S C B A R S T A G N O T E S [ 2018 ]
TAXATION LAW
GENERAL PRINCIPLES OF
TAXATION
Taxation
It is the process or means by which the sovereign
(independent State), through its law-making body
(legislative branch), raises income to defray the
necessary expenses of the government. It is the
power by which the State raises revenue to defray
the necessary expenses of the government.
It is a destructive power which interferes with the
personal and property rights of the people and
takes from them a portion of their property for the
support of the government. (Paseo Realty &
Development Corporation v. CA, 2004)
Purpose of Taxation
The purpose of taxation is fiscal when it raises
funds or regulatory when it seeks to achieve social
or economic goals.
Elements of Taxation
 It is an enforced contribution from
persons or properties
 It is imposed by the State by virtue of its
sovereignty
 It is levied for the support of the
government (PCGG vs. COCOFED, 2001)
Characteristics of Taxation
 Inherent Power - it may be exercised
although not expressly granted by the
Constitution
 Essentially a legislative function - only
the legislative can impose taxes
 Subject to inherent and constitutional
limitations - not an absolute power
 For public purpose
 Subject to international treaty or comity
 Generally payable in money
 Territorial in scope
Nature of the taxing power of government
The power to tax is inherent to the state but
constitutional provisions limit the exercise thereof.
Taxes are mandatory impositions and not a
contract between the state and the taxpayer (in
Page 1 of 31
BRAVO BASTE!
invitum) because consent, which is an essential
element of contract, is absent. It has the power to
destroy as it puts restraint on personal and
property rights.
The two-fold nature of the power of taxation is
inherent power and legislative power. It is
inherent because it is an exercise of sovereign
powers and not granted by the Constitution. The
primary purpose of taxation is to generate funds
for the state to finance the needs of the citizens
and promote the common good. This is carried out
by way of legislation.
Features of A Sound Tax System (F-A-T)
 Fiscal Adequacy – it requires the sources of
government revenues must be adequate to
meet government expenditures and their
variations.
 Administrative Feasibility – it should be
capable of being effectively administered
and enforced with the least inconvenience
to the taxpayer.
 Theoretical Justice – it should be fair to the
average taxpayer and should be based on
ability to pay
Non-observance of a canon of a sound tax system
(fiscal adequacy, theoretical justice and
administrative feasibility) does not invalidate a tax
imposition unless some aspect of it is shown to
violate the Constitution. (Diaz v. Secretary, 2011)
Taxes
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.
Essential Characteristics of Tax
 Forced charge, imposition or
contribution
 Pecuniary burden payable in money
 For public purpose
 Pursuant to a legislative authority
 Levied within territorial and legal
jurisdiction of the State
 Assessed in accordance with some
reasonable rule of apportionment
 S C B A R S T A G N O T E S [ 2018 ]
TAXATION LAW
Relevant Theories Governing the State’s Inherent
Power to Tax
 Necessity Theory - The existence of
government is a necessity; therefore it has
the right to compel citizens and property to
pay taxes. The power to tax is an attribute
of sovereignty. It is a power emanating
from necessity. It is a necessary burden to
preserve the State’s sovereignty and a
means to give the citizenry an army to
resist an aggression, a navy to defend its
shores from invasion, a corps of civil
servants to serve, public improvements
designed for the enjoyment of the citizenry
and those which come within the State’s
territory, and facilities and protection
which a government is supposed to
provide. (Phil. Guaranty Co., Inc, v.
Commissioner of Int. Rev., 1965)
The government cannot continue to serve
and protect its people without means to
pay its expenses. For this reason, the state
has the right to compel all its citizens and
property within its limits to contribute.
 Lifeblood Doctrine – taxes constitute the
lifeblood of the country and taxes support
the operations of government and the
public services extended to the people.
Taxes are the lifeblood of the nation. Taxes
are the lifeblood of the government, for
without taxes, the government can neither
exist nor endure. (National Power
Corporation v. City of Cabanatuan, 2003)
Manifestation of the Lifeblood Theory
 No estoppel against the Government
 Collection of taxes cannot be enjoined
by injunction
 Taxes could not be the subject of
compensation or set-off
 A valid tax may result in the
destruction of the taxpayer’s property
Page 2 of 31
BRAVO BASTE!
The no-injunction rule applies to
national internal revenues taxes (Sec.
218, NIRC). The underlying reason is
the lifeblood theory which
underscores the policy of least
interference to the collection of taxes
upon which the existence of the State
depends.
The rule, however, has no counterpart
in the Local Government Code
concerning local taxes. Thus, courts
may issue writs to restrain local
governments from collecting taxes.
(Angeles City v. Angeles Electric
Corporation, 2010)
Basis of Taxation
 Benefits–Protection Theory –
payment of taxes allows a citizen to
enjoy benefits in an organized society.
The individual receives the equivalent
of the tax in the form of protection
and benefit he receives from the
government as such. (Churchill and
Tait v. Rafferty, 32 Phil. 580, No.
10572, December 21, 1915)
 Symbiotic Relationship Doctrine –
Taxes are what we pay for civilized
society. Without taxes, the
government would be paralyzed.
Hence, every person who is able must
contribute his share in the burden of
running the government. The
government, for its part, is expected
to respond in the form of tangible and
intangible benefits intended to
improve the state of living.
Other Doctrines/ Rules in Taxation
 Equitable Recoupment - claim for refund
which is prevented by prescription may
be allowed to be used as payment for
unsettled tax liabilities if both taxes arise
from the same transaction in which
overpayment is made and
underpayment is due.
 S C B A R S T A G N O T E S [ 2018 ]
TAXATION LAW
The Supreme Court rejected this doctrine
(University of Sto. Tomas v. Collector, 104
Phil 1062) saying that it was not
convinced of the wisdom and propriety
thereof, and that it may work to temp
both the collecting agency and the
taxpayer to delay and neglect their
respective pursuits of legal action within
the periods set by law.
 Set-off Taxes - taxes are not subject to
set-off or legal compensation because
the government and the taxpayer are not
mutual creditors and debtors of each
other.
As a general rule, internal revenue taxes
cannot be the subject of set-off or
compensation:
a) The lifeblood theory requires that
there should be no unnecessary
impediments to the collection of taxes to
make available to the government the
wherewithal to meet its legitimate
objectives; and
b) The payment of taxes is not a
contractual obligation but arises out of a
duty to pay, and in respect of the positive
acts of government, regarding the
making and enforcing of taxes, the
personal consent of the individual
taxpayer is not required. (Republic v.
Mambulao Lumber Co., 1962; Caltex v.
Commission on Audit, 1992; and Philex v.
CIR, 1998)
However, there is a possibility that set-
off may arise, if the claims against the
government have been recognized and
an amount has already been
appropriated for that purpose. Where
both claims have already become
overdue and demandable as well as fully
liquidated, compensation takes place by
operation of law under Article 1200 in
relation to Articles 1279 and 1290 of the
New Civil Code. (Domingo v. Garlitos,
1963)
Page 3 of 31
BRAVO BASTE!
 Taxpayer Suit - a taxpayer suit can only
be allowed if the act involves a direct and
illegal disbursement of public funds
derived from taxation.
A taxpayer’s suit refers to a case where
the act complained of directly involves
the illegal disbursement of public funds
derived from taxation. (Kilosbayan v.
Guingona, Jr., 1994)
The plaintiff in a taxpayer's suit is in a
different category from the plaintiff in a
citizen's suit. In the former, the plaintiff
is affected by the expenditure of public
funds, while in the latter, he is but the
mere instrument of the public concern.
(De Castro v. JBC, 2010)
Scope of The Taxing Power of the Legislative
The Supreme Court held that the power of taxation
is the most absolute of all the powers of the
government. It has the broadest scope of all the
powers of the government because in the absence
of limitations, it is considered as comprehensive,
unlimited, plenary, and supreme. (130 SCRA 654)
The matters within the competence of the
legislature include the determination of the
following:
 Subject matter to be taxed
 Purpose of the tax
 Amount or rate of tax
 Kind of tax
 Apportionment of tax
 Situs of taxation
 Manner or method of collection
Sources of Tax Laws
 The 1987 Constitution
 Tax Treaties and Conventions with
Foreign Countries
 The Tax Code (RA No. 8424 - National
Internal Revenue Code, as amended),
Tariff and Customs Code, and portion of
the Local Government Code
 Statues and laws like RA No. 10963
(TRAIN Law), RA No. 1125 (an Act
Creating the Court of Tax Appeals), RA
 S C B A R S T A G N O T E S [ 2018 ]
TAXATION LAW
No. 7716 (E-VAT Law), RA No. 8424 (Tax
Reform Act of 1997)
 Presidential Decrees and Executive
Orders
 Court Decisions
 Revenue Regulations promulgated by the
Department of Finance
 Administrative issuances of the Bureau
of Internal Revenue and the Bureau of
Customs
 BIR Rulings
 Local Tax Ordinances
Interpretation of Tax Laws
In case of doubt as to whether a taxpayer is
covered by the tax or not, the doubt shall be
resolved in favor of the taxpayer and strictly
against the government. (CIR v. Friemans Ins. Co.,
1987)
However, doubts as to the validity of tax
exemptions are resolved liberally in favor of the
government and strictly against the taxpayer,
except:
 When the statute granting exemption
provides for liberal constructions thereof
 Exemptions in favor of the government,
political subdivisions or instrumentalities
(Maceda v. Macaraig, 197 SCRA 771)
 Exemptions in favor of exemptees
traditionally exempt such as churches and
educational institutions
 Special circumstances to special classes of
persons such as the granting of exemptions to
victims of the eruption of Mount Pinatubo
Non-Retroactivity of Rulings
General Rule:
Any revocation, modification, or reversal of rules
and regulations of any of the rulings or circulars
shall not be given retroactive application if
prejudicial to the taxpayers.
Exceptions: (MSB)
1. Where the taxpayer deliberately
misstates or omits material facts from
his return or any document required
of him by the BIR
2. Where the facts subsequently
gathered by the BIR are materially
Page 4 of 31
BRAVO BASTE!
different from the facts on which the
ruling is based on
3. Where the taxpayer acted in bad faith
(NIRC Sec 246)
Stages of Taxation (L-A-P)
 Levying or Imposition - the passage of tax
laws or ordinances through the
legislature.
 Assessment and Collection - the act of
administration and implementation of
tax laws by the executive through its
administrative agencies such as the
Bureau of Internal Revenue or Bureau of
Customs.
 Payment of Tax - the act of compliance
by the taxpayer in contributing his share
to pay the expenses of the government.
Distinction Between the Power to Tax and The
Exercise of Police Power
An imposition that is for revenue is generally a tax
while an imposition that has another purpose such
as regulation is an exercise of police power.
When the purpose of the imposition of a royalty
fee upon an oil company is not for the purpose of
generating revenue but a recognition that the oil
industry is imbued with public interest, then the
royalty fee will be considered as a regulatory fee.
(Chevron v. BCDA and CDC)
LIMITATIONS ON THE
TAXING POWER
Inherent Limitations
Inherent limitations proceed from the very nature
of the taxing power itself. The taxing power has
very distinct and positive limitations some of which
inhere in its very nature and exist whether or not
declared in the Constitution.
Inherent Limitations of Taxation
(P-E-N-I-S)
 Public Purpose
o Proceed from the tax must be used for
(a) the support of the government, (b)
some of the recognized objects of the
 S C B A R S T A G N O T E S [ 2018 ]
TAXATION LAW
government, and (c) to promote the
welfare of the community
 Exemption of the Government
o Agencies performing governmental
functions are tax exempt unless
expressly taxed
o Agencies performing proprietary
functions are subject to tax unless
expressly exempted
o GOCCs performing proprietary
functions are subject to tax, except for
GSIS, SSS, PHIC, PCSO and Local Water
Districts (RA 10026)
 Non-delegation of Taxing Power
o The power of taxation is purely
legislative; hence the power cannot
be delegated either to the executive
or judicial departments.
 International Comity
o A State cannot tax another State
based on the principle of Sovereign
Equality among States.
 Situs/Territoriality of Taxation
o The taxing power of a country is
limited to the person and property
within and subject to its jurisdiction.
o Factors to be considered in
determining the situs of taxation:
 Subject matter
 Nature of the tax
 Citizenship
 Residence of the taxpayer
o An income is taxable if its generating
source, the PROPERTY, ACTIVITY or
SERVICE, is found in the Philippines
(but the RC and DC may be liable even
on incomes from sources outside the
Philippines). (CIR v. BOAC, 1987)
Page 5 of 31
BRAVO BASTE!
Constitutional Limitations
(N5-U-D-E3-P-V-C)
Limitations prescribed in the Constitution or
implied from its provisions on the taxing power of
the government
 Due Process
(Sec. 1, Art. III, 1987 Constitution)
 Taxes which are excessive and beyond
the paying capacity of the taxpayers are
confiscatory, oppressive and could be
unquestionably struck down as
deprivation of the taxpayer’s property
without due process.
 Equal protection of law
(Sec. 1, Art. III, 1987 Constitution)
 No person or class of persons hall be
deprived of the same protection of laws
enjoyed by other persons or other
classes in the same place and in like
circumstances. (Phil. Rural Electric
Cooperative Association, Inc. v. DILG, 403
SCRA 558)
 Uniformity and equity in taxation
(Sec. 28(1), Art. VI, 1987 Constitution)
 All the taxable persons or property of the
same class shall be taxed at the uniform
or same rate. There is uniformity of
taxation when the tax operates within
the same force and effect on this subject
wherever found. (Churchill v.
Concepcion, 24 Phil 969)
 Progressive scheme of taxation
(Sec. 28(1), Art. VI, 1987 Constitution)
 Tax the rate of which increases as the tax
base or bracket increases.
 Non-imprisonment for non-payment of poll
tax
(Sec. 20, Art. III, 1987 Constitution)
 Non-impairment of obligations and contracts
(Sec. 10, Art. III, 1987 Constitution)
 The obligation of contract is impaired
when its terms or conditions are changed
by law or by treaty without the consent
of the other, thereby weakening the
 S C B A R S T A G N O T E S [ 2018 ]
TAXATION LAW
position of the latter. (Edwards v.
Kearmey, 96 US 607)
 Non-infringement of religious freedom
(Sec. 5, Art. III, 1987 Constitution)
 To require such religious groups to pay
taxes would impair their free exercise
and enjoyment of religious freedom and
worship, as well as its rights and
dissemination of religious beliefs.
(American Bible Society vs. City of
Manila, 101 Phil 396)
 Non-appropriation of public funds or property
for the benefit of any church, sect, or system
of religion etc.
(Sec. 29(2), Art. VI, 1987 Constitution)
 The Constitution strictly prohibits public
money from being appropriated, applied,
paid, or used, directly or indirectly, for
the use, benefit, or support of any sect,
church, denomination, sectarian
institution, or system of religion.
 Exemption of charitable institutions,
churches, parsonages, or convents
appurtenant thereto, mosques, and non-
profit cemeteries, and all lands, buildings and
improvements actually, directly and
exclusively used for religious, charitable or
educational purposes
(Sec. 28(3), Art. VI, 1987 Constitution)
 Charitable, educational and religious
institutions are exempt from property
tax
 Exemption from taxes of the revenues and
assets of non-profit, non-stock educational
institutions including grants, endowments,
donations or contributions for educational
purposes
(Sec. 4(3 and 4), Art. XIV, Sec. 28, Art. VI, 1987
Constitution)
 Non-stock, non-profit educational
institutions are exempt from income tax,
property tax, or customs duties;
provided that donations or contributions
are actually, directly, and exclusively
used for educational purposes
Page 6 of 31
BRAVO BASTE!
 Concurrence of a majority of all members of
congress for the passage of a law granting tax
exemption
(Sec. 28(4), Art. VI, 1987 Constitution)
 The president shall have the power to veto
any particular item or items in a revenue or
tariff bill
(Sec. 27(2), Art. VI, 1987 Constitution)
 Non-impairment of the jurisdiction of the
Supreme Court in tax cases
(Sec. 5(2), Art. VIII, 1987 Constitution)
Effect on the tax-exempt status of a charitable
institution if it engages in activities conducted for
profit
It does not lose its tax-exempt status for its non-
profit activities. However, its income from
activities conducted for profit, regardless of its
disposition, shall be subject to income tax. (RMC
67-2012; CIR v. St. Luke’s, 2012)
Tax implication if a non-stock, non-profit
educational institution leases a portion of its
property to a third-party bookstore that is open to
the public. The rental income is used to pay its
teachers.
The rental income will be exempt from income tax.
As long as the income is actually, directly, and
exclusively used for educational purposes, it will be
exempt from income tax. (Sec. 4 (3), Art XIV, 1987
Constitution)
As to the portion leased out to the bookstore, it is
subject to the RPT since it is not used actually,
directly and exclusively for educational purposes.
(Sec. 28(3), Art VI, 1987 Constitution)
Income of non-stock, non-profit educational
institution from property or activity conducted for
profit may be exempt from income tax and VAT (as
well as local business tax) provided the school uses
such income actually, directly and exclusively for
educational purposes. (Art. XIV, Sec. 4, par. 3, 1987
Constitution; CIR v. DLSU, 2016)
A proprietary non-profit educational institution
enjoys tax privileges such as 10% lower income tax
on net income (hence, exempt from MCIT which is
 S C B A R S T A G N O T E S [ 2018 ]
TAXATION LAW
paid in lieu of regular income tax). It is also given
the option to deduct capital outlay (generally non-
deductible business expense) for expansion of
school facilities either as business expense or
depreciation expense. (Secs. 27(B), 34(A)(2), 34(F)
and 36(A)(2)(3), NIRC)
Application of 10% Preferential Tax Rate On
Proprietary Educational Institutions
It will apply only if its gross income from related
trade, business, or activity does not exceed 50% of
its total gross income. Otherwise, it will be subject
to the regular tax rate of 30%. (NIRC Sec 27)
Can a non-profit, non-stock educational
institution refuse to settle the assessment of a
local government for its building permit?
No. The DPWH implements the Building Code
through the Building Officials of all local
government units. While there is incidental
revenue to the local government unit, the
imposition of a Building Permit partakes of a
regulatory nature. The imposition of Building
Permit fee is an exercise of police power to ensure
compliance with the standards under the Building
Code to protect the public from any danger.
(Angeles University Foundation v. City of Angeles)
San Juan University is a non-stock, non-profit
educational institution. It owns a piece of land in
Caloocan City on which its three 2-storey school
buildings stood. Two of the buildings are devoted
to classrooms, laboratories, a canteen, a
bookstore and administrative offices. The third
building is reserved as dormitory for student
athletes who are granted scholarships for a given
academic year. In 2017, San Juan university
earned income from tuition fees and from leasing
a portion of its premises to various
concessionaires of food, books, and school
supplies.
(A) Can the city treasurer of Caloocan city collect
real property taxes on the land and building of San
Juan University?
With respect to the land and buildings that are
devoted to classrooms, laboratories,
administrative offices and the dormitory for
student athletes who are granted scholarships for
a given academic year, no real property taxes shall
Page 7 of 31
BRAVO BASTE!
be imposed on these properties since they are used
actually, directly and exclusively used for
educational purposes. (Section 28(3), Article
6 ,1987 Constitution; Section 234, Local
Government Unit)
As to the land and buildings which are devoted for
canteen and bookstore, there shall be levied real
property taxes on these properties since they
contribute to the development and essential usage
of the industry or work. The same are not expressly
mentioned by law to be exempt from real property
tax.
(B) Is the income earned by San Juan university for
the year 2017 subject to income tax?
Yes, provided that the income derived shall be
used actually, directly and exclusively used for
educational purposes. This is pursuant to the
provision of Article 14, section (3) Of the 1987
constitution which prevails over Section 30 of the
Tax Code.
Also, as held in a catena of cases that the
determination of exemption from income tax on
income derived by a non-stock non-profit
educational institution is the use of such income
and not the source. For as long as the income,
regardless of the source is actually, directly or
adequately used for educational purposes, such
income shall be exempt from income tax.
CLASSIFICATION OF TAXES
As to Subject Matter or Object (P-P-E)
 Personal, poll, or capitation
 Property
 Excise or privilege
Two concepts of ‘excise’ tax. As used in the NIRC,
excise taxes refer to taxes applicable to certain
specified goods or articles manufactured or
produced in the Philippines for domestic sale or
consumption or for any other disposition and to
things imported into the Philippines. Excise tax is
essentially a tax on property. (Sec. 129, NIRC;
Chevron Philippines, Inc. v. CIR, 2016)
 S C B A R S T A G N O T E S [ 2018 ]
TAXATION LAW
As used in classifying taxes according to tax base,
excise tax is “a tax upon the performance, carrying
on, or exercise of some right, privilege, activity,
calling or occupation.” Examples are income tax,
transfer tax, VAT, percentage tax and documentary
stamp tax.
As to Who Bears the Burden
 Direct - tax is demanded from the person
who also shoulders the burden of the tax
 Indirect - tax is demanded from one
person in the expectation and intention
that he shall indemnify himself at the
expense of another
The Relationship Between Impact, Shifting, And
Incidence of a Tax
The impact is the initial phenomenon, the shifting
is the intermediate process, and the incidence is
the result. Impact is the imposition of the tax;
shifting is the transfer of the tax; while incidence is
the setting or coming to rest of the tax.
As to Determination of Amount
(S-A)
 Specific
 Ad valorem
As to Purpose (G-S)
 General, fiscal, or revenue
 Special or regulatory
As to Authority Imposing the Same (N-L)
 National
 Local or Municipal
As to Graduation or Rate (P-P-R)
 Proportional
 Progressive
 Regressive
DOUBLE TAXATION
Kinds of Double Taxation
 Direct Double Taxation - taxing twice for
the same purpose, by the same taxing
authority, in the same jurisdiction, in the
same period, some of the property in the
territory. It is objectionable and
prohibited because it violates the
Page 8 of 31
BRAVO BASTE!
constitutional provision on uniformity
and equality.
 Indirect Double Taxation - taxation other
than direct double taxation, extending to
all cases in which there is a burden of two
or more pecuniary impositions but
imposed by different taxing authorities.
It is not legally objectionable.
In a long line of cases, the Supreme Court
considered double taxation as not unconstitutional
although obnoxious. It is not in itself a valid
defense against the validity of a tax measure. But
such taxation, while not forbidden is something not
favored, that is why it should be avoided and
prevented whenever possible to avoid injustice or
unfairness. (Pepsi Cola Bottling Co. v. Municipality
of Tanauan, 1976)
Double Taxation as A Ground for Assailing an
Assessment
As opposed to assailing the levy of tax, double
taxation is a ground for assailing a BIR assessment.
Essentially, the question relates to the
reasonableness of the assessment.
In Nursery Care Corp. v. Acevedo, 2014, the City of
Manila individually assessed the petitioners for
taxes either under Section 15 (Tax on Wholesalers,
Distributors or Dealers) or Section 17 (Tax on
Retailers) of the Revenue Code of Manila. The city
also imposed additional taxes under Section 21
(Tax on Business Subject to the Excise, VAT or
percentage tax under the NIRC). It was held that
the imposition under Section 21 constituted
double taxation. Section 21 of the Revenue Code of
Manila is based on Sec. 143 (h) of the LGC. Sec. 143
(h) may be imposed only on businesses not
otherwise specified in the preceding paragraphs (a)
to (g) of Sec, 143, LGC, such as the tax on
wholesalers, distributors or dealers (par. b) and tax
on retailers (par. d).
Distinction Between Tax and Fee
When the imposition is primarily regulatory in
nature, not primarily for revenue-raising, it is not a
tax. If not a tax, then the procedure outlined in Sec.
187 of the LGC for questioning the validity of the
tax ordinance is not applicable. (Smart
 S C B A R S T A G N O T E S [ 2018 ]
TAXATION LAW
Communications, Inc. v. Municipality of Malvar,
2014)
Also, if one imposition is a tax and the other is not,
then the claim of prohibited double taxation fails.
In Ferrer v. Bautista (2015), it was held that the
imposition of the garbage fee falls within the police
power to protect public health, safety, and welfare.
Not being a tax, there is no double taxation.
Modes of Eliminating International Double
Taxation
Double taxation usually takes place when a person
is resident of a contracting state and derives
income from, or owns capital in, the other
contracting state and both states impose tax on
that income or capital. In order to eliminate double
taxation, a tax treaty resorts to several methods.
(CIR v. SC Johnson & Sons, Inc., 1999)
 Allowing reciprocal exemption either by
law or by treaty;
 Allowance of tax credit for foreign taxes
paid;
 Allowance of deductions such as for
foreign taxes paid, and vanishing
deductions in estate tax; or
 Reduction of Philippine tax rate.
The purpose of these international agreements is
to reconcile the national fiscal legislations of the
contracting parties in order to help the taxpayer
avoid simultaneous taxation in two different
jurisdictions.
The apparent rationale for doing away with double
taxation is to encourage the free flow of goods and
services and the movement of capital, technology
and persons between countries, conditions
deemed vital in creating robust and dynamic
economies. Foreign investments will only thrive in
a fairly predictable and reasonable international
investment climate and the protection against
double taxation is crucial in creating such a climate.
(CIR v. SC Johnson & Sons, Inc.)
The bureau of internal revenue assessed a
cigarette manufacturing company separately for
the raw materials it used for manufacturing its
products and for its finished products. Is the
Page 9 of 31
BRAVO BASTE!
taxation of raw materials and the products
resulting therefrom considered double taxation?
No. Stemmed leaf tobacco is subject to the specific
tax under Section 141 (b). It is a partially prepared
tobacco. The removal of the stem or midrib from
the leaf tobacco makes the resulting stemmed leaf
tobacco a prepared or partially prepared tobacco.
Since the Tax Code contained no definition of
“partially prepared tobacco,” then the term should
be construed in its general, ordinary, and
comprehensive sense x x x.” Finally, excise taxes
are essentially taxes on property because they are
levied on certain specified goods or articles
manufactured or produced in the Philippines for
domestic sale or consumption or for any other
disposition, and on goods imported. In this case,
there is no double taxation in the prohibited sense
despite the fact that they are paying the specific tax
on the raw material and on the finished product in
which the raw material was a part, because the
specific tax is imposed by explicit provisions of the
Tax Code on two different articles or products: (1)
on the stemmed leaf tobacco; and (2) on cigar or
cigarette. (La Suerte Cigar & Cigarette Factory v.
Court of Appeals and Commissioner of Internal
Revenue, 2014)
The City of Manila sought to enforce both sections
14 and 21 of the Manila revenue code claiming
that the former is a tax on manufacturers, etc.
While the latter applies to business subject to
excise, VAT or percentage tax. Will the imposition
of both sections amount to invalid double
taxation?
Yes. There is in fact double taxation since both
sections are being imposed on the same subject
matter (privilege of doing business within the city),
for the same purpose, by the same taxing
authority, within the same taxing jurisdiction, for
the same taxing period, and of the same kind or
character (a local business tax imposed on gross
sales or receipts). (Nursery Care Corporation;
Shoemart, Inc.; Star Appliance Center, Inc.; H&B,
Inc.; Supplies Station Inc.; And Hardware
Workshop, Inc. v. Anthony Acevedo, in his capacity
as The Treasurer of Manila; and The City of Manila,
2014)
 S C B A R S T A G N O T E S [ 2018 ] Page 10 of 31
TAXATION LAW BRAVO BASTE!

FORMS OF ESCAPE FROM generally within the same taxing district

are obliged to pay
TAXATION
Tax Amnesty
Basic Forms of Escape It is an immunity from all criminal and civil
 Those that do not reduce the revenue obligations arising from nonpayment of taxes. It is
collection of the government (S-T-C) a general pardon given to all taxpayers; it applies
 Shifting - transfer of tax burden by one only to past periods, hence of retroactive
on whom the tax is assessed to another application.
 Capitalization - reduction in the selling
price of income-producing property by It is distinguished form tax exemption in the sense
an amount equal to the capitalized value that while tax amnesty is immunity from civil and
of future taxes that may be paid by the criminal obligations, tax exemption is immunity
purchaser from civil liability only. Moreover, tax exemption is
 Transformation - the manufacturer or prospective application, while tax amnesty is
producer upon whom the tax is imposed retroactive.
pays the tax and strives to recover such
expense through lower production cost
without sacrificing the quality of the
INCOME TAX
product
Gross Income
 Those that result in the loss of revenue to the
All income derived from whatever source,
government (A-X-E)
including, but not limited to: (Sec. 32, RA 8424)
 Tax Evasion - fraudulent or forbidden
 Compensation for services
schemes or devices designed to lessen or
 Gross income derived from the conduct
defeat taxes.
of trade or business or the exercise of a
profession
According to the Supreme Court, tax
 Gains derived from dealing in property
evasion connotes the integration of
 Interests
three factors: (a) the end to be achieved,
 Rents
i.e. the payment of less than that known
 Royalties
by the taxpayer to be legally due, or the
 Dividends
non-payment of tax when it is shown that
 Annuities
a tax is due; (b) an accompanying state of
 Prizes and winnings
mind which is described as being evil, in
 Pensions
bad faith, willful, or “deliberate and not
 Partner’s distributive share from the net
accidental; and (c) a course of action or
income of the general professional
failure of action which is unlawful. (CIR v.
partnership
the Estate of Benigno Toda, Jr., 2004)
Taxable Income
 Tax Avoidance - exploitation by the
The pertinent items of gross income specified in
taxpayer of legally permissible
the Tax Code, less the deductions and/or personal
alternative tax rate or methods of
and additional exemptions, if any, authorized for
assessing taxable property or income in
such types of income by the Tax Code or other
order to reduce tax liability
special laws. (Sec. 31, NIRC of 1997)
 Exemption from taxation - grant of
Principle of Mobilia Sequuntur Personam in
immunity to particular persons or
Income Taxation
corporations or to persons or
Principle of Mobilia Sequuntur Personam in income
corporations of a particular class from a
taxation refers to the principle that taxation
tax which persons and corporations
 S C B A R S T A G N O T E S [ 2018 ]
TAXATION LAW
follows the property or person who shall be subject
to the tax.
Distinction Between Allowable Deductions and
Personal Exemptions
 As to amount — Allowable deductions
generally refer to actual expenses
incurred in the pursuit of trade, business
or practice of profession while
 As to nature — Allowable deductions
constitute business expenses while
personal exemptions pertain to personal
expenses.
 As to purpose — Deductions are allowed
to enable the taxpayer to recoup his cost
of doing business while personal
exemptions are allowed to cover
personal, family and living expenses.
 As to claimants — Allowable deductions
can be claimed by all taxpayers,
corporate or otherwise, while personal
exemptions can be claimed only by
individual taxpayers.
Non-Deductible Items for Purposes of Income
Taxation
 Personal, living or family expenses;
 Any amount paid out for new buildings or
for permanent improvements, or
betterments made to increase the value
of any property or estate;
 Any amount expended in restoring
property of in making good the
exhaustion thereof for which an
allowance is or has been made; or
 Premiums paid on any life insurance
policy covering the life of any officer or
employee, or of any person financially
interested in any trade or business
carried on by the taxpayer, individual or
corporate, when the taxpayer is directly
or indirectly a beneficiary under such
policy;
 Illegal expenses;
 Losses obtained from transactions
between related taxpayers.
Page 11 of 31
BRAVO BASTE!
Final Tax vs. Creditable Withholding Tax
A final tax is a full settlement of the income tax
liability corresponding to the income to which it is
imposed. Consequently, such income would no
longer be forming part of the gross income of the
taxpayer. On the other hand, a creditable
withholding tax is merely considered as an
advanced payment of whatever tax liability the
taxpayer may incur during the year, hence, such
income subject to creditable withholding tax
should be made part of the gross income of the
taxpayer.
Tax Deduction vs. Tax Credit
A tax credit reduces the tax due, including -
whenever applicable - the income tax that is
determined after applying the corresponding tax
rates to taxable income. A tax deduction, on the
other, reduces the income that is subject to tax in
order to arrive at taxable income. To think of the
former as the latter is to avoid, if not entirely
confuse, the issue. A tax credit is used only after
the tax has been computed; a tax deduction,
before.
Robin and Mariel are married taxpayers with
three children all below 21 years of age. In 2011
one of their children, Cocoy, then 18 years old
wed his long-time girlfriend, Beth. In the same
year, 2 of their children, Abe, 20 years old, and
Boboy, 19 years old, both unmarried, were
gainfully employed in A Corporation. In 2013, Abe
and Boboy were terminated from A Co. and Cocoy
obtained a decree of nullity of his marriage with
Beth. How much can robin claim as additional
exemption in 2013?
Robin can claim P50,000 as additional exemption in
2013 provided Cocoy and Boboy can still be
considered as dependents.
Withholding Tax System
Three-fold purpose of the withholding tax system.
(1) to provide the taxpayer with a convenient way
of paying his tax liability; (2) to ensure the
collection of tax, and (3) to improve the
government’s cash flow. (CREBA v. Executive
Secretary, 2010])
 S C B A R S T A G N O T E S [ 2018 ]
TAXATION LAW
There are usually two kinds: (a) Final Withholding
Tax (FWT) which applies to all income payments
subject to final tax, and (b) Creditable Withholding
Tax (CWT) which applies to some income payments
subject to basic income tax.
The withholding tax is used in income taxation and
in VAT (FWT of 5% on government procurement of
supplies and services). (Sec. 114[C], NIRC)
“Deposit Substitutes” That May Be Subjected to
The 20% Final Tax On Passive Income
These are alternative forms of obtaining funds
from the public, other than deposits, through the
issuance, endorsement, or acceptance of debt
instruments of the borrower’s own account, for the
purpose of relending or purchasing of receivables
and other obligations. “Public” refers to 20 or more
lenders at any one time. The phrase “at any one
time” for purposes of determining the “20 or more
lenders” would mean every transaction executed
in the primary and secondary market in connection
with the sale of the bonds. (BDO vs. Republic, 2015)
Capital Gains Tax
A tax on passive income, it is the seller, not the
buyer, who generally would shoulder the tax. As a
general rule, therefore, any of the parties to a
transaction shall be liable for the full amount of the
documentary stamp tax due, unless they agree
among themselves on who shall be liable for the
same. (Republic of the Philippines, Represented by
the Department of Public Works and Highways v.
Arlene R. Soriano, 2015)
Y corporation engaged the services of the
Manananggol law firm in 2006 to defend the
corporation's title over a property used in the
business. For the legal services rendered in 2007,
the law firm billed the corporation only in 2008.
The corporation duly paid.
Y corporation claimed this expense as a deduction
from gross income in its 2008 return, because the
exact amount of the expense was determined
only in 2008. Is Y’s claim of deduction proper?
No. The expense is deductible in the year it
complies with the all-events test. The test is
considered met if the liability is fixed, and the
Page 12 of 31
BRAVO BASTE!
amount of such liability to pay is already fixed in
2007 when the services were rendered, and the
amount of such liability is determinable with
reasonable accuracy in the same year. Hence the
deduction should have been claimed in 2007 and
not in 2008. (CIR v. Isabela Cultural Corporation,
2007)
Can an income earner, whose earnings are subject
to final withholding tax at source, be liable for
such if the payor failed to withhold the tax on such
income?
Yes. In a withholding tax system, the liability of the
withholding agent is independent from that of the
taxpayer. The withholding agent may be made
liable due to his failure to perform his duty to
withhold the tax and remit the same to the
government. The liability for the tax, however,
remains with the taxpayer because the gain was
realized and receiver by him. While the payor can
be held accountable for its negligence in
performing its duty to withhold the amount of tax
due on the transaction, the taxpayer which earned
the income remains liable for the payment of tax as
the taxpayer shares the responsibility of making
certain that payment of the withholding tax due.
Taxpayer cannot evade its liability for by shifting
the blame on the payor as the withholding agent.
Ernesto, a Filipino citizen and a practicing lawyer,
filed his income tax return for 2007 claiming
optional standard deductions. Realizing that he
has enough documents to substantiate his
profession connected expenses, he now plans to
file an amended income tax return for 2007, in
order to claim itemized deductions, since no audit
has been commenced by the BIR on the return he
previously filed. Will Ernesto be allowed to amend
his return? Why or why not?
No. Since Ernesto has elected to claim optional
standard deduction, said election is irrevocable for
the taxable year for which the return is made. (Sec
34(L), NIRC)
 S C B A R S T A G N O T E S [ 2018 ]
TAXATION LAW
Calvin was a permits and licensing officer (rank-
and-file) of Sta. Portia realty corporation (SPRC).
He invited the regional director of the Housing
and Land Use Regulatory Board (HLURB) to lunch
at the Sulo Hotel in Quezon City to discuss the
approval of SPRC’s application for a development
permit in connection with its subdivision
development project in Pasig City. At breakfast
the following day, Calvin met a prospective client
interested to enter into a joint venture with SPRC
for the construction of a residential condominium
unit in Cainta, Rizal.
Calvin incurred expenses for the lunch and
breakfast meetings he had with the regional
director of HLURB and the prospective client,
respectively. The expenses were duly supported
by official receipts issued in his name. At month's
end, he requested the reimbursement of his
expenses, and SPRC granted his request.
(A) Can SPRC claim an allowable deduction for the
expenses incurred by Calvin?
Yes. SPRC can claim as deduction the expenses
incurred by Calvin. Under Section 34(A)(1) of the
Tax Code, a taxpayer shall be allowed as deduction
from gross income all the ordinary and necessary
expenses paid or incurred during the taxable year
in carrying on or which are directly attributable to
the development, management, operation and/or
conduct of trade, business or exercise of
profession. In as much as the expenses incurred by
Calvin which will be reimbursed by SPRC are
ordinary and necessary expenses directly
attributable to the operation of the realty business
and are paid during the taxable year, such
expenses shall be claimed as allowable deduction
from the gross income of SPRC.
(B) is the reimbursement received by Calvin from
SPRC subject to tax?
No. The reimbursements received by Calvin are
not constitutive of income, hence not subject to
tax. In BIR Ruling No. DA-158-4-14-97 dated April
14, 1997, citing BIR Ruling No. 202-81 dated
October 22, 1981, it is discussed that that
reimbursement of actual expenses being mere
return of capital and not return on capital does not
constitute income. These sums do not represent
any actual earnings because they are simply
Page 13 of 31
BRAVO BASTE!
replacing funds that the employee already had paid
rather than paying him something new.
On April 30, 2015, Daryl resigned as the
production manager of 52nd avenue, a television
studio owned by S entertainment corporation.
52nd avenue issued to her a certificate of
withholding tax on compensation (BIR form no.
2316), which showed that the tax withheld from
her compensation was equal to her income tax
due for the period from January 2015 to April 30,
2015.
A month after her resignation, Daryl put up her
own studio and started producing short films. She
was able to earn a meager income from her short
films but did not keep record of her production
expenses.
Is Daryl qualified for substituted filing for taxable
year 2015?
Daryl is qualified for the substituted filing for the
months of January to April 2015 but is not qualified
for such filing for May to December 2015.
Under the tax code, individual taxpayers receiving
purely compensation income, regardless of
amount, from only one employer in the Philippines
for the calendar year, the income tax of which has
been withheld correctly by the said employer (tax
due equals tax withheld) shall not be required to
file an annual income tax return. The certificate of
withholding filed by the respective employers, duly
stamped 'received' by the BIR, shall be tantamount
to the substituted filing of income tax returns by
said employees." (As implemented by Rev. Reg. 08-
2018)
Since only the months of January to April are
covered by the certificate of withholding filed
Daryl’s employer, it goes to say that only in these
months of the taxable year 2015 will Daryl be
eligible or qualified for substituted filing. He is not
qualified for substituted filing for the months of
May to December, 2015.
 S C B A R S T A G N O T E S [ 2018 ]
TAXATION LAW
For purposes of imposing the improperly
accumulated earnings tax, the accumulation of
profits for the reasonable needs of the business is
allowed. How can the "reasonable needs" of the
business be determined?
To determine the "reasonable needs" of the
business in order to justify an accumulation of
earnings, the Courts of the US have invented the
so-called "immediacy test" which construed the
words "reasonable needs of the business" to mean
the immediate needs of the business, and it was
generally held that if the corporation did not prove
an immediate need for the accumulation of the
earnings and profits, the accumulation was not for
the reasonable needs of the business, and the
penalty tax would apply. (Cyanamid Phil., Inc. vs
CA, 2000)
Litigation expenses were spent by atlas mining for
the protection of its title over a mining property.
These expenses were declared by the taxpayer as
a deduction, but the same was disallowed by the
BIR. Comment on the action of the BIR.
The BIR is correct. Litigation expenses incurred in
defense or protection of title are capital in nature
and not deductible, likewise it was ruled by the US
Tax Court that expenditures in defense of title
property constitute a part of the cost of the
property are not deductible as expense. (Atlas
Consolidated Mining & Development Corporation
v. Commissioner of Internal Revenue, 1981)
Tax Benefit Rule
The taxpayer is obliged to declare as taxable
income subsequent recovery of bad debts in the
year they were collected to the extent of the tax
benefit enjoyed by the taxpayer when the bad
debts were written-off and claimed as a deduction
from income. It also applies to taxes previously
deducted from gross income but which were
subsequently refunded or credited. The taxpayer is
also required to report as taxable income the
subsequent tax refund or tax credit granted to the
extent of the tax benefit the taxpayer enjoyed
when such taxes were previously claimed as
deduction from income.
Page 14 of 31
BRAVO BASTE!
After experiencing substantial business losses,
Rosario company, a domestic corporation, was
dissolved. A deed of assignment was executed in
favor of its majority stockholder Mr. KPR
transferring a parcel of land located in Aguilar,
Pangasinan as liquidating dividend. Is the transfer
of property subject to tax?
No. During liquidation, the transfer of property by
the dissolving corporation to its stockholders by
way of liquidating dividend is not a sale subject to
income tax, Creditable Withholding Tax (CWT) and
Documentary Stamp Tax (DST). However, it is
deemed sale transaction for VAT purposes under
Sec. 106 (3) (4) of the NIRC. On the part of the
stockholder, any liquidating gain shall be treated as
a capital gain subject to regular income tax rates
under the NIRC and not CGT. From the foregoing,
the deemed sale transaction be Rosario Company
shall be subject to VAT but not to income tax while
the gain or loss sustained by Mr. KPR shall be
subject to the regular income tax rates under the
NIRC (BIR Ruling No. 363-2014, Sept. 22, 2014).
X took out a life insurance policy on his own life in
the amount of P2 million. He designated his wife,
y, as an irrevocable beneficiary to P1 million to his
son z, to the balance of P1 million but, in the latter
designation but, in the latter designation,
reserving his right to substitute him for another. X
died and his wife and son went to collect the
proceeds of the life insurance policy. Are the
proceeds of the insurance subject to income tax?
No. The law explicitly provides that the proceeds of
life insurance policies paid to the heirs and
beneficiaries upon the death of the insured are
excluded from gross income and is exempt from
income taxation. The proceeds of life insurance
received upon the death of the insured constitute
a compensation for the loss of life, hence a return
of capital, which is beyond the scope of income
taxation (TAX CODE. Sec. 32 (B)(1)).
 S C B A R S T A G N O T E S [ 2018 ]
TAXATION LAW
Upon his retirement, Alfredo transferred his
savings derived from his salary as a marketing
assistant to a time deposit with AAB bank. The
bank regularly deducted 20% final withholding tax
on the interest income from the time deposit.
Alfredo contends that the 20% final tax on the
interest income constituted double taxation
because his salary had been already subjected to
withholding tax. Is Alfredo's contention correct?
No. Alfredo’s contention is not correct. There is
direct double taxation when two or more taxes are
imposed on the same subject of taxation for the
same purpose during the same period, by the same
authority under the same jurisdiction.
In the given case, the taxes were imposed on
different subjects of taxation. On one hand, the
creditable withholding tax was imposed on the
salary of alfredo which is the subject of a scheduler
or tabular tax rates. On the other hand, the final
income tax was imposed on the interest income
earned by alfredo from his investment in a time
deposit. Clearly there is no double taxation in the
instant case.
The board of directors of Sumo corporation, a
company primarily engaged in the business of
marketing and distributing pest control products,
approved the partial cessation of its commercial
operations, resulting in the separation of 32
regular employees. Only half of the affected
employees were notified of the board resolution.
Rule on the taxability of the separation pay and
indemnity that will be received by the affected
employees as the result of their separation from
service.
The separation pay received by the affected
employees shall be exempt from tax. Pursuant to
Section 332(b) (6) (B) of the Tax Code, as amended,
any amount received by an official or employee or
by his heirs from his employer as a consequence of
separation of such official or employee from the
service of the employer due to death, sickness, or
other physical disability or for any cause beyond
the control of said official or employee is exempt
from taxes regardless of age or length of service.
The abovementioned law requires the presence of
these two conditions in order that the employee
benefits may be granted tax exemption: (1) the
Page 15 of 31
BRAVO BASTE!
employee is separated from the service of the
employer due to death, sickness, or other physical
disability or for cause beyond the control of the
said official or employee; and (2) the employer
pays benefits to the official or employee or his heirs
as a consequence of such separation. Since the
separation of your employees due to partial
cessation of Sumo Corporation’s commercial
operations is beyond their control, any and all
amounts received by them as a result thereof are
exempt from all taxes.
TRANSFER TAX
Estate Tax
Tax imposed on the privilege that a person is given
in controlling to a certain extent, the disposition of
his property to take effect upon death. Estate tax is
an excise tax imposed on the act of passing the
ownership of property at the time of death and not
on the value of the property or right.
Succession
Mode of acquisition by virtue of which the
property, rights and obligations to the extent of the
value of the inheritance, of a person are
transmitted through his death to another or others
either by will or by operation of law. (Art. 774, NCC)
Taxpayer in Estate Tax
The estate of the decedent as a juridical person,
represented by the administrator, executor, or
legal heirs.
Law Governing the Imposition of the Estate Tax
The statute in force at the time of death of the
decedent shall govern the liability for estate tax.
The estate tax accrues as of the death of the
decedent and the accrual of the tax is distinct from
the obligation to pay the same. Upon the death of
the decedent, succession takes place and the right
of the State to tax the privilege to transmit the
estate vests instantly upon death. For this reason,
properties should be valued at the moment of
death.
 S C B A R S T A G N O T E S [ 2018 ]
TAXATION LAW
Gross Estate
Consists of all properties and interests in properties
of the decedent at the time of his death as well as
properties transferred during lifetime, but in
substance was only transferred at the time of
death.
Properties Included in Valuation of the Estate
For estate tax purpose, what are the properties
considered situated in the Philippines:
 Franchise which must be exercised in the
Philippines
 Share, obligations or bonds issued by
corporation or sociedad anonima
organized or constituted in the
Philippines.
 Shares, obligations or bonds issued by a
foreign corporation eighty-five per
centum of the business of, which is
located in the Philippines.
 Shares, obligations or bonds issued by a
foreign corporation if such shares,
obligations or bonds have acquired a
business situs in the Philippines.
 Shares or rights in any partnership,
business or industry established in the
Philippines. (Section 104, NIRC)
Donation Mortis Causa and Donation Inter Vivos
Donations inter vivos are subject to donor's gift tax
(Sec. 91 (a). Tax Code) while donations mortis
causa are subject to estate tax (Sec. 77, Tax Code).
However, donations inter vivos, actually
constituting taxable lifetime like transfers in
contemplation of death or revocable transfers (Sec.
78 (b) and (c), Tax Code) may be taxed for estate
tax purposes, the theory being that the transferor's
control thereon extends up to the time of his
death.
Donations inter vivos are not subject to estate
taxes because the transfer of the property take
effect during the lifetime of the donor. The transfer
is therefore subject to the donor's tax. On the other
hand, donations mortis causa are subject to estate
taxes since the transfer of the properties takes
effect after the death of the decedent. Such
donated properties, real or personal, tangible or
intangible, shall form part of the gross estate.
Page 16 of 31
BRAVO BASTE!
A, aged 90 years and suffering from incurable
cancer, on august 1, 2001 wrote a will and, on the
same day, made several inter-vivos gifts to his
children. Ten days later, he died. In your opinion,
are the inter-vivos gifts considered transfers in
contemplation of death for purposes of
determining properties to be included in his gross
estate?
Yes. When the donor makes his will within a short
time of, or simultaneously with, the making of gifts,
the gifts are considered as having been made in
contemplation of death. (Roces v. Posadas, 58 Phil.
108). Obviously, the intention of the donor in
making the inter-vivos gifts is to avoid the
imposition of the estate tax and since the donees
are likewise his forced heirs who are called upon to
inherit, it will create a presumption juris tantum
that said donations were made mortis causa,
hence, the properties donated shall be included as
part of A's gross estate.
Exemptions and Exclusions from Gross Estate
 Sections 85-86, NIRC
 Capital or exclusive property of the
surviving spouse
 Properties outside the Philippines of a
non-resident alien decedent
 Intangible persona property in the
Philippines of a non-resident alien when
the rule of Reciprocity applies
 Section 87, NIRC
 Merger of the usufruct in the owner of
the naked title
 Transfer under Special Power of
Appointment - transmission from the
first heir, legatee or donee in favor of
another beneficiary in accordance with
the will of the predecessor.
 Transmission or delivery of the
inheritance or legacy of the fiduciary heir
or legatee to the fideicomissary
 All bequests, devices, legacies, or
transfers to social welfare, cultural, and
charitable institutions
 S C B A R S T A G N O T E S [ 2018 ]
TAXATION LAW
 No part of the net income of said
institutions inure to the benefit of
any individual
 Not more than 30% of such
transfers shall be used for
administration purposes
 Under special laws
On the first anniversary of the death of Y, his heirs
hosted a sumptuous dinner for his doctors,
nurses, and others who attended to Y during his
last illness. The cost of the dinner amounted to
P50,000.00. Compared to his gross estate, the
P50,000.00 did not exceed five percent of the
estate. Is the said cost of the dinner to
commemorate his one-year death anniversary
deductible from his gross estate?
No. This expense will not fall under any of the
allowable deductions from gross estate. Whether
viewed in the context of either funeral expenses or
medical expenses, the same will not qualify as a
deduction. Funeral expenses may include medical
expenses of the last illness but not expenses
incurred after burial nor expenses incurred to
commemorate the death anniversary. (De Guzman
V. De Guzman, 83 SCRA 256)
Medical expenses, on the other hand, are allowed
only if incurred by the decedent within one year
prior to his death. (Section 86(A)(6), NIRC).
Casimira died on June 19, 2017 after three weeks
of confinement due to an unsuccessful liver
transplant. For her confinement, she had incurred
substantial medical expenses that she financed
through personal loans secured by mortgages on
her real properties. Her heirs are still in the
process of making an inventory of her assets that
can be used to pay the estate taxes, if any, which
are due on December 19, 2017.
(A) Are the medical expenses, personal loans and
mortgages incurred by Casimira deductible from
her gross estate?
The Medical Expenses can no longer be deducted
from the gross estate of Casimira since the same
were already paid using the personal loans secured
by mortgages on her real properties.
Page 17 of 31
BRAVO BASTE!
However, the unpaid mortgage on her real
properties can be claimed as deduction provided
that the amount of the mortgaged property is
included in the gross estate and the mortgaged
loan complied with the requirements of Section 86
of the Tax Code and related Rev. Regulations.
(B) may the heirs of Casimira file the estate
tax return and pay the corresponding estate tax
beyond December 19, 2017 without incurring
interest and surcharge?
Yes. Section 91 (B) of the Tax Code permits the
extension of the filing of estate tax return and the
payment thereof for a period of 5 years in case of
judicial settlement and 2 years in case of
extrajudicial settlement.
Since Casimira’s heirs are still in the process of
making an inventory of her assets that can be used
to pay the estate taxes, they may opt to settle the
estate judicially or extra judicially in order that an
extension for the filing of the estate tax return be
granted.
Vanishing Deductions
Vanishing deductions or property previously taxed
in estate taxation refers to the diminishing
deducibility/ exemption, at the rate of 20% over a
period of five (5) years until it is lost after the fifth
year, of any property (situated in the Philippines)
forming part of the gross estate, acquired by the
decedent from a prior decedent who died within a
period of five (5) years from the decedent's death.
Residence for Purpose of Taxation of Estate
Residence is synonymous with the term domicile.
The two terms may be used interchangeably
without distinction. (Collector v. De Lara, 102 Phil
813) To effect the abandonment of one's domicile,
there must be (1) a deliberate and provable choice
of a new domicile, coupled with (2) actual
residence in the place chosen, with (3) a declared
or provable intent that it should be one's fixed and
permanent place of abode, one's home. (Velilla v.
Posadas, 62 Phil 624)
 S C B A R S T A G N O T E S [ 2018 ]
TAXATION LAW
Situs of Taxation for A Non-Resident Decedent
The value of the gross estate of a non-resident
decedent who is a Filipino citizen at the time of his
death shall be determined by including the value at
the time of his death of all property, real or
personal, tangible or intangible, wherever situated
to the extent of the interest therein of the
decedent at the time of his death (Sec. 85 (A),
NIRC). These properties shall have a situs of
taxation in the Philippines hence subject to
Philippine estate taxes.
On the other hand, in the case of a non-resident
decedent who at the time of his death was not a
citizen of the Philippines, only that part of the
entire gross estate which is situated in the
Philippines to the extent of the interest therein of
the decedent at the time of his death shall be
included in his taxable estate. Provided, that, with
respect to intangible personal property, we apply
the rule of reciprocity.
Date-Of-Death Valuation Rule
The value of an estate of a decedent is based on its
value at the time of his death regardless of any
post-death development affecting its value (e.g.,
subsequent settlement of a claim against the
estate for a lesser amount). (Dizon v. CTA, 2008)
Filing of Estate Tax Return
Within six (6) months from the decedent’s death
(Sec. 90 (B), NIRC), provided that the Commissioner
of Internal Revenue shall have authority to grant in
meritorious cases, a reasonable extension not
exceeding thirty (30) days for filing the return (Sec.
90 (c), NIRC)
Except in cases where the Commissioner of
Internal Revenue otherwise permits, the estate tax
return shall be filed with an authorized agent bank,
or Revenue District Officer, Collection Officer, or
duly authorized Treasurer City in which the
decedent was domiciled at the time of his death.
(Sec. 90 (D). NIRC)
Page 18 of 31
BRAVO BASTE!
VCC is the administrator of the estate of his
father NGC, in the estate proceedings pending
before the MM regional trial court. Last year, he
received from the commissioner of internal
revenue a deficiency tax assessment for the
estate in the amount of P1,000,000. But he
ignored the notice. Last month, the BIR effected
a levy on the real properties of the estate to pay
the delinquent tax. VCC filed a motion with the
probate court to stop the enforcement and
collection of the tax on the ground that the BIR
should have secured first the approval of the
probate court, which had jurisdiction over the
estate, before levying on its real properties. Is
VCC’s contention correct?
No. VCC's contention is not correct. The approval
of the probate court is not necessary. Payment of
estate taxes is a condition precedent for the
distribution of the properties of the decedent and
the collection of estate taxes is executive in nature
for which the court is devoid of any jurisdiction.
Hence, the approval of the court, sitting in
probate, or as a settlement tribunal is not a
mandatory requirement in the collection of estate
taxes (Marcos v. Court of Appeals, 1997).
Donor’s Tax
It is a tax levied, assessed, collected and paid upon
the transfer by any person, resident or
nonresident, of the property by gift.
It is a tax imposed on the exercise of the donor’s
right during lifetime to transfer property to others
in the form of gift. Hence, donor’s tax is not a
property tax, but is an excise tax on the transfer of
property by way of gift inter vivos. (RR 12-2018)
Gift in Relation to Donor’s Tax
It covers not only “direct gifts” but also “indirect
gifts.” Examples of indirect gifts are: condonation
of indebtedness due to mere liberality of the
creditor; transfer of property without
consideration; sales, exchanges and other
dispositions of property for a consideration to the
extent that the value of the property transferred
exceeds the value in money or money’s worth of
the consideration received therefor; and
renunciation of an inheritance in favor of another
co-heir.
 S C B A R S T A G N O T E S [ 2018 ]
TAXATION LAW
Elements of Taxable Donation
 Capacity of the donor to transfer property
 Donative intent (not an absolute requirement;
required only in direct gift)
 Delivery
 Acceptance of the gift by the donee
Stranger in Relation to Donor’s Tax
A person who is not a brother, sister (whether by
whole or half-blood), spouse, ancestor and lineal
descendant or relative by consanguinity in the
collateral line within the 4th civil degree. Note:
donations between business organizations and
those made between an individual and a business
organization will be treated as donations to
strangers.
Transfers Subject to Donor’s Tax
 Direct gift
 Gift through creation of trust
 Condonation of debt
 Repudiation of inheritance if:
 Specifically and categorically done in
favor of identified heirs
 To the exclusion or disadvantage of other
co-heirs
 Renunciation by the surviving spouse of
his/her share in the conjugal partnership or
absolute community after the dissolution of
the marriage in favor of the heirs of the
deceased spouse or any other person/s
 Transfer for insufficient consideration
(exception: real property classified as capital
asset)
Exemptions from Gross Gifts
 Gifts made on account of marriage by parents
to their children before or within 1 year from
its celebration, up to P10,000;
 Gifts to the Government or any of its political
subdivision or any entity created by its
agencies which is not conducted for profit;
 Gifts to a nonprofit educational and/or
charitable, religious, cultural or social welfare
institution, accredited NGO, trust,
philanthropic or research organization;
provided that not more than 30% shall be used
by the donee for administration purposes;
 Encumbrances on the property donated if
assumed by the donee:
Page 19 of 31
BRAVO BASTE!
 Donations made to entities exempted under
special laws;
 Donations not exceeding P100,000 per
calendar year. [NIRC, Sec 99(A)]
Renunciation of Share in the Conjugal Partnership
or Absolute Community or Inheritance
Renunciation by the surviving spouse of his/her
share in the conjugal partnership or absolute
community after the dissolution of the marriage is
subject to donor’s tax whereas general
renunciation by an heir, including tax surviving
spouse of his/her share in the hereditary estate left
by the decedent is not subject to donor’s tax,
unless specifically and categorically done in favor
of identified heir’s to the exclusion of other co-
heirs in the estate. (R.R. 2-2003).
Donor’s Tax; Donation to Non-Stock, Non-Profit
Private Educational Institutions
The following conditions must occur in order that
all grants, donations and contributions to non-
stock, non-profit private educational institutions
may be exempt from the donor's tax under Section
101 (a) of the Tax Code.
 Not more than thirty percent (30%) of said
gifts shall be used by such donee for
administration purposes;
 The educational institution is incorporated
as a non-stock entity,
 paying no dividends,
 governed by trustees who receive no
compensation, and
 devoting all its income, whether students'
fees or gifts, donations, subsidies or other
forms of philanthropy, to the
accomplishment and promotion of the
purposes enumerated in its Articles of
Incorporation.
Are contributions to a candidate in an election
subject to donor's tax? On the part of the
contributor, is it allowable as a deduction from
gross income?
No, provided the recipient candidate had complied
with the requirement for filing of returns of
contributions with the Commission on Elections as
required under the Omnibus Election Code.
 S C B A R S T A G N O T E S [ 2018 ]
TAXATION LAW
The contributor is not allowed to deduct the
contributions because the said expense is not
directly attributable to, the development,
management, operation and/or conduct of a trade,
business or profession (Sec. 34(l)(a), NIRC).
Furthermore, if the candidate is an incumbent
government official or employee, it may even be
considered as a bribe or a kickback (Sec. 34(l)(c),
NIRC).
J owns a ring valued at P5m. He sold the ring to K
for an amount of P1m. Is there a gift tax
consequence?
Yes. There was an indirect gift arising from a sale
for inadequate consideration. The material
difference in the fair market value and the
consideration (Php4M) is equivalent to a gift, for
which donor’s tax should be paid.
J owns a residential land valued at P5m. He sold
the land for an amount of P1m. Is there a gift tax
consequence?
No. The liability for donor’s tax arising from an
indirect gift due to a sale for inadequate
consideration is not applicable if what has been
sold is a real property classified as capital asset
(Section 100, NIRC). This is because the transaction
is subject to the 6% capital gains tax; hence,
regardless of the insufficiency in consideration, the
government will still be able to get the correct
amount of tax as the tax base is selling price or fair
market value whichever is higher
Your bachelor client, a Filipino residing in Quezon
city, wants to give his sister a gift of P 200,000.00.
He seeks your advice, for purposes of reducing if
not eliminating the donor’s tax on the gift, on
whether it is better for him to give all of the
P200,000.00 on Christmas 2001 or to give
P100,000.00 on Christmas 2001 and the other
P100,000.00 on January 1, 2002. Please explain
your advice.
I would advise him to split the donation. Giving the
P200,000 as a one-time donation would mean that
it will be subject to a higher tax bracket under the
graduated tax structure thereby necessitating the
payment of donor’s tax. On the other hand,
Page 20 of 31
BRAVO BASTE!
splitting the donation into two equal amounts of
P100,000 given on two different years will totally
relieve the donor from the donor’s tax because the
first P100,000 donation in the graduated brackets
is exempt. (Section 99, NIRC). While the donor’s tax
is computed on the cumulative donations, the
aggregation of all donations made by a donor is
allowed only over one calendar year.
VALUE-ADDED TAX
Value-Added Tax
The value-added tax is an indirect tax and the
amount of tax may be shifted or passed on to the
buyer, transferee or lessee of the goods, properties
or services.
Indirect Tax
An “Indirect Tax” is a tax demanded in the first
instance from one person in the expectation and
intention that he can shift the burden to someone
else. It is one paid by a person who is not directly
liable therefor, and who may thereafter shift or
pass on the tax to another person or entity, which
ultimately assumes the tax burden. The impact of
taxation is on the seller upon whom the tax has
been imposed, while the incidence of taxation is on
the final consumer, the place at which the tax
comes to rest. (MAMALATEO, Value Added Tax in
the Philippines (2003), p. 8).
Export Sales (Transaction Subject to Zero-Rated
VAT)
 Sake and actual shipment of goods from
the Philippines to a foreign country, paid
for in acceptable currency, and
accounted for in accordance with the
rules and regulations of the BSP
 Sale of raw materials or packaging
materials to a non-resident buyer for
delivery to a resident local export-
oriented enterprise to be used in
manufacturing, processing, packing, or
repacking in the Philippines of the said
buyer’s goods, paid for in acceptable
currency, and accounted for in
accordance with the rules and
regulations of the BSP
 Sale of raw materials or packaging
materials to an export-oriented
 S C B A R S T A G N O T E S [ 2018 ] Page 21 of 31
TAXATION LAW BRAVO BASTE!

enterprise whose export sales exceed o Sale or importation of fertilizers,

70% of total annual production seeds, seedlings and fingerlings,
 Transactions considered constructively fish, prawn, livestock and poultry
exported under Art. 23 of EO 226 feeds
 Sale of gold to BSP o Sale, importation, printing or
 Sale of goods, supplies, equipment, and publication of books and
fuel to persons engaged in international newspaper or magazines
shipping or air transport operations appearing at regular intervals
with fixed prices for subscription
The validity of the VAT law was questioned for and which is not devoted
being contrary to article vi sec. 28 (1) of the principally to the publication of
constitution which provides that “the congress paid advertisements
shall evolve a progressive system of taxation.” It o Sale, importation, or lease of
is argued that since vat is regressive and therefore passenger or cargo vessels and
unconstitutional since the law imposes a flat rate aircraft
of 12% and thus places the tax burden on all  Sale:
taxpayers without regard to their ability to pay. Is o Sales by agricultural cooperatives
the vat law unconstitutional? duly registered with the CDA to
their members, and the sale of
No. Article VI, Sec. 28 (1) mandates Congress not to their produce to non-members,
prescribe, but to evolve, a progressive tax system. their importation of direct farm
The Constitution does not really prohibit the inputs, machineries and
imposition if indirect taxes which, like the VAT, are equipment to be used directly and
regressive. The Constitutional provision has been exclusively in the production
interpreted to mean simply that direct taxes are to and/or processing of their
be preferred and as much as possible, indirect produce
taxes should be minimized. Therefore, the VAT law o Sales by non-agricultural, non-
is constitutional. (Tolentino v. Secretary of Finance, electric and non-credit
1995). cooperatives duly registered with
the CDA, the share capital
Elements of Vat Taxable Transaction (P-S-B-P-E) contribution of each member
 It involves any Person. does not exceed P15,000
 There must be a Sale, barter exchange, o Export sales by not VAT-
lease rendering of service (including registered persons
deemed sale transactions); o Sale of the following real
 It must be made in the course trade or properties:
Business (except if importation) including  Not primarily hold for
incidental transactions; sale or lease in the
 The transaction is done in the Philippines, ordinary course of trade
and or business
 It must neither be zero-rated nor Exempt  Utilized for low-cost or
from VAT. (NIRC. Secs. 105-109) socialized housing
 Residential lot valued at
VAT-Exempt Transactions P 1,919,500 and below,
 Sale or importation: or house and lot and
o Sale or importation of agricultural other residential
and marine food products in their dwellings valued at
original state for human P3,199,200 and below
consumption; (as amended by RR No.
16-2011)
 S C B A R S T A G N O T E S [ 2018 ]
TAXATION LAW
 If two or more adjacent
residential lots are sold
or disposed in favor of
one buyer, for the
purpose of utilizing the
lots as one residential lot.
the sale shall be exempt
from VAT only if the
aggregate value of the
lots do not exceed
P1,919.500 (as amended
by RR No 16-2011)
 Importation:
o Importation of personal and
household effects of residents
returning from abroad and non-
resident citizens coming to
resettle in the Philippines
o Importation of domestic animals
and personal household effects of
persons coming to settle in the
Philippines for their own use
o Importation of fuel,
goods and supplies by persons
engaged in international shipping
or air transport operations
 Services:
o Services subject to percentage tax
o Services by agricultural contract
growers and milling for others of
palay into nee, corn into grits and
sugar into raw sugar
o Medical, dental, hospital and
veterinary services, except those
rendered by professionals
o Educational services rendered by
duly accredited private
educational institutions and
government educational
institutions
o Services rendered pursuant to an
employer-employee relationship
o Services rendered by regional or
area HQ established in the PH by
multinational corporations which
do not earn or derive income
from the Philippines
o Transport of passengers by
international carriers doing
business in the PH (RA. 10378)
Page 22 of 31
BRAVO BASTE!
o Transport of cargo by
international carriers is VAT-
exempt, but subject to
percentage tax. (RR No. 15-2013)
o Services of banks and other non-
bank financial intermediaries
o Money changers and pawnshops
are VAT-exempt, but subject to
percentage tax. (RR No. 4-2007)
 Others:
o Transactions exempt under
international agreements to
which the Philippines is a
signatory except those under PD
529 (Petroleum Exploration
Concessionaires under the
Petroleum Act of 1949)
o Gross receipts from lending
activities by credit or multi-
purpose cooperatives registered
with the CDA
o Lease of residential units where
the monthly rental does not
exceed P12,800
 If monthly rentals exceed
P12,800 per unit AND if
the aggregate annual
gross receipts from said
units only (not including
the gross receipts from
units leased for not more
than P 12,800) exceeds
P1,919,500 - subject to
VAT
 If monthly rentals exceed
P 12,800 per unit AND if
the aggregate annual
gross receipts do not
exceed P1,919,500 = 3%
percentage tax
o Sales to senior citizens (R.A. 9994)
o Sales to PWD of certain goods and
services. (IRR of R.A 10754)
o Sale or lease of goods or
properties or the performance of
services other than the
aforementioned transactions, the
gross annual sales and/or receipts
do not exceed P1.919,500. (NIRC,
 S C B A R S T A G N O T E S [ 2018 ]
TAXATION LAW
Sec. 109: RR No. 16-2005. as
amended)
Transactions "Deemed Sales”
 Transfer, use, or consumption not in the
course of business of goods originally
intended for sale or for use in the course
of business;
 Distribution or transfer to:
o Shareholders or investors as
share in the profits of VAT-
registered persons; or
o Creditors in payment of debt;
 Consignment of goods if actual sale is not
made within 60 days following the date
such goods were consigned; and
 Retirement from or cessation of business,
with respect to inventories of taxable
goods existing as of such retirement or
cessation.
A vat-registered contractor performed services
for his customer in 2010 and billed him P11.2
million, broken down as follows: P10 million –
cost of services, plus P1.2 million, 12% vat. Of the
contract price of P10 million, only P8 million plus
VAT thereon was received from the customer in
2010, and the balance of p4 million plus vat was
received by the contractor in 2011. How much is
the taxable gross receipts of the contractor in
2010, for VAT purposes?
P8 Million, the amount received from the
customer in 2010 (Sec. 108, NIRC).
Colossus Inc., a corporation engaged in firearms
dealing is a VAT-registered company. Included in
its roster of assets is a van that it uses to deliver
machine guns to AFP. The van being 10 years old
and dated, colossus decided to sell it to Sugarwax,
a corporation engaged in the business of
providing mobile waxing services to busy office
women. The selling price of the van was way
below its acquisition cost. Is the sale of the van
subject to VAT?
Yes, the sale of the van is vatable. According to
Mindanao Geothermal Partnership v. CIR, March
11, 2013, although the sale of the van is an isolated
transaction, it does not follow that an isolates
transaction cannot be an incidental transaction for
Page 23 of 31
BRAVO BASTE!
the purposes of VAT liability. A reading of Section
105 of the 1997 Tax Code would show that a
transaction “in the course of trade of business”
includes “transactions incident thereto.”
Beauxbatons Inc., is a VAT-registered corporation
and is engaged in the business of importing books
and school supplies. In 2004, it imported 5m pesos
worth of books, 2.5m worth of fountain pens and
2.5m worth of bookstands. Is the transaction
subject to VAT?
Yes, but only as to fountain pens and bookstands.
The importation of books is a transaction exempt
from VAT pursuant to Section 109 of the NIRC.
Magdalena motors Inc., a VAT-registered
corporation, leases its vans to its customers. What
tax is it subject to for the lease of the vehicles?
It is subject to 12% VAT pursuant to Section 108 of
the NIRC.
Destination Principle
The destination principle means that the
destination of the goods determines the taxation
or exemption from VAT. Goods and services are
taxed only in the country where they are
consumed.
Difference Between Zero-Rated Entities and VAT-
Exempt Entities
Zero-rated: (1) It is a taxable transaction but does
not result in an output tax, (2) The input VAT on the
purchases of a VAT- registered person with zero-
rated sales may be allowed as tax credits or
refunded, (3) Persons engaged in transactions
which are zero-rated, being subject to VAT, are
required to register.
VAT-exempt: (1) Not subject to output tax, (2) The
seller in an exempt transaction is not entitled to
any input tax on his purchases despite the issuance
of a VAT invoice or receipt, (3) Registration is
optional for VAT-exempt persons.
Availment of VAT-Refund
One may avail of a VAT-refund when there are (1)
zero-rated and effectively zero-rates sales or (2)
cancellation of VAT registration.
 S C B A R S T A G N O T E S [ 2018 ]
TAXATION LAW
A claim for refund was filed by Apollo of unutilized
input vat in the amount of P30.3 million paid on
capital goods. The close of the taxable quarter
when the purchases were made was September
30, 2000. Apollo filed with the BIR and
administrative claim for refund of the unutilized
input vat on December 11, 2000. The CIR had a
period of 120 days, or until April 10, 2001, to act
on the claim. This 120-day period lapsed without
any action by the BIR on the claim. Apollo filed a
petition for review with the CTA on September 11,
2002. Decide.
The petition should be denied. The CIR’s failure to
act on the administrative claim should have been
treated as a denial of the claim and Apollo would
have had 30 days from April 10, 2001, or until May
10, 2001, to file a judicial claim with the CTA. But
Apollo filed a petition for review with the CTA only
on September 11, 20002. The judicial claim was
thus filed late. (Rohm Apollo Semiconductor
Philippines v. CIR, 2015)
SMZ, Inc. is a vat-registered enterprise engaged in
the general construction business. HP
international contracts the services of SMZ, Inc.
To construct HP international’s factory building
located in the Laguna techno park, a special
economic zone. HP international is registered
with the Philippine Economic Zone Authority
(PEZA) as an ecozone export enterprise, and, as
such, enjoys income tax holiday pursuant to the
special economic zone act of 1995. SMZ, Inc. Files
an application with the bureau of Internal
Revenue (BIR) for the vat zero-rating of its sale of
services to HP international. However, the BIR
denies SMZ, lnc.'s application on the ground that
HP international already enjoys income tax
holiday. Is the BIR correct in denying SMZ, lnc.'s
application?
No. The BIR’s contention is not correct applying the
new rule which incorporates the Destination
Principle and Cross-Border Principle.
The Supreme Court, in the recent case of Coral Bay
Nickel Mining Vs. Commissioner of Internal
Revenue ruled that the sale of goods or rendition
of services to a PEZA registered enterprise is
considered to be Effectively-Zero rated applying
Page 24 of 31
BRAVO BASTE!
the new Rule that incorporates the Cross-Border
and Destination Principle despite the availment by
the PEZA registered entity of this so called “Income
Tax Holiday”. This new rule, as implemented by
RMC 74-99, deviates from the old rule which gives
a PEZA registered entity to choose between
payment (1)5% franchise tax in lieu of all taxes and
(2) the availment of the so called income tax
holiday where the PEZA registered entity will no
longer pay income tax but will have to pay VAT and
thereby removing the transaction from zero rated
system.
In the given case, although assuming that HP
international opted to avail of the Income Tax
Holiday Scheme, the BIR should still grant the
application for the Zero-rating of SMZ’s sale of
services to HP applying the Cross Border and
Destination Principle.
Thus, the application of SMZ for the zero-rating of
its sale of services to HP must be granted.
Effect of a VAT-Registered Person Issuing a VAT
Invoice or VAT Receipt for a VAT-Exempt
Transaction, But Fails to Display Prominently on
the Invoice or Receipt the Term “VAT-Exempt
Sale”
The issuer shall be subject to VAT as if Sec. 109 did
not apply.
On what grounds can the commissioner suspend
the business operations? What are the limitations
to such temporary suspension order?
In case of a VAT-registered person (1) Failure to
issue receipts or invoices; (2) Failure to file a VAT
tax return; (3) Understatement of taxable sales or
receipts by 30% or more of his correct taxable sales
or tax receipts for the taxable quarter. Or the
failure of any person to register under Sec. 236. The
temporary closure of the establishments shall be
for the duration of not less that in five (5) days and
shall be lifted only upon compliance with whatever
requirements prescribed by the Commissioner on
the closure order. (Sec. 115)
 S C B A R S T A G N O T E S [ 2018 ]
TAXATION LAW
Rules for Filing VAT Returns
Quarterly returns for every person liable to pay for
VAT filed 25 days following the close of the taxable
quarter. For VAT-registered persons, they must pay
VAT on a monthly basis on the 20th day following
the end of the month. (RR 16-2005)
LOCAL GOVERNMENT TAXES
Local Taxation: Coverage
The following taxes, aside from basic real estate
tax, may be imposed by:
 Provincial Government
o Printer's or publisher's tax
o Franchise Tax
o Professional tax
 City Government - may levy taxes which
the province or municipality are
authorized to levy (Sec. 151, LGC)
o Printer's or publisher's tax
o Franchise tax
o Professional tax
 Municipalities in the Metro Manila Area –
may levy taxes at rates which shall not
exceed by 50% the maximum rates
prescribed in the Local Government
Persons Exempt to Pay the Community Tax
 Diplomatic and consular representatives
 Transient visitors when their stay in the
Philippines does not exceed three
months
Properties Are Exempt from Real Property Taxes
(Sec. 234, LGC)
 Real property owned by the Republic of
the Philippines or any of its political
subdivisions except when the beneficial
use thereof has been granted, for
consideration or otherwise, to a taxable
person;
 All lands, buildings and improvements
actually, directly, and exclusively used for
religious, charitable or educational
purposes by charitable institutions,
churches, parsonages or convents
appurtenant thereto, mosques, nonprofit
or religious cemeteries;
 All machineries and equipment that are
actually, directly, and exclusively used by
Page 25 of 31
BRAVO BASTE!
local water districts and government-
owned or controlled corporations
engaged in the supply and distribution of
water and/or generation and transmission
of electric power;
 All real property owned by duly registered
cooperatives as provided for under R.A
No. 6938; and
 Machinery and equipment used for
pollution control and environmental
protection.
Remedies Available to Local Government Units to
Enforce the Collection of Taxes, Fees, And Charges
 Administrative Remedies of distraint of
personal property of whatever kind
whether tangible or intangible, and levy of
real property and interest therein; and
 Judicial Remedy by institution of an
ordinary civil action for collection with the
regular courts of proper jurisdiction.
In order to raise revenue for the repair and
maintenance of the newly constructed city hall of
Makati, the city mayor ordered the collection of
P1.00, called “elevator tax”, every time a person
rides any of the high-tech elevators in the city hall
during the hours of 8:00 a.m. to 10:00 a.m. and
4:00 p.m. to 6:00 p.m. is the “elevator tax” a valid
imposition?
No. The imposition of a tax, fee or charge or the
generation of revenue under the Local
Government Code, shall be exercised by the
SANGUNIAN of the local government unit
concerned through an appropriate ordinance
(Section 132 of the Local Government Code). The
city mayor alone could not order the collection of
the tax; as such, the “elevator tax” is an invalid
imposition.
 S C B A R S T A G N O T E S [ 2018 ]
TAXATION LAW
The real property of Mr. and Mrs. Angeles,
situated in a commercial area in front of the public
market, was declared in their tax declaration as
residential because it had been used by them as
their family residence from the time of its
construction in 1990. However, since January
1997, when the spouses left for the united states
to stay there permanently with their children, the
property has been rented to a single proprietor
engaged in the sale of appliances and agri-
products. The provincial assessor reclassified the
property as commercial for tax purposes starting
January 1998. Mr. and Mrs. Angeles appealed to
the local board of assessment appeals,
contending that the tax declaration previously
classifying their property as residential is binding.
How should the appeal be decided?
The appeal should be decided against Mr. and Mrs.
Angeles. The law focuses on the actual use of the
property for classification, valuation and
assessment purposes regardless of ownership.
Section 217 of the Local Government Code
provides that "real property shall be classified,
valued, and assessed on the basis of its actual use
regardless of where located, whoever owns it, and
whoever uses it".
Mr. Fermin, a resident of Quezon city, is a certified
public accountant-lawyer engaged in the practice
of his two professions. He has his main office in
Makati city and maintains a branch office in Pasig
city. Mr. Fermin pays his professional tax as a CPA
in Makati city and his professional tax as a lawyer
in Pasig city.
May Makati city, where he has his main office,
require him to pay his professional tax as a
lawyer?
No. Makati City where Mr. Fermin has his main
office may not require him to pay his professional
tax as a lawyer. Mr. Fermin has the option of paying
his professional tax as a lawyer in Pasig City where
he practices law or in Makati City where he
maintains his principal office. (Sec. 139[b], Local
Government Code)
Page 26 of 31
BRAVO BASTE!
Batas law is a general professional partnership
operating in the city of Valenzuela. It regularly
pays value-added tax on its services. All its
lawyers have individually paid the required
professional tax for the year 2017. However, as a
condition for the renewal of its business permit
for the year 2017, the city treasurer of Valenzuela
assessed Batas law for the payment of percentage
business tax on its gross receipts for the year 2016
in accordance with the revenue tax code of
Valenzuela.
Is Batas law liable to pay the assessed percentage
business tax?
No. Valenzuela City may not impose Percentage
Business Tax since as BATAS LAW, as a general
professional partnership, does not operate
business.
In Bureau of Local Government Finance Opinion
dated March 15, 2017 involving exact same facts as
the instant case, it was discussed that following the
rules on taxation provided by the LGC, as well as
the relevant rulings of the Supreme Court, this
Bureau in several occasions held that a GPP is not
subject to business tax, as it is not engaged in any
trade or business, but is focused on the exercise of
the profession of its individual partners.
The contention of Batas Law that it must not be
subject to percentage business tax based on gross
receipts exclusively on year 2017 must be upheld,
without prejudice to the validity of the assessment
made by the City Treasurer pursuant to the
Revenue Code of Valenzuela.
TARIFF AND CUSTOMS CODE
Importation
Importation begins when the carrying vessel or
aircraft enters the jurisdiction of the Philippines
with the intention to unload therein (TARIFF CODE,
Sec. 1202).
Importation is deemed terminated upon payment
of duties, taxes, and other charges due upon the
articles or secured to be paid at a port of entry, and
legal permit for withdrawal shall have been
 S C B A R S T A G N O T E S [ 2018 ]
TAXATION LAW
granted in case of dutiable goods or until they have
legally left the jurisdiction of the customs in case of
duty-free goods. (TARIFF CODE, Sec. 1202, Carrara
Marble Philippines, inc v. CIR, 1999)
Categories of Imports (F-R-P)
 "Freely importable commodities" or those
commodities which are neither
“regulated” nor “prohibited" and the
importation of which may be effected
without any prior approval of or
clearance from any government agency.
 “Regulated commodities" or those
commodities the importation of which
require clearances/permits from
appropriate government agencies; and
 “Prohibited commodities” or those
commodities the importation of which are
not allowed by law. (Secretary of Finance
v. Court of Tax Appeals, 2013)
"De Minimis" Importations
These are importations with a value of P10,000 and
below. No duties and taxes shall be collected on
“de minimis'' importations. (CMTA. Sec 423)
Technical Smuggling
the act of importing goods into the country by
means of fraudulent, falsified or erroneous
declaration of the goods to its nature, kind, quality,
quantity or weight, for the purpose of reducing or
avoiding payment of prescribed taxes, duties and
other charges.
Outright Smuggling
the act of importing goods into the country without
complete customs prescribed importation
documents, or without being cleared by customs or
other regulatory government agencies, for the
purpose of evading payment of prescribed taxes,
duties and other government charges. (CMTA. Sec.
102)
Whenever the decision of the collector of customs
is adverse to the government, it is automatically
elevated to the commissioner for review and, if it
is affirmed by him, it is automatically elevated to
the secretary of finance for review. What is the
basis of the automatic review procedure in the
bureau of customs?
Page 27 of 31
BRAVO BASTE!
Automatic review is intended to protect the
interest of the Government in the collection of
taxes and customs duties in seizure and protest
cases. Without such automatic review, neither the
Commissioner of Customs nor the Secretary of
Finance would know about the decision laid down
by the Collector favoring the taxpayer. The power
to decide seizure and protest cases may be abused
if no checks are instituted. Automatic review is
necessary because nobody is expected to appeal
the decision of the Collector which is favorable to
the taxpayer and adverse to the Government. This
is the reason why whenever the decision of the
Collector is adverse to the Government, the said
decision is automatically elevated to the
Commissioner for review; and if such decision is
affirmed by the Commissioner, the same shall be
automatically elevated to and be finally reviewed
by the Secretary of Finance (Yaokasin v.
Commissioner of Customs, 1989).
Relief Consignment and the Applicable Duty and
Tax Treatment
Relief consignment refers to goods such as food,
medicine, equipment and materials for shelter,
donated or leased to government institutions and
accredited private entities for free distribution to
or use of victims of calamities. Relief consignment
shall be exempt from duties and taxes. (CMTA.
Secs. 120 & 121)
Does the RTC have jurisdiction over seizure and
forfeiture conducted by the Bureau of Customs?
No. The RTCs are devoid of competence and
authority. Pursuant to the Doctrine of Primary
Jurisdiction, the BOC acquires exclusive jurisdiction
the moment imported goods are placed in their
possession or control. (Agriex Co Ltd. v. Villanueva,
2014)
Mr. X, an OFW, sent a balikbayan box to his family
member in the Philippines. However, while in
customs custody, all balikbayan boxes, including
that of Mr. X, were subjected to 100%
examination on September 21, 2015 by customs
officers by opening the boxes. Mr. X’s wife
questioned the propriety of the examination. Is
the examination proper?
 S C B A R S T A G N O T E S [ 2018 ]
TAXATION LAW
No. Pursuant to Bureau of Customs (BOC) Revised
Rules and Regulations on the Importation of
Balikbayan Boxes issued on September 2, 2015,
OFW’s balikbayan boxes shall not be subjected to
random or arbitrary physical inspection. Instead
they shall undergo mandatory X-ray scanning. For
balikbayan boxes without violation, it shall be
segregated and provisionally released to allow its
continuous processing. It is only when a balikbayan
box is placed under alert that it will be subjected to
100% physical examination at the authorized
examination area to be conducted by a customs
examiner in the presence of apprehending officers.
Freight forwarder consolidator, representatives of
the Overseas Workers Welfare Administration
and/or designated officer of an OFW association
should also be present.
On the basis of a warrant of seizure and detention
issued by the collector of customs for the purpose
of enforcing the tariff and customs code, assorted
brands of liquor and cigarettes said to have been
illegally imported into the Philippines were seized
from a store operating in a freeport zone. The
store owner moved for the quashal of the warrant
on the ground that the collector of customs had
no jurisdiction to enforce it within the freeport
zone. Should the motion to quash be granted?
No. The motion to quash must be denied.
As held in the case of Agriex vs. Villanueva, the
Supreme Court ruled that by virtue of R.A 7227, as
implemented by Customs Administrative Order No.
4-93, also known as the Rules and Regulations for
Customs Operations in the Subic Special Economic
and Freeport Zone, both the SBMA and the Bureau
of Customs have the power to seize and forfeit
goods or articles entering the Subic Bay Freeport,
except that SBMA’s authority to seize and forfeit
goods or articles entering the Subic Bay Freeport
has been limited only to cases involving violations
of RA No. 7227 or its IRR. There is no question
therefore, that the authority of the Bureau of
Customs is larger in scope because it covers cases
concerning violations of the customs laws.
The Court added that the authority of the Bureau
of Customs to seize and forfeit goods and articles
entering the Subic Bay Freeport does not
Page 28 of 31
BRAVO BASTE!
contravene the nature of the Subic Bay Freeport as
a separate customs authority. Indeed, the
investors can generally and freely engage in any
kind of business as well as import into and export
out goods with minimum interference from the
Government
Hence, the motion to quash must be denied for the
reason that the Collector of Customs has
jurisdiction to enforce the TCC within the Freeport
zone.
TAX REMEDIES
Tax Remedies
On the part of the government, courses of action
provided by or allowed in the law to implement the
tax laws or enforce tax collection.
On the part of the taxpayer, these are legal actions
which a taxpayer can avail of to seek relief from the
undue burden or oppressive effect of tax laws, or
as a means to check possible excesses by revenue
officers in the performance of their duties.
Letter of Authority
An official document that empowers a Revenue
Officer to examine and scrutinize a taxpayer’s book
of accounts and other accounting records, in order
to determine the taxpayer’s correct internal
revenue tax liabilities. In the absence of such an
authority, the assessment or examination is a
nullity. (CIR v. Sony Phils, Inc, 635 SCRA 234)
Tax Cases that need not be Covered by a Letter of
Authority
 Cases involving civil or criminal tax fraud
which fall under the jurisdiction of the
National Investigating Division under the
Enforcement and Advocacy Services of
the BIR
 Policy cases under audit by the special
teams in the National Office
Administrative Remedies for Assessment
 After receipt of the Pre-Assessment
Notice, he must within fifteen (15) days
from receipt explain why no additional
taxes should be assessed against him.
 If the Commissioner of Internal Revenue
issues an assessment notice, the taxpayer
 S C B A R S T A G N O T E S [ 2018 ]
TAXATION LAW
must administratively protest or dispute
the assessment by filing a motion for
reconsideration or reinvestigation within
thirty (30) days from receipt of the notice
of assessment. (4th par.. Sec. 228, NIRC)
 Within sixty (60) days from filing of the
protest, the taxpayer shall submit all
relevant supporting documents.
Mandatory Nature of Service of Preliminary
Assessment Notice Prior to Final Assessment
Notice
As a general rule, issuance of PAN prior to FAN is
part of the due process requirement, the absence
of which renders nugatory any assessment made
by the tax authorities.
As an Exception, PAN is not Required in the
following cases
 The finding for any deficiency tax is the
result of mathematical error in the
computation of the tax as appearing on
the face of the return
 A discrepancy has been determined
between the tax withheld and the
amount actually remitted by the
withholding agent
 A taxpayer who opted to claim a refund
or tax credit of excess creditable
withholding tax for a taxable period was
determined to have carried over and
automatically applied the same amount
claimed against the estimated tax
liabilities for the taxable quarter or
quarters of the succeeding taxable year
 The excise tax due on excisable articles
has not been paid
 An article locally purchased or imported
by an exempt person has been sold,
traded, or transferred to non-exempt
persons
Matters that may be Appealed Straight to the CTA
from the CIR
Decisions on disputed assessments, disputed
refund; and other matters arising under the NIRC
and other tax laws. (NIRC, Sec. 4 & RA. 9282 Sec.
7(a)(1))
Page 29 of 31
BRAVO BASTE!
Instances when the CIR may inquire into Bank
Deposit Accounts (Es Comp Re)
 A decedent to determine his gross estate
 Any taxpayer who has filed an application
for compromise based on financial
incapacity; or
 Upon Request for the supply of tax
information of specific taxpayers made by
a foreign tax authority pursuant to a tax
treaty. (NIRC, Sec 6(F). as amended by Sec
3 of R.A 10021)
Requisites to Claim Refund for Excess Creditable
Withholding Tax
 Filing the claim within the 2-year period.
 Establishing the fact of withholding with
copies of the CWT certificates; and
 Showing that the income received was
declared as part of gross income.
Taxpayer does not have to resubmit the quarterly
ITR to support its claim. II is presumed that BIR
already has the quarterly ITR on file. (Republic v.
Team Energy Corporation and Mirant Energy
Corporation, 2015)
Grounds for Compromise
 Reasonable doubt as to the validity of the
claim against the taxpayer
 Financial position of the taxpayer
demonstrates a clear inability to pay
assessed tax
Grounds for Abatement or Cancellation of Tax
Liability
 The tax or any portion thereof appears to
be unjustly or excessively assessed
 The administration and collection costs
involved do no justify the collection of the
amount due
Does the Secretary of Justice have jurisdiction to
review disputed assessments from the CIR?
No. The SOJ has no jurisdiction to review disputed
assessments. The SOJ should instead refer it to the
CTA. (CIR v. SOJ and PAGCOR. 2016)
 S C B A R S T A G N O T E S [ 2018 ]
TAXATION LAW
The CIR has both the power to interpret tax laws
and the power to decide tax cases. Differentiate a
taxpayer's mode of appeal in the exercise of the
CIR’s quasi-legislative and quasi-judicial
functions.
Issuances and rulings by the CIR pursuant to its
quasi-legislative function, review by the Secretary
of Finance.
Quasi-judicial functions or the authority to decide
disputed assessments, refunds, penalties and the
like, exclusive appellate jurisdiction of the CTA.
(The Philippine American Life and General
Insurance Company v. CIR, 2014)
Remedies of A Taxpayer if the BIR does not act on
his Protest within the 180-Day Period
A taxpayer can either: (1) file a petition for review
with the CTA within 30 days after the expiration of
the 180-day period; or (2) await the FDDA and
appeal such final decision to the CTA within 30 days
after receipt of a copy of such decision. These
options are mutually exclusive and resort to one
bars the application of the other. (Lascona Land Co.
Inc. v. CIR, 2012)
To whom are adverse rulings of the secretary of
finance appealed?
CTA. Its power to rule on decisions of the SOF is
covered by the phrase ‘other matters arising under
the NIRC" CTA has jurisdiction to rule not only on
the property of an assessment or tax treatment of
a certain transaction, but also on the validity of the
RR or RMC on which said assessment is based. (The
Philippine American Life and General Insurance
Company v CIR, 2014)
Can a taxpayer raise the defense of prescription
for the first time on appeal?
Yes. Even if the taxpayer raises the defense of
prescription for the first time on appeal to CTA En
Banc, it does not negate the applicability of the
defense. (China Banking Corporation vs. CIR, 2015)
Page 30 of 31
BRAVO BASTE!
On January 27, 2017, Ramon, the comptroller of
Vantage point, Inc., executed a document entitled
waiver of the statute of limitations in connection
with the BIR’s investigation of the tax liabilities of
the company for the year 2012. However, the
board of directors of Vantage point, Inc. Did not
adopt a board resolution authorizing Ramon to
execute the waiver.
On October 14, 2017, Vantage point, Inc. Received
a preliminary assessment notice from the BIR
indicating its deficiency withholding taxes for the
year 2012. Vantage point, Inc. Filed its protest. On
October 30, 2017, the BIR issued a formal letter of
demand and final assessment notice. Vantage
point, Inc. Again filed a protest. The commissioner
of internal revenue denied the protests and
directed the collection of the assessed deficiency
taxes.
Accordingly, Vantage point, Inc. filed a petition for
review in the CTA to seek the cancellation and
withdrawal of the assessment on the ground of
prescription.
(A) What constitutes a valid waiver of the statute
of limitations for the assessment and collection of
taxes?
A valid waiver of the statute of limitations under
paragraphs (b) and (d) of Section 223 of the Tax
Code of 1977, as amended, must be: (1) in writing;
(2) agreed to by both the Commissioner and the
taxpayer; (3) before the expiration of the ordinary
prescriptive periods for assessment and collection;
and (4) for a definite period beyond the ordinary
prescriptive periods for assessment and collection.
The period agreed upon can still be extended by
subsequent written agreement, provided that it is
executed prior to the expiration of the first period
agreed upon. The BIR had issued Revenue
Memorandum Order (RMO) No. 20-90 on 04 April
1990 to lay down an even more detailed procedure
for the proper execution of such a waiver. RMO No.
20-90 as modified by RDAO No. 05-01, mandates
that the procedure for execution of the waiver shall
be strictly followed, and any revenue official who
fails to comply therewith resulting in the
 S C B A R S T A G N O T E S [ 2018 ]
TAXATION LAW
prescription of the right to assess and collect shall
be administratively dealt with."
(B) Has the right of the government to assess and
collect deficiency taxes from Vantage point, Inc.
For the year 2012 prescribed?
Yes. The right of the Government to assess and
collect deficiency taxes from Vantage Point, Inc. for
the year 2012 has already prescribed.
As held in the case of CIR vs. Stanley Works Sales
(December 3, 2014; J. Sereno), the period to assess
and collect deficiency taxes may be extended only
upon a written agreement between the CIR and the
taxpayer prior to the expiration of the three-year
prescribed period in accordance with Section 222
(b) of the NIRC. This is also one of the requisites of
a valid waiver of statute of limitation as
implemented by the foregoing BIR issuances.
As the execution of the waiver of statute of
limitation dated January27, 2017 was made
beyond the 3-year assessment period (from April
15, 2013 to April 15, 2016), said waiver is void. The
waiver did not comply with one of the requisites for
valid waiver. This leads to the inevitable conclusion
that the assessment period was not extended.
Hence, the right of the Government to assess and
collect deficiency taxes from Vantage Point, Inc. for
the year 2012 has already prescribed.
Note: Even assuming that the principle of in pari
delicto as laid down by the Supreme Court in the
case of CIR vs. Next Mobile case applies in this case,
prescription still sets in since the execution of the
waiver was made beyond the 3-year assessment
period.
Globesmart services, Inc. received a final
assessment notice with formal letter of demand
from the BIR for deficiency income tax, value-
added tax and withholding tax for the taxable
year 2016 amounting to P48 million. Globesmart
services, Inc. filed a protest against the
assessment, but the commissioner of internal
revenue denied the protest. Hence, Globesmart
services, Inc. Filed a petition for review in the CTA
with an urgent motion to suspend the collection
of tax.
After hearing, the CTA division issued a resolution
granting the motion to suspend but required
Page 31 of 31
BRAVO BASTE!
Globesmart services, Inc. To post a surety bond
equivalent to the deficiency assessment within 15
days from notice of the resolution. Globesmart
services, Inc. moved for the partial
reconsideration of the resolution and for the
reduction of the bond to an amount it could
obtain. The CTA division issued another resolution
reducing the amount of the surety bond to l24
million. The latter amount was still more than the
net worth of Globesmart services, Inc. As reported
in its audited financial statements.
(A) May the collection of taxes be suspended?
Yes. Under Section 11 of RA 1125, when in the
opinion of the Court, the collection by the Bureau
of Internal Revenue or the Commissioner of
Customs may jeopardize the interest of the
Government and/or the taxpayer, the Court at any
stage of the proceeding may suspend the said
collection.
(B) Is the CTA division justified in requiring
Globesmart services, Inc. to post a surety bond as
a condition for the suspension of the deficiency
tax collection?
No. The bond requirement should have been
dispensed with.
The Supreme Court in the case of Tridharma
Marketing Corporation v. CIR which involves
similar facts as in the instant case, ruled that the
CTA in Division gravely abused its discretion under
Section 11 because it fixed the amount of the bond
at amount higher than the net worth of the
petitioner without conducting a preliminary
hearing to ascertain whether there were grounds
to suspend the collection of the deficiency
assessment on the ground that such collection
would jeopardize the interests of the taxpayer.
Clearly, the requirement of bond which amounts to
more than Globesmart’s net worth would
practically deny to it the meaningful opportunity to
contest the validity of the assessments, and would
likely even impoverish it as to force it out of
business.