid, should the 25% Republic of the Philippines or any of its
surcharge be computed yearly based on the political subdivisions except when the
unpaid tax due for each particular year? beneficial use thereof has been granted, for
consideration or otherwise, to a taxable
A. No. Section 168 of the Local Government person.” The PEZA is an instrumentality of
Code categorically provides that the local the national government. Being an
government unit may impose a surcharge not instrumentality of the national government,
exceeding 25% of the amount of taxes, fees, the PEZA cannot be taxed by local
or charges not paid on time. The surcharge is government units. Further, the real
a civil penalty imposed once for late payment properties under the PEZA’s title are owned
of a Contrast this with the succeeding by the Republic of the Philippines. Properties
provisions on interest, which was imposable of public dominion, even if titled in the name
at the rate not exceeding 2% per month of the of an instrumentality as in this case, remain
unpaid taxes until fully paid. The fact that the owned by the Republic of the Philippines.
interest charge is made proportionate to the (City of Lapu-Lapu v. PEZA, G.R. No.
period of delay, whereas the surcharge is not, 184203 & 187583, November 26, 2014)
clearly reveals the legislative intent for the
different modes in their application. If the Note: Even the PEZA’s lands and buildings
legislative intent was to make the 25% whose beneficial use have been granted to
surcharge proportionate to the period of other persons may not be taxed with real
delay, the law should have provided for the property taxes. The PEZA may only lease its
same in clear terms. (NPC v. City of lands and buildings to PEZA-registered
Cabanatuan, G.R. No. 177332, October 1, economic zone enterprises and entities.
2014) These PEZA-registered enterprises and
entities, which operate within economic
REAL PROPERTY TAXATION zones, are not subject to real property taxes.
Under Section 24 of the Special Economic
Q. Is the Philippine Economic Zone Authority Zone Act of 1995, no taxes, whether local or
(PEZA) exempt from the payment of real national, shall be imposed on all business
property taxes? establishments operating within the
economic zones.
A. Yes. The PEZA is exempt from the payment
of real property taxes. The general rule is that Q. Distinguish between an illegal assessment
real properties are subject to real property and an erroneous assessment of real property
taxes. This is true especially since the Local taxes in terms of remedies to be taken?
Government Code has withdrawn
exemptions from real property taxes of all A. An erroneous assessment is different from an
persons, whether natural or juridical. illegal assessment, and the proper remedy of
Exceptions to the rule are however also a taxpayer issued an assessment depends on
provided in the Local Government Code. whether the assessment was erroneous or
Under Section 133(o), local government illegal.
units have no power to levy taxes of any kind
on the national government, its agencies and An erroneous assessment “presupposes that
instrumentalities and local government units. the taxpayer is subject to the tax but is
Specifically on real property taxes, Section disputing the correctness of the amount
234 enumerates the persons and real assessed.” With an erroneous assessment,
property exempt from real property taxes, the taxpayer claims that the local assessor
Page 22 of 27
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erred in determining any of the items for on certiorari under Rule 45 of the Rules of
computing the real property tax, i.e., the Court raising pure questions of law. (City of
value of the real property or the portion Lapu-Lapu v. PEZA, G.R. No. 184203 &
thereof subject to tax and the proper 187583, November 26, 2014)
assessment levels. In case of an erroneous
assessment, the taxpayer must exhaust the Q. May a municipality within the Metropolitan
administrative remedies provided under the Manila Area, a city, or a province have an
Local Government Code before resorting to additional levy on real property for the
judicial action. The taxpayer must first pay special education fund at the rate of less than
the real property tax under protest. Should 1%.?
the taxpayer find the action on the protest
unsatisfactory, the taxpayer may appeal with A. Yes. Section 235 of the Local Government
the Local Board of Assessment Appeals Code provides that “a province or city, or a
within 60 days from receipt of the decision municipality within the Metropolitan Manila
on the protest. If the taxpayer is still Area, may levy and collect an annual tax of
unsatisfied after appealing with the Local one percent (1%) on the assessed value of
Board of Assessment Appeals, the taxpayer real property which shall be in addition to the
may appeal with the Central Board of basic real property tax. The proceeds thereof
Assessment Appeals within 30 days from shall exclusively accrue to the Special
receipt of the Local Board’s decision. The Education Fund (SEF).” The operative
decision of the Central Board of Assessment phrase in Section 235’s grant to
Appeals is appealable before the Court of municipalities in Metro Manila, cities, and
Tax Appeals En Banc. The Court of Tax provinces of the power to impose an
Appeals’ decision may then be appealed additional levy for the special education fund
before the Supreme Court through a petition is prefixed with “may,” thus, “may levy and
for review on certiorari under Rule 45 of the collect an annual tax of one percent (1%).”
Rules of Court raising pure questions of law. There is no limiting qualifier to the
articulated rate of 1% which unequivocally
On the other hand, an assessment is illegal if indicates that any and all special education
it was made without authority under the law. fund collections must be at such rate. Setting
In case of an illegal assessment, the taxpayer the rate of the additional levy for the special
may directly resort to judicial action without education fund at less than 1% is within the
paying under protest the assessed tax and taxing power of local government units.
filing an appeal with the Local and Central (Demaala v. COA, G.R. No. 199752,
Board of Assessment Appeals. The taxpayer February 17, 2015)
shall file a complaint for injunction before the
Regional Trial Court to enjoin the local Q. From 1994 to 1996, a taxpayer was not able
government unit from collecting real to pay its real property taxes. As a result, a
property taxes. The party unsatisfied with the warrant was issued by the City Treasurer
decision of the Regional Trial Court shall file subjecting the property to levy. A public
an appeal, not a petition for certiorari, before auction sale was conducted. The taxpayer
the Court of Tax Appeals, the complaint now questions the validity of the auction sale
being a local tax case decided by the Regional in that it violated the procedural
Trial Court. The appeal shall be filed within requirements under the Local Government
fifteen (15) days from notice of the trial Code. The buyer argues that there is a
court’s decision. The Court of Tax Appeals’ presumption of regularity of an official act in
decision may then be appealed before the a tax delinquency sale. The taxpayer argues
Supreme Court through a petition for review that no presumption of regularity is enjoyed
Page 23 of 27
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by any administrative action which results in the same shall be mailed to or served upon
depriving a taxpayer of his property. Is the the delinquent owner of the real property or
taxpayer correct? person having legal interest therein, or in
case he is out of the country or cannot be
A. Yes. There is no presumption of the regularity located, the administrator or occupant of the
of any administrative action which resulted in property. At the same time, the written notice
depriving a taxpayer of his property through of the levy with the attached warrant shall be
a tax sale. This is an exception to the rule that mailed to or served upon the assessor and the
administrative proceedings are presumed to Registrar of Deeds of the province, city or
be regular. It is incumbent upon the buyer at municipality within the Metropolitan Manila
an auction sale to prove the regularity of all Area where the property is located, who shall
proceedings leading to the sale for the buyer annotate the levy on the tax declaration and
could not rely on the presumption of certificate of title of the property,
regularity accorded to ordinary respectively.
administrative proceedings.
Section 260 of the LGC also mandates that
The burden to prove compliance with the within thirty (30) days after service of the
validity of the proceedings leading up to the warrant of levy, the local treasurer shall
tax delinquency sale is incumbent upon the proceed to publicly advertise for sale or
buyer or the winning bidder. This is premised auction the property or a usable portion
on the rule that a sale of land for tax thereof as may be necessary to satisfy the tax
delinquency is in derogation of property and delinquency and expenses of sale. Such
due process rights of the registered owner. In advertisement shall be effected by posting a
order to be valid, the steps required by law notice at the main entrance of the provincial,
must be strictly followed. The burden to city or municipal building, and in a publicly
show that such steps were taken lies on the accessible and conspicuous place in the
person claiming its validity, for the Court barangay where the real property is located,
cannot allow mere presumption of regularity and by publication once a week for two (2)
to take precedence over the right of a weeks in a newspaper of general circulation
property owner to due process accorded no in the province, city or municipality where
less than by the Constitution. the property is located. (Strategies
Development Corporation & Prieto v. Agojo,
It is, thus, necessary to determine whether G.R. No. 208740, November 19, 2014)
respondent has fulfilled his burden of
proving compliance with the requirements TARIFF AND CUSTOMS TAXATION
for a valid tax delinquency sale. Under
Section 254 of the LGC, it is required that Q. Does the Commissioner of Customs have the
the notice of delinquency must be posted at power to accredit customs brokers?
the main hall and in a publicly accessible and
conspicuous place in each barangay of the A. No. The BOC Commissioner’s power under
local government unit concerned. It shall also Section 608 of the Tariff and Customs Code
be published once a week for two (2) (TCCP) is a general grant of power to
consecutive weeks, in a newspaper of general promulgate rules and regulations necessary
circulation in the province, city, or to enforce the provisions of the TCCP. Under
municipality. the rules of statutory construction, this
general rule-making power gives way to the
Section 258 of the LGC further requires that specific grant of power to promulgate rules
should the treasurer issue a warrant of levy, and regulations on the practice of customs
Page 24 of 27
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brokers profession to the CSC Commissioner or his agent. Failure to comply with the
under Section 3409 of the TCCP. Indeed, in foregoing procedural requirements would
the exercise of this specific power, the Board negate the propriety of having the subject
of Examiners (of which the BOC shipment of the importer seized and forfeited
Commissioner serves as ex-officio chairman) in favor of the Government in all cases.
was to perform only a recommendatory role.
With the repeal of Section 3409 of the TCCP Further, the shipment could not be deemed
by RA 9280, this specific rule-making power liable for seizure or even forfeiture on the
was transferred to the Professional ground of violation of Section 2530(f) of the
Regulatory Board for Customs Brokers TCCP, as amended, for it must be proven
(PRBCB) to complement its supervisory and first that fraud has been committed by or
regulatory powers over customs brokers. there was bad faith on the part of the
importer/consignee to evade payment of the
The similarity in the functions and concerns duties due and demandable. (COC v. New
of the BOC and the BIR does not support a Frontier Sugar Corporation, G.R. No.
grant of power to accredit customs brokers 163055, June 11, 2014)
to the BOC Commissioner. Unlike the BOC
Commissioner whose power over customs Q. Who has jurisdiction to hear and determine
brokers was – at the very least – implied and questions involving the seizure and forfeiture
indirect, the BIR Commissioner was given of dutiable goods?
express and specific powers to accredit and
register tax agents under Section 6(G) of the A. The Collector of Customs has exclusive
National Internal Revenue Code (NIRC). jurisdiction over seizure and forfeiture
(Airlift Asia Customs Brokerage, Inc. v. proceedings, and regular courts cannot
Court of Appeals, G.R. No. 183664, July 28, interfere with his exercise thereof or stifle or
2014) put it at naught. The Collector of Customs
sitting in seizure and forfeiture proceedings
Q. New Frontier Sugar Corporation imported has exclusive jurisdiction to hear and
raw cane sugar from Thailand. The Bureau determine all questions touching on the
of Customs found that there was a violation seizure and forfeiture of dutiable goods.
of Joint Order No. 1-91, in relation to Regional trial courts are devoid of any
paragraph (f), Section 2530 of the Tariff and competence to pass upon the validity or
Customs Code (TCCP) for failure to subject regularity of seizure and forfeiture
the shipment to pre-shipment inspection and proceedings conducted by the BOC and to
for lack of a Clean Report of Findings (CRF). enjoin or otherwise interfere with these
The BOC asserts that pursuant to Joint proceedings. Regional trial courts are
Order No. 1-91, the shipment shall be precluded from assuming cognizance over
subject to automatic seizure. Is the BOC such matters even through petitions for
correct? certiorari, prohibition or mandamus. (Agriex
Co. Ltd. v. Commissioner of Customs, G.R.
A. No. A Warrant of Seizure and Detention No. 158150, September 10, 2014)
(WSD) is a condition precedent, before any
seizure proceeding can be formally initiated. JUDICIAL REMEDIES
The following mandatory procedures must (COURT OF TAX APPEALS)
be observed in a seizure case: (1) that a WSD
must first be issued upon making any seizure; Q. Is an adverse ruling of the Secretary of
and (2) that a written notice of such seizure Finance in the exercise of its power of review
must be served upon the owner or importer
Page 25 of 27
NOTICE
TAXATION LAW
under Section 4 of the NIRC appealable to directors and the latter was 100% owned by
the Court of Tax Appeals? the former. The District Collector assessed
URC for taxes due on its oil imports between
A. Yes. Review by the Secretary of Finance 1991 and 1995. On November 25, 1998, the
pursuant to Section 4 of the NIRC, as Commissioner of Customs (COC) issued a
amended, of a BIR Ruling is appealable to final assessment. On December 21, 1998,
the Court of Tax Appeals. The Court opined the COC wrote URC to pay the deficiency
that Section 7(a)(1) of RA 1125, as taxes but in a reduced amount. Upon
amended by RA 9282, addresses the assumption of the new COC, another
seeming gap in the law as it vests in the demand letter was sent to URC. URC
Court of Tax Appeals, albeit impliedly, with proposed to pay a lesser amount, of which
jurisdiction over the appeal from the the initial payment was to be taken from
Secretary of Finance’s review of rulings of collectibles of Oilink from the National
the Commissioner of Internal Revenue as Power Corporation. The COC rejected the
“other matters” arising under the NIRC or same and, on July 2, 1999, made a final
other laws administered by the BIR. demand upon URC and Oilink. Oilink
(Philippine American Life and General formally protested the assessment arguing
Insurance Company v. The Secretary of that it is not a party liable for the assessed
Finance and Commissioner of Internal taxes. The COC denied the protest on July
Revenue, G.R. No. 210987, November 24, 12, 1999. On July 30, 1999, Oilink appealed
2014; Banco de Oro v. Republic, G.R. No. to the CTA, seeking nullification of the
G.R. No. 198756, January 13, 2015) assessment. The COC argues that the CTA
does not have jurisdiction as the 30-day
Q. Does the CTA have jurisdiction relative to period within which to appeal has already
matters involving the validity of a rule or lapsed. Is the COC correct?
regulation issued by the Bureau of Internal
Revenue? A. No. The reckoning date for Oilink’s appeal
was July 12, 1999, not July 2, 1999, because
A. Yes. The Court of Tax Appeals can now rule it was on the former date that the
not only on the propriety of an assessment or Commissioner of Customs denied the protest
tax treatment of a certain transaction, but of Oilink. Clearly, the filing of the petition on
also on the validity of the revenue regulation July 30, 1999 by Oilink was well within its
or revenue memorandum circular on which reglementary period to appeal. The
the assessment is based. It is now within the insistence by the Commissioner of Customs
power of the Court of Tax Appeals, through on reckoning the reglementary period to
its power of certioriari, to rule on the validity appeal from November 25, 1998, the date
of a particular administrative rule or when URC received the final demand letter,
regulation so long as it is within its appellate is unwarranted. The November 25, 1998
jurisdiction. (Philippine American Life and final demand letter of the BoC was addressed
General Insurance Company v. The to URC, not to Oilink. As such, the final
Secretary of Finance and Commissioner of demand sent to URC did not bind Oilink
Internal Revenue, G.R. No. 210987, unless the separate identities of the
November 24, 2014) corporations were disregarded in order to
consider them as one. (COC v. Oilink
Q. Union Refinery Corporation (URC) and International Corporation, G.R. No.
Oilink International Corporation (Oilink) 161759, July 2, 2014)
are engaged in the importation of oil
products. URC and Oilink had interlocking
Page 26 of 27
NOTICE
TAXATION LAW
Note: The Court also stated in the case that

the doctrine of piercing the corporate veil has
no application here because the COC did not
establish that Oilink had been set up to avoid
the payment of taxes or duties, or for
purposes that would defeat public
convenience, justify wrong, protect fraud,
defend crime, confuse legitimate legal or
judicial issues, perpetrate deception or
otherwise circumvent the law.
Q. The BIR issued several assessment notices to

the taxpayer for deficiency income tax and
VAT for the taxable years 1999 to 2002. The
taxpayer filed protests, but they were denied
by the BIR. The taxpayer then filed a Petition
for Review with the CTA in Division. The
CTA Division denied the Petition. The CTA
Division likewise denied the Motion for
Reconsideration. The taxpayer then appealed
directly to the Supreme Court. Does the
Supreme Court have jurisdiction?
A. No. The Court is without jurisdiction to

review decisions rendered by a division of the
CTA, exclusive appellate jurisdiction over
which is vested in the CTA en banc. RA
1125, as amended by RA 9282, provides that
the CTA en banc shall have exclusive
jurisdiction over appeals from the decision of
its divisions. A party adversely affected by the
resolution of the CTA division may, on
motion for reconsideration, file a petition for
review with the CTA en banc. Thereafter, the
decision or ruling of the CTA en banc may be
elevated to this Court. Simply stated, no
decision of the CTA division may be elevated
to this Court under Rule 45 of the 1997
Rules of Civil Procedure without passing
through the CTA en banc. (Duty Free
Philippines v. BIR, G.R. No. 197228,
October 8, 2014)
*** Nothing else follows ***
Page 27 of 27
NOTICE
TAXATION LAW
ADDENDUM TO THE
LAST-MINUTE TIPS FOR THE 2016 BAR
PIERRE MARTIN D. REYES
Q. Distinguish ‘tax evasion’ from ‘tax net income or asset accrues to or benefits any
avoidance.’ member or specific person and all the activities of
the hospital are non-profit. On the other hand,
A. The difference is as follows: Section 30(E) and (G), while providing for an
exemption is qualified by the last paragraph
which, in turn, provides that activities conducted
Tax Avoidance Tax Evasion for profit shall be taxable. Section 30(E) and (G)
requires that an institution be operated
It is the tax saving It is a scheme used exclusively for charitable purposes to be
device within the outside of those completely exempt from income tax. In this case,
means sanctioned by lawful means and however, St. Lukes is not operated exclusively for
law. when availed of, it charitable purposes insofar as its revenues from
usually subjects the paying patients are concerned. Such revenue is
taxpayer to further subject to income tax at 10% under Section 27(B).2
or additional civil or
criminal liabilities Q. What is the rule on the deductibility of
representation or entertainment,
Q. What are the elements of direct double amusement and recreation expenses?
taxation?
A. Such expenses must:
A. There is direct double taxation if the two taxes
are imposed: 1. Must be paid or incurred during the
taxable year
1. On the same subject matter; 2. be directly related to or in furtherance of
2. For the same purpose; the conduct of the trade, business or
3. By the same taxing authority; exercise of the profession
4. Within the same jurisdiction; 3. not be contrary to law, morals, public
5. During the same taxing period; policy or public order
6. The taxes must be of the same kind or 4. does not constitute a bribe, kickback or
character.1 other similar payment
5. must be duly substantiated by adequate
Q. St. Lukes Medical Center is a hospital proof
organized as a non-stock and non-profit 6. The appropriate amount of withholding
corporation. It admits both paying and non- tax if applicable should have been withheld
paying patients. The CIR claimed that St. therefrom and paid to the BIR
Lukes was liable for income tax at 10% as 7. not exceed such ceilings prescribed by the
provided under Section 27(B) of the NIRC. Secretary of Finance.
St. Lukes argues that it is a non-stock, non-
profit institution for charitable and social Q. Is there a ceiling on entertainment,
welfare purposes exempt from income tax amusement and recreational expenses?
under Section 30(E) and (G) of the NIRC.
Decide. A. Yes. The ceiling are as follows:
A. St. Lukes cannot claim full tax exemption 1. Sellers of goods or properties– 0.5% of
under Section 30 because it has paying patients their net sales as representation expenses
and this is notwithstanding the fact that it is a
non-profit hospital. For Section 27(B) to apply, the
hospital must be non-profit which means that no
1Pepsi-Cola Bottling Company v. Mun. of Tanauan, G.R. No. L- 2CIR v. St. Lukes Medical Center, G.R. No. 195909 and 195960,
31156 February 27, 1976. September 26, 2012
Page 1 of 6
NOTICE
This work is not affiliated or in any way associated with any institution, law school, student
organization, or any other entity. No portion of this work may be copied or reproduced without the
written permission of the author. Possessors may reproduce and distribute this supplement provided
the name of the author remains clearly associated with my work and no alterations in the form and
content of this supplement are made. No stamping is allowed.
TAXATION LAW PM REYES
ADDENDUM TO THE LAST-MINUTE
TIPS FOR THE 2016 BAR
2. Sellers of services– 1% of their net

revenues as representation expenses.3 A. The obligation of the payor/employer to deduct
and withhold the related withholding tax arises at
Q. What are the conditions for bad debts to the time the income was paid or accrued or
be deductible? recorded as expense in the payor’s/employer’s
books, whichever comes first.7
A. The requisites for deductibility of bad debts
are: Q. What is the taxability of campaign
contributions for donor’s tax purposes?
1. There must be an existing indebtedness
due to the taxpayer which must be valid A. The tax treatment of campaign contributions
and legally demandable for donor’s tax purposes are as follows:
2. The same must be connected with the
taxpayer’s trade, business or practice of
profession Campaign Period Before or after the
3. The same must not be sustained in a set by COMELEC campaign period
transaction entered into between related set by COMELEC
parties
4. The same must actually be charged-off
within the taxable year The donations/ The donations/
5. The same must be actually ascertained to contributions that contributions that
be worthless and uncollectible as of the end have been utilized have been utilized
of the taxable year. and spent during the and spent before or
6. The debts are uncollectible despite diligent campaign period as after the campaign
efforts exerted by the taxpayer.4 set by the period are subject to
COMELEC are donor’s tax.
Q: Is the 20% Senior Citizens’ discount a tax exempt from donor’s
credit or a tax deduction? tax.
A. The 20% Senior Citizen Discount is a tax

deduction. The 20% sales discount shall be treated Donations made by corporations in violation of the
as a tax deduction and no longer as a tax credit.5 Section 36(9) of the Corporation Code are subject
to donor’s tax. (RMC No. 30-2016 dated March
Note: This reversed the ruling in CIR v. Central Luzon 14, 2016)
Drug Corporation,6 where the Court held that the 20%
discount required by the law to be given to senior Note: Section 36(9) of the Corporation Code prohibits
citizens was a tax credit and not merely a tax deduction corporations, domestic or foreign, from giving
from the gross income or gross sale of the donations in aid of any political party or candidate or
establishment concerned. This ruling, however, was for purposes of partisan political activity
based on Section 4 of Republic Act No. 7432, which
provides establishments may claim the discount as a Q. What is the 20-lender rule?
tax credit. Note that Republic Act No. 9257, which
amended Republic Act No. 7432, now provides that
establishments may claim the discounts as a tax
A. Under the 20-lender rule, when funds are
deduction. Republic Act No. 9994 retains this simultaneously obtained from 20 or more
treatment of the 20% senior citizen’s discount as a tax lenders/investors, there is deemed to be a public
deduction. borrowing and the debt instrument at that point
in time is deemed a deposit substitute.
Q. When is the payor/employer obliged to Consequently, the seller is required to withhold
deduct and withhold the related the 20% final withholding tax on the imputed
withholding taxes on accrued bonuses? interest income from the said debt instrument.8
3 RR 10-2002 dated JULY 10, 2002. 6 G.R. No. 159647, April 15, 2005.
4 RR 5-99 dated March 10, 1999. 7 ING Bank v. Commissioner of Internal Revenue, G.R. No. 167679,
5 Carlos Superdrug Corp v. Department of Social Welfare and July 22, 2015.
Development, G.R. No. 166494, June 29, 2007; M.E. Holding 8 Banco de Oro v. Republic, G.R. No. G.R. No. 198756, August 16,
Corporation v. Court of Appeals, G.R. No. 160193, March 3, 2008, 2016.
Page 2 of 6
NOTICE
(b) If the laws of the foreign country of which

Q. There were claims against the estate of the decedent was a citizen and resident at
the deceased which allegedly exceed the the time of his death allows a similar
gross estate which resulted in the exemption from estate tax, in respect of
administrator reporting no estate tax intangible personal property owned by
liability. The BIR contested the amounts of citizens of the Philippines not residing in
the claims against the estate deductions that foreign country.10
stating that lower amounts were paid as
compromise payments during the Q. ABC is the operator of XYZ Inn Hotel. It
settlement of the estate and these amounts leases part of its premises to PAGCOR and
should be what will be considered in caters food and beverages to its patrons.
arriving at the net estate. Will the ABC contends that the sale of food and
compromise amounts be the amounts beverages to PAGCOR is zero-rated and thus
considered as deductions to the gross entitling them to claim a tax refund/credit.
estate? Is ABC correct?
A. No, the deduction allowable is that amount A. Yes. The services rendered to persons or
determined at the time of death. The claims entities whose exemption under special laws or
existing at the time of death are significant to, and international agreements to which the
should be made the basis of, the determination of Philippines is a signatory effectively subjects the
allowable deductions. Post-death developments supply of such services to zero (0%) rate shall be
are not material in determining the amount of subject to 0%. Since the law clearly provides for
deduction, especially for the claims against the PAGCOR’s exemption, the sale of services of
estate deduction. There is no law, nor any Acesite to PAGCOR is effectively zero-rated.
legislative intent in our tax laws, which Hence, ABC may refund the VAT it paid on its
disregards the date-of-death valuation principle sale of food and beverages to PAGCOR.11
which is the US rule on deductions. The amount
deductible is the debt which could have been Note: In the same case, the Supreme Court said that
enforced against the deceased in his lifetime, the Government is not exempt from the application of
nothing more and nothing less. In this solutio indebiti. In the field of taxation where the State
jurisdiction, we follow the date-of-death valuation exacts strict compliance upon its citizens, the State
rule. 9 must likewise deal with taxpayers with fairness and
honesty. Hence, under the principle of solutio
Q. What is the rule of reciprocity indebiti, the Government has to restore to the taxpayer
the sums representing erroneous payments of taxes.12
applicable to intangible personal property
of a decedent who is a non-resident alien?
Q. ABC filed a claim for refund of unutilized
input taxes for the 4th quarter of 1993. The
A. With respect to intangible personal
CTA found that ABC failed to present proof
property of a non-resident alien, no estate tax
that it has not applied the alleged excess
shall be collected if reciprocity is present. There is
input taxes to any of its subsequent
reciprocity in the following cases:
quarter's output tax liability. The taxpayer
merely presented in evidence documents to
(a) If the decedent at the time of his death was
show that it has not applied the amount
a citizen or resident of a foreign country
subject of the claim to its 1994 first quarter
which at the time of his death did not
output tax liability but did not present the
impose an estate tax, in respect of
1994 1st quarter VAT return at all. Will ABC’s
intangible personal property of citizens of
claim prosper?
the Philippines not residing in that foreign
country; or
A. No. When claiming tax refund/credit, the VAT-
registered taxpayer must be able to establish that
9 Dizon v. Court of Tax Appeals, GR No. 140944, April 30, 2008, citing 11 Commissioner of Internal Revenue v. Acesite Philippines, G.R. No.
Ithaca v. US, 279 bUS 151, 49 S.Ct. 291, 73 L.Ed. 647 (1929). 147295, February 16, 2007.
10 NIRC, §4 12 Id.
Page 3 of 6
NOTICE
it does have refundable or creditable input VAT, A. Based on Section 249(B) of the Tax Code, the
and the same has not been applied against its "Deficiency Interest" shall be imposed on “[a]ny
output VAT liabilities information which are deficiency in the tax due, as term is defined in this
supposed to be reflected in the taxpayers VAT Code", i.e., as the term "deficiency" is defined in
returns. Thus, an application for tax refund/credit the NIRC of 1997. There are only three (3)
must be accompanied by copies of the taxpayers instances where it defines the term "deficiency",
VAT return/s for the taxable quarter/s and this relates only and respectively to three (3)
concerned.13 types of internal revenue taxes, namely, income
tax, estate tax, and donor's tax, pursuant to
Q. In VAT refunds, is there a difference Sections 56(8), 93 and 104. Thus, the deficiency
between an invoice and official receipt for interest under Section 249(8) should be applied
purposes of substantiation of the claim? only whenever there is a deficiency income tax, a
deficiency estate tax, and a deficiency donor's
A. Yes. A VAT invoice is necessary for every sale, tax.17
barter or exchange of goods or properties while a
VAT official receipt properly pertains to ever; Note: In the same case, the CTA 1st Division also ruled
lease of goods or properties, and every sale, barter that deficiency interest extends only up to the time
or exchange of services. In other words, the VAT when the taxpayer is required to pay the assessed after
being informed thereof while delinquency interest shall
invoice is the seller's best proof of the sale of the
commence from the time when the concerned taxpayer
goods or services to the buyer while the VAT failed to pay the assessed tax within the time allowed
receipt is the buyer's best evidence of the payment as stated in the formal letter of demand. In other
of goods or services received from the seller.14 words, the deficiency interest would not accrue at the
same that the delinquency interest begins to accrue
Q. Will the failure of the taxpayer to and therefore avoiding a 40% interest rate per annum.
appeal the inaction result in the finality of
the Formal Letter of Demand and Final Note that the Tax Code specifically states that
Assessment Notice? deficiency interest shall apply from the date prescribed
for its payment until the full payment thereof. In any
case, the Liquigaz case is merely a CTA decision and
A. No. Section 228 of the NIRC did not limit the
as such should not be considered as binding precedent.
remedy to appeal the inaction of the CIR to the At most, it is persuasive. Further, in recent CTA cases
filing of an appeal after the lapse of the 180-day (albeit with dissents), the 20% deficiency interest has
period. When the taxpayer protested the been imposed on all types of taxes.
assessment, he naturally expects the
Commissioner to either decide positively or Q. The National Power Corporation
negatively. The taxpayer cannot be prejudiced if (NPC) received a notice of franchise tax
he chooses to wait for the final decision of the CIR delinquency from the Provincial
on the protested assessment.15 Government of Bataan. The assessment is
based on NPC’s sale of electricity that it
Q. Define “willful blindness.” generated from two power plants in Bataan.
The province once again sent notices of tax
A. Willful blindness is the "deliberate avoidance due. NPC replied that it had ceased to be
of knowledge of a crime, esp. by failing to make a liable after the enactment of Electric Power
reasonable inquiry about suspected wrongdoing Industry Act (EPIRA), which relieved NPC
despite being aware that it is highly probable."16 of its functions of generating and supplying
electricity. The province proceeded to levy
Q. In what type of internal revenue taxes on the properties that NPC used to own. Is
may deficiency interest be imposed? NPC liable for the franchise tax?
13 Atlas Consolidated Mining Corporation v. Commissioner of August 11, 2010; Rogelio A. Tan v. People, CTA EB Crim No. 022
Internal Revenue, G.R. 159471, January 26, 2011. (CTA Crim Case Nos. O-064 and O-065) and People v. Rogelio A. Tan,
14 Nippon Express (Philippines) Corporation v. CIR, G.R. No. 185666, CTA EB Crim No. 023 (CTA Crim. Case Nos. O-064 and O-65), Nov.
February 4, 2015; Northern Mindanao Power Corporation v. CIR, 18, 2014.
G.R. No. 185115, February 18, 2015. 17 Liquigaz Philippines Corporation v. Commissioner of Internal
15 Lascona Land v Commissioner of Internal Revenue, G.R. No. Revenue, CTA EB No. 1117 & CTA EB No. 1119, September 21, 2015;
171251, March 5, 2012. Ace/Saatchi & Saatchi Advertising, Inc. v. Commissioner of Internal
16 People v Benjamin G. Kintanar, CTA Crim. Case No. 0-030, Revenue, CTA Case No. 8439, December 9, 2015.
Page 4 of 6
NOTICE
A. No. The MCIAA is an instrumentality of the

A. No. The EPIRA transferred to the National government, thus, its properties actually, solely
Transmission Corporation (TRANSCO) the NPC’s and exclusively used for public purposes,
electric transmission function. Thus, the NPC ceased consisting of the airport terminal building,
to operate said business in Bataan. Since the local airfield, runway, taxiway and the lots on which
franchise tax is imposed on the privilege of operating they are situated, are not subject to real property
tax.20
a franchise, such tax is not the liability of NPC, but
instead of TRANSCO. The province cannot likewise
Q. Is the Philippine Economic Zone
levy on the transmission facilities to satisfy the Authority (PEZA) exempt from the payment
assessment against NPC because the same is now of real property taxes?
owned by TRANSCO.
A. Yes. The PEZA is exempt from the payment of
The EPIRA also created the Power Sector Assets and real property taxes. The general rule is that real
Liabilities Management Corporation (PSALM) and properties are subject to real property taxes.
transferred to it all of the NPC’s generation assets, Exceptions to the rule are however also provided
which includes the plants in Bataan. Clearly, NPC in the Local Government Code. Under Section
had ceased running said business. Further, the 133(o), local government units have no power to
EPIRA transferred all existing liabilities of NPC to levy taxes of any kind on the national government,
PSALM, which would include its unpaid liabilities its agencies and instrumentalities and local
for local franchise tax. Consequently, such tax is government units. Specifically on real property
collectible from PSALM.18 taxes, Section 234 enumerates the persons and
real property exempt from real property taxes,
Q. Is the payment under protest which includes “real property owned by the
requirement for real property assessment Republic of the Philippines or any of its political
cases complied with by posting a surety subdivisions except when the beneficial use
bond before appealing to the Local Board of thereof has been granted, for consideration or
Assessment Appeals? otherwise, to a taxable person.” The PEZA is an
instrumentality of the national government.
A. Yes. Section 252 of the Local Government Code Being an instrumentality of the national
mandates that "[n]o protest shall be entertained government, the PEZA cannot be taxed by local
unless the taxpayer first pays the tax." It is settled government units. Further, the real properties
that the requirement of "payment under protest" under the PEZA’s title are owned by the Republic
is a condition sine qua non before an appeal may of the Philippines. Properties of public dominion,
be entertained. By posting a surety bond before even if titled in the name of an instrumentality as
filing its appeal of the assessment with the LBAA, in this case, remain owned by the Republic of the
the taxpayer may be considered to have Philippines.21
substantially complied with the requirement of
payment under protest in Section 252 of the Local Note: Even the PEZA’s lands and buildings whose
beneficial use have been granted to other persons may
Government Code for the said bond already
not be taxed with real property taxes. The PEZA may
guarantees the payment to the Office of the City
only lease its lands and buildings to PEZA-registered
Treasurer of the total amount of real property economic zone enterprises and entities. These PEZA-
taxes and penalties due.19 registered enterprises and entities, which operate
within economic zones, are not subject to real property
Q. Is the Mactan Cebu International taxes. Under Section 24 of the Special Economic Zone
Airport Authority (MCIAA) a GOCC which Act of 1995, no taxes, whether local or national, shall
will now be considered liable for real be imposed on all business establishments operating
property taxes under the Local Government within the economic zones.
Code?
18 National Power Corporation v. Provincial Government of Bataan, 20 Mactan-Cebu International Airport Authority (MCIAA) v. City of
G.R. No. 180654, April 21, 2014. Lapu-Lapu, G.R. No. 181756, June 15, 2015.
19 Meralco v. City Assessor and City Treasurer of Lucena City, G.R. 21 City of Lapu-Lapu v. PEZA, G.R. No. 184203 & 187583, November
No. 166102, August 5, 2015. 26, 2014.
Page 5 of 6
NOTICE
Q. ABC Company owned two parcels of land at the BOC, and are other charges. Often
in Pasig City. Portions of the properties are not declared through committed by means
leased to different business establishments. submission of import of misclassification
Being part of the ill-gotten wealth of the documents, such as of the nature, quality
Marcoses, the owner of ABC voluntarily the import entry and or value of goods and
surrendered ABC Company to the Republic internal revenue articles,
through the PCGG. Now, Pasig City seeks to declaration. undervaluation in
impose real property taxes on the properties terms of their price,
of ABC. Are the properties of ABC liable for quality or weight,
real property taxes? and misdeclaration
of their kind.23
A. It depends. The portions of the properties not
leased to taxable entities are exempt from RPT
while the portions leased to taxable entities are Q. Does the CTA En Banc have jurisdiction
subject to RPT.22 to take cognizance of a petition for
annulment of judgment to annul a decision
Q. Distinguish “unlawful importation” of one of its divisions?
under Section 3601 of the TCCP from
“various fraudulent practices against A . N o . The Revised Rules of the CTA and even
customs revenue” under Section 3602 of the the Rules of Court which apply suppletorily
TCCP? thereto provide for no instance in which the en
bane may reverse, apnul or void a final decision of
a division. Verily, the Revised Rules of the CTA
Unlawful Fraudulent provide for no instance of an annulment of
Importation Practices judgment at all. Further, the Rules of Court are
(Outright (Technical silent as to whether a collegial court sitting en
smuggling) smuggling) bane may annul a final judgment of its own
division.24
Goods and articles of Goods and articles Q. Does the CTA in Division have
commerce are are brought into the jurisdiction to review the decision of the
brought into the country through RTC which concerns a petition for
country without the fraudulent, falsified declaratory relief involving real property
required importation or erroneous taxes?
documents, or are declarations, to
disposed of in the substantially reduce, A . Y e s . The CTA, sitting as Division, has
local market without if not totally avoid, jurisdiction to review by appeal the decisions,
having been cleared the payment of rulings and resolutions of the RTC over local tax
by the BOC or other correct taxes, duties cases, which includes real property taxes. This is
authorized and other charges. evident from a perusal of the Local Government
government Such goods and Code (LGC) which includes the matter of Real
agencies, to evade articles pass through Property Taxation under one of its main chapters.
the payment of the BOC, but the Indubitably, the power to impose real property tax
correct taxes, duties processing and is in line with the power vested in the local
and other charges. clearing procedures governments to create their own revenue sources,
Such goods and are attended by within the limitations set forth by law. As such,
articles do not fraudulent acts in the collection of real property taxes is conferred
undergo the order to evade the with the local treasurer rather than the Bureau of
processing and payment of correct Internal Revenue.25
clearing procedures taxes, duties, and
22Pasig City v. Republic, G.R. No. 185023, August 24, 2011. 24 Commissioner of Internal Revenue v. Kepco Ilijan Corporation,
23Bureau of Customs v. Hon. Devanadera, G.R. No. 193253, G.R. No. 199422, June 21, 2016.
September 8, 2015. 25 National Power Corporation v. Municipality of Navotas, G.R. No.
192300, November 24, 2014.
Page 6 of 6
NOTICE
TAXATION LAW
PIERRE MARTIN D. REYES
Q. Under its franchise, Philippine Airlines Philippines. Is the sale of the tickets taxable
(PAL) shall pay the government either as income from sources within the
income tax or franchise tax based on Philippines?
revenues, whichever is lower, and that such
shall be in lieu of all other taxes, duties, and A. Yes. An offline international air carrier selling
other fees. passage tickets in the Philippines, through a
general sales agent, is a resident foreign
(a) Caltex sold imported jet fuel to PAL for corporation doing business in the Philippines. As
the latter’s domestic operations. The such, it is taxable under Section 28(A)(1), and not
excise taxes were passed on to PAL. PAL Section 28(A)(3) of the 1997 National
filed a claim for refund of the alleged International Revenue Code, subject to any
erroneously paid excise taxes. The BIR applicable tax treaty to which the Philippines is a
argues that only the statutory taxpayer, signatory.3
in this case Caltex, can seek a refund of
the excise taxes. Does PAL have legal Note: In the Air Canada case, the Supreme Court held
personality o file a claim for refund of the that pursuant to Article 8 of the Republic of the
said excise taxes? Philippines-Canada Tax Treaty, Air Canada may only
be imposed a maximum tax of 1 ½ % of its gross
revenues earned from the sale of its tickets in the
A. Yes. The propriety of a tax refund claim is
Philippines.4
hinged on the kind of tax exemption upon which
the refund claim is based. If the law confers an
Q: What is the tax treatment of benefits
exemption from both direct or indirect taxes, a
received by an employee by virtue of a
claimant is entitled to a tax refund even if it only
collective of a collective bargaining
bears the economic burden of the applicable tax.
agreement (CBA) and productivity incentive
On the other hand, if the exemption conferred only
schemes?
applies to direct taxes, then the statutory
taxpayer is regarded as the proper party to file the
A. Benefits received by an employee by virtue of a
refund claim. In the instant case, the franchise of
provided that the total annual monetary value
PAL exempts it both from direct and indirect
received from both CBA and productivity
taxes. Thus, PAL can file the refund claim even if
incentive schemes combined do not exceed ten
only bears the economic burden of the tax.1
thousand pesos (P10,000) per employee per
taxable year are considered de minimis benefits
Note: This was later clarified in the Chevron case. In
Chevron, the Supreme Court held that, as a general
and are thus, exempt from withholding tax on
rule, it is the statutory taxpayer, not the party who compensation income, and consequently from
only bears the economic burden, who is entitled to income tax.
claim the tax refund or tax credit. However, this rule
does not apply where the law grants the party (to whom Q. What is the proper tax treatment on
the economic burden of the tax is shifted) an exemption dividends received from foreign
from both direct and indirect taxes. Such party may corporations?
claim the refund or tax credit even if it is not the
statutory taxpayer. The general rule applied in the A. The income shall form part of the gross income
case because Chevron did not pass on the excise taxes.2
of the corporation but the situs of the income
becomes material except for a resident citizen and
Q. ABC Airways is a foreign airline. While it
domestic corporation which is taxed on worldwide
did not carry passengers and/or cargo to or
income. In other words, only resident citizens and
from the Philippines, ABC maintains a
domestic corporations would be subject to tax on
general sales agent of its tickets in the
1 CIR v. PAL, G.R. No. 198759, July 1, 2013; CIR v. PAL, G.R. Nos. 3 Air Canada v. Commissioner of Internal Revenue, G.R. No. 169507,
212536-37, August 27, 2014. January 11, 2016.
2 Chevron Philippines v. Commissioner of Internal Revenue, G.R. No. 4 Id.
210836, September 1, 2015
Page 1 of 15
NOTICE
dividends received from foreign corporations as Q. Differentiate between the tax treatment
they taxable on income without the Philippines. of capital gains of individuals and
corporations from the sale of real
Q. What are ordinary assets and what are properties.
capital assets?
A. Capital gains of individuals and corporations
A. The following are considered “ordinary from the sale of real properties are taxed
assets:” differently. Individuals are taxed on capital gains
from sale of all real properties located in the
1. Stock in trade of the taxpayer or other Philippines and classified as capital assets. For
property of a kind which would properly be corporations, the National Internal Revenue Code
included in the inventory of the taxpayer if of 1997 treats the sale of land and buildings, and
on hand at the close of the taxable year; the sale of machineries and equipment,
2. Property held by the taxpayer primarily differently. Domestic corporations are imposed a
for sale to customers in the ordinary course 6% capital gains tax only on the presumed gain
of his trade or business; realized from the sale of lands and/or buildings.
3. Property used in trade or business of a The National Internal Revenue Code of 1997 does
character that is subject to allowance for not impose the 6% capital gains tax on the gains
depreciation; and realized from the sale of machineries and
4. Real property used in trade or business of equipment. Therefore, only the presumed gain
the taxpayer.5 from the sale of petitioner’s land and/or building
may be subjected to the 6% capital gains tax. The
The term “capital assets” means property held by income from the sale of petitioner’s machineries
the taxpayer whether or not connected with his and equipment is subject to the provisions on
trade or business, except those considered as normal corporate income tax.7
ordinary assets as stated above.
Q. When is a debt instrument considered a
Q. ABC is a PEZA-registered corporation “deposit substitute” and consequently
engaged in the business of manufacturing subject to the 20% final withholding tax?
microprocessors. After its registration, ABC
constructed buildings and purchased A. The term ‘deposit substitutes’ shall mean an
machineries and equipment. ABC failed to alternative form of obtaining funds from the
commence operations. ABC sold the said public other than deposits, through the issuance,
building and its machineries and equipment endorsement, or acceptance of debt instruments
to another PEZA-registered enterprise. Are for the borrower’s own account, for the purpose of
properties considered “capital assets” or relending or purchasing of receivables and other
ordinary assets”? obligations, or financing their own needs or the
needs of their agent or dealer. The term 'public'
A. The properties are not among the exclusions means borrowing from twenty (20) or more
enumerated in Section 39(A)(1) of the National individual or corporate lenders at any one time).
Internal Revenue Code of 1997 which defines Based on this definition, the number of lenders is
“ordinary assets.” None of the properties were determinative of whether a debt instrument
used in trade or ordinary course of business should be considered a deposit substitute and
because petitioner never commenced operations. consequently subject to the 20% final withholding
They were not part of the inventory. None of them tax.8
were stocks in trade. Based on the definition of
capital assets under Section 39 of the National Q. What are the conditions that must be met
Internal Revenue Code of 1997, they are capital in order to exempt interest income from
assets.6 long-term deposit or investments from
income taxes?
5 NIRC, §39(A)(1); RR No. 7-2003 dated December 27, 2002, §2(b); RR 7Id.
No. 6-2008 dated April 22, 2008, §2(u). 8Banco de Oro v. Republic, G.R. No. G.R. No. 198756, January 13,
6 SMI-ED Philippines v. Commissioner of Internal Revenue, G.R. No. 2015.
175410, November 12, 2014.
Page 2 of 15
NOTICE
A. The following conditions must be met: corporations or associations subject to income tax.
This is because condominium corporations and
1. The depositor or investor is an individual homeowner’s associations furnish their members
citizen (resident or non-resident) or and tenants with benefits, advantages, and
resident alien or non-resident alien privileges in return for such payments. They
engaged in the trade or business in the constitute as income payments or compensation
Philippines; for beneficial services provided to members and
2. The long-term deposits or investment tenants. Since they are subject to income tax,
certificates should be under the name of income payments made to such condominium
the individual and not under the name of corporations and associations are subject to
the corporation or the bank or the trust withholding taxes.
department/unit of the bank;
3. The long-term deposits or investments The same are also subject to VAT as they
must be in the form of savings, common or constitute income payment or compensation for
individual trust funds, deposit substitutes, the beneficial services that the condominium
investment management accounts and corporations and homeowner’s associations
other investments evidenced by provide to members and tenants.9
certificates in such form prescribed by the
Bangko Sentral ng Pilipinas (BSP); Note: In the Officemetro case, the CTA ruled that
4. The long-term deposit or investments must condominium dues, membership fees, and other
be issued by banks only and not by other assessments/charges collected by condominium
entities or individuals; corporations are not subject to income tax and
consequently, to withholding tax because they are
5. The long-term deposits or investments
merely held in trust and are to be used solely for
must have a maturity period of not less administrative expenses in implementing their
than five (5) years; purposes and from which the corporation could not
6. The long-term deposits or investments realize any gain or profit.10 Note, however, that:
must be in denominations of Ten Thousand
Pesos (P10,000) and other denominations 1. The case was decided by the CTA and such does
as may be prescribed by the BSP; not constitute binding or settled jurisprudence.
7. The long-term deposits or investments At most, it is persuasive.
should not be terminated by the original 2. The case did not deal with the issue of VAT
investor before the fifth (5th) year, 3. The covered period subject of the instant case
otherwise they shall be subjected to the is the taxable year 2005.
4. The CTA did not rule on the validity of RMC
graduated rates of 5%, 12% or 20% on
No. 65-2012. The CTA En Banc only ruled that
interest income earnings; and pursuant to Section 246 of the Tax Code, the
8. Except those specifically exempted by law reversal by RMC No. 65-2012 of the CIR’s
or regulations, any other income such as previous and consistent position that
gains from trading, foreign exchange gain condominium dues are not subject to income
shall not be covered by income tax tax and to withholding tax cannot apply
exemption. retroactively to the prejudice Officemetro..11
Q. Are association dues, membership fees, Q. May association dues and income derived
and other assessments/charges collected by from rentals of the homeowner’s
a condominium corporation or a association’s properties be exempted from
homeowner’s association subject to income income tax, VAT and percentage tax?
tax (and consequently, withholding tax) and
to value-added tax? A. Yes. Pursuant to Section 18 of RA No. 9904,
otherwise known as the “Magna Carta for
A. Yes. The association dues, membership fees, Homeowners and Homeowner’s Associations,”
and other assessments/charges collected by they may be exempt from income tax, VAT, and
condominium corporations and by homeowner’s percentage tax subject to the following conditions:
associations form part of gross income of the said
9RMC 65-2012; RMC 9-2013 Officemetro Philippines, Inc. v. CIR, CTA EB No. 1210 and CTA
11
10Officemetro Philippines, Inc. v. CIR, CTA Case No. 8382, June 3, EB No. 1213 (CTA Case No. 8382), June 3, 2014
2014
Page 3 of 15
NOTICE
1. The homeowner’s association must be a under international agreements, especially since

duly constituted “Association” as defined said tax treaties do not provide for any
under Section 3 (b) of RA No. 9904; prerequisite at all for the availment of the benefits
under said agreements. The application for a tax
2. The local government unit having treaty relief from the BIR should merely operate
jurisdiction over the homeowners’ to confirm the entitlement of the taxpayer to the
association must issue a certification relief. So long as the taxpayer requests for
identifying the basic services being confirmation before it filed its administrative
rendered by the homeowners’ association claim for refund, the same should be deemed
and therein stating its lack of resources to substantial compliance with RMO No. 1-2000.13
render such services notwithstanding its
clear mandate under applicable laws, rules Q. What are the instances where no gain or
and regulations. Provided further, that loss is recognized (tax-free exchanges)?
such services must fall within the purview
of the “basic community services and A. No gain or loss shall be recognized if in
facilities” which is defined under Section 3 pursuance of a plan of merger or consolidation:
(d) of RA No. 9904 as those referring to
services and facilities that redound to the 1. A corporation which is a party to a merger
benefit of all homeowners and from which, or consolidation exchanges property solely
by reason of practicality, no homeowner for stock in a corporation, which is a party
may be excluded such as, but not limited to the merger or consolidation (property for
to: security; street and vicinity lights; stock)
maintenance, repairs and cleaning of 2. A shareholder exchanges stock in a
streets; garbage collection and disposal; corporation, which is a party to a merger or
and other similar services and facilities; consolidation solely for the stock of another
and corporation also a party to a merger or
consolidation (stock for stock)
3. The homeowners’ association must present 3. A security holder of a corporation, which is
proof (i.e. financial statements) that the a party to a merger or consolidation,
income and dues are used for the exchanges his securities in such
cleanliness, safety, security and other corporation, solely for stock or securities in
basic services needed by the members, another corporation, a party to the merger
including the maintenance of the facilities or consolidation (security for stock)
of their respective subdivisions or 4. If property is transferred to a corporation
villages.12 by a person in exchange for stock or unit of
participation in such a corporation of
Q. Is the prior application for an ITAD ruling which as a result of such exchange, said
pursuant to RMO No. 1-2000 necessary person, alone or together with others, not
before a taxpayer can avail of the exceeding four (4) persons gains control of
preferential tax rates under income tax said corporation provided that stocks
treaties entered into by the Philippines with issued for services shall not be considered
other countries? as issued in return for property. (estate
planning or transfer of a controlled
A. No. Treaties have the force and effect of law. corporation)14
The obligation to comply with a tax treaty must
take precedence over the objective of RMO No. 1- Q. What is meant by “control” in relation to
2000. Not only is the requirement illogical, but it tax-free exchanges?
is also an imposition that is not found at all in the
applicable tax treaties. The BIR should not A. “Control” means ownership or stocks in a
impose additional requirements that would corporation possessing at least 51% of the total
negate the availment of the reliefs provided for
12RMC No. 9-2013 14 NIRC, Section 40(C)(2).

13Deutsche Bank AG Manila v. Commissioner of Internal Revenue,
G.R. No. 188550, August 19, 2013;CBK Power Company Limited v.
CIR, G.R. No. 193383-84 and G.R. No. 193407-08, January 15, 2015
Page 4 of 15
NOTICE
voting power of all classes of stock entitled to vote, consideration shall be deemed a gift. Thus, even if
not simply a majority of the voting shares. there is no actual donation, the difference in price
is considered a donation by fiction of law.16
Q. What are the requisites for deductibility
of claims against the estate? Q. What are the prevailing rules on the
determination of the prescriptive period for
A. In order for claims against the estate to be filing a tax refund or credit of unutilized
deductible from the gross estate of a decedent, input VAT as provided in Section 112 of the
the following requisites must be present: NIRC of 1997, as amended?
1. The liability must be a personal obligation A. The following are the prevailing rules on
of the deceased existing at the time of his prescriptive periods involving VAT:
death except those incurred incident to his
death such as unpaid funeral expenses and 1. An administrative claim must be filed with
unpaid medical expenses; the CIR within two years after the close of
2. Liability must have been contracted in the taxable quarter when the zero-rated or
good faith and for adequate and full effectively zero-rated sales were made.17
consideration in money or money’s worth;
3. The claim must be a debt or claim which is 2. The CIR has 120 days from the date of
valid in law and enforceable in court; submission of complete documents in
4. The indebtedness was not condoned by the support of the administrative claim within
creditor or the action to collect from the which to decide whether to grant a refund or
decedent must not have prescribed.15 issue a tax credit certificate.18
5. At the time the indebtedness was incurred
the debt instrument was duly notarized; 3. The application for VAT refund/tax credit
and must be accompanied by complete
6. If the loan was contracted within three (3) supporting documents. It is now required
years before the death of the decedent, the that the taxpayer completes his supporting
administrator or executor shall submit a documents at the time he files his claim. The
statement showing the disposition of the taxpayer is barred from submitting
proceeds of the loan. additional documents after he has filed his
administrative claim. Thus, the 120-day has
Q. If certain shares were sold at a price to be counted from the filing of the
lower than their book value, may the administrative claim.19
taxpayer argue that the price difference is
not subject to donor’s tax because the 4. The 120-day period may extend beyond the
transaction was done for a legitimate two-year period from the filing of the
business purpose and that there was no administrative claim if the claim is filed in
donative intent? the later part of the two-year period. If the
120-day period expires without any decision
A. No. The absence of donative intent does not from the CIR, then the administrative claim
exempt the sales of stock transaction from donor's may be considered to be denied by inaction.20
tax since Sec. 100 of the Tax Code categorically
states that the amount by which the fair market 5. The inaction is already a decision denying
value of the property exceeded the value of the the refund claim. Consequently, the
15 RR 2-2003, §6(A)(3). 19 RMC No. 54-2014 dated June 11, 2014; Pilipinas Total Gas v.
16 Philippine American Life and General Insurance Company v. The Commissioner of Internal Revenue, G.R. No. 207112, December 8,
Secretary of Finance and Commissioner of Internal Revenue, G.R. 2015; Hedcor, Inc. v. Commissioner of Internal Revenue, G.R. No.
No. 210987, November 24, 2014. 207575, July 15, 2015.
17 NIRC, §112; CIR v. San Roque Power Corporation, G.R. No. 20 NIRC, §112; CIR v. San Roque Power Corporation, G.R. No.
187485, Taganito Mining Corporation v. CIR, G.R. No. 196113, 187485, Taganito Mining Corporation v. CIR, G.R. No. 196113,
Philex Mining Corporation v. CIR, G.R. No. 197156, February 12, Philex Mining Corporation v. CIR, G.R. No. 197156, February 12,
2013; Mindanao II Geothermal Partnership v. Commissioner of 2013; Mindanao II Geothermal Partnership v. Commissioner of
Internal Revenue, and Mindanao I Geothermal Partnership v. Internal Revenue, and Mindanao I Geothermal Partnership v.
Commissioner of Internal Revenue, G.R. Nos. 193301 and 194637, Commissioner of Internal Revenue, G.R. Nos. 193301 and 194637,
March 11, 2013 March 11, 2013.
18 Id.
Page 5 of 15
NOTICE
taxpayer must file his appeal within 30 days submit supporting which must
from the lapse of the 120-day period.21 documents, it is, necessarily include
thus, crucial for a whatever is required
6. A judicial claim must be filed with the Court taxpayer in a judicial for the
of Tax Appeals (“CTA”) within 30 days from claim for refund or administrative
the receipt of the CIR’s decision denying the tax credit to show claim.23
administrative claim or from the expiration that its
of the 120-day period without any action administrative claim
from the CIR.22 should have been
granted in the first
Q. If the taxpayer fails to submit a document place.
at the administrative level, can the taxpayer
cure such failure by filing the said document A taxpayer cannot
in its judicial claim before the CTA? cure its failure to
submit a document
A. A distinction must, thus, be made between an requested by the BIR
administrative claimed appealed due to inaction at the
and those dismissed at the administrative level administrative level
due to the failure of the taxpayer to submit by filing the said
supporting documents. document before the
CTA.
Administrative If the judicial

claim dismissed claim is an appeal Q. ABC Corporation was dissolved by
by the BIR due to due to inaction of shortening its corporate term. As a result
the taxpayer’s the BIR thereof, ABC moved out of its address in
failure to submit Las Pinas City and transferred to
complete Calamba Laguna. ABC sent a notice of
documents dissolution to the BIR as well as an
despite update of information contained in its
notice/request BIR Certificate of Registration. ABC was
assessed for deficiency income taxes. The
Final Assessment Notice was sent via
The judicial claim The CTA may give registered mail to ABC’s former address
before the CTA credence to all in Las Pinas City. Is the assessment
would be evidence presented valid?
dismissible, not for by the taxpayer,
lack of jurisdiction, including those that A. No. The taxpayer’s right to due process is
but for the may not have been violated when there is no valid notice of
taxpayer’s failure to submitted to the CIR assessment sent to it. Here, the CIR was
substantiate the as the case is being aware of the new address and yet sent the
claim at the essentially decided assessment to the taxpayer’s former address.
administrative level. in the first instance. As a consequence thereof, the running of the
The taxpayer must three-year period was not suspended and had
In case of claims prove every minute already prescribed.24
dismissed at the aspect of its case by
administrative level presenting and Q. What are the rules on prescriptive
due to the failure of formally offering its period for the assessment of taxes?
the taxpayer to evidence to the CTA,
21 Rohm Apollo Semiconductor Philippines v Commissioner of and Mindanao I Geothermal Partnership v. Commissioner of
Internal Revenue, G.R. No. 168950, January 14, 2015. Internal Revenue, G.R. Nos. 193301 and 194637, March 11, 2013.
22 CIR v. San Roque Power Corporation, G.R. No. 187485, Taganito 23Pilipinas Total Gas v. Commissioner of Internal Revenue, G.R. No.
Mining Corporation v. CIR, G.R. No. 196113, Philex Mining 207112, December 8, 2015
Corporation v. CIR, G.R. No. 197156, February 12, 2013; Mindanao
II Geothermal Partnership v. Commissioner of Internal Revenue, 24Commissioner of Internal Revenue v BASF Coating + Inks Phils.,
Inc., G.R. No. 198677, November 26, 2014
Page 6 of 15
NOTICE
A. The rules are as follows: assessment, assessment,

either or both by either or both by
(1) Regular Return filed distraint or levy or distraint or levy or
by court by court
(a) Internal revenue taxes shall be proceeding. proceeding.
assessed within three (3) years after
the last day prescribed by law for the
filing of the return; Note: The author subscribes to the first
(b) If the return is filed after such date, view i.e. the 5-year period.
the 3-year prescriptive period shall
be reckoned from the day the return (2) False or Fraudulent Return or
was filed or from the date of actual Return Not Filed
filing;
(c) If the return is filed before the last (a) If there is a prior assessment,
day for filing of the return, such (meaning that there was an
early filing shall be considered filed assessment made witin 10 years
on the last day. (“Early Return from discovery of the fraud, falsity,
Rule”) or omission), 26 the collection must
be made within five (5) years from
(2) False or Fraudulent Return or the date of the assessment, either
Return Not Filed or both by distraint or levy or by
court proceeding.27
(a) In the case of a (i) false return; (ii) (b) If there is no prior assessment, the
fraudulent return with intent to collection must be made within ten
evade tax; or (iii) failure to file a (10) years from the date of discovery
return, the tax may be assessed at of the falsity, fraud, omission by
any time within ten (10) years after court proceeding only.28
the discovery of the falsity, fraud, or
omission. Q. What are the requirements of a valid
waiver of the statute of limitations?
Q. What are the rules on prescriptive
period for the collection of taxes? A. RMO No. 20-90 provides the following
requirements:
A. The rules are as follows:
1. The waiver must be in the prescribed
(1) Regular Return filed form. There should be no deviation
from this form;
If there is a prior assessment (meaning 2. The waiver must specify a definite
that there was an assessment made agreed date between the BIR and the
within 3 years from the last day taxpayer within which the former may
prescribed by law for the filing of the assess and collect revenue taxes. The
return or the actual date of filing if the phrase “but not after “ which
return is filed beyond the prescribed indicates the expiry date of the period
period),25 there are two views: agreed upon to assess/collect should be
filled up;
5-year period 3-year period 3. The waiver shall be signed by the
If there is a prior If there is a prior taxpayer himself or his duly authorized
assessment, the assessment, the representative. In the case of a
collection must be collection must be corporation, the waiver must be signed
made within five made within three by any of its responsible officials. In
(5) years from the (3) years from the case the authority is delegated by the
date of the date of the taxpayer to a representative, such
25 The assessment must be. See §203, NIRC. 27 NIRC, §222(c).

26 The assessment must be made. See §222, NIRC. 28 NIRC, §222(a).
Page 7 of 15
NOTICE
delegation should be in writing and 3. Taxpayer is estopped from questioning the

duly notarized; validity of its waivers as it did not raise
4. The waiver should be duly notarized; any objection against their validity until
5. The waiver shall be signed by the the BIR assessed taxes against it.
Commissioner of Internal Revenue or 4. The Court cannot tolerate a highly
his duly authorized representative, and suspicious situation where after the
the date of acceptance of the BIR taxpayer voluntarily executes the waivers,
should be indicated; it later on insists on their invalidity by
6. Both the date of execution by the raising the very same defects it caused and
taxpayer and the date of acceptance by where the BIR miserably failed to exact
the BIR should be before the expiration from the taxpayer compliance with its
of the period of prescription or before rules.30
the lapse of the period agreed upon in
case a subsequent agreement is Q. When is the running of the statute of
executed; and limitations for assessment and collection
7. The waiver must be executed in three suspended?
copies, the original copy to be attached
to the docket of the case, the second A. The prescriptive period to assess is suspended
copy for the taxpayer and the third in the following cases:
copy for the Office accepting the
waiver. The taxpayer must be 1. The Commissioner of Internal Revenue
furnished a copy of the waiver as was prohibited from making the
accepted by the BIR. The fact of receipt assessment and for sixty (60) days
by the taxpayer of his copy must be thereafter; or
indicated in the original copy to show 2. Taxpayer requests reinvestigation which
that the taxpayer was notified of the is granted by the Commissioner of Internal
acceptance of the BIR and the Revenue; or
perfection of the agreement. 29 3. Taxpayer cannot be located in the address
given by him in the return filed upon which
Q. Can a waiver of the statute of the tax is being assessed or collected; or
limitations which does not comply with 4. Taxpayer is out of the Philippines.31
the requirements specified under RMO
No. 20-90 and RDAO No. 01-05 become Q. Will the mere filing of a protest suspend
valid? the running of the statute of limitations?
Yes. Generally, a waiver of the statute of A. No. The protest must be in the form of a request
limitations that does not comply with the for reinvestigation. Further, a request for
requisites for its validity specified under RMO reinvestigation alone will not suspend the statute
No. 20-90 and RDAO 01-05 is invalid. of limitations. Two things must concur: there
However, due to peculiar circumstances and must be a request for reinvestigation and the CIR
as exception to the general rule, a waiver may must have granted it.32
be considered valid for the following reasons:
Q. PAGCOR received a Final Assessment
1. If the parties are in pari delicto or “in equal Notice (FAN) signed by the Regional
fault” and thus they shall have no action Director. Claiming exemption based on its
against each other. charter, PAGCOR timely filed a protest to
2. Parties who do not come to Court with the FAN. After 203 days, PAGCOR elevated
clean hands cannot be allowed to benefit its protest to the CIR. After 209 days,
from their own wrongdoing. PAGCOR filed a Petition for Review with the
29 RMO No. 20-90 dated April 4, 1990; RMC No. 6-2005 dated 31NIRC, §223.
February 14, 2005; RDAO No. 01-05; Philippine Journalist v. CIR, 32China Banking Corporation v. Commissioner of Internal Revenue,
G.R. No. 162852, December 16, 2004. G.R. No. 172509, February 4, 2015.
30 Commissioner of Internal Revenue v. Next Mobile, G.R. No.
212825, December 7, 2015
Page 8 of 15
NOTICE
CTA. Does the CTA have jurisdiction over BIR of a Ruling declaring the tax-exempt status of
the appeal? a taxpayer, if at all, is merely confirmatory in
nature. Such ruling is not the operative act from
A. No, a protesting taxpayer has only three which an entitlement of refund is determined.34
options:
Q. What are the three essential
1. If the protest is wholly or partially denied conditions for the grant of a claim for refund
by the CIR or his authorized of creditable withholding income tax?
representative, then the taxpayer may
appeal to the CTA within 30 days from A. The three essential conditions are:
receipt of the whole or partial denial of the
protest. 1. The claim is filed with the Commissioner
2. If the protest is wholly or partially denied of Internal Revenue within the two-year
by the CIR's authorized representative, period from the date of payment of the tax;
then the taxpayer may appeal to the CIR 2. It is shown on the return of the recipient
within 30 days from receipt of the whole or that the income payment received was
partial denial of the protest. declared as part of the gross income; and
3. If the CIR or his authorized representative 3. The fact of withholding is established by a
failed to act upon the protest within 180 copy of a statement duly issued by the
days from submission of the required payor to the payee showing the amount
supporting documents, then the taxpayer paid and the amount of the tax withheld
may appeal to the CTA within 30 days therefrom.35
from the lapse of the 180-day period.
Q. Can an injunction be issued to restrain
A whole or partial denial by the CIR's authorized the collection of any internal revenue tax,
representative may be appealed to the CIR or the fee or charge?
CTA. A whole or partial denial by the CIR may be
appealed to the CTA. The CIR or the CIR's A. As a general rule, no court shall have the
authorized representative's failure to act may be authority to issue an injunction to restrain the
appealed to the CTA. There is no mention of an collection of any national internal revenue tax, fee
appeal to the CIR from the failure to act by the or charge imposed by the Tax Code.36
CIR's authorized representative.33
As an exception, the CTA may suspend the
Q. Can the date of issuance of a BIR Ruling collection of taxes and require the taxpayer either
confirming the tax-exemption status of a to deposit the amount claimed or to file a surety
taxpayer be used as the reckoning point of bond for not more than double the amount when
the prescriptive period for recovery of in the opinion of the Court the collection may
erroneously or illegally assessed or collected jeopardize the interest of the Government and/or
internal revenue taxes? the taxpayer.37 Further, it must be noted that this
can only be issued by the CTA only in the exercise
A. No. The claim for refund must be filed within of its appellate jurisdiction.38
two (2) years from the date of payment of the tax
regardless of any supervening cause that may Note: A suspension of the collection of tax may only be
arise after payment. While the prescriptive period be issued by the CTA in the exercise of its appellate
of two (2) years commences to run from the time jurisdiction.39
that the refund is ascertained, the propriety
thereof is determined by law (in this case, from Q. Will an appeal to the CTA suspend the
the date of payment of tax), and not upon the collection of tax?
discovery by the taxpayer of the erroneous or
excessive payment of taxes. The issuance of the A. No. An appeal to the CTA from the decision of
the CIR will not suspend the payment, levy,
33 PAGCOR v. BIR, G.R. No. 208731, January 27, 2016. 37 RA 1125, as amended by RA 9282, §11; RRCTA, Rule 10
34 CIR v. Meralco, G.R. No. 181459, June 9, 2014 38 Commissioner of Internal Revenue v J.C. Yuseco, G.R. No. L-
35 CIR v. Team (Philippines) Operations Corporation, G.R. No. 12518, October 28, 1961.
179260, April 2, 2014. 39 Commissioner of Internal Revenue v J.C. Yuseco, G.R. No. L-
36 NIRC, §218. 12518, October 28, 1961]
Page 9 of 15
NOTICE
distraint, and /or sale of any property of the A. The non-retroactivity principle means that any
taxpayer for the satisfaction of his tax liability. revocation, modification or reversal of any of the
However, when in the view of the CTA, the revenue rules and regulations or any of the
collection may jeopardize the interest of the rulings or circulars shall not be given retroactive
Government and/or the taxpayer, it may suspend application if the revocation, modification or
the said collection and require the taxpayer either reversal will be prejudicial to the taxpayers.44
to deposit the amount claimed or to file a surety
bond.40 Q. What are the exceptions to the non-
retroactivity of rulings principle?
Q. What is the composition of the amount of
the bond required to suspend the collection A. Even if prejudicial to the taxpayer, revenue
of tax? rules and regulations or any of the rulings or
circulars may be given retroactive application in
A. The “amount claimed” refers to the principal the following cases:
amount of the deficiency taxes, excluding
penalties, interests, and surcharges.41 1. Where the taxpayer deliberately misstates
or omits material facts from his return or
Q. May the bond requirement for the CTA to any document required of him by the Bureau
suspend the collection of tax be dispensed of Internal Revenue; or
with? 2. Where the facts subsequently gathered by
the Bureau of internal Revenue are
A. Yes. The authority of the CTA to issue such materially different from the facts on which
injunctive writs to restrain the collection of tax the ruling is based; or
and to dispense with the deposit of the amount 3. Where the taxpayer acted in bad faith.45
claimed or the filing of the required bond is not
simply confined to cases where prescription has set Q. Do LGUs have the power to impose taxes
in. Whenever it is determined that the method on the gross receipts of keepers of garages,
employed by the CIR in the collection of tax is not cars for rent or hire driven by the lessee,
sanctioned by law or jeopardies the interests of a transportation contractors, persons who
taxpayer for being patently in violation of the law, transport passenger or freight for hire, and
the bond requirement under Section 11 of R.A. common carriers by land, air, or water?
1125 should be dispensed with.42
A. No. Section 133(j) of the LGC clearly and
Note: In the Pacquiao case, the Supreme Court said unambiguously proscribes LGUs from imposing a
that the purpose of the rule is not only to prevent tax on the gross receipts of transportation
jeopardizing the interest of the taxpayer but more contractors and common carriers. Exemption of
importantly to prevent the absurd situation wherein transportation contractors and common carriers
the court would declare that the collection was
from local business tax is consistent with the
violative of the law and then in the same breath require
the taxpayer to deposit or file a bond as a prerequisite
intent of our laws, which is to prevent the
for the issuance of a writ of injunction. Further, the duplication of the so-called common carriers tax.46
Court said that it cannot make a preliminary
determination on whether the CIR used methods Q. Do LGUs have the power to impose taxes
sanctioned by law. It is a question of fact that calls for on persons or entities engaged in the
receipt of evidence. Hence, the Supreme Court business of manufacturing and distribution
remanded the petition to the CTA to make such a of petroleum products?
determination in a preliminary hearing.43
A. No. Among the common limitations on the
Q. Explain the rule on non-retroactivity of taxing powers of LGUs provided under Section
rulings 133 of the LGC are “excise taxes on articles
40 Pacquiao v. Court of Tax Appeals – First Division, G.R. No. 44 NIRC, §246
2133394, April 6, 2016, citing RA 1125, as amended by RA 9282, §11. 45 Id.
41 A.M. No. 15-92-01-CTA; CTA En Banc Resolution No. 02-2015. 46 City of Manila v Hon. Colet and Malaysian Air System, G.R. No.
42 Pacquiao v. Court of Tax Appeals – First Division, G.R. No. 120051, December 10, 2014.
2133394, April 6, 2016.
43 Id.
Page 10 of 15
NOTICE
enumerated under the National Internal Revenue establishment, subject to the assessment
Code, as amended, and taxes, fees or charges on level for commercial buildings or an
petroleum products.” The prohibition with respect appurtenant to the hospital, entitled it to the
to petroleum products extends not only to excise special assessment for hospitals?
taxes thereon, but all “taxes, fees or charges.”47
A. The medical arts center is an integral part of
Q. On January 15, 2007, ABC protested, thru the hospital. The fact that that the doctors are
a letter, the imposition of business tax under holding office in a separate building does not take
Section 21 of the Manila Revenue Code on away the essence and nature of their services vis-
the ground that it constitutes double -vis the over-all operation of the hospital and the
taxation. The City Treasurer acknowledged benefits to the hospitals patients. Thus, it should
receipt of the letter but said that she will be accorded the special assessment.49
await the formal protest. On March 27, 2007,
ABC wrote a letter-reply reiterating that Q. May submarine communications cables
ABC already protested. On April 17, 2007, be classified as taxable real property by the
ABC filed a Petition for Review with the local governments?
Regional Trial Court (“RTC”). On appeal, the
CTA ruled that ABC belatedly filed its A. Yes. Submarine or undersea communications
petition with RTC by 1 day. ABC countered cables are akin to electric transmission lines
it timely filed now claiming that reckoning which the Court has previously declared as
point should be from March 27, 2007. Was the “machinery” subject to real property tax under the
petition timely filed? Local Government Code to the extent that the
equipment's location is determinable to be within
A. No. Section 195 of the Local Government Code the taxing authority's jurisdiction. Both electric
states that the taxpayer shall have thirty (30) lines and communications cables, in the strictest
days from the receipt of the denial of the protest sense, are not directly adhered to the soil but pass
or from the lapse of the sixty (60)-day period through posts, relays or landing stations, but both
prescribed herein within which to appeal with the may be classified under the term "machinery" as
court of competent jurisdiction otherwise the real property under Article 415(5) of the Civil
assessment becomes conclusive and Code for the simple reason that such pieces of
unappealable. In the instant case, the period equipment serve the owner's business or tend to
within which the City Treasurer must act on the meet the needs of his industry or works that are
protest, and the consequent period to appeal a on real estate.50
“denial due to inaction,” should be reckoned from
January 15, 2007, the date the taxpayer filed its Q. Distinguish between an illegal
protest, and not March 27, 2007.48 assessment and an erroneous assessment of
real property taxes in terms of remedies to
Note: The Court likewise stated that, at any rate, the be taken?
RTC has no jurisdiction. Following R.A. No. 9282, the
authority to exercise either original or appellate A. An erroneous assessment is different from an
jurisdiction over local tax cases depended on the illegal assessment, and the proper remedy of a
amount of the claim. In cases where the amount sought taxpayer issued an assessment depends on
to be refunded is below the jurisdictional amount of the whether the assessment was erroneous or illegal.
RTC, the Metropolitan, Municipal, and Municipal
Circuit Trial Courts (“MTC”) have jurisdiction. RTC
has jurisdiction if amount exceeds exceed P300,000
outside Metro Manila (P400,000 in Metro Manila); Erroneous Illegal Assessment
MTC if amount does not exceed P300,000 outside Assessment
Metro Manila (P400,000 in Metro Manila).
An erroneous An assessment is
Q. Is a medical arts center built by a hospital assessment illegal if it was made
to house its doctors a separate commercial “presupposes that
47Batangas City v. Pilipinas Shell, G.R. No. 187631, July 8, 2015 49 City Assessor of Cebu v. Association of Benevola De Cebu, Inc.,
48China Banking Corporation v. City Treasurer of Manila, G.R. No. G.R. No. 152904, June 8, 2007
204117, July 1, 2015. 50 Capitol Wireless v. Provincial Treasurer of Batangas, G.R. No.
180110, May 30, 2016.
Page 11 of 15
NOTICE
the taxpayer is without authority the Local Board’s fifteen (15) days
subject to the tax but under the law. decision. The from notice of the
is disputing the decision of the trial court’s decision.
correctness of the Central Board of The Court of Tax
amount assessed.” Assessment Appeals Appeals’ decision
With an erroneous is appealable before may then be
assessment, the the Court of Tax appealed before the
taxpayer claims that Appeals En Banc. Supreme Court
the local assessor The Court of Tax through a petition
erred in determining Appeals’ decision for review on
any of the items for may then be certiorari under
computing the real appealed before the Rule 45 of the Rules
property tax, i.e., the Supreme Court of Court raising pure
value of the real through a petition questions of law.51
property or the for review on
portion thereof certiorari under
subject to tax and Rule 45 of the Rules
the proper of Court raising pure
assessment levels. questions of law.
The taxpayer must The taxpayer may
exhaust the directly resort to
administrative judicial action Q. Explain the process of automatic review
remedies provided without paying of decisions of the Collector in protest and
under the Local under protest the forfeiture cases.
Government Code assessed tax and
before resorting to filing an appeal with A. There are minor differences between the
judicial action. The the Local and process under the Tariff and Customs Code
taxpayer must first Central Board of (TCCP) and the recent Republic Act No. 10863,
pay the real property Assessment otherwise known as the Customs Modernization
tax under protest. Appeals. The and Tariff Act:
Should the taxpayer taxpayer shall file a
find the action on the complaint for
protest injunction before the TCCP CMTA
unsatisfactory, the Regional Trial Court
taxpayer may appeal to enjoin the local The decision shall be The Commissioner
with the Local Board government unit automatically shall automatically
of Assessment from collecting real reviewed by the review any decision
Appeals within 60 property taxes. The Commissioner and by the District
days from receipt of party unsatisfied the records of the collector adverse to
the decision on the with the decision of case elevated within the government. The
protest. If the the Regional Trial five (5) days from the entire records of the
taxpayer is still Court shall file an promulgation of the case shall be
unsatisfied after appeal, not a petition decision of the elevated within five
appealing with the for certiorari, before Collector (5) days from the
Local Board of the Court of Tax promulgation of the
Assessment Appeals, the decision
Appeals, the complaint being a The Commissioner The Commissioner
taxpayer may appeal local tax case shal render a shall decide on the
with the Central decided by the decision of the automatic review
Board of Assessment Regional Trial automatic appeal within thirty (30)
Appeals within 30 Court. The appeal within thirty (30) days, or within ten
days from receipt of shall be filed within days from receipt of (10) days in case of
51City of Lapu-Lapu v. PEZA, G.R. No. 184203 & 187583, November

26, 2014.
Page 12 of 15
NOTICE
the records of the perishable goods, final and

case. rom receipt of the executory.52
records
If the Collector’s When no decision is Note: Under the TCCP, if the decision or action of the
decision is affirmed, rendered within the Collector is adverse to the taxpayer, such person may
or if within thirty prescribed period or within fifteen (15) days after notification in writing by
(30) days from when a decision the Collector of his action or decision, file a written
notice to the Collector with a copy furnished to the
receipt of the records adverse to the
Commissioner of his intention to appeal the said action
of the case by the government is or decision. It is only then that the Collector shall
Commissioner no rendered by the transmit all the records of the proceedings to the
decision is rendered Commissioner Commissioner. If the decision is adverse to the
or the decision involving goods with government, the case is automatically reviewed and
involves imported FOB or FCA value of the records of the case elevated to the Commissioner
articles whose ten million pesos within 5 days from promulgation of the decision of the
published value is (P10,000,000.00) or Collector.
Five Million pesos more, the records of
(P5,000,000.00) or the decision shall be Q. Mr. Kamata was about to depart for Japan
when she was found to be carrying more than
more, such decision automatically
Php10,000.00 in Philippine currency and
shall be deemed elevated within five Japanese Yen with total value exceeding
automatically (5) days for review by US$10,000.00. The amount covering Php10,000.00
appealed to the the Secretary of and Japanese Yen up to US$10,000.00 in value
Secretary of Finance Finance were returned to petitioner. The rest were
and the records of subjected to forfeiture. Mr. Kamata argues that
the proceedings shall currency is not among the properties subject to
be elevated within forfeiture under the law, and the BSP circular
five (5) days from the prohibiting the exportation of the said amounts
promulgation of the do not provide forfeiture as penalty for violation.
Is the excess money subject to forefeiture.
decision of the
Commissioner or of
A. Yes. Under the BSP Circular, the applicable
the Collector under
penalties are those provided for under the
appeal.
Customs Law. And under the said law, attempt to
If the decision of the The decision issued export items illegally is penalized by forfeiture of
Commissioner or of by the Secretary of the contraband sought to be exported. In addition,
the Collector under Finance, whether or the CTA noted that the Supreme Court has
appeal, as the case not a decision was consistently held that currency is falls under
may be, is affirmed rendered by the “merchandise” since, in the case of foreign
by the Secretary of Commissioner currency, it is not legal tender and thus is
Finance, or if within within thirty (30)
considered merchandise to be traded. As for the
thirty (30) days from days, or within ten Philippine Peso, since it was being taken out of
receipt of the records (10) days in the case Philippine territory, it also loses its status as
of the proceedings by of perishable goods, currency and thus becomes an item of trade.54
the Secretary of from receipt of the
Finance, no decision records, shall be Q. What is the jurisdiction of the CTA over
is rendered, the final upon the cases involving criminal offenses?
decision of the BOC. 53
Secretary of A. The CTA in Division shall exercise exclusive

Finance, or of the
original jurisdiction over all criminal offenses
Commissioner or of arising from violations of the Tax Code or the
the Collector under Tariff and Customs Code and other laws
appeal, as the case administered by the BIR or the BOC where the
may be, shall become principal amount of taxes and fees, exclusive of
charges and penalties, claimed is P1,000,000 or
52 TCCP, §2313. 54Kamata v. Commissioner of Customs, CTA Case No. 8846,

53 CMTA, §1127. September 26, 2016.
Page 13 of 15
NOTICE
more. based, so long as it is within its appellate

jurisdiction.58
If the principal amount of taxes and fees,
exclusive of charges and penalties, is less than Note: But see next question.
P1,000,000 or where there is no specified amount
claimed, original jurisdiction is vested in the Q. Does the CTA have exclusive original
regular courts, not the CTA. The CTA would jurisdiction to determine the
instead have appellate jurisdiction. constitutionality or validity of tax laws,
rules and regulations, and other
Q. Should compromise penalties, interests, administrative issuances of the
and surcharges be included in the Commissioner of Internal Revenue?
determination of the jurisdictional amount
of criminal offenses within the CTA’s A. Yes. The CTA may now take cognizance of
jurisdiction? cases directly challenging the constitutionality or
validity of a tax law or regulation or
A. No. Compromise penalties, interests, and administrative issuance (revenue orders, revenue
surcharges should not be included in the memorandum circulars, rulings). Petitions for
determination of the jurisdictional amount. The writs of certiorari, prohibition or mandamus
CTA’s original jurisdiction is limited only to against the acts and omissions of quasi-judicial
criminal offenses arising from violations of the agencies (Commissioner of Internal Revenue,
Tax Code, where the principal amount of taxes Commissioner of Customs, Secretary of Finance,
and fees claimed, exclusive of charges and Central Board of Assessment Appeals, Secretary
penalties, is at least P1,000,000.55 of Trade and Industry) on tax-related problems
should, thus, be filed before the CTA.
Q. What is the proper remedy to assail an
adverse BIR Ruling? Administrative issuances (revenue orders,
revenue memorandum circulars, or rulings) are
A. The adverse BIR Ruling is subject to review by issued by the Commissioner under its power to
and appealable to the Secretary of Finance within make rulings or opinions in connection with the
thirty (30) days from receipt thereof. Thereafter, implementation of the provisions of internal
if the Secretary of Finance affirms the said revenue laws. Tax Rulings, on the other hand, are
adverse ruling, such review by the Secretary of official positions of the Bureau on inquiries of the
Finance is appealable to the CTA within 30 days. taxpayers who request clarification on certain
The CTA has jurisdiction over the appeal from the provisions of the National Internal Revenue Code,
Secretary of Finance’s review of rulings of the CIR other tax laws, or their implementing regulations.
as it is included in “other matters” arising under Hence, the determination of the validity of these
the NIRC or other laws administered by the BIR.56 issuances clearly falls within the exclusive
appellate jurisdiction of the Court of Tax Appeals,
Q. Does the CTA have the power to issue subject to review by the Secretary of Finance.59
writs of certiorari in its appellate
jurisdiction? Q. Does the CTA en banc have jurisdiction
over interlocutory orders issued by the CTA
A. Yes. The Court of Tax Appeals has the power Division?
to issue writs of certiorari in the exercise of its
appellate jurisdiction.57 The CTA can rule not only A. No. The CTA en banc has jurisdiction over final
on the propriety of an assessment or tax orders or judgments but not over interlocutory
treatment of a certain transaction, but also on the orders issued by the CTA in division. An
validity of the revenue regulation or revenue interlocutory order may not be questioned on
memorandum circular on which the assessment is appeal.60
55 People v. Johnel Bunao, CTA Crim Case No. O-583, July 28, 2016. 58 Philippine American Life and General Insurance Company v. The
56 Philippine American Life and General Insurance Company v. The Secretary of Finance and Commissioner of Internal Revenue, G.R.
Secretary of Finance and Commissioner of Internal Revenue, G.R. No. 210987, November 24, 2014
No. 210987, November 24, 2014; Banco de Oro v. Republic, G.R. No. 59 Banco de Oro v. Republic, G.R. No. G.R. No. 198756, August 16,
G.R. No. 198756, January 13, 2015. 2016.

57 City of Manila v. Hon. Grecia-Cuerdo, G.R. No. 175723, February 60 Commissioner of Internal Revenue v. Court of Tax Appeals and
4, 2014. CBK Power, G.R. No. 203054-55, July 29, 2015.
Page 14 of 15
NOTICE
Q. Does the CTA have jurisdiction over a Claim for refund Claim for refund
petition for certiorari assailing a or credit of or credit of
Department of Justice (DOJ) resolution in a erroneously paid unutilized input
preliminary investigation involving tax and taxes under taxes under
tariff offenses? Section 228 of the Section 112 of the
NIRC of 1997 NIRC of 1997
A. Jurisdiction over a petition for certiorari The CTA may Where the issue to
assailing a DOJ resolution in a preliminary determine whether be resolved is
investigation involving tax and tariff offenses is there are taxes that whether the
now with the CTA, not the Court of Appeals.61 should have been taxpayer is entitled
paid in lieu of the to a refund or credit
Q. The BIR issued several assessment taxes paid. of its unutilized
notices to the taxpayer for deficiency Determining the input VAT, the
income tax and VAT for the taxable years proper category of correctness of the
1999 to 2002. The taxpayer filed protests, but tax that should have VAT returns is not
they were denied by the BIR. The taxpayer been paid is not an an issue. Thus, there
then filed a Petition for Review with the assessment. It is an is no need for the
CTA in Division. The CTA Division denied incidental matter Court to determine
the Petition. The CTA Division likewise necessary for the whether the
denied the Motion for Reconsideration. The resolution of the taxpayer is liable for
taxpayer then appealed directly to the principal issue, deficiency VAT.64
Supreme Court. Does the Supreme Court which is whether the
have jurisdiction? taxpayer is entitled
to the refund63
A. No. The Court is without jurisdiction to review
decisions rendered by a division of the CTA,
exclusive appellate jurisdiction over which is GOOD LUCK!
vested in the CTA en banc. RA 1125, as amended
by RA 9282, provides that the CTA en banc shall ***Nothing else follows***
have exclusive jurisdiction over appeals from the
decision of its divisions. A party adversely affected
by the resolution of the CTA division may, on
motion for reconsideration, file a petition for
review with the CTA en banc. Thereafter, the
decision or ruling of the CTA en banc may be
elevated to this Court. Simply stated, no decision
of the CTA division may be elevated to this Court
under Rule 45 of the 1997 Rules of Civil Procedure
without passing through the CTA en banc.62
Q. May the Courts determine, in a claim for

refund, whether there are taxes that should
have been paid in lieu of the taxes paid?
A. A distinction between a claim for refund or

credit of erroneously paid taxes under Section 228
of the NIRC of 1997, as amended, and a claim for
refund or credit of unutilized input taxes under
Section 112 of the NIRC of 1997, as amended:
61 Bureau of Customs v. Hon. Devanadera, G.R. No. 193253, 63 SMI-ED Philippines v. Commissioner of Internal Revenue, G.R.
September 8, 2015. No. 175410, November 12, 2014.
62 Duty Free Philippines v. BIR, G.R. No. 197228, October 8, 2014. 64 Commissioner of Internal Revenue v. Toledo Power Company, G.R.
No. 196415 & 196451, December 2, 2015.
Page 15 of 15
NOTICE
TAXATION LAW
ADDENDUM TO THE 2016 SUPPLEMENT
AND FLOWCHART OF TAX REMEDIES
OCTOBER 13, 2016
PIERRE MARTIN D. REVES
This Addendum discusses the recent ruling of the on which the assessment is based, so long as it is within
Supreme Court in Banco de Oro v. Republic, G.R. No. its appellate jurisdiction.
G.R. No.198756, August 16, 2016. Although the said case
Then, in the 2015 case of Clark Investors and Locators
is beyond the cut-off for the 2016 bar, the case clarifies
Association v. Secretary ofFinance,6 the Supreme Court
or, better yet, settles the previous conflicting rulings of
ruled that the proper remedy to assail a Revenue
the Supreme Court.
Regulation is a special civil action for declaratory relief
under Rule 63 of the Rules of Court filed with the

BACKGROUND
Regional Trial Court, not a special civil action for
Note that in the 2002 case of Commissioner of Internal certiorari under Rule 65.
Revenue v. Leal, 1 citing the case of Rodriguez v.
The Supreme Court also ruled in Commissioner of
Blaquera and the 2007 case of Asia International
Internal Revenue v. Court of Tax Appeals and Petron
Auctioneers v. Hon. Parayno, Jr.2 the Supreme Court
Corporation, 7 that CTA has no jurisdiction to
has held that revenue regulations, revenue
determine the validity of a ruling issued by the CIR or
memorandum circulars and revenue memorandum
the COC in the exercise of their quasi-legislative
orders should be questioned before the Court of Tax
powers to interpret tax laws.
Appeals, not the regular courts.
However, in the 2008 case of British American Tobacco DISCUSSION OF THE RULING/
v. Camacho,3 the Supreme Court ruled that although CLARIFICATIONS
the Court of Tax Appeals has jurisdiction to resolve tax

1. Adverse interpretative rulings (BIR Rulings)
disputes in general, this does not include cases where
are still reviewable by the Secretary of
the constitutionality of a law or rule is challenged.
Finance and, if affirmed, appealable to the
Court of Tax Appeals
Fast forward to 2014, in City of Manila v. Hon. Grecia
Cuerdo,4 the Supreme Court recognized that the Court In the earlier case of Banco de Oro v. Republic, 8 the
of Tax Appeals has the power to issue writs of Supreme Court ruled that the review by the Secretary
certiorari in the exercise of its appellate jurisdiction. of Finance pursuant to Section 4 of the NIRC, as
amended, of a BIR Ruling is appealable to the Court of
The same doctrine was reiterated in the 2014 case of
Tax Appeals.
Philippine American Life and General Insurance
Company v. The Secretary of Finance and Commissioner That doctrine remains unchanged and was affirmed in
of Internal Revenue5 where the Supreme Court held the Resolution of the Supreme Court in Banco de Oro
that The Court of Tax Appeals can now rule not only v. Republic.9
on the propriety of an assessment or tax treatment of
a certain transaction, but also on the validity of the
revenue regulation or revenue memorandum circular
1 G.R. No. 113459, November 18, 2002. 6 G.R. No. 200670, July 6, 2015
2 G.R. No. 163583, August 20, 2008. 7 G.R. No. 207843, July 15, 2015
3 G.R. No. 163583, August 20, 2008. a G.R. No. G.R. No. 198756, January 13, 2015.
4 G.R. No. 175723, February 4, 2014. 9 G.R. No. 198756, August 16, 2016
5 G.R. No. 210987, November 24, 2014
Page 1 of 2
NOTICE
No portion of this work may be copied or reproduced without rhe written permission of the author. Possessors may
reproduce and distribute this supplement provided the name of the author remains clearly associated with my work and
no alterations in the form and content of this supplement are made. No stamping is allowed.
ADDENDUM TO THE 2016 SUPPLEMENT AND FLOWCHART PIERRE MARTIN D. REYES
OF TAX REMEDIES
2. The Court of Tax Appeals has the power to opinions in connection with the implementation of
issue writs of certiorari in its appellate
the provisions of internal revenue laws. Tax Rulings,
jurisdiction.
on the other hand, are official positions of the Bureau
The doctrine laid down in City of Manila v. Hon. on inquiries of the taxpayers who request clarification
Grecia-Cuerdo and which was later reiterated in on certain provisions of the National Internal Revenue
Philippine American Life and General Insurance Code, other tax laws, or their implementing
Company v. The Secretary of Finance and Commissioner regulations. Hence, the determination of the validity
of Internal Revenue remains unchanged. of these issuances clearly falls within the exclusive
appellate jurisdiction of the Court of Tax Appeals,

In its Resolution in Banco de Oro v. Republic, the
subject to review by the Secretary of Finance.
Supreme Court affirmed the doctrine that the Court of
Tax Appeals has jurisdiction to pass upon the
S UMMARY OF REMEDIES
constitutionality or validity of a tax law or regulation
In assailing tax laws, rules and regulations, and other
when raised by the taxpayer as a defense in disputing
administrative issuances, the following rules apply:
or contesting an assessment or claiming a refund.
1. The Court of Tax Appeals has both original

3. However, the Court of Tax Appeals now has
and appellate jurisdictions to determine the
exclusive original jurisdiction to determine
the constitutionality or validity of tax laws, constitutionality or validity of tax laws, rules
rules and regulations, and other and regulations, and other administrative
administrative issuances of the issuances.
Commissioner of Internal Revenue
2. Tax laws and rules and regulations (revenue
In its Resolution in Banco de Oro v. Republic, the regulations) are to be questioned before the
Supreme Court reverted to its earlier rulings in Court of Tax Appeals. The remedy is to file a
Rodriguez, Leal, and Asia International Auctioneers, Inc. petition for certiorari, prohibition, or
The Court of Tax Appeals has exclusive jurisdiction to mandamus with the Court of Tax Appeals
determine the constitutionality or validity of tax laws, Division.
rules and regulations, and other administrative
3. Administrative issuances (revenue
issuances of the Commissioner of Internal Revenue.
memorandum orders, revenue memorandum
The Court of Tax Appeals may now take cognizance circulars, or BIR rulings) are subject to review
of cases directly challenging the constitutionality or by the Secretary of Finance and, if still adverse,
validity of a tax law or regulation or administrative appealable to the Court of Tax Appeals. The
issuance (revenue orders, revenue memorandum remedy is to file a Petition for Review with the
circulars, rulings). Petitions for writs of certiorari, Court of Tax Appeals Division.
prohibition or mandamus against the acts and
**This Addendum supersedes contrary
omissions of quasi-judicial agencies (Commissioner of
doctrines cited in the 2015 Supplement and
Internal Revenue, Commissioner of Customs,
2016 Supplement and the procedure in the
Secretary of Finance, Central Board of Assessment 2016 Flowchart of Tax Remedies.
Appeals, Secretary of Trade and Industry) on tax
related problems should, thus, be filed before the For purposes of convenience, a Revised 2016
Court of Tax Appeals. Flowchart of Tax Remedies is provided.
Administrative issuances (revenue orders, revenue
memorandum circulars, or rulings) are issued by the
Commissioner under its power to make rulings or
Page 2 of 2
NOTICE
No portion of this work may be copied or reproduced without the written permission of the author. Possessors may
reproduce and distribute this supplement provided the name of the author remains clearly associated with my work and
no alterations in the form and content of this supplement are made. No stamping is allowed.
REVISED FLOWCHART OF TAX REMEDIES by Pierre Martin D. Reyes Page 1 of 1 1
I. REMEDIES UNDER THE NATIONAL INTERNAL REVENUE CODE

A. Assessments (Section 228, NIRC) OPTIONS OF TAXPAYER
IF RECONSIDERATION 1. If CIR denies Protest:
180 days
30 days
••1------.e•
30 days
15 days
. • •
�--'----11J Period within CIR or
• • • • • Authorized Representative r---------------�
t '1t "1 '1t '1t to decide FDDA

: Petition for Review with 1
ICTA Division
L---------------�
:
�BC��=:�c��=J
�I NOTE: Taxpayer may file a Motion for Reconsideration with the CIR but it shall not
I IF REINVESTIGATION I
toll the 30-day period to appeal to the CTA.
I 60 days 180 days 2. If authorized representative denies Protest:

I
a. Follow Procedure in l(A)(l); or
• b. File a Motion for Reconsideration with CIR
Period within CIR or
: ��b�it
____
: authorized representative
30 days 30 days
: Documents : to decide • • •
L _______ __!
"'---
r--------, .---------------�
----'1t
FDDA
L��t��I�_: : Petition for Review with 1
I CTA Division
L---------------�
:
3. If CIR or authorized representative does not act within the 180-day
a. File a Petition for Review within 30 days; or
30 days
I
• •
.---------------�
Lapse of 180-day period
1
: Petition for Review with
(deemed a denial) ICTA Division
L---------------�
:
b. Await for FDDA
Follow procedure in either l(A)(l) or l(A)(2).

REVISED FLOWCHART OF TAX REMEDIES by Pierre Martin D. Reyes Page 2of 1 1
B. Recovery of Erroneously or Illegally Collected Taxes and/or Penalties (Section 229, NIRC}
2 years
•
�
1---------
NOTE: Both the administrative and the judicial
Date of Payment 1 Petition for :

claim must be filed within the two-year period.
or Withholding of : Review with :

Tax L ��A_?�v�s�o� : _
, ------------ ,
1 File Administrative 1
: Claim with CIR :
1
I
(before Judicial 1
I Claim) I
I
L_ ____________ _!
C. VAT Refund/Credit (Section 112, NIRC) OPTIONS OF TAXPAYER

1. If CIR or authorized Representative denies claim:
30 days
2 years 120 days
• •
• • • �
1---------
� � Period to Denial 1
Petition for :
- ----------
decide : Review with :
Close of the I File
I
Taxable Quarter I Administrative

L �A_D��s�o� :
I Claim with CIR
I
when the
_
I and
I 2. If inaction:
relevant sales I
complete
submit
30 days
were made I
I documents
I
L __________
• •
NOTE: Only the administrative claim must be �
,---------
' Petition for :
filed within the two-year period.
(considered a denial)
l Review with :
D so l
L��A_ �� _
REVISED FLOWCHART OF TAX REMEDIES by Pierre Martin D. Reyes Page 3of11
11. REMEDIES UNDER THE LOCAL GOVERNMENT CODE
A. Local Business Tax

1. Assessment
1. Ifs P300,000 (ors P400,000 for Metro Manila)

60 days 60 days
15 days 15 days 30 days
• • •
• • • •
� --Period to
Notice of II Protest- to : decide
,- - --- , � ,,------ -...,
, -----,
Assessment 1 Local Denial by I Appeal I Appeal : Petition :
: Treasurer :1 LT or 1
I to MTC I1 to RTC I
I1 for I
I
L--------'
Lapse of Review 1
60 days i to the :
I CTA en I
I1 bane
I1
L,. ______ J
2. If> P300,000 (or> P400,000 for Metro Manila)

NOTE: The period to appeal shall be interrupted by a timely motion for new trial
15 days 30 days or reconsideration. In any case, if the motion is denied, the movant has a fresh
period of 15 days from receipt or notice of order denying or dismissing the
motion for reconsideration within which to file the appeal. (Neypes Doctrine)
• • •
�
Denial by fA�;�1-l Petition
LT or :_�o_R!�_J for
Lapse of Review
60 days to the
CTA
Division
2. Refund
2 years
1. If S P300,000 (or S P400,000 for Metro Manila)
•
Follow procedure in ll(A) (l ).
, ----
Date of ( Appeal to l
-----
Payment of l either MTC l

Tax L �r R!:
_
l
____
- -
f �ile Cla��fu� ;ef�nd l Follow procedure in ll(A)(2).
J before Local l
1 Treasurer l
L ____________ _

3. Assail Tax Ordinance
30 days 60 days 30 days 15 days 15 days (extendible)
• • • • • •
,
t
- -------
Period for the t .- t t
,1 Appeal to
---
t
SOJ to decide l Appeal
- ---
Effectivity of ( Appeal to l Denial by Appeal to

1 Secretary of l the Court of
I
Tax Ordinance SOJ or Supreme
l Justice 1
' lapse of i ��c
L------
1
Appeals Court
60 days
�--------
or reconsideration. In any case, if the motion is denied, the movant has a fresh
motion for reconsideration within which to file the appeal (Neypes Doctrine)
B. Real Property Tax

1. Assessment
a. Erroneous Assessment
30 days 60 days 60 days 120 days 30 days 30 days

• • • • • • • •
��--, , t
--- - ----,
Period to ...-��--, , t , , r-------1
with II Protest to I decide

------
I Petition
�------
Pay Denial by I Appeal I Denial I Appeal 1 Adverse I

Protest 1 Local I
LT or 1I to LBAA I1 by LBAA l to the I Decision of I for I
I Treasurer I Lapse of L._ _! or Lapse I CBAA : the CBAA l Review to l
I the CTA
I I
_____
'------� L________ L _____ _
60 days of 120- I
1I en bane
I
1
days I
b. Illegal Assessment
15 days 30 days
• • •
t t
----- -- ,
I
Issuance IFile I Petition
I I
of Illegal Ilnjuncti I for
Assessm I
I
on with I
I
Review
ent IRTC I to the
L._ ______I
CTA
Division
-
2. Refund
2 years 60 days
• If denied or inaction by the Local Treasurer

• •
,--
t - ---
- -- Period to Follow Procedure in ll(B)(l).
Date of ' File Claim J decide
Payment J with Local J
L�r��s��--J
NOTE: Only the administrative claim must be
Ill. REMEDIES UNDER THE CUSTOMS MODERNIZATION AND TARIFF ACT.
A. Assessments
1. If protest is sustained
15 days 30 days
•
The COC shall make the appropriate order and the entry reassessed, if necessary.
• •
t t
----------- Period to 2. If protest is denied
Payment Protest to decide
under Commissioner 30 days
Protest of Customs
(COC) • •
- - - -- --- ---
- - ------ ,
,
Denialby 1 Petition for l
NOTE: Assessment shall be deemed final within
15 days after receipt of the notice of assessment. the CDC l Reviewto I
l the CTA II
I Division
L--------
l
B. Refund
1. If the claim and application is for refund of duties.
12 months If the claim is denied If denied by the COC
30 days 30 days Follow procedure in lll(A)(2) .

r--------, • •
•
Date of l File Claim l t
payment 1withBureau I
L ________I
,--------, Period to
Appeal to l
EJ
1 decide
NOTE: Only the administrative claim must be l COC I
I
I
filed within the 12-month period. The CMTA did
I I
not specify the office within which to file the I I
L _______ _!
claim for refund
2. If the claim and application is for refund of duties and taxes.
As to refund of the duties element
Follow procedure under 111(8).
As to refund of internal revenue taxes element
Follow procedure under l(B).
Note: The Bureau of Customs shall cause the refund of internal revenue taxes after issuance of a certification from the CIR
granting claim for refund, whether wholly or partially.
C. Forfeiture
1. If importer is aggrieved by decision of District Collector 1. If importer aggrieved by decision of COC
15 days or 5 days 30 days or 15 Follow Procedure in lll(A)(2).

if perishable days if perishable
2. If no decision rendered (inaction)
• • • •
� � The adverse decision of the District Collector is deemed affirmed.
Adverse I
Follow Procedure in lll(A)(2).
--------
Notice of
I The District Period
decision Appeal to
I
I Collector for COC
of District Dist rict
I
I shall to decide
Collector Collector
I
transmit
I
records to
---------
coc
2. If government i s aggrieved by decision of the District Collector (Automatic Review)
30 days or 10
5 days days if perishable If no decision rendered within the said period or when a decision adverse to
government is rendered by the COC involving goods with FOB or FCA value of
• Pl0,000,000.00
• •
�
Adverse Period 5 days
Elevate Receipt of for coc
decision Records records by to decide
of District to Coe coc
• •
NOTE: The decision of the SOF
Collector ,--------,
whether or not a decision was
1 Elevate : rendered by the COC within 30 days,
: records to I1 or within 10 days in the case of
: SoF I
perishable goods, from receipt of the
I I records, shall be final upon the

L_______ J Bureau.
If importer aggrieved by decision of COC
3. If the importer is aggrieved by the decision of the Secretary of Finance on automatic review
30 days
• •
,--------,
Adverse 1 Petition for :
decision : Review to 1
of SOF : the CTA : -
1 Division :
L_______ _
IV. APPELLATE REMEDIES IN THE COURT OF TAX APPEALS
15 days 15 days (extendible) 15 days 15 days (extendible)
• • • • • • • • •
,---- -----. .-------. r-------1 .-------. r------, .-------...., ,-------1 � �
r Petition for : Adverse MR
1
i of Adverse r i Petition Adverse
r r MR of Adverse : ;;t�i�� -f;-:
: Review 1
: Decision of CTA Div.
1
: Resolution for : Decision of : CTA-EB : Resolution : Review to the :
: before the 1 the CTA : Decision : of the CTA : Review : the CTA-EB L�:c!:��-: of the CTA rI Supreme r
i
i CTA Division Division L�r-��-J Division : before : �---� EB I Court
I
I
L - - - - - - - -' : the CTA r

L J
________
r En Banc :
L------
NOTE: A petition for review of a decision or resolution of the
CTA in Division must be preceded by the filing of a timely MR
or MNT with the Division. The filing of a MR or MNT, however,
with the CTA en bane is not mandatory.
V. ASSAILING THE VALIDITY OF TAX LAWS, RULES AND REGULATIONS AND OTHER ADMINISTRATIVE ISSUANCES
A. Tax laws and Rules and Regulations (Revenue Regulations)
• •
t
:��r��7s�i��f: I Petition for
I the quasi-judicial II I Certiorari,
1 Prohibition,
1 agency reIatmg
. to 1 I
I the tax law or rule I 1 or
I and regulation I Mandamus

L
IJ I with CTA
I Division
____________
.._ ________
B. Administrative Issuances (Revenue Memorandum Circulars, Revenue Memorandum Orders, BIR Rulings)
30 days 30 days
• • •
t
,------ - - ,
t
1---------
I Adverse Ruling 1 Appeal to 1 1 Petition
for
l Review with l
I
l Secretary of I
L ��a�_:e_ :
___
L :r!_o�v�s�o�_l
FLOWCHART OF TAX REMEDIES by Pierre Martin D. Reyes Page 1 of 12
I. REMEDIES UNDER THE NATIONAL INTERNAL REVENUE CODE

A. Assessments (Section 228, NIRC) OPTIONS OF TAXPAYER
IF RECONSIDERATION 1. If CIR denies Protest:
180 days
30 days
15 days 30 days •
- • • •
•
Period within CIR or
t - -
• • • • Authorized Representative -
: �i�;nf�r��v�e� �th :
t t t t t to decide FDDA
L�T!_D�v��-------- :
�� L-��iJ�L-��
� II -1 NOTE: Taxpayer may file a Motion for Reconsideration with the CIR but it shall not
IF REINVESTIGATION toll the 30-day period to appeal to the CTA.
II I
60 days 180 days 2. If authorized representative denies Protest:
a. Follow Procedure in l(A)(l); or
b. File a Motion for Reconsideration with C IR

-------- , Period within CIR or
i Submit : authorized representative
30 days 30 days
: Documents : to decide • • •
L-------�
---------\J,,
3. If CIR or authorized representative does not act within the 180-day

a. File a Petition for Review within 30 days; or
30 days
I
• •
(deemed a denial)
b. Await for FDDA

Follow procedure in either l(A)(l) or l(A)(2).
FLOWCHART OF TAX REMEDIES by Pierre Martin D. Reyes Page2of12
B. Recovery of Erroneously or Illegally Collected Taxes and/or Penalties (Section 229, NIRC}
2 years
I
• •
1--------,
1 claim must be filed within the two-year period.
Date of Payment Petition for I
I1 I
or Withholding of R ev1ew
. . h 1
w1t
Tax
L�!'__o�v��J
r-------------
1
File Administrative :
: Claim with CIR
:
: {before Judicial 1
1 Claim)
:
�------------'
C. VAT Refund/Credit (Section 112, NIRC) OPTIONS OF TAXPAYER

1. If CIR or authorized Representative denies claim:
30 days
2 years 120 days
• •
• • • �
,--------,
Period to
Denial I Petition for I
I1
r----------
decide I1 . .
Close of the I File Review with
I
Taxable Quarter I Administrative
I
L�1!__D�v�� J
I
when the Claim with CIR
I and submit 2. If inaction:
relevant sales I
I complete 30 days
were made I
documents
I
L _________ • •
NOTE: Only the administrative claim must be �
1--------,
Lapse of 120-day period I Petition for I
(considered a denial) : Review with :

L�T!'__D�v�� J
FLOWCHART OF TAX REMEDIES by Pierre Martin D. Reyes Page 3 of 1 2
II. REMEDIES UNDER THE LOCAL GOVERNMENT CODE
A. local Business Tax

1. Assessment
1. Ifs P300,000 (or S P400,000 for Metro Manila)

60 days 60 days
15 days 15 days 30 days
• • •
• • • •
t
r--------, Period to
t
Notice of I Protest to I decide ------ r------1
, ,
Assessment
I
1 local
I
1
Denial by I Appeal I
I
Appeal : Petition :
:
I
: Treasurer LT or 1 to MTC 1 to RTC I for I
L _____ J
1 1
Lapse of I Review
L_ _______ _.
I
I to the I
60 days
: CTA en :
1bane I
�------'

NOTE: The period to appeal shall b e interrupted b y a timely motion for new trial
15 days 30 days or reconsideration. In any case, if the motion is denied, the movant has a fresh
motion for reconsideration within which to file the appeal. (Neypes Doctrine)
• • •
t
,------1
Denial by I Appeal I Petition
LT or : to RTC
______
:
J
for
Lapse of Review
to the
60 days
CTA
Division
FLOWCHART OF TAX REMEDIES by Pierre Martin D. Reyes Page 4of12
2. Refund
2 years
1. If :S P300,000 (ors P400,000 for Metro Manila)

•
Follow procedure in ll{A)(l).
, ------- - ,
Date of I Appeal to I
Payment of l either MTC l
I or RTC
1
Tax
L_ _______ J 2. If> P300,000 (or> P400,000 for Metro Manila)
-------------
r
1 File Claim for Refund I Follow procedure in ll{A)(2).
I
1 before Local :
ITreasurer 1
�------------l

3. Assail Tax Ordinance
30 days 60 days 30 days 15 days 15 days (extendible)
• • • • • •
, -------- , Period for the t t t t
Effectivity of I Appeal to I
I
SOJ to decide Denial by :��--, Appeal to Appeal to
I to
I
Secretary of 1 the I
I
Tax Ordinance 1 SOJ or Court of Supreme
1 I
I Justice I RTC I
L _____ _,
L_
_______ J lapse of Appeals Court
60 days
or reconsideration. In any case, if the motion is denied, the movant has a fresh
motion for reconsideration within which to file the appeal (Neypes Doctrine}
FLOWCHART OF TAX REMEDIES by Pierre Martin D. Reyes Page 5 of 12
B. Real Property Tax

1. Assessment
a. Erroneous Assessment
30 days 60 days 60 days 120 days 30 days 30 days
• • • • • • • •
t t
,------- - , Period to t t
,-- ----,
t t -: t
, - ------,
Pay with I Protest to I decide

: Denial :�;p�� Adverse I Petition
Denial by 1 Appeal 1
I
1 Local
I
: to LBAA I : to the I
I
I for
I
:
Protest I LT or by LBAA Decision of
:
I
I I 1 Review to I
Treasurer I I CBAA
L------'
I Lapse of ______ .J or Lapse the CBAA I I
'--------�
I the CTA I
60 days of 120-
1
1
I en bane I
days L ______ .1
b. Illegal Assessment
15 days 30 days
• • •
t ,----- - ,
t t
Issuance I File : Petition
of Illegal : lnjuncti I for
i ��c
Assessm with
i Review
to the
L-----�
ent
CTA
Division
2. Refund
2 years 60 days
• • • If denied or inaction by the Local Treasurer
, --------, Period to Follow Procedure in ll(B)(l).

Date of I File Claim I decide
I . I
Payment I With Local I
L�=��=r J __
NOTE: Only the administrative claim must be

FLOWCHART OF TAX REMEDIES by Pierre Martin D. Reyes Page 7 of12
Ill. REMEDIES UNDER THE CUSTOMS MODERNIZATION AND TARIFF ACT.
A. Assessments
1. If protest is sustained
15 days 30 days
The COC shall make the appropriate order and the entry reassessed, if necessary .
• • •
� -
�
- -- ------ .., Period to 2. If protest is denied
I
Payment I Protest to I decide
I
under I Commissioner I 30 days
I I1
I of Customs
Protest
I {COC) I
I I • •
L _________ J
�
1--------1
1
NOTE: Assessment shall be deemed final within
Denial by Petition for I
15 days after receipt of the notice of assessment. the COC : Review to :
I the CTA I
I
1I o·1v1s1on
.. 1
L.._ _______ J
B. Refund
1. If the claim and application is for refund of duties.
12 months If the claim is denied If denied by the COC
• • 30 days 30 days Follow procedure in lll(A)(2) .
r--------1
1 • • •
: File Claim
�
Date of
payment I with Bureau : 1--------1 Period to
L-------� 1
Appeal to I decide
NOTE: Only the administrative claim must be : coc :
filed within the 12-month period. The CMTA did I I
I I
not specify the office within which to file the I I
L.._ _______ J
claim for refund
2. If the claim and application is for refund of duties and taxes.
As to refund of the duties element
Follow procedure under lll(B}.
As to refund of internal revenue taxes element
Follow procedure under l(B).
Note: The Bureau of Customs shall cause the refund of internal revenue taxes after issuance of a certification from the CIR
granting claim for refund, whether wholly or partially.
C. Forfeiture
1. If importer is aggrieved by decision of District Collector 1. If importer aggrieved by decision of CDC
15 days or 5 days 30 days or 15

Follow Procedure in lll(A}(2).
if perishable days if perishable
2. If no decision rendered (inaction)

• • • •
--- ----,
� The adverse decision of the District Collector is deemed affirmed.
Adverse : Notice of : The District Period Follow Procedure in lll(A}(2}.
decision : Appeal to 1 Collector for COC
of District I District : shall to decide
: Collector I
Collector I
I -- ----�
transmit
-
records to
coc
2. If government is aggrieved by decision of the District Collector (Automatic Review)
30 days or 10
5 days
If no decision rendered within the said period or when a decision adverse to
days if perishable
government is rendered by the COC involving goods with FOB or FCA value of
• • Pl0,000,000.00
• •
, ----- -, �
1
Period 5 days
Adverse Elevate :
1
Receipt of
coc
:
for
decision Records
1
records by
of District to Coe : to decide • •
NOTE:
Collector
I
I
I
I
Coe
�
1--------1 whether
The
or
decision
not a
of the
decision
SOF
was
L ______ J 1
Elevate I rendered by the COC within 30 days,
: records to : or within 10 days in the case of
I SoF I perishable goods, from receipt of the

I I records, shall be final upon the
I I
L. _______ J Bureau.
If importer aggrieved by decision of COC
3. If the importer is aggrieved by the decision of the Secretary of Finance on automatic review
30 days
• •
�
1--------1
1
Adverse Petition for I
decision : Review to :
of SOF I the CTA I
I 1I
1 Division
L. _______ J
IV. APPELLATE REMEDIES IN THE COURT O F TAX APPEALS
15 days 15 days (extendible) 15 days 15 days (extendible)
• • • • • • • • •
t t t t
1--------,
1 Petition for I Adverse

: �� ---
f .--Adv- - ers- _e
o :
_
_, : �; � �;J
t i
.-- __-_ _
A dverse
_
_, :-�;-�f: Adverse : Petition for

I
1 Review
I
1 Decision of I CTA Div. I
Resolution I for I
Decision of : CTA-EB I Resolution I Review to the
: before the : I
I Decision
I
1
I
1 Review 1
I
I Decision I
L -----�1 of the CTA
I
1 Supreme
I CTA Division I
I I
the CTA
Division
I orMNT
I
'1
of the CTA
Division
I
I
before
I
I
t h e CTA-EB
.._______.
EB
: Court
the CTA I
L_ ______ _J �---� L_ ________ _J
I
�-------J I I
1
'------' ..._______.
En Banc 1
...._ _____ ...J
NOTE: A petition for review of a decision or resolution of the

CTA in Division must be preceded by the filing of a timely MR
or MNTwith the Division. The filing of a MR or MNT, however,
with the CTA en bane is not mandatory.
FLOWCHART OF TAX REMEDIES by Pierre Martin D. Reyes Page11 of12
V. ASSAILING THE VALIDITY OF REVENUE ISSUANES
A. Quasi-Judicial (BIR Rulings)

30 days 30 days
• • •
1--------,
t 1--------,t
Adverse Ruling I Appeal to I I Petition for I
w. t1 h 1
I1 I1 I
1
I .
Secretary of R ev1ew
1
I
!_
F inance
_______ _! L :r�__o�v�� J
B. Quasi-Legislative (Revenue Regulations, Revenue Memorandum Circulars, or Revenue Memorandum Orders)

1. If in the exercise of the Secretary of Finance's rule-making power (Revenue Regulations)
15 days
If there is no breach
15 days (extendible)
• • • •
t
:-;�t:i��
Issuance of
y-: , ------ ,
1 Supreme 1
l Relief (Rule :
Court of
I I Court I NOTE: The period to appeal shall be
:
the SOF Appeals
:
I I
I
I 63} w ith the I interrupted by a timely motion for new
L ______ J trial or reconsideration In any case, if the
RTC
L _______ _, motion is denied, the movant has a fresh
15 days period of 15 days from receipt or notice

15 days (extendible)
If there is breach of order denying or dismissing the
,--��'---��---,.--�-J��---.
motion for reconsideration within which
• • • • to file the appeal (Neypes Doctrine)
1--------,
t - ------ ,
I1 I1
Breach of I Petition for I
Court of Supreme
:
1I . . I
the Cert1oran 1 Appeals
I Court I
I I
(Rule 65) l I
:
1 L ______ J
issuance I
w ith the I
RTC
-- - ----- -'
:
FLOWCHART OF TAX REMEDIES by Pierre Martin D. Reyes Page12of12
2. If in the exercise of the ClR's power to interpret tax laws (Revenue Memorandum Circulars and Revenue Memorandum Orders)
30 days 15 days 15 days (extendible)
• • • • • •
� 1------- 1� � �
r---------
t ---
�- --- ,
1
Issuance 1 Request Adverse : Petition for : Court of : Supreme
of the : for Review : Decision of 1 Certiorari : Appeals
I Court
I
1 before the I : (R65) before 1 I
CIR
: I
L ______ J
the SOF
: SOF : the RTC :
L _______I
_________ J
TAXATION LAW
QUESTIONS AND ANSWERS ON SIGNIFICANT

SUPREME COURT JURISPRUDENCE AND BIR
ISSUANCES FOR THE 2016 BAR
PIERRE IVIARTIN D. REYES
Preliminary Considerations other internal revenue taxes. (RMC 9-2016 dated

January 12, 2016)
Pursuant to Bar Bulletin No. 13, May 31, 2015 is th-e
cut-off date for laws and jurisprudence covered by the Q. When is the payor/employer obliged to
2016 Bar Examination. However, there is no cut-off
deduct and withhold the related withholding
taxes on accrued bonuses?
for "principles of law."
The obligation of the payor/employer to deduct and
In any case, this supplement covers the significant and
withhold the related withholding tax arises at the time
relevant Supreme Court jurisprudence on taxation law
the income was paid or accrued or recorded as expense
and BIR issuances from April 1, 2015 to May 31, 2016.
in the payor's/employer's books, whichever comes
first.
For jurisprudence and BIR issuances for the period
March 31, 2014 to May 3 1, 2015, please refer to the In ING Bank v. Commissioner of Internal Revenue, G.R.
2015 Supplement. No. 1676 79, July 22, 2015, at issue is whether ING Bank
is liable for deficiency withholding tax on accrued
Note further that on June 15, 2016, which is fifteen bonuses for the taxable years 1996 and 1 997. The
days following its publication in Manila Bulletin, a accrued bonuses were recorded in ING Bank's books
newspaper of general circulation, on June 1, 2015, the as expenses for taxable years 1996 and 1997, although
Customs Modernization and Tariff Act (CMTA), no withholding of tax was effected. ING Bank asserted
which replaces the Tariff and Customs Code of the that the liability of the employer to withhold the tax
Philippines (TCCP) took effect. The changes are not does not arise until such bonus is actually distributed.
discussed here as it is beyond the 2016 bar coverage. Since the supposed bonuses were not distributed to the
officers and employees in 1996 and 1997 but were
Income Taxation distributed in the succeeding year when the amounts
of the bonuses were finally determined, ING Bank
Q. What is the taxability of non-stock saving�> asserts that its duty as employer to withhold the tax
and loans associations (NSSLA) for income talc during these taxable years did not arise.
purposes?
The Supreme Court ruled that ING bank is liable for
Pursuant to the Revised Non-Stock Savings and Loan
the withholding tax on the bonuses since it claimed the
Association Act of 1997 (R.A. No. 8367), NSSLAs shall
same as expenses in the year they were accrued. Three
be exempt from income tax with respect to the incom1�
provisions of the NIRC of 1997, as amended, were
it receives, including interest on its deposits with any
reconciled:
bank. However, any income derived by it from any of
its properties, real or personal, or any activity l. Section 72 (now Section 79), which provides
conducted for profit, regardless of the disposition that an employer is required to deduct and pay
thereof, is subject to the applicable income tax and the income tax on compensation paid to its
employees, either actually or constructively.
Page 1of14
NOTICE
This material supplements the author's 2013 Bar Reviewer, 2014 Bar Sttp)lement, 2015 Bar Supplement, and Tax Audit
Primer. No portion of this work may be copied or reproduced without the written permission of the author. Possessors
may reproduce and distribute this supplement provided the name of the author remains clearly associated with my work
and no alterations in the form and content of this supplement are made. N' stamping is allowed.
QUESTIONS AND ANSWERS ON SIGNIFICANT SUPREME COURT PIERRE MARTIN D. REYES
2. Section 39 (now Section 35), which provides exempt from donor's

that deductions from gross income are taken tax.
for the taxable year in which "paid or accrued"
or "paid or incurred" is dependent upon the
Donations made by corporations in violation of the
method of accounting income and expenses
Section 36(9) of the Corporation Code are subject to
adopted by the taxpayer. If the taxpayer is on
donor's tax. (RMC No. 30-2016 dated March 14, 2016)
cash basis, the expense is deductible in the year
it was paid, regardless of the year it was
Note: Section 36(9) of the Corporation Code prohibits
incurred. If he is on the accrual method, he can
deduct the expense upon accrual thereof. corporations, domestic or foreign, from giving
3. Section 29(j) (now Section 34(K)), which donations in aid of any political party or candidate or
provides that, as a condition for deductibility for purposes of partisan political activity
of an expense, the tax required to be withheld
on the amount paid or payable must be shown Value-Added Taxation
to have been remitted to the BIR by the
withholding agent. Q. What is the taxability of transport network
companies (TNCs}, such as Uber, Grab Taxi,
Reconciling the above provisions, the Court held their partners/suppliers and similar
arrangements for VAT purposes?
that the obligation of the payor/employer to
deduct and withhold the related withholding tax 1 . Payment is made t o TNC and TNC pays its
arises at the time the income was paid or accrued partners
or recorded as an expense in the
payor's/employer's books, whichever comes first.
Estate and Donor's Taxation If the TNC is not a If the TNC is a
holder of a valid and holder of a valid and

Q. What is the taxability of campaign
contributions for donor's tax purposes? current Certificate current CPC
of Public
Convenience (CPC)
Campaign Period set Before or after the
by COMELEC campaign period set

The TNC shall issue a The TNC shall issue a
by COMELEC VAT OR to its non-VAT OR to the
passenger/customer passengerI customer
and as a land and, shall be subject to
The donations/ The donations/ transportation service the 3% common
contributions that contributions that contractor, shall be carriers tax.
have been utilized and have been utilized and subject to 12% VAT.
spent during the spent before or after
campaign period as set the campaign period 2. Payment is made to Partner and Partner pays
are subject to donor's TNC

by the COMELEC are
tax.
Page 2 of 1 4
NOTICE
This material supplements the author's 2013 Bar Reviewer, 2014 Bar Supplement, 2015 Bar St>pplement, and Tax Audit
Primer. No portion of lhis work may be copied or reproduced without the written permission of the author. Possessors
and no alterations in the form and content of this supplement are made. No stamping is allowed.
mandatory vessel retirement program of

MARINA.
If the Partner is not If the Partner is a
a holder of a valid holder ofa valid and 3. Importation of fuel, goods, and supplies by
persons engaged in international shipping or
and current CPC current CPC
air transport operations. Provided, that the
said fuel, goods, and supplies shall be used
exclusively or shall pertain to the transport of
The Partner is a land The Partner shall issue
goods and/or passenger from a port in the
transportation service a non-VAT OR to the
Philippines directly to a foreign port, or vice
contractor, and should passengerI customers
versa, without docking or stopping at any
issue either a VAT and shall be liable for
other Philippine port unless the docking or
OR, when it is a VAT the 3% common
stopping at any other Philippine port is for the
registered taxpayer or carriers tax.
purpose of unloading passengers and/ or
a non-VAT OR if it
cargoes that originated from abroad, or to load
has not exceeded the (RMC No. 70-2015
passengers and/or cargoes bound for abroad.
threshold of dated October 29, 2015)
Note: Pursuant to RR 15-2015, Section 4.109-
Pl,919,500.00 and has
not opted for VAT 1 (B)(l)(t) and (u) relating to importation oflife-saving
Registration. equipment and capital equipment and machinery for
construction and repair of vessel for domestic trade,

respectively, have been deleted. (RR No. 15-2015 dated
Q. What are the VAT-exempt transactions
December 28, 2015)
relative to the sale, importation, or lease of
passenger or cargo vessels and aircraft,
including engine, equipment, and spare parts Q. What are the rules on the determination of
thereof for domestic or international transport the prescriptive period for filing a tax refund or
operations? credit of unutilized input VAT as provided in
Section 112 of the NIRC of 1997, as amended?
The following transactions are exempt from VAT:
The following are the rules on prescriptive periods
1 . The transport of passengers and cargo by involving VAT:
international carriers doing business in the
Philippines. 1. An administrative claim must be filed with the
CIR within two years after the close of the
2. Sale, importation, or lease of passenger or
taxable quarter when the zero-rated or
cargo vessels and aircraft, including engine,
effectively zero-rated sales were made.
equipment, and spare parts thereof for
domestic or international transport 2. The CIR has 120 days from the date of
operations. Provided, however, the that the submission of complete documents in support of
exemption from VAT on importation and the administrative claim within which to decide
local purchase of passenger and/ or cargo whether to grant a refund or issue a tax credit
vessels shall be subject to the requirements on certificate. The 120-day period may extend
restriction on vessel importation and beyond the two-year period from the filing of
the administrative claim if the claim is filed in
Page 3of 1 4
NOTICE
This material supplements the author's 2013 Bar Reviewer, 2014 Bar Supplement, 2015 Bar Supplement, and Tax Audit
and no alterations in the form and content ofthis supplement are made. No stamping is aUowed.
the later part of the two-year period. If the 120- 1. The CIR has 120 days 1. As it now stands,
day period expires without any decision from from the date of RMC 54-2014
the CIR, then the administrative claim may be submission of complete datedJune 11, 2014
considered to be denied by inaction. documents to decide a mandates that the
claim for tax credit or application for
3. A judicial claim must be filed with the Court of
refund. Pursuant to VAT refund/tax
Tax Appeals ("CTA") within 30 days from the
RMC No. 49-2003, from credit must be
receipt of the CIR's decision denying the
the date an accompanied by
administrative claim or from the expiration of
administrative claim for complete
the 120-day period without any action from the
excess unutilized VAT is supporting
CIR.
filed, a taxpayer has 30 documents.
4. All taxpayers, however, can rely on BIR Ruling days within which to
submit the documentary 2. Under the current
No. DA-489- 03 from the time of its issuance on
rule, the reckoning
10 December 2003 up to its reversal by this requirements sufficient
of the 120-day
Court in Aichi on 6 October 2010, as an to support his claim.
period has been
exception to the mandatory and jurisdictional
2. If in the course of the withdrawn from
120+30 day periods. (Cargill Philippines, Inc. v.
investigation and the taxpayer by
CIR, G.R. No. 203774, March 11, 2015;
processing of the claim, RMC 54-2014,
Commissioner of Internal Revenue v. Air Liquide,
additional documents since it requires
G.R. No. 210646, July 29, 2015; Commissioner of
Internal Revenue v. Toledo Power Company, G.R. are required for the him at the time he
No. 195175 & 199645, August 10, 2015; proper determination of files his claim to
Commissioner of Internal Revenue v. Toledo the legitimacy of the complete his
Power Company, G.R. No. 196415 & 196451, claim, the taxpayer supporting
December 2, 2015; Commissioner of Internal claimants shall submit documents and
Revenue v. Mirant Pagbilao Corporation, G.R. No. such documents within attest that he will
180434, January 20, 2016; Silicon Philippines v.
thirty (30) days from no longer submit
Commissioner of Internal Revenue, G.R. No.
request of the any other
182737, March 2, 2016)
investigating/processing document to prove
office. Notice, by way of his claim. Further,
Q. When does the 120-day period begin to run?
a request from the tax the taxpayer is
A distinction must be made between claims filed collection authority to barred from
before June 14, 2014 and claims filed onJune 14, 2014 produce the complete submitting
to present. documents in these additional
cases, is essential. documents after he
has filed his
Claims filed prior to Claims filed on June 3. Then, upon filing by the administrative
June 14, 2014 (RMC 49- 14, 2014 to present taxpayer of his complete
claim. Thus, the
documents to support
2003 prevailing rule) (RMC 54-2014
120-day has to be
his application, or
-
counted from the

prevailing rule) expiration of the period
filing of the
given, the BIR has 120
administrative
days within which to
Page 4 of 1 4
NOTICE
and no alterations in the form and content of this supplement are made. No stamping is aUowed.
decide the claim for tax claim. (Pilipinas Commissioner of Internal Revenue, G. it No. 207112,
credit or refund. Total Gas v. December 8, 2015)
Commissioner of
4. Should the taxpayer, on Internal Revenue, Q. Who determines when the com1>leteness of
the date of filing, G.R. No. 207112, documents submitted in a claim for refund or
manifest that he no December 8, 2015) tax credit of unutilized input taxes�'
longer wishes to submit
It is the taxpayer who ultimately detE rmines when
any other additional
complete documents have been subrr itted for the
documents to complete
purpose of commencing and continuin.� the running
his administrative claim,
of the 120-day period. To allow the CIR to determine
the 120-day period
the completeness of the documents submitted and,
allowed to the BIR
thus, dictate the running of the 120-day period, would
begins to run from the
undermine these objectives, as it woul.i provide the
date of filing.
CIR the unbridled power to indefinitely delay the
5. In all cases, whatever administrative claim, which would ultimately prevent
documents a taxpayer the filing of a judicial claim with the CfA. Whether
intends to file to support these documents are actually complete as required by
his claim must be law - is for the CIR and the courts ·:o determine.
completed within the 2- (Pilipinas Total Gas v. Commissioner of Internal
Revenue, G.R.No. 207112, December 8, 2015)
year period under
Section 112(A) of the
Q. ABC filed its administrative claim for the
NIRC. refund of excess and unused input VAT for the
2"d quarter of taxable year 2008 on 28
Thus, for claims filed prior to June 14, 2014, the 120-
December 2009. Counting 120+30 days, the
day period begins to run from the date of submission taxpayer should have elevated the same to the
of complete documents supporting the administrative CTA on 27 May 2010. The judicial claim was
claim. If there is no evidence showing that the taxpayer belatedly filed on 6 July 2010. ABC now argues
was required to submit - or actually submitted - that it filed its complete documents on 20
additional documents after the filing of the September 2010 and thus the 120-day period
should be counted from said dc:ite. Is ABC
administrative claim, it is presumed that the complete
correct?
documents accompanied the claim when it was filed.
(Silicon Philippines v. Commissioner of Internal No. To allow the taxpayer's position to )revail would
Revenue, G.R. No. 182737, March 2, 2016) set a dangerous precedent, as the reckon: ng period for
the 120 days would be at the mercy of ta:cpayers. They
Failure of the taxpayer to submit all relevant
will then submit complete supporting do :uments even
documents is not fatal to its claim for refund or tax
after the two-year prescriptive period for filing an
credit of unutilized input VAT. If the taxpayer indeed
administrative claim has lapsed. This is ·)bviously not
failed to submit the complete documents in support of
the intention of the law. The burden of proving
its application, the CIR could have informed the
entitlement to a tax refund is on the taxpayer. It is
taxpayer of its failure. (Commissioner of Internal
logical to assume that in order to discharge this
Revenue v. Toledo Power Company, G.R. No. 196415 &
burden, the law intends the filing of an a?plication for
196451, December 2, 2015; Pilipinas Total Gas v.
a refund to necessarily include the filin1: of complete
Page 5of 14
NOTICE
This material supplements the authors 2013 Bar Reviewer, 2014 Bar Supplement, 2015 Bar Supplement, and Tax Audit
supporting documents to prove entitlement for the The judicial claim The CTA may give
refund. Otherwise, the mere filing of an application before the CTA would credence to all
without any supporting document would be as good as be dismissible, not for evidence presented by
filing a mere scrap of paper. lack of jurisdiction, but the taxpayer, including
for the taxpayer's those that may not
Peculiar to this case is that prior to the alleged
failure to substantiate have been submitted
completion of its supporting documents, the taxpayer
the claim at the to the CIR as the case
had already filed its j udicial claim with the CTA.
administrative level. is being essentially
Assuming arguendo that the 120-day period should
decided in the first
commence to run only upon receipt of the complete Jn case of claims
instance. The taxpayer
documents or from 20 September 2010, the judicial dismissed at the must prove every
claim will still fail. By that time, the period for filing an administrative level
minute aspect of its
administrative application for a refund would have due to the failure of
case by presenting and
already on 30June 2010 or two (2) years from the close the taxpayer to submit
formally offering its
of the taxable quarter when the relevant sales were supporting
evidence to the CTA,
made. (Hedcor, Inc. v. Commissioner of Internal documents, it is, thus,
which must
Revenue, G.R. No. 207575, July 15, 2015) crucial for a taxpayer
necessarily include
in a judicial claim for
whatever is required
refund or tax credit to
for the administrative
show that its
claim. (Pilipinas Total
Q. If the taxpayer fails to submit a document at administrative claim
Gas v. Commissioner of
the administrative level, can the taxpayer cure should have been Internal Revenue, G.R.
such failure by filing the said document in its granted in the first No. 207112, December 8,
judicial claim before the CTA? place. 2015)
A distinction must, thus, be made between an

A taxpayer cannot
administrative claimed appealed due to inaction and
cure its failure to
those dismissed at the administrative level due to the
submit a document
failure of the taxpayer to submit supporting
requested by the BIR
documents.
at the administrative
level by filing the said
Administrative If the judicial claim document before the
CTA.
claim dismissed by is an appeal due to
the BIR due to the inaction of the BIR
taxpayer's failure to Q. What is the effect of the absence and non

printing of the word "zero-rated" in the
submit complete
taxpayer's invoices to the claim for refund or
documents despite tax credit of unutilized input VAT?
notice/request An applicant for a claim for tax refund or tax credit
must not only prove entitlement to the claim but also
compliance with all the documentary and evidentiary
Page 6of 1 4
NOTICE
and no alterations in the fom1 and content of this supplement are made. No stamping is allowed.
requirements. A claim for the refund of creditable a. The Waiver of

input taxes must be evidenced by a VAT invoice or the Statute of
official receipt in accordance with the invoicing Limitations under
requirements. The failure to indicate the words "zero Section 222 (b)
rated" on the invoices and receipts issued by a taxpayer and (d) shall be
would result in the denial of the claim for refund or tax executed before
credit. (Eastern Telecommunications Philippines v. the expiration of
Commissioner of Internal Revenue, G.R. No. 183531, the period to
March 25, 2015) assess or to collect
taxes. The date of
Tax Remedies execution shall be
specifically
Q. What are the new guidelines and
indicated in the
requirements for the execution of waivers of
waiver.
the defense of prescription under Section 222
of the NIRC of 1997, as amended?
b. The waiver shall
be signed by the
P revious Rules New Rules taxpayer himself
or his duly
authorized
(RMO No.14-2016)
(RMO No.20-90, representative. In
RDAO No. 05-01, the case of a
corporation, the
Supreme Court and
waiver must be
Court of Tax signed by any of
Appeals
its responsible
officials;
Jurisprudence)
c. The expiry date of
the period agreed
The waiver must be in Thewaiver may be,but upon to
the prescribed form (as not necessarily, in the assess/collect the
revised by RDAO 05- form prescribed by tax after the
01). There should be RMO No. 20-90 or regular three-year
no deviation from this RDAO No. 05-01. The period of
form. taxpayer's failure to
prescription
follow the aforesaid
should be
forms does not
indicated;
invalidate the executed
waiver, for as long as
The waiver must speci[v Except for waiver of
the following are
the type of tax and the collection of taxes
complied with: amount oftax due. The which shall indicate
purpose of stating the the particular taxes
Page 7 of 1 4
NOTICE
Primer. No ponion of this work may be copied or reproduced without the written permission of the author. Possessors
specific kind of tax and assessed, the waiver and official unless duly be thereafter contested
the amount of tax due need not specify the notarized. to invalidate the waiver.
is for the taxpayer to particular taxes to be
pinpoint which among assessed nor the amount
the proposed tax thereof, and it may
assessments may simply state "all
subsequently be issued internal revenue

taxes" considering that
without the taxpayer
invoking the defense during the assessment
of prescription. RMO stage, the

Commissioner of
No. 20-90 requires
specific information Internal Revenue or
(Dole Philippines, Inc. v. her duly authorized

Commissioner of representative is still
Internal Revenue, CTA in the process of
Case No. 5705, July 1, examining and
2003, and reiterated in determining the tax
various CTA Decisions) liability of the
taxpayer.
The authorized revenue Since the taxpayer is The waiver should be The waiver may be
official shall ensure that the applicant and the duly notarized. notarized. However, it
the waiver is duly executor of the is sufficient that the
accomplished and signed extension of the waiver is in writing as
by the taxpayer or his
period of limitation specifically provided
authorized
for its benefit in order by the NIRC, as
representative before
to submit the required amended.
affixing his signature
documents and
to signify acceptance A
_ _
w_ai_ ve
_ _r
__ __
is a_n Considering that the
accounting records,
_
of the same. In case the agreement between the waiver is a voluntary

the taxpayer is charged
authority is delegated taxpayer and the
tvith the lntrden of act of the taxpayer, the
by the taxpayer to a Commissioner, and not a
ensuring that the waiver shall take legal
unilateral act of either
representative, the waivers of statute of effect and be binding on
E.f!!1Y.. (Philippine the taxpayer upon its
concerned revenue limitation are validly
Journalist v. execution thereof.
official shall see to it executed by its
Commissioner of
that such delegation is authorized
Internal Revenue, C.R.
in writing and duly representative. The
No. 162852, December 16,
authority of the
notarized. The "WAI 2004)
taxpayer's
VER" should not be
representative who
accepted by the The taxpayer must be
participated in the
concerned BIR office furnished a copy of the
conduct of audit or
investigation shall not waiver as accepted by
Page 8of 14
NOTICE
Primer. No ponion of this work may be copied or reproduced without the written permission of the author. Possessors
the BIR. The fact of circumstances. In Commissioner of Internal Revenue v.

receipt by the taxpayer Next Mobile, G.R.No.212825, December 7, 2015, five (5)
of his copy must be waivers were executed by the taxpayer and the BIR.
indicated in the The CTA found the following defects: (1) they were
original copy to show executed without a notarized board authority; (2) the
that the taxpayer was dates of acceptance by the BIR were not indicated
notified of the therein; and (3) the fact of receipt by respondent of its
acceptance ofthe BIR and copy of the Second Waiver was not indicated on the
the perfection of the face of the original Second Waiver.
agreement.
The Court ruled that, due to peculiar circumstances
Both the date of Note that there shall and as exception to the general rule, the supposedly
execution by the onlybe two (2) material invalid waivers may be considered valid for the
taxpayer and the date dates that need to be following reasons:
of acceptance by the present on the waiver:
BIR. 1. If the parties are in pari delicto or "in equal fault"
a. The date of and thus they shall have no action against each
The taxpayer must be execution of the other. Taxpayer violated RMO No. 20-90
waiver by the which states that in case of a corporate
furnished a copy of the
taxpayer or its taxpayer, the waiver must be signed by its
waiver as accepted by
authorized
the BIR. The fact of responsible officials and RDAO 01-05 which
representative;
receipt by the taxpayer requires the presentation of a written and
and
of his copy must be notarized authority to the BIR. Similarly, BIR
indicated in the b. The exirirv date violates its own rules when it did not ensure
original copy to show of the period the that the waiver is duly signed by an authorized
that the taxpayer was taxpayer waives representative and by not ensuring that the
notified of the the statute of delegation of authority is in writing and duly
acceptance of the BIR limitations notarized.
and the perfection of
2. Parties who do not come to Court with clean
the agreement.
hands cannot be allowed to benefit from their
Note: These guidelines and requirements should apply own wrongdoing. Taxpayer should not be
allowed to benefit from the flaws in its own
to waivers executed after April 18, 1016.
waivers and successfully insist on their
invalidity in order to evade its responsibility to
pay taxes.
Q. Can a waiver of the statute of limitations
which does not comply with the requirements 3. Taxpayer is estopped from questioning the
specified under RMO No. 20-90 and RDAO No.
validity of its waivers. The taxpayer executed 5
01-05 become valid?
waivers and delivered them to the BIR and did
Yes. Generally, a waiver of the statute of limitations not raise any objection against their validity
that does not comply with the requisites for its validity until the BIR assessed taxes against it. In its
specified under RMO No. 20-90 and RDAO 01-05 is Letter Protest to the BIR, respondent did not
invalid, but may still be valid due to peculiar
Page 9of 1 4
NOTICE
even question the validity of the Waivers or The denial of the application shall be considered final
call attention to their alleged defects. and the outstanding tax liabilities and/or penalties
shall be immediately collected from the taxpayer.
4. The Court cannot tolerate a highly suspicious
(RMO No. 4-2016 dated January 25, 2016)
situation. In this case, after the taxpayer
voluntarily executing the waivers, insisted on Q. In claims for excess and unutilized
their invalidity by raising the very same defects creditable withholding tax, is the presentation
it caused. On the other hand, the BIR of the Certificates of Creditable Withholding
miserably failed to exact from the taxpayer Tax Withheld at Source (BIR Form No. 2307)
required to prove that the taxpayer did not use
compliance with its rules. The BIR's
the claimed creditable withholding tax to pay
negligence in the compliance of its duties was for his/its tax liabilities?
so gross such that it seemed that it consented
to the mistakes in the waivers. Such a situation In claims for excess and unutilized creditable
is dangerous and open to abuse by withholding tax, the probative value of BIR Form
unscrupulous taxpayers who intend to escape 2307, which is basically a statement showing the
their responsibility to pay taxes by mere amount paid for the subject transaction and the
expedient of hiding behind technicalities. amount of tax withheld therefrom, is to establish only
the fact of withholding of the claimed creditable
Further, the Court said that while the BIR was also withholding tax. There is nothing in BIR Form No.
at fault here because it was careless in complying 2307 which would establish either utilization or non -
with the requirements of RMO No. 20-90 and utilization, as the case may be, of the creditable
RDAO 01-05, such negligence may be addressed withholding tax. There is no basis in law or
by enforcing the provisions imposing jurisprudence to say that the BIR Form No. 2307 is the
administrative liabilities upon the officers only evidence to prove that the taxpayer did not use
responsible for these errors. The BIR's right to the claimed creditable withholding tax to pay for
assess and collect taxes should not be jeopardized his/its tax liabilities. (Philippine National Bank v.
merely because of the mistakes and lapses of its Commissioner of Internal Revenue, G.R. No. 206019,
officers, especially in cases like this where the March1 8, 201 5)
taxpayer is obviously in bad faith. (Commissioner of
Internal Revenue v. Next Mobile, G.R. No. 21 2825, Local Government Taxation
December 7, 201 5)
Q. Do LGUs have the power to impose taxes on
persons or entities engaged in the business of
manufacturing and distribution of petroleum
products?
Q. What is the effect of a denial of an
application for compromise settlement, No. Among the common limitations on the taxing
abatement, or cancellation of international powers of LGUs provided under Section 133 of the
revenue tax liabilities by the Regional LGC are "excise taxes on articles enumerated under the
Evaluation Board (REB), or by the Large National Internal Revenue Code, as amended, and
Taxpayer's Service (LTS) Technical Working
taxes, fees or charges on petroleum products." The
Committee (TWC) or the LTS Evaluation Board
prohibition with respect to petroleum products
(LTSEB)?
extends not only to excise taxes thereon, but all "taxes,
Page 10of 1 4
NOTICE
and no alterations in the form and content ofthis supplement are made. No stamping is allowed.
fees or charges." (Batangas City v. Pilipinas Shell, G.R. Metro Manila); MTC if amount does not exceed
No. 187631, July 81 2015) P300,000 outside Metro Manila (P400,000 in Metro
Manila).
Q. On January 15, 2007, ABC protested, thru a
letter, the imposition of business tax under
Section 21 of the Manila Revenue Code on the Real Property Taxation
ground that it constitutes double taxation. The
City Treasurer acknowledged receipt of the Q. The Provincial Treasurer assessed ABC for
letter but said that she will await the formal real property taxes on its submarine cables.
protest. On March 27, 2007, ABC wrote a letter Thereafter, ABC received a Warrant of Levy and
reply reiterating that ABC already protested. On a Notice of Auction Sale. ABC filed a Petition
April 17, 2007, ABC filed a Petition for Review for Prohibition and Declaration of Nullity of
with the Regional Trial Court ("RTC"). On Warrant of Levy, Notice of Auction Sale and/or
appeal, the CTA ruled that ABC belatedly filed Auction Sale with the RTC. ABC argues that the
its petition with RTC by 1 day. ABC countered it submarines cables are not subject to tax.
timely filed now claiming that reckoning point Further, ABC argues that such issue involves
should be from March 27, 2007. Was the purely questions of law and, thus, exhaustion of
petition timely filed? administrative remedies is not required. Is
ABC's remedy proper?
No. Section 195 of the Local Government Code states
No. In disputes involving real property taxation, the
that the taxpayer shall have thirty (30) days from the
general rule is to require the taxpayer to first avail of
receipt of the denial of the protest or from the lapse of
administrative remedies and pay the tax under protest
the sixty (60)-day period prescribed herein within
before allowing any resort to a judicial action, except
which to appeal with the court of competent
when the assessment itself is alleged to be illegal or is
jurisdiction otherwise the assessment becomes
made without legal authority. The instant case,
conclusive and unappealable.
however, is one replete with questions of fact instead
In the instant case, the period within which the City of pure questions of law, which renders its filing in a
Treasurer must act on the protest, and the consequent judicial forum improper because it is instead
period to appeal a "denial due to inaction," should be cognizable by local administrative bodies like the
reckoned from January 15, 2007, the date the taxpayer Board of Assessment Appeals, which are the proper
filed its protest, and not March 27, 2007. (China venues for trying these factual issues such as the extent
Banking Corporation v. City Treasurer of Manila, G.R. and status of the taxpayer's ownership of the system,
No. 204117, July 1, 2015) the actual length of the cable/s that lie in Philippine
territory, and the corresponding assessment and taxes
Note: The Court likewise stated that, at any rate, the
due on the same. (Capitol Wireless v. Provincial
RTC has no jurisdiction. Following R.A. No. 9282, the Treasurer of Batangas, G.R. No. 180110, May 30, 2016)
authority to exercise either original or appellate
jurisdiction over local tax cases depended on the Q. May submarine communications cables be
amount of the claim. In cases where the amount
classified as taxable real property by the local
governments?
sought to be refunded is below the jurisdictional
amount of the RTC, the Metropolitan, Municipal, and
Yes. Submarine or undersea communications cables
Municipal Circuit Trial Courts ("MTC'') have
are akin to electric transmission lines which the Court
jurisdiction. RTC has jurisdiction if amount exceeds
has previously declared as "machinery" subject to real
exceed P300,000 outside Metro Manila (P400,000 in
property tax under the Local Government Code to the
Page 11of14
NOTICE
extent that the equipment's location is determinable to undergo the order to evade the
be within the taxing authority's jurisdiction. Both processing and payment of correct
electric lines and communications cables, in the clearing procedures at taxes, duties, and other
strictest sense, are not directly adhered to the soil but the BOC, and are not charges. Often
pass through posts, relays or landing stations, but both declared through committed by means
may be classified under the term "machinery" as real submission of import of misclassification of
property under Article 415(5) of the Civil Code for the documents, such as the the nature, quality or
simple reason that such pieces of equipment serve the import entry and value of goods and
owner's business or tend to meet the needs of his internal revenue articles,
industry or works that are on real estate. (Capitol declaration. undervaluation m
Wireless v. Provincial Treasurer of Batangas, G.R. No. terms of their price,

1 8011 0, May 30, 201 6) quality or weight, and
misdeclaration of their
Tariff and Customs Duties kind.
Q. Distinguish "unlawful importation" under

Section 3601 of the TCCP from "various (Bureau of Customs v. Hon. Devanadera, G.R. No. 193253,
fraudulent practices against customs revenue" September 8, 2015)
under Section 3602 of the TCCP?
Unlawful
Appellate Jurisdiction and
Fraudulent Practices
Procedure in the Court of Tax
Importation
(Technical smuggling)
Appeals
(Outright smuggling)
Q. What is the proper remedy to assail a

Revenue Regulation?
Goods and articles of Goods and articles are
commerce are brought brought into the The proper remedy to assail a Revenue Regulation is a
into the country country through special civil action for declaratory relief under Rule 63
without the required fraudulent, falsified or of the Rules of Court filed with the Regional Trial
importation erroneous Court, not a special civil action for certiorari under
documents, or are declarations, to Rule 65.
disposed of in the local substantially reduce, if
A petition for certiorari under Rule 65 of the 1997
market without not totally avoid, the
Rules of Civil Procedure, as amended, is a special civil
having been cleared by payment of correct
action that may be invoked only against a tribunal,
the BOC or other taxes, duties and other
board, or officer exercising judicial or quasi-judicial
authorized charges. Such goods
functions. A revenue regulation is issued in the
government agencies, and articles pass
exercise of the quasi-legislative or rule-making powers
to evade the payment through the BOC, but
of the Secretary of Finance, and not judicial or quasi
of correct taxes, duties the processing and
judicial functions. Being quasi-legislative in nature, a
and other charges. clearing procedures
revenue regulation is outside the scope of a Petition
Such goods and are attended by
for Certiorari. The proper remedy is one for
articles do not fraudulent acts in
Page 1 2 of 1 4
NOTICE
Tltls material supplements the author's 2013 Bar Reviewer, 2014 Bar Supplement, 2015 Bar Supplement, and Tax Audit
declaratory relief over which the Supreme Court has A party adversely affected by a ruling or decision of the
only appellate, not original jurisdiction. Under Rule 63 customs collector may protest such ruling or decision
of the Rules of Court, the special civil action of upon payment of the amount due and, if aggrieved by
declaratory relief falls under the exclusive jurisdiction the action of the customs collector on the matter under
of the Regional Trial Courts. (Clark Investors and protest, may have the same reviewed by the COC. It is
Locators Association v. Secretary of Finance, G.R. No. only after the COC shall have made an adverse ruling
200670, July 6, 2015) on the matter may the aggrieved party file an appeal to
the CT A. (Commissioner of Internal Revenue v. Court
Q. Does the CTA have jurisdiction to determine ofTax Appeals and Petron Corporation, G.R. No. 207843,
the validity of a ruling issued by the CIR or the July 15, 2015)
COC in the exercise of their quasi-legislative
powers to interpret tax laws? Q. Does the CTA en bane have jurisdiction over
interlocutory orders issued by the CTA
No. The CTA has no jurisdiction to determine the
Division?
validity of a ruling issued by the CIR or the COC in the
exercise of their quasi-legislative powers to interpret No. The CTA en bane has jurisdiction over final
tax laws. The phrase "other matters arising under this orders or judgments but not over interlocutory orders
Code," as stated in the second paragraph of Section 4 issued by the CTA in division. An interlocutory order
of the NIRC, should be understood as pertaining to may not be questioned on appeal. (Commissioner of
those matters directly related to the preceding phrase Internal Revenue v. Court of Tax Appeals and CBK
"disputed assessments, refunds of internal revenue Power, G.R. No. 203054-55, fuly 29, 2015)
taxes, fees or other charges, penalties imposed in
relation thereto" and must therefore not be taken in Q. Does the CTA have jurisdiction over a
petition for certiorari assailing a Department of
isolation to invoke the jurisdiction of the CTA. In
Justice (DOJ) resolution in a preliminary
other words, the subject phrase should be used only in investigation involving tax and tariff offenses?
reference to cases that are, to begin with, subject to the
exclusive appellate jurisdiction of the CTA, i.e., those Jurisdiction over a petition for certiorari assailing a
controversies over which the CIR had exercised her DO] resolution in a preliminary investigation
quasi-judicial functions or her power to decide involving tax and tariff offenses is now with the CTA,
disputed assessments, refunds or internal revenue not the Court of Appeals ("CA").
taxes, fees or other charges, penalties imposed in
In Bureau of Customs v. Hon. Devanadera, G.R. No.
relation thereto, not to those that involved the CIR's
193253, September 8, 2015, the Supreme Court said that
exercise of quasi-legislative powers. (Commissioner of
the elementary rule is that the Court of Appeals has
Internal Revenue v. Court of Tax Appeals and Petron
jurisdiction to review the resolution of the DOJ
Corporation, G.R. No. 207843, July 15, 2015)
through a petition for certiorari under Rule 65 of the
Rules of Court on the ground that the Secretary of
Q.Does the CTA have jurisdiction to review by
appeal decisions of the Customs Collector? Justice committed grave abuse of his discretion
amounting to excess or lack of jurisdiction. However,
No. Under Section 7 of RA 1 125, as amended by RA with the enactment of Republic Act (RA) No. 9282
9282, what is appealable to the CTA is the decision of expanding the CTA's jurisdiction, it is no longer clear
the COC over a customs collector's adverse ruling on which between the CA and the CTA has jurisdiction
a taxpayer's protest. to review through a petition for certiorari the DOJ
resolution in preliminary investigations involving tax
Page 13 of 14
NOTICE
JURISPRUDENCE AND BIR ISSUANCES FOR THE 201 6 BAR
and tariff offenses. The Supreme Court then declared

that the CA's original jurisdiction over a petition for
certiorari assailing the DOJ resolution in a preliminary
investigation involving tax and tariff offenses was
necessarily transferred to the CTA pursuant to Section
7 of RA No. 9282, amending R.A. No. 1 1 25
Q. May the Courts determine, in a claim for

refund or credit of unutilized input taxes under
Section 112 of the NIRC of 1997, as amended,
whether there are taxes that should have been
paid in lieu of the taxes paid?
No. First and foremost, the courts have no assessment

powers, and therefore, cannot issue assessments
against taxpayers. In SMI-ED Philippines v.
Commissioner of Internal Revenue, C.R. No. 1 75410,
November 12, 2014, the Supreme Court an action for the
refund of taxes allegedly erroneously paid, the CTA
may determine whether there are taxes that should
have been paid in lieu of the taxes paid. Determining
the proper category of tax that should have been paid
is not an assessment. It is an incidental matter
necessary for the resolution of the principal issue,
which is whether the taxpayer is entitled to the refund.
In the instant case, however, the taxpayer filed a claim

for tax refund or credit under Section 112 of the NIRC,
where the issue to be resolved is whether the taxpayer
is entitled to a refund or credit of its unutilized input
VAT. And since it is not a claim for refund under
Section 229 of the NIRC, the correctness of the VAT
returns is not an issue. Thus, there is no need for the
Court to determine whether the taxpayer is liable for
deficiency VAT. (Commissioner of Internal Revenue v.
Toledo Power Company, G.R. No. 196415 & 196451,
December 2, 2015)
Page 1 4 of 1 4
NOTICE
and no alterations in the form and content ofthis supplement are made. No stamping is allowed.

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PM REYES BAR REVIEWER ON TAXATION I

This is the first installment of my two-part reviewer on

I. General Principles of Taxation .................... 1 The power of taxation is essentially a legislative

PIERRE MARTIN DE LEON REYES Page 1 of 158

Q: May the legislature enact a law to raise ---------------------------------------------------------------

Benefits It is He receives The person

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individual property indirect

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In determining whether an imposition is a tax or a Some cases:

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Q: Should margin fees be considered a tax In PLANTERS PRODUCT V. FERTIPHIL CORPORATION

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the effect that motor vehicle registrations fees are

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--------------------------------------------------------------- In PHILIPPINE GUARANTY V. CIR [13 SCRA 775], the

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--------------------------------------------------------------- Jurisdiction is a reason why citizens must provide

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Q: Is double taxation prohibited under the

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withholding, while the GRT is a percentage tax not

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In the refund of indirect taxes, the statutory taxpayer

Q: How do you determine if a tax is direct or

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exempted from absorbing the burden of indirect

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of the First Division.

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--------------------------------------------------------------- This is only a case of tax avoidance. In DELPHER

Note: An example of tax avoidance is when a taxpayer

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Q: What is a tax exemption? Tax exemptions are:

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Q: What is the rationale behind tax

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Q: What is the doctrine of equitable

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FACTS: As an exception, if there is an ambiguity in the law,

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rampant film piracy and flagrant violation of

1. Public purpose – the revenues collected from ---------------------------------------------------------------

In TIO VS. VIDEOGRAM REGULATORY BOARD [151

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1987 Constitution. NAPOCOR V. CITY OF A, who sold a parcel of land which he

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1. provide for exemptions or allowance of

1. Where tax laws operate outside territorial ---------------------------------------------------------------

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--------------------------------------------------------------- occupation is being conducted. This is so because

For citizens, whether resident or non-resident,

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As held in TANADA V. ANGARA [272 SCRA 18], by

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contributions. (Article XVI, Section 4, par. Q: What is meant by “equitable”?